More than sixty years ago, psychologist Abraham Maslow advanced a theory that he termed the 'hierarchy of needs' which explains the way that — as each human need is met — we strive towards increasingly cerebral goals. It is this hierarchy of needs that helps explain why Australians saw the environment, a century ago, as a foe to be tamed, whereas today its beauty is highly prized. More prosaically, our yardsticks for the value of an asset have broadened from basic measures of its immediate economic capacity to encompass non-financial, perhaps even non-empirical, benefits such as future prospects and aesthetics. How might financial decisions contribute to higher needs, specifically sustainability?
What is sustainability in the context of finance? Googling 'sustainable investing' or something similar throws up thousands of hits covering reports, advice and money sinks at the United Nations, non-government organisations and financial institutions. Most of this is a long-winded recitation of platitudes, with little actionable advice. The reason, of course, is that the meaning of financial sustainability is not clear, not even to banks promoting their green credentials.
To me, sustainability covers multiple topics — particularly the environment, society and economy — and minimises the harmful future impact of decisions. This especially includes impacts that are either not included in conventional analysis (so-called externalities) or those that are diminished in value today by discounting future cash flows. Thus adopting 'sustainable objectives' signals a bias towards longer term goals and places greater value on less quantifiable future costs and benefits. This raises two important challenges. The first is that a longer-term perspective will axiomatically incur immediate expenses or opportunity cost. The second is that a more distant horizon introduces greater uncertainty, which imposes the need for risk management across a longer time frame and over a wider set of exposures.
More specifically, sustainability in finance avoids harmful impacts, now and in the future, on markets, financial institutions and firms. Sustainable investors will not seek short-term gain if this increases market volatility and uncertainty, and renders markets less efficient; similarly firms will promote stabilising strategies, including ethical dealings, with an eye to longevity. Investors will seek out financial institutions that adopt sustainable practices, including refusal to fund damaging projects and a preference for promoting stability in markets. Finally sustainable investors will commit their funds — whether as equity or debt — to firms with sustainable business practices and products.
Although most investors still ignore sustainable factors or pay only lip service to