SUMMARY SUSTAINABLE FIANCE & VALUE CREATION
Part 1 – Corporate Purpose
Shareholder Value Maximization (SVM) = Creating value for shareholders and CG should
prevent acting in own interest
Enhances Shareholder Value Maximization (ESVM) = Not only focusing on the shareholders,
but also on the stakeholders
In Europe = civil law, stakeholder is embedded in law
In US = common law with shareholder primacy. In most states constituency statutes: firms can consider
the interest of stakeholders without violating shareholder primacy
In UK = stakeholders are mentioned in UK Co Act
Consider interest of stakeholders will serve Long Term (LT) SVM
Long term value depends on stakeholders: Employees, community of tax payers, customers & firms
Maximizing shareholder valuation should always be long term shareholder valuation
Support for ESVM comes from
- Corporate leaders: “Taking into account the needs of all their stakeholders, and society at large”
- Institutional investors (Big3, Pension funds): “Serve full set of stakeholders, to manage systemic risks
and promote diversity, and to tackle climate change”
Win-win = business choices -> benefit both shareholders & stakeholders
In practice mostly trade-offs between shareholder and stakeholders interests and of taxpayers and society
E.g. Climate change, offshoring, labor share, tax avoidance
In practice, is ESVM = SVM ?
ESVM < > SVM if ESVM leads to fuller consideration of stakeholder effects.
SVM is good under:
- Perfect competitive economy with no agent able to affect prices
- No externalities (=everything that is not priced but has a cost on stakeholders)
Then: SVM -> increase in value increases wealth of shareholders without anyone being worse off
SVM breaks down under:
- Imperfect competition: danger of monopoly (dominant single seller) / monopsony (dominant single buyer)
- Common ownership: Maximizing value of a portfolio rather than an individual firm (Maximize firm A with
the use of firm B)
- Externalities: Damage-inducing activities (e.g. pollution) are often inseparable from production activities -
> Regulation is suboptimal. Regulation is mostly only within national frontiers, so not global
Pure SVM is amoral (=without thoughts about good and bad)
Corporate purpose statement (CP)
= Defines the reason your company exists. It also illustrates how your product or service positively impacts
the people you serve
ESG has higher returns
- Out of equilibrium: a shock (e.g. a higher ESG score) -> demand goes up -> price goes up -> high initial
return -> longer term higher prices = lower returns
o Out of equilibrium: high returns
o In equilibrium: lower returns
Advantage of CP
- The commitment -> trust
- Also: while many stakeholders are protected by contracts
- For shareholder: legal shareholder protection is needed and focus on shareholder primacy
Even if one show that purpose statements cause success, the implications would be doubly unclear:
- First, purpose (statements) may only work for the few firms that have (voluntarily) adopted them
- Second, a regulator can only set minimum requirements for mandatory purpose statements
PAPER: On the Foundations of Corporate Social Responsibility (Liang, H. and L. Renneboog, 2017)
What fundamental forces steer corporations to behave as good citizens rather than as pure profit maximizers?
, Legal origins: English common law, French civil law, German civil law, Scandinavian law, Socialist law
The “law and finance” view
- Corporate laws address agency conflicts between managers and shareholders, and between
controlling and minority shareholders
- Common law is superior in providing fertile ground for shareholder protection
- Shareholder protection -> financial development -> efficient resource allocation -> Better economic
development and social welfare
The stakeholder view
- Firm has responsibility to shareholders, but also to broader stakeholders
- Civil laws are superior in providing fertile ground for stakeholder protection
- Stakeholder protection -> reducing market externalities -> social welfare
The institutional view
- Political institutions shape corporate governance structures and aggregate social preferences
- To foster CSR and sustainability: democracy and constraints on government need to come first
The development view
- Institutions are the consequence of economic development
- Democracy and executive constraints hinder good economic outcomes (e.g. CSR and sustainability):
difficulty in consensus building
Data & results:
- Test different scores in different laws (English, French, Socialist, German, Scandinavian)
- Civil law countries have better ESG ratings
- Civil law does better than common law
Summary:
- Legal origins: only consistent predictors of CSR
o Civil law firms outperform common law firms in CSR issues
o Scandinavian firms outperform the rest of the world in CSR
- Political “institutions”: mostly insignificant
PAPER: Marquis, C. (2020).
The B Corp Movement Goes Big
B Corp = for profit corporations, certified by the nonprofit B Labs
- (Public) Benefit corporation = legal entity with in its acts of incorporation a public benefit
“Impediments” (Marquis, 2020)
- Institutions: the rules of the game (corporate law, securities law, policy
incentives, market institutions) designed to max. shareholder value
- Norms: cultural norms of behavior of business and people (max. shareholder
value)
Today: profit is maximized -> The future: Value to all stakeholders is maximized
B Corp
Four key sections: governance, workers, community, environment
The assessment process
- An analyst reviews and ensures consistency and accuracy of submitted
assessment
- If below 80, BIA helps identify new areas to create impact
Firms must score above 80 out of 200 to be certified
Part 2 – PwC Guest Lecture
Drivers to put ESG on top of the agenda for financial services organizations and corporates:
- Consumer sentiment, Corporate reputation, Revenue growth, Investor expectations, Value creation
ESG focus leads to outperformance and value creation: more trust, more growth, lower risk & lower costs
Even big companies are not ready to report about ESG, reporting will be game changing since more date
will be available
Part 3 – ESG Reporting and ESG Metrics
1. ESG reporting
, Sustainability report: document that firms use to communicate their sustainability efforts and their impact
on people and planet
Audience: employees, investors, consumers, environment, society at large, etc
Currently there are no common set of reporting standards (choice in format, scope, leaving out poor
performances)
68 exchanges have written guidance on ESG reporting, 34 mandate ESG reporting as a listing rule
Assurance rates: validation of the numbers in the ESG reports
Frameworks
Global Reporting Initiative (GRI) -> first global standards and currently used for multinationals,
governments, small and medium enterprises, NGOs
More general, not focused on what the investor needs
Sustainability Accounting Standards
- Investor focused sustainability disclosure
- Consolidated into IFRS to become the global standard for sustainability disclosures for financials
Other frameworks: International Integrated Reporting Council (IIRC), Task force on Climate-Related
Financial Disclosures (TCFD), (Carbon Disclosure Project (CDP)
Scope of sustainability reporting: “Single vs Double materiality”
- Single materiality = narrow = only focused on targeting the investors
- Double materiality = wide = focused on targeting a broad range of possible stakeholders
o Difficult to tackle and navigate
o Alignment is possible if investor preferences are broader than focusing on financial gains only
Reporting on United Nation Sustainable Development Goals (SDG’s)
- Used by 70% of the firms in 2022 (was only 40% in 2017)
- Some disclosure is difficult due to a lack in good measurements
Benefits and Costs of disclosure
Benefits
Estimate future cash flows → reduces cost of capital
Improvement of liquidity
Managers can learn from peers
Enables monitoring of managers → improves decision making and efficiency
Costs
Costs of data collection, processing and auditing these measurements
Proprietary costs: can weaken the competitive positioning and thereby incentives
Too optimistic or too pessimistic disclosure -> litigation risk
Most important cost = Evasive actions: avoidance of disclosure via real decisions
Sustainability disclosure
Characteristics: Diversity of users and use cases, Diversity in measures and lack of quantifiability, Long-
term horizons and heterogeneity in horizons, Central role of externalities & Voluntary nature of activities
Problems with reporting
- Big complexity of the supply chain
- Lack of mandates and auditing
- Opaque supply chain
- Complexity (sustainability metrics are difficult, but technology gives companies new tools)
Estimate causal effects of sustainability disclosure
How to measure the transparency disclosure?
- Sustainability reporting + assurance + GRI standard + reporting scope
How to measure the success?
- ESG activities & policies (infrastructure), ESG performance (employee satisfaction), Financial
performance (profitability, cost of capital, firm value)
Drivers for disclosure
Firm characteristics; Quality of CG is correlated with voluntary disclosure. Can be used as an PR tool
Board characteristics; CEO explains the variation in disclosure
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