Published by Moneycation™
Newsletter: March 2014
Investigating sustainable finance
“Anyone who believes in indefinite growth on a
physically finite planet is either mad, or an economist”
How long can we live a lie, bury the financial truth and hide from the fact that many of our existing
financial models are less than perfect, and in a substantially serious or significant way? Design
flaws in any model eventually cause larger complications to a machine, financial operation or
infrastructure. The failure of institutions such as Lehman Brothers and the controlled revitalization
of firms such as AIG, General Motors and the mortgage giants Freddie Mac and Fannie Mae
demonstrate how financial models can and do fail, and that repairs are made to stem the negative
impact of the problems.
What if even better financial models had existed in the first place? If by better, one means
sustainability for the benefit of the greater system and core model strength while still maintaining
at least some of the ethical principles associated with profiteering, then why not pursue that
objective? That is what this newsletter seeks to explore, extrapolate and elaborate upon.
What is sustainable finance?
According to the University of California at Berkeley's Center For Responsible Business,
sustainable finance is “...the practice of creating economic and social value through financial
models, products and markets that are sustainable over time.” This means in order for finance to
be “sustainable”, most, if not all of the financial system must create economic and social value.
Economic and social value themselves are terms that should also be understood as these may be
defined differently depending on what organization, political entity, business etc. thinks it is and
how they benefit from that meaning.
A good place to begin understanding the notion of sustainable finance is with a simple visual
display of the aforementioned definition. Moreover, when social value is extended to include
environmental impact, three core areas of sustainability emerge. These three areas are economics,
social responsibility and environmental safety. They must interact together in a way that allows for
a functional societal eco-system. Financial sustainability is only a part of the greater system, but
before looking at it more closely, the Venn diagram below demonstrates the basic principles behind
sustainability and serves as a good introductory graphic to the topic:
Sustainability is a measure of social, environmental and economic worth
Image license: Johann Dréo , GFDL
What is economic value?
There are several ways to interpret economic value. One such method is the concept of economic
value added. According to the New York Stern School of Business, economic value added or EVA
“...is a measure of surplus value created on an investment.” Their calculation for such is below:
EVA = (Return on Capital - Cost of Capital) (Capital Invested in Project)
According to Investopedia, economic worth rather than economic value is. “The worth of a good
or service as determined by people’s preferences and the tradeoffs they choose to make given their
scarce resources, or the value the market places on an item”
In light of the above two definitions or meanings, economic value is a measure of worth as created
by market forces and perceived by market participants whether they be corporations or individuals.
Sustainable economic value
So what then, is sustainable economic value? Given that sustainable finance involves social
responsibility and long-term renewable benefits, sustainable economic value would be the market
worth of something as understood in terms of social responsibility or long-term renewable benefits.
For example, an energy producing wind turbine may have more sustainable economic value than
non-sustainable economic value due to the socially responsible benefits it is capable of providing.
Thus, financial models by necessity, must involve sustainable economic value instead of the
opposite. Crudely, the addition of the word sustainable is all that is needed to the aforementioned
SEVA = (Sustainable return on capital – Sustainable cost of capital) (Sustainable capital invested in project)
What is social value?
The notions of sustainable finance can be whittled down even further if one attempts to
conceptualize what social value is. Social value depends on individuals, organizations and even
regulations. In a broad sense, social value is the net perception of the value of sustainable products
and services as determined by market forces, which kind of begs the question. Essentially, the more
people and entities believe in such value, the greater its prevalence and impact on total value
If total value is equal to sustainable economic value plus non-sustainable value as a weighted
average of the two, as the former becomes larger, its influence on valuation rises. An example of
this is the value of solar panels as measured by demand. Over time, as technological advancements
are made, as non-renewable resources deplete and as consciousness of environmental
responsibility expands, the sustainable economic value of solar panels increases. Whether or not
sustainable economic value is in and of itself a sustainable metric depends on what culture values
in the first place.
Image license: Saint George IV, GFDL
The image above provides one interpretation of how sustainable models incorporate social,
environmental and economic interests to varying degrees. It also illustrates the complexity of
balancing a complex and interrelated system of organizations, industry, culture etc.
The above diagram also illustrates sustainability is not as simple as social, economic and
environmental harmonization. There are many more factors and disciplines that influence each
other with varying levels of sustainability.
Sustainable financial models
Since market forces vary, organizational objectives differ and social values change, the idea of one
sustainable financial model seems naïve. If economic value is not calculated using a single formula
or method, then it should not be surprising if multiple models of sustainable finance exist, nor is it
necessarily required that they do. Each of these models should generally seek to measure some
method for developing anything from business financial models to fiscal regulations. Non-profit
organizations have been practicing sustainable or socially responsible finance for some time, and
many of the models are effective. Yet, a world without profit seems fantastical, so adaptation of
not-for-profit financial models in to sustainable for-profit models is a possible alternative.
According to a USAID and Nature Conservancy report on sustainable finance, the four pillars or
key areas of sustainability include: Financial and strategic planning, income diversification, sound
administration and finance and in-house income generation or self-sourced revenue. These are not
new concepts and are applicable to many legal entities. They are important in maintaining
organizational continuity, which is not necessarily sustainable. Thus, additional elements of
managerial finance are needed to add economic opportunity that allows for individual wealth
Financial models are designed for numerous levels and types of administration. For example, fiscal
policy creates taxation, budgetary and operational models. Moreover, monetary policy uses
economic models that incorporate econometric equations to assess optimal outcomes via various
policy initiatives. If every organization has its own model that functions symbiotically with other
models, then creating fundamental framework that allows systemic sustainable integration possible
An important understanding behind sustainable finance is that profit, whether it be shareholder
earnings or profit margin, is not necessarily the most important factor in modeling. As long as
profit is the pinnacle motive, social values, economic sustainability and environmental equilibrium
become secondary. It is that simple, but the broader implications are not. Nations seek power
through economic growth because it is in the best interest of the nation. Money pays for defense
programs, improves educational funding, stimulates commercial innovation etc. These are all
legitimate reasons to seek economic growth, but not necessarily the best ones.
The financial model on the next page details the following attributes of financing the renewability
of product sourcing and the sustainability of funding the organization process.
• Cost effective
• Buoyant capacity
• Balanced revenue generation
Convention Biological Diversity: Funding model
Source: Convention on Biological Diversity; License: Fair Use
Problems of sustainable financial models
Since sustainable finance is an ideal, and is not currently common practice, obstacles that
challenge financial models today may not be problems in the future if more sustainable models are
adopted. However, at present, corporations and legal entities have expenses, shareholders and
operations that do not necessarily allow them to become fully sustainable. A few obstacles to
sustainability of financial models are listed below:
• Profit interest
Overcoming these obstacles is possible, although not necessarily right away. Forward thinking is
all that is needed to begin the process of creating or developing sustainable financial models.
Possible ways to do this and objectives to consider are listed as follows:
• Partial re-structuring
• Progressive implementation
• Re-designed marketing
• Profitable methods within a sustainable model
• Commercial and economic viability of the new model
Sustainable finance within industry
Financial sustainability is dynamic and interlinked within business models. In other words, since
sustainability is thought to take more than simply one business division in to account in order to
function, it more often than not, must work within a broader system by necessity. Moreover,
isolated operations that only take departmental functionality in to account is generally not as
sustainable due to the lack of integration with a broader system. For this reason, financial
sustainability should be considered as part of interconnected business models in addition to the
financial models themselves.
The different types of sustainable business protect resources while simultaneously meeting the
goals and objectives of business interests. According to the International Institution for Sustainable
Development (IISA), different types of sustainable business require business strategies that define,
implement, change, design and enhance aspects of business that affect sustainability.
Attributes of sustainable businesses include profitability and compliance with both environmental
regulations and credible scientific knowledge regarding the impact of business practice on the
environment. The IISA also states protecting, sustaining and enhancing human resources while not
degrading those resources is a characteristic of business sustainability. This is interpreted to mean,
keeping the work force alive and healthy, but not too wealthy to ensure ongoing or sustainable
The following industry profiles indicate how steps toward more sustainable business have already
Agricultural businesses necessitate sustainability as without it, crops management is susceptible to
failure. Without renewable resources such as the sun, rain and fertilizer agriculture would not exist.
Since these types of businesses rely so heavily on sustainable resources it follows that proper
management of those resources helps ensure sustainability of the business. Organic farmers
nationwide have embraced sustainable business models that are health for the environment and
people. What's more, according to a report from Inc. com's, businesses such as Frog’s Leap
Winery, the upfront cost of becoming a sustainable business are indeed profitable.
• Green energy
The green energy movement has been gaining momentum for some time now. Green energy
businesses are in the business of sustainability. Businesses that create, build and install equipment
that harness, store and distribute renewable energy are as sustainable as the resources that fuel
these types of businesses are. Green energy businesses that utilize renewable parts and equipment
that are environmentally safe naturally follow suit with the green energy sustainability they help
• Waste management
Recycling, reuse, and re-integration are methods used by green waste management companies such
as Waste Management Inc. This is one of largest waste management companies in the United
States and has begun reusing the garbage it collects to fuel its trucks in addition to running and
enhancing its traditionally earth friendly recycling programs. This type of sustainable business
demonstrates how costs can actually be reduced by going green.
• Construction materials
Companies that recognize environmental and financial pitfalls of harvesting and wasting
construction materials are green friendly and thus sustainable at some level. According to Inc.
Magazine, a business called Hycrete has found a way to waterproof concrete with earth friendly
chemicals that make it more efficient to reuse old concrete than costly to recondition. Green
friendly businesses such as lumber supply companies that rotate crops to ensure a constant supply
of wood without having to acquire additional land have also grasped the concept of sustainable
Auto manufacturers are on the sustainable business wagon as well. Increasingly energy efficient
vehicle models are being designed, tested and marketed in an effort to meet earth friendly
standards that test business models sustainability. Renewable energy news reports design concepts
that support automotive business sustainability include fold up cars, self-repairing cars, plastic
cars and even plastic roads.
Different types of sustainable businesses span multiple industries among which there may also be
unsustainable businesses. However, some industries are more apt to sustainability than others. To
identify what the different types of sustainable business are it is helpful to understand what makes
a business sustainable, and then match those attributes of sustainability with businesses and
business models that have them. Business.gov provides an outline of qualities that business on the
road to sustainability or that are already sustainable possess. These factors can be referred to as a
qualitative measure of business sustainability.
1. “University of California at Berkeley”; Sustainable Finance; Haas School of Business
2. “Journal of Sustainable Finance and Investment”; Corporate governance and sustainable thinking: new and old
models of thinking; Eleanor Bloxham; June 16, 2001.
3. “World Wildlife Fund”; Sustainable Finance.
4. “Nasdaq”; Financial Model.