3: Finance

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This chapter is by Julia S. Kwok, Northeastern State University, 3100 E. New Orleans Street, Department of Accounting and Finance, College of Business and Technology, Broken Arrow, OK 74014. E-mail: kwok@nsuok.edu; Phone: 918-449-6516.

The intersection of sustainability and finance occurs on many fronts. In this chapter, we will discuss how sustainability impacts various activities associated with the finance function, such as investments, banking, trading, insurance, and more. The chapter starts with capital investments, which are long-term corporate finance decisions related to fixed assets and capital structure. The discussion of the valuation techniques centers on the inclusion of sustainability measures in the analysis. Green and socially responsible investment opportunities, such as green bonds and emissions trading, are explored in the financial investment section. We then turn to financial services, such as banking and insurance.

3.1: Capital Investments
This page discusses the necessity for organizations to evaluate capital investments in sustainable projects beyond traditional financial methods. It highlights the lack of standardized sustainability valuation metrics, which complicates effective measurement of social and environmental impacts. Research indicates that nonfinancial indicators are vital for future performance, with firms on sustainability indices outperforming others.
3.2: Socially Responsible Investments
This page discusses socially responsible investing (SRI), which seeks to balance financial returns with social, economic, and environmental considerations. Valued at $2.7 trillion in the U.S., SRI uses criteria such as corporate ethics and environmental impact, supported by sources like the Social Investment Forum. Despite higher risks, SRI mutual funds remain competitive, with various indexes tracking sustainable companies.
3.3: Measuring Corporate Performance
This page discusses the shift in measuring corporate performance from traditional financial metrics to include predictive nonfinancial indicators. It highlights the balanced scorecard as a system integrating both measures across innovation, internal processes, customer value, and financial performance. This system aligns daily activities with long-term goals and has evolved to create the Sustainability Balanced Scorecard, which emphasizes sustainability.
3.4: Carbon Finance
This page discusses carbon finance, which involves managing greenhouse gas emissions in light of future regulations. Key components include cap-and-trade systems, enabling emissions trading, and carbon taxes, which tax emissions based on their societal impact.
3.5: Sustainable Financing
This page discusses the growing focus of financial intermediaries, such as banks and credit unions, on sustainable practices that incorporate social, environmental, and economic factors. It highlights key industry standards like the Equator and Wolfsberg Principles that promote responsible financing. Sustainable financing is divided into green and social categories, with initiatives like microfinancing supporting underserved communities.
3.6: Sustainable Insurance
This page discusses the insurance industry's vulnerabilities to climate change, emphasizing potential financial losses and the growing focus on sustainability. Insurers are creating green investment strategies and products, including weather-related coverage and incentives for low-emission vehicles. Many are also implementing exclusion clauses to limit risks from greenhouse gas emitters, indicating a broader shift towards sustainability in their finance and operations.

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