S3 - E1 The Evolution of Sustainable Finance with Alex Edmans
Oct 29, 2024
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In this conversation, Alex Edmans, a Professor of Finance at London Business School and author of "Grow the Pie," shares his evolution in thinking about sustainable finance. He emphasizes the crucial link between employee satisfaction and market performance, arguing that this relationship is often overlooked. Edmans introduces 'pieconomics', advocating for business practices that enhance social welfare. Notably, he expresses increased optimism about businesses tackling societal challenges like climate change, highlighting a shift from shareholder value to broader stakeholder responsibilities.
Alex Edmans emphasizes that sustainability is often misunderstood, but crucial for long-term value creation in business.
The concept of 'pieconomics' distinguishes between companies that create shared benefits and those that only seek short-term profits.
Adopting a long-term mindset inspires all investors to integrate ESG factors, highlighting their material impact on overall business performance.
Deep dives
The Business Case for ESG
Engaging in Environmental, Social, and Governance (ESG) issues is perceived to yield greater benefits than focusing solely on traditional business concerns. This perspective posits that sustainability should be treated as a long-term intangible asset rather than as an irrelevant concept. Investors who recognize the interconnectedness of sustainability with overall corporate performance are likely to outperform those who dismiss ESG factors. Focusing on ESG can enhance company reputation, attract talent, and ultimately drive profitability.
Historical Perspectives on Sustainability
The interview highlights an evolution in the understanding of sustainability in corporate finance, illustrating how past work in human capital and corporate governance ties into modern sustainability initiatives. Initially, concepts such as employee satisfaction were regarded purely as corporate governance issues rather than sustainability ones. This shift in perspective underscores the idea that long-term value creation inherently requires addressing sustainability factors. Modern companies recognize that neglecting these issues can jeopardize their financial future.
Growing vs. Splitting the Pie
The podcast introduces the metaphor of 'pieconomics,' which differentiates between companies that grow the economic pie and those that simply take larger slices for themselves. Tobacco companies are cited as examples of pie-splitting businesses, profiting at the expense of consumer welfare, whereas pharmaceutical companies like Novo Nordisk, through their production of insulin, exemplify pie-growing firms that create shared societal benefits while achieving economic success. This distinction serves to encourage businesses to adopt practices that lead to overall societal and economic growth instead of short-sighted profit-making. The emphasis is placed on the importance of aligning business interests with positive contributions to society.
Investor Perspectives on ESG
Research indicates that the divide between sustainable and traditional investors may not be as pronounced as previously thought, with many traditional investors incorporating ESG considerations into their strategies. This suggests that a commitment to long-term value often aligns with sustainable practices, indicating that all investors should prioritize long-term thinking. The findings challenge the notion that investment mandates can be separated into different categories based solely on sustainability labels. Ultimately, all investors are encouraged to recognize the material impact of ESG factors on business performance.
The Role of Individual Responsibility in Business
The discussion emphasizes the importance of individual attitudes in contributing to broader societal benefits, intersecting personal actions with organizational outcomes. Creating value in one's professional role does not necessarily require a focus on sustainability-specific initiatives; rather, committing to excellence in any capacity can yield positive impacts. Academic professionals, for instance, can create significant influence through their teaching and research without needing to prioritize ESG topics explicitly. This broader view encourages individuals in every profession to consider how their skill and commitment can drive positive change.
In this episode, I speak with Alex Edmans, a professor of Finance at London Business School. Many of you in the audience will have heard of Alex before. We traced his evolution of thought regarding sustainable finance, covering his extensive body of work, including the book “Grow the Pie,” his academic papers, op-eds, and TED Talks, including his most recent paper: Sustainable Investing: Evidence from the Field.
My favorite takeaways from the conversation were:
When I asked when he first got interested in sustainability, Alex surprised me by saying he was never interested in sustainability or sustainable finance per se. He was interested in long-term value creation but noticed that sustainability aspects are sometimes important but overlooked or misunderstood.
I realized how the concept of competitive advantage is really at the heart of figuring out how a business or an individual can drive change. Focusing on what you can do very well right now can help to exit ESG compliance mode and enter an innovative mindset that helps society move forward.
I asked Alex whether he is more or less optimistic about businesses solving important problems than he was four years ago. Delightfully, he is MORE optimistic, which I find so encouraging.
If you like the pod, I can only recommend diving more deeply into Alex’s work, which is very nicely made accessible on his homepage: https://alexedmans.com
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