Creating a Better Environment for Finance

One casualty of the financial crisis and subsequent global economic downturn has been employment in the financial sector. In the United States alone, finance employment fell by 233,000 jobs in 2008 — and more than half of that decline in employment took place in the last four months of 2008. Unfortunately, the worst may not be over: London’s financial sector, for example, is expected to shed nine percent of its jobs in 2009, by one estimate. What will become of all the skilled professionals losing jobs in finance?

One domain where financial acumen may fruitfully be applied is, perhaps surprisingly, environmental sustainability. Addressing environmental sustainability has traditionally been understood as necessitating a trade-off with economic benefits such as growth and prosperity. Over the last few years, however, this mindset has started to shift, as more and more managers have come to realize that economics can provide a way to address — and profit from — the sustainability challenges that beset human society. Companies have begun positioning themselves to capitalize upon a world where environmental and social constraints will inevitably cause dramatic shifts in how businesses are run. Forward-thinking organizations are seizing the moment to rethink not only their investment portfolios and their perceptions of risk but also their product and service offerings.

The creation and redefinition of markets to align our economy with environmental constraints is only in its infancy. Prominent among these efforts is the battle against climate change, in which the logics of economics are being brought to bear on carbon emissions. Carbon taxes and cap-and-trade policies are both being proposed as viable mechanisms for recalibrating markets and harnessing economic forces to help society reduce greenhouse gas pollution. Similarly, we are witnessing the emergence of “biodiversity” offsets, by means of which companies can counterbalance their environmental impacts in one geographical region by preserving vibrant natural habitats in other areas. Royal Dutch Shell plc is using this approach to help preserve antelope populations and other fauna in Qatar, offsetting the impacts of developing a new natural gas facility being built in another part of the country. In a similar fashion, the United Nations is promoting the concept of “reduced emissions from deforestation and degradation” (REDD) to place an economic value on existing rainforest because of its high capacity to sequester carbon. Proponents expect the REDD scheme to be included in the successor to the Kyoto protocol, slated to take effect in 2013. Taking an even broader view, Mike Johanns, former U.S. Secretary of Agriculture, sees “a future where credits for clean water, greenhouse gases, or wetlands can be traded as easily as corn or soybeans.”

Perhaps even more intriguing is the possibility of crafting new offerings that integrate economic and environmental concerns. For example, the city of Berkeley, California, is working with Renewable Funding LLC, a financial services company based in Oakland, California, to offer an innovative new program that helps homeowners purchase solar installations. The model allows property owners to install solar panels with little upfront cost, via funds generated through the sale of bonds. The property owners then pay for their solar installations over 20 years, through a line item on their tax bills — and thus repay the bonds. (The program is voluntary, so it doesn’t affect property tax expenses for those property owners who decide not to take part in it.) Another business model that addresses customers’ upfront costs in transitioning to solar power is that of Sun Edison LLC, based in Beltsville, Maryland. The company sells solar energy to its corporate and government clients — and it also installs and maintains the equipment and arranges project financing for installations.

Of course, applying financial logic to environmental issues can in some cases be problematic, both morally and technically. As became abundantly clear in the financial meltdown in 2008, transparency, simplicity and a clear linkage between financial instruments and underlying assets are important safeguards for keeping financial systems in check. An equivalent, if not greater, degree of prudence must be applied to environment-related markets.

Despite these challenges, however, responsibly integrating environmental concerns into strategy presents a remarkable business opportunity. Companies that have come to terms with the harsh reality of finite planetary resources and have begun shifting their business models accordingly are poised to benefit the most from the inexorable transition towards a more sustainable economy. In the current economic climate, corporations pursuing this strategy can easily attract bright, motivated professionals from the financial sector to work in positions that will enable them to continue utilizing some of the finance skills that they have nurtured and honed in business schools and management positions. Many of these employees will be delighted to discover a way to intertwine their professional expertise with meaningful personal values. Companies should strive to make the most of this eminently capable workforce.