When Dr Searat Ali introduced the concept of sustainable finance to his postgraduate students, he encountered some initial scepticism.
Some of his students questioned the necessity of prioritising societal wellbeing over profit.
“They asked ‘Why do we have to save society? What about profit?'” Dr Ali says.
A senior lecturer in finance, Dr Ali developed and began teaching the inaugural subject on sustainable finance at the University of Wollongong (UOW) in 2022.
“The Socially Responsible Finance (also known as sustainable finance) unit has since become a core subject of the Master of Applied Finance program, providing crucial education to future financial leaders in Australia regarding the shift towards sustainable finance and investment,” says Dr Ali.
There was no textbook on how to design the unit, but Dr Ali has made sure his students are equipped with a diverse range of knowledge in sustainable finance utilising learning materials from multiple sources including journal articles, analyst and industry reports, professional manuals, and regulatory policies.
“By compiling these resources in a meaningful way, students were able to gain a comprehensive understanding of the latest trends in sustainable finance and how prioritising societal welfare can also lead to profitable outcomes,” Dr Ali says.
Dr Searat Ali from the UOW School of Business
For those in the financial sector, sustainable finance has become a major focus not just for corporations and institutional investors, but also for the everyday, mum-and-dad investor looking to build a portfolio or super nest-egg.
“We think of sustainable finance as where environmental, social and governance (ESG) considerations are made in financial decision-making that leads to better outcomes that are sustainable in the long-term,” says Professor Millicent Chang, from UOW’s School of Business.
Professor Chang’s work on climate-related information disclosures and modern slavery is instrumental in understanding ESG issues and the University’s role in addressing the United Nations Sustainable Development Goals (SDGs).
The 17 SDGs were adopted by United Nations (UN) member countries in 2015, and sustainable finance is a crucial element of the UN's efforts to achieve them.
The UN estimated that the world will need to spend between $3 trillion and $5 trillion each year to meet the SDGs by 2030, and the ongoing Covid-19 pandemic has increased that estimate by an additional $2 trillion annually.
It also stated that chief financial officers of organisations around the world will need to play a critical role in reshaping the future of corporate finance and investment into a catalyst for growth, value creation, and social impact.
Investors have traditionally evaluated performance based on financial measures, but the move to ESG investing has become mainstream in the past decade. According to the Global Sustainable Investment Alliance, $23 trillion, or 26 per cent of all assets under management in 2016, were in “socially responsible investments” that take account of environmental, social and governance issues.
Professor Chang says decision makers that take into account ESG issues must consider not only the organisation and its stakeholders but also avoid focusing solely on maximizing profits.
“There is a concern that there will be a trade-off between profitability and sustainability,” she explains.
“That is the question investors also ask themselves – we want to invest in companies that have good ESG performance but also need a return on investment in the short-term.”
However, Professor Chang says the more recent research is showing that ESG investment is actually better than, or comparable to, the more traditional investments.
But she does warn that investors need to have a longer-term mindset.
While ESG activities or sustainable investing sound good on paper, Professor Chang says there also needs to be government buy-in to encourage those companies and investors looking to make sustainable choices more willing to do so.
She says funding grants and tax breaks for companies putting their money into things like renewable energy should be compensated.
“Of course, the government can’t support all business. This type of support has to be on a competitive basis,” she says.
“Australia is moving towards that, but it has to be a long-term commitment and not affected by political change. With the passing of the climate change bill last year there is a commitment to net zero emissions by 2050, but there should be support for businesses and individuals to get there.”
She added that although some companies are disclosing their ESG commitments, and the Australian Securities and Investment Commission is cracking down on “greenwashing” – where organisations exaggerate their green credentials – there also needs to be a standardised framework to which companies adhere if the average investor can compare and contrast green claims and make sustainable decisions.
“At the moment there is no standardised disclosure framework, but that is coming with the International Sustainability Standard Board which will require companies to disclose climate risk so investors can compare,” she says.
“That being said, having a standard is not going to ensure that greenwashing is not happening for large or small firms, but these statements will be audited and that will give investors and external parties some confidence that what is being disclosed is what is happening.”
Associate Professor Andrew Ainsworth, from the UOW Faculty of Business and Law says some companies are taking positive steps to tackle their ESG commitments by implementing strategies to change the way they do business.
“There is some low-hanging fruit they are taking advantage of like reducing their carbon footprint, looking at their energy consumption,” he says.
“But there are also some bigger things they are doing, like mining company Rio Tinto teaming up with a company that is involved in battery development so not only are they changing their operation but also looking at how they can work with other companies in the sustainable space.”
Associate Professor Ainsworth says regulation on ESG claims is vital if sustainable investing is to work to its full potential.
“People see what is going on in the climate space – when companies pollute there is no penalty. If the government can’t regulate this then the alternative is that investors have to care enough that they take action in terms of voting at company annual general meetings – shareholder activism,” he says.
“There is more to debate in this than just a need to see a return on investments.
“Investors want a return to compensate for the risk they are taking. Some people, when it comes to sustainable investing, are happy to take a lower return if they can see it is having a positive impact on the environment and society. Then there are others that say they want the higher return.
“There are real risks that are attached to ESG issues that will impact traditional investing. Even if you don’t care about the environment, your investment will suffer because of climate risk.
“For example, you may want to hold shares in a coal mining company, but at some time in the future, this company may not exist. Once investors realise this, they will see a change in behaviour and all investors will take sustainability into account in their investment decisions.”
UOW's Associate Professor Ainsworth
Associate Professor Ainsworth says there also must be more emphasis on educating investors and the next generation of advisers.
“At the University of Wollongong, our undergraduate and postgraduate business and finance programs have achieved great success in integrating sustainable practices into the curriculum,” he says.
Dr Ali agrees it is crucial to educate students who will become finance practitioners in the future about sustainable finance concepts and trends.
“This will equip them to make significant contributions at both domestic and international levels when they enter the financial services industry,” he says.
The newly minted core subject for the Master of Applied Finance was introduced to align with UOW’s strategic goals of empowering students for their future, creating knowledge for a better world, and making a difference to communities. Additionally, the subject reinforces the university's commitment to sustainability.
Dr Ali says the subject, which he has designed specifically to respond to new trends in financial markets, will not only be beneficial and motivating for students who take it, but it also has the potential to create a ripple effect in the broader community by implementing change at the grassroots level over the long-term.
Throughout the unit, Dr Ali teaches students about the various phases of sustainable finance.
“Among other things, they learn how ESG has evolved from a focus on developing and developed countries, and how corporate governance initiatives like diversity on boards are contributing to a shift in mindset from a focus on profits alone to a focus on the triple bottom line - planet (environment), people (society), and profit (economic),” he says.
“Students are taught why it is important for investors to consider these things, and how they, as investment professionals, would be able to influence the way in which investors direct their money.
“Encouraging individuals to prioritise long-term sustainability over short-term gains can be a challenging task in the realm of sustainable finance.
“However, through education, we can foster a behavioural shift that prioritises the common good of all stakeholders rather than solely benefiting shareholders with profits at the cost of society.
“This shift towards a more sustainable approach would benefit everyone and lead to a healthier planet for all.”
Join Professor Chang, Associate Professor Ainsworth, Dr Ali and finance industry expert Jacki Johnson, in the latest Luminaries webinar Sustainable Finance: Investing in a Better Future on Thursday 8 June.