A strategic approach to finance and sustainability

Strategic finance involves making decisions that increase cash flow over the long term. In strategic finance, the focus is on long-term value creation rather than short-term profits. Meanwhile, sustainability involves more stakeholders in value creation. In the past, companies only served the interests of shareholders. Today, companies try to balance the interests of other stakeholders, such as employees and suppliers.

Across the world, companies are changing the yardstick they use to measure their performance. In addition to profits, they now focus on the triple bottom line, i.e., profits, people, and planet. There is some overlap between strategic finance and sustainability. They broaden people's horizons and are non-conventional. As we move forward, we will take a closer look at how strategic finance and sustainability are interconnected.

Strategic Finance and Sustainability Go Together

Sustainability and strategic finance are similar concepts. They both lead the company in the same direction. Almost all Fortune 500 companies follow sustainable finance practices. As a result, sustainable finance practices also maximize a firm's long-term value. Today, companies cannot generate profit for too long if they harm the environment or specific groups.

Investing in sustainability lowers capital costs

A firm's debt costs are directly related to its risks. Non-sustainable finance practices expose companies to lawsuits and reputational risks. Ultimately, these risks result in losses. As a result, the expected value is reduced. Therefore, creditors start asking for more compensation in the form of higher interest payments. Shell and British Petroleum, for instance, have paid large sums of money for the environmental damage caused by oil spills and other practices. Nike has also been sued for enabling child labor in sweatshops in third-world countries. By contrast, sustainable practices greatly reduce the risk of lawsuits and related monetary losses for companies. As a result, following the policies reduces debt costs.

Likewise, companies that practice sustainability have a lower cost of equity. As a result, they voluntarily adopt fair practices with employees and vendors. Also, such companies tend to focus excessively on product safety. They would rather recall faulty products and lose money than risk their reputation. Thus, the company faces fewer labor strikes, and raw material supply is steady. As a result, equity costs are lowered. Furthermore, since vendors receive payments on time, they do not include interest costs in their prices.

As a result of sustainable finance, both debt and equity costs are reduced. A lower cost of capital leads to an increase in the firm's long-term discounted cash flow value.

Volatility is reduced with sustainability

Sustainability dictates that resources should be used less rapidly than they are replenished naturally. For example, the consumption rate of gold and silver should be less than its mining rate. If this condition is met, supply spikes and shortages are almost impossible. Since the supply tends to be stable, so do the prices. By doing so, companies are able to reduce their cost of capital and supply their goods and services on time.

Investing in sustainability reduces operating costs

People who support sustainability have helped reduce fossil fuel dependency over the ages. Environmental groups have pushed companies to switch to environmentally friendly sources of power. Not only are they renewable, but they are also free! Hence, if companies can harness this energy, their overall costs will be reduced. On the surface, natural sources seem expensive. However, the technology is not sufficiently developed to prevent this from happening permanently. Eventually, the benefits will be reaped.

It is clear from the above points why strategic finance and sustainability are aligned in the long run. World's biggest companies have already adopted sustainable finance principles. Now is the time for smaller businesses to follow suit.