In my first year, I was attending a macroeconomics class when I heard Frances Donald, chief economist at Manulife, talk about her regrets as a student. Given her success, it struck me to hear that the only thing she wished she had done was take a course in sustainable finance. His reflection on the importance of this skill set for new finance professionals underscored the high degree of relevance of elements such as ESG ratings within the industry.
I took this advice seriously. When the opportunity to take electives arose in my second year of my MBA, I chose Rotman’s Sustainable Finance course taught by Professor Jan Mahrt-Smith. However, I wasn’t just following the advice of someone I admired. I have always looked to the future. And financing for sustainability is a necessary step to unlock solutions that address social and environmental problems.
SUSTAINABLE FINANCE ENCOURAGES A MARKET-BASED APPROACH
One aspect that I enjoyed throughout the course was understanding “how things work”. It was easy for me to say, broadly speaking, that governments should spend more money on climate change. Yet this claim was much harder to defend when I realized the amount of capital needed to tackle climate change and the importance of private investors in making the necessary capital available. Therefore, to finance sustainability projects, we need to demonstrate that their investment generates value.
One assignment I worked on with other MBA students was on carbon capture, use and storage projects. The political and financial costs of financing these projects with public funds have proven to be a huge obstacle. Moreover, there is great uncertainty as to whether this emerging technology will ever lead to profit generation. Therefore, the creative methods of financing were presented as the solutions of choice.
FROM THE CREATIVE TO THE GENERAL PUBLIC
Some financing models that have been proposed to finance climate initiatives deviate significantly from conventional methods such as increasing debt or equity. For example, sustainability bonds are securities whose cost of debt is linked to key performance indicators agreed upon before issuance. However, the money collected in this way does not have to be used to advance climate projects. For example, sustainability bonds can provide automakers looking to go greener with an affordable source of finance. However, if the company fails to meet its agreed KPI – for example an increase in emissions – the interest on the bond is increased.
Green bonds are another approach to sustainable financing. These are securities where money is raised from investors to finance environmentally friendly projects. They are backed by governments that incentivize investors through tax credits that investors get by buying green bonds. Ultimately, these funding methods aim to overcome the challenges currently faced in funding sustainable development projects and to support new technologies and initiatives coming to market.
TAKING STEPS TOWARDS THE FUTURE
My personal investment journey started during my MBA where I felt more confident and equipped as a market player. Sustainable finance has taken my financial education a step further, and I intend to follow this topic closely as I believe it will make me a better informed investor. I particularly enjoyed understanding ESG ratings. Learning about its current flaws and potential has painted a more realistic picture of their role in finance. Beyond finance, as an aspiring leader, I also believe that to lead companies into the future, it will be necessary to take into account the impact of ESG issues in order to best position companies for growth. and resilience.
Sustainability has never been more important than it is today. But in the fight against climate change, finance must be the hero rather than the villain. To prepare as future business leaders, it is essential to learn what the company is doing in the face of climate adversity. Sustainability bonds and green bonds are just the tip of the iceberg in terms of what you can learn in a sustainability finance course. From ESG ratings to social bonds, the number of emerging topics in sustainable finance is only growing. Now is the time to invest in the future, and developing expertise in sustainable finance is a big step in the right direction.
Dr Peter Zhang, PharmD is an MBA candidate at the Rotman School of Management at the University of Toronto. Through the unique combined Doctor of Pharmacy / MBA program, he explored the intersection between life sciences and business strategy. In addition, he has published research in peer-reviewed academic journals and opinion pieces in national media in Canada.
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