Sustainable finance – the integration of environmental, social, and governance factors into the investment decision-making process – has been a trending topic in financial markets in recent years as investors’ money flowed into bonds, stocks, and portfolios with an ESG focus. Sustainable finance bond issuance totaled $859 billion in 2021, the highest ever, according to Refinitiv data. This represents almost twice as much as in 2020, and four times more than in 2019. ESG assets under management this year total $35.3 trillion according to Global Sustainable Investment Review and such assets are expected to account for more than half of all global assets under management by 2025 (Deloitte).
This trend towards allocating capital for ESG assets and goals is a crucial part of the transformation towards a more sustainable economy. Given this tendency, what we today refer to as sustainable finance, will soon become mainstream finance. Therefore, understanding how sustainable financial instruments work, how to use them to align financial performance and positive change goals, and how they can be used in capital allocation and risk management is essential for all market participants. Moreover, everyone should understand these concepts to amplify the beneficial effect on society and induce a change in investment habits for retail investors. As a result, sustainable finance literacy – meaning an understanding of sustainable financial products and their use for promoting sustainable development goals – plays a key role in the integration of ESG factors into financial decisions.
How do we, business school educators, prepare leaders who understand sustainable finance? How do we educate our students about sustainable financial products and the implications of knowledge about sustainable finance in their decisions about sustainable investments?
The first step in achieving sustainable finance literacy is creating awareness. While the financial sector is advancing at great speed towards integrating ESG factors in financial decision-making, teaching sustainable finance lags behind. Teaching sustainable finance courses is therefore essential. However, to create awareness we need more than specialized courses.
We need to integrate sustainable finance topics in all our courses – and especially in the core courses. This will expose students to sustainability issues in finance whether they choose to work in sustainable finance or not. For some students, this will be part of their basic sustainable finance education, for others it will be just the starting point for more specialized training. More in-depth electives or master’s courses will help students develop the required skills to work in the future financial industry.
Be aware and accommodate student demand
We should be aware and accommodate student demand. Sustainable finance has become increasingly popular among millennials and Generation Z – who prefer to invest in companies with intrinsic values that drive positive change. Students know that if you want to invest based on your values, then it is important to understand basic sustainable investment practice. Student demand for sustainable training is strong and diverse. They know exactly what aspects of sustainable finance they want to learn.
I discovered this huge level of student motivation and drive while organizing a series of sustainable finance debates together with OIKOS Barcelona, the local chapter in Esade of OIKOS International (a non-profit student-driven organization for sustainable economics and management). Students find sustainable finance attractive and engaging. They are involved with sustainable issues and want to learn. Improving their education and then seeing them acting on that knowledge is the best possible outcome for a lecturer.
Get involved with the industry
In addition to the student-driven demand, there is an industry-driven demand. As the field is evolving quickly and many jobs in the financial industry orientate towards ESG integration by firms and the investment process, we need to equip our students with the specialized training that the job market demands.
Academics and practitioners should coordinate to create and share knowledge. We should together identify the relevant questions in research, those questions that help us advance research and provide solutions to burning issues. Moreover, as the financial industry is changing fast, our research is going to be more than ever data-driven and lead by the industry. From an educational point of view, the financial industry can provide us with feedback about the teaching content, tools, and methodology that our students need to learn to competently tackle these jobs.
Integrate sustainability into financial decisions
Finally, integrating sustainability into financial decisions requires an in-depth approach. We need to create tools for assessing the financial value created by corporate sustainability strategies; show how to integrate ESG benefits and costs in a traditional valuation model; how to value green bonds; and how to assess the implications of negative screening in portfolio allocation.
We also need to integrate real-world experience into our courses by bringing theory into practice. One of the activities of the 2022 Sustainability Week in Esade provides a good example. Our ESG investing challenge allows students to create portfolios using a trading simulation platform with real stock prices by screening companies based on ESG criteria. How to identify companies that care about ESG is not an easy task, but the challenge offers students an excellent way of learning how to select assets that reflect their standards and values while providing good financial returns.
With the increasing importance of sustainable investments, acquiring knowledge about sustainability and its inclusion in financial decisions is essential. Moreover, to have an impact on society, we need more than claims from market players about a change in corporate purpose and investment strategies. In addition to the Business Roundtable and the activities of United Nations Principle Responsible Investing signatories, we need to mobilize the many smaller players: students; lecturers; researchers; and practitioners. Only with a solid sustainable financial education can we make a smooth transition to a more sustainable economy.
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