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How will finance balance green business strategies against profit reductions?

As businesses step up to support Paris Accord goals, financial professionals will increasingly need to understand sustainability and environmental issues within the supply chain.

Earlier this month, the US president announced his intention to pull the United States out of the Paris Accord on climate change. Much to the dismay of the financial and business world. Mayors and states in America are now taking on the fight at a local level to stop further climate change and some businesses have also pledged to act in line with the Paris agreement's objectives.

A group of Wharton professors of legal studies and business ethics believe that corporates have an important role in showing leadership on climate change and they have a responsibility to act on the commitments that many in the business world are now making. Wharton professor Eric W Orts, says that both business and government have to play a role in addressing climate change while his colleague Brian Berkey adds that the Trump administration’s intention to withdraw from the Paris Accord means that a greater share of responsibility now falls on the corporate world.

Will self-regulation work on environmental issues?

This raises the question of whether companies are able to self-govern when it comes to curbing greenhouse gas emissions and environmental pollutants in the supply chain. The stated intentions of multinationals such as Amazon, Apple, Target, of working towards the Paris Accord objectives, are noble. But what happens if or when a climate-related principle comes into conflict with the bottom line? Without legislation, can a good – voluntary – intention (to reduce or eliminate a production process that is environmentally damaging) really stand up against a reduction in profits?

Professor Berkey says that, if firms can reduce their own emissions, or those deriving from their supply chains, they should be doing that – even if doing so would cut into profits.

Need for collaboration at all levels

The reality is, of course, that companies and government need to work together. There's a need for legislation locally, nationally and internationally. Professor Orts writes: “The dynamic complexity of the climate change problem suggests that the best solutions will leverage broad-based social movements favoring the production and maintenance of many kinds of legal, economic, and political agreements involving many institutions — not just nation-states negotiating international treaties, but also other agreements involving regional and municipal governments, non-profit organizations (including educational, religious, and environmentalist groups), business firms, and consumer groups.”

Ensuring that sustainable and green corporate strategies and objectives are adhered to even when they cut into financial profits will be a tough tightrope for corporates to walk in future. Weighing up environmental commitments against cash flow and revenues will be a discussion that will involve treasury too. For example, in future, explaining variations in cash flow to the board might involve some detailed knowledge of sustainability and environmental issues within the supply chain. And as the business community is called upon to show leadership in achieving important global environmental goals, it may fall to financial professionals in large corporates to provide financial analysis as part of the corporate sustainability agenda.

CTMfile take: And it's always worth remembering that green and sustainable business strategies don't necessarily have to be damaging to revenues. Businesses that don't harm the environment can of course be more profitable and sustainable in the long run.

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