POINT OF VIEW Rod Lohin, Lee-Chin Institute for Corporate Citizenship, Rotman School of Management
Financing
Sustainability:
A Market Emerges
FOR YEARS, sustainability professionals —
and the academics who study their work
— have been answering some tough ques-
tions. Is there a business case? (Yes). Can
we determine which social and environ-
mental issues are most important to our
business? (Yes). Is it possible to measure and report on sus-
tainability practices credibly? (Yes). Can we deliver value to
business and society? (Yes). Simply put, the evidence shows
that companies generally perform better if they’re more sus-
tainable.
However, despite this progress, many sustainability
professionals still struggle to access budgets internally — in
particular, long-term funding for big, multi-year projects.
The fact is that they may know where they want to go, but
they’re short on capital — the fuel needed to achieve greater
social and environmental benefit.
In our research and consulting work at the Lee-Chin
Institute and through our networks, we have seen a number
of major corporations develop a bold sustainability strategy,
map out breakthrough programming to support it, and gain
support for the intent of the project and its initial costs —
often from annual philanthropy, sponsorship or other ex-
pense budgets. However, when they pitch the longer-term
capital requirements to access internal pools of capital, we
have seen them thwarted time and time again by otherwise
typical features of many socially-responsible investments:
complexity, long-term payoff, and modest or moderate fi-
nancial returns. In other words, these initiatives often fail
the test for internal capital allocation.
Some companies simply do it anyway, typically with the
leadership of key executives. For instance, Walmart’s lead-
ership invested in a massive sustainable supply-chain man-
agement initiative that has had global reach and helped it
manage risks and establish a new narrative with consumers;
and under Paul Polman, Unilever repositioned itself as ‘the
sustainable living company’ and consistently outperformed
its rivals in the public markets for more than 10 years.
But in the absence of such clear executive commitment,
how can sustainability professionals get further down this
road? How can we fund projects with long(er) time horizons
and lower rates of return but also with important long-term
payoffs for the company and the world? How can we better
leverage the capital markets and the finance capabilities of
our companies in support of social, environmental — and
business — benefits?
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 Unilever, Apple and Toyota Finance have issued
bonds worth billions for their own green projects.
The answer may be in the burgeoning market for sus-
tainable and responsible investments (SRI). Worldwide,
more and more investments have been made with regard
for sustainability. In 2015, the market for all types of SRI of-
ferings reached US$ 22.90 trillion (26.3 per cent of all global
capital markets) according to the Global Sustainable In-
vestment Alliance (GSIA). Specifically, two approaches
may be the most relevant to sustainability practitioners
within companies: green bonds and impact investments.
1. GREEN BONDS
Green bonds (publicly or privately issued) raise and deploy
funds for environment-beneficial projects (retrofits, clean
energy, pollution mitigation, etc.), offering a safe and pre-
dictable rate of return for investors often at a rate slightly
lower than more traditional bonds. Remarkably, green bond
issuance grew more than 100 times between 2012 and 2017,
from US$3 billion to US$389 billion (according to the Cli-
mate Bond Initiative).
For sustainability professionals and their companies,
there is a clear opportunity here to get past the capital road-
block. The cost of capital of green bonds can sometimes be
lower than that from other sources, even internal sources.
In this case, external capital could be more attractive than
internal capital. Companies that access funds through green
bonds could potentially be able to allocate funds to their
highest-potential capital projects and — at the same time —
fund more activities with environmental benefits.
There are two principal ways for practitioners to use
green bonds: raising your own funds by issuing a corpo-
rate green bond; or accessing green bonds raised by oth-
ers. More and more companies are issuing their own green
bonds. There are plenty of examples: Unilever, Apple and
Toyota Finance have issued bonds worth billions for their
own green projects. Best of all, companies issuing green
bonds appear to be paying both environmental and finan-
cial dividends. Boston University Professor of Strategy
106 / Rotman Management Spring 2019
Caroline Flammer recently noted that corporate green
bonds “yield a positive stock market reaction, improve-
ments in financial and environmental performance, an in-
crease in green innovations, and an increase in stock own-
ership by long-term and green investors.”
Companies can also access funds raised by govern-
ments, municipalities and a range of private players through
green bonds. Examples include green bonds worth more
than US$4.35 billion by Bank of America, and in Canada,
the Canadian Pension Plan Investment Board (CPPIB)
raised over $3 billion for investments.
However, there remains a risk that such funds are not
consistently ‘green’. To overcome this, financiers appear to
be increasingly making use of the ‘Green Bond Principles’
(GBPs) or the Climate Bond Certification (CBCs), as well as
third party verification.
2. IMPACT INVESTMENTS
Impact investing is another type of SRI investing that seeks
both measurable social and environmental impact along-
side financial returns. Between 2013 and 2017, the global
impact investing market grew almost tenfold from US$ 25.4
to US$ 228 billion. As the market continues to grow, more
and more major financial institutions like BlackRock and
UBS are joining pioneers like Bridges and Calvert.
With all of these funds seeking investments, sustain-
ability professionals may be able to access external funds
that align with their environmental and social benefit initia-
tives. This may be most compelling for companies that have
a tangible environmental or social purpose — for example,
renewable energy or education. However, even more tra-
ditional companies could potentially seek investments for
specific projects.
Clearly, the type and the stage of an organization plays
a role in determining how to access these markets. For start-
ups or social enterprises (businesses with a specific social or
environmental purpose), there are a range of fast-growing
 Between 2013 and 2017, the global impact investing market
grew almost tenfold from US$ 25.4 to US$ 228 billion.

networks of angel or early-stage investors, including Angel.
co and F6S.
Another option for social enterprises is social impact
bonds (SIBs), increasingly known as pay-for-performance
contracts. This is a complex investment vehicle in which a
principal (often a government funder) invests in an organiza-
tion or program that is expected to have a social or environ-
mental benefit. A third party is typically engaged to verify
achievement of the benefits, which triggers payment to the
principal. However, the benefits of SIBs may be outweighed
by the complexities.
For more established companies, issuing a green bond
is one possibility that could be targeted to impact investors
with an interest in environmental benefit. But there are oth-
er ways to structure deals to support projects with environ-
mental or social benefit.
Companies with advanced finance capabilities might
consider more complex instruments like real options or spe-
cial purpose vehicles. Real options allow an investor to partici-
pate in an investment in a tangible (real) asset. For example,
a company could offer an investor greater access to a promis-
ing green or social benefit project for a small upfront invest-
ment with the right to choose to expand their involvement
later, wait, or abandon the project.
There are also special purpose vehicles in which a par-
ent company places an asset in a subsidiary and securitizes
it or otherwise offers it to investors. This approach is already
used to manage billions and possibly trillions in public-pri-
vate partnerships involving governments, multilateral orga-
nizations and lenders/investment banks. However, in strict-
ly private markets, this promising approach may have been
destroyed by Enron, which made extensive use of them.
Sustainability professionals have come a long way in
understanding how to manage risk and add value to their
companies. At each stage, we have had to learn or otherwise
access new capabilities, including making a stronger busi-
ness case, understanding materiality, measurement and
reporting and ultimately, how to deliver both business and
social value.
These are all powerful advances. However, the better
we get, the more it becomes apparent that we need more fuel
— that is, more financial resources — for our sustainability
initiatives than is easily accessible in internal pools of capi-
tal. To overcome this challenge, we can access new pools of
external capital, but we will need to learn and engage in an-
other set of capabilities: finance and investment.
In closing
Happily, the investment market is looking for good work to
fund. Many of our companies — especially the larger, estab-
lished, publically-traded ones — have strong finance capa-
bilities that we have only tangentially leveraged.
Perhaps the time has come for us to reach out to our
finance colleagues, connect our work with the capital mar-
kets, and potentially have a greater positive environmental
and social impact than ever before.
Rod Lohin is Executive Director of the Michael Lee-Chin Family Insti-
tute for Corporate Citizenship at the Rotman School of Management.
This essay was first published on the website for the Network for Busi-
ness Sustainability (NBS), which is headquartered at the Ivey School
of Business. For more on this and related topics, visit https://nbs.net

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