Journal of Sustainable Finance & Investment

ISSN: (Print) (Online) Journal homepage: https://www.tandfonline.com/loi/tsfi20

Obstacles to sustainable finance and the covid19

crisis

Rodrigo Zeidan

To cite this article: Rodrigo Zeidan (2020): Obstacles to sustainable finance and the covid19
crisis, Journal of Sustainable Finance & Investment, DOI: 10.1080/20430795.2020.1783152

To link to this article: https://doi.org/10.1080/20430795.2020.1783152

Published online: 24 Jun 2020.

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JOURNAL OF SUSTAINABLE FINANCE & INVESTMENT
https://doi.org/10.1080/20430795.2020.1783152

Obstacles to sustainable finance and the covid19 crisis

Rodrigo Zeidana,b
a
NYU Shanghai, Shanghai, People’s Republic of China; bFundação Dom Cabral, Belo Horizonte, Brazil

ABSTRACT ARTICLE HISTORY

Rarely are the incentives of portfolio managers aligned with those of Received 29 May 2020
companies’ stakeholders. In this article, I use access to the founder of Accepted 12 June 2020
Wright Capital, a wealth management company that has U$600
KEYWORDS
million under management, to explore the dynamics of ESG; asset allocation;
sustainable finance and impact investment amidst the covid19 sustainable finance
crisis. Pointedly, Wright Capital is a consumer of financial products
related to the sustainability domain. As such, it encounters many
of the supply-side obstacles that have been observed by
researchers; chiefly among it, few specialized funds, the
prevalence of green washing, and difficulties in disentangling ESG
scores from other companies’ characteristics (larger companies
tend to provide more detailed information on their environmental
and social initiatives).

This perspective article is a case study regarding the obstacles that practitioners face when
trying to improve the environmental and social performance of their portfolios without
abandoning financial returns. The article does not deal directly with the impact of
covid19 on financial markets but explores some of the issues that limit the efficiency of
sustainable finance. Pointedly, covid19 may limit the dissemination of ESG-related
funds but may increase incentives for the creation of financial products that fully incor-
porate environmental and social outcomes. Some of the insights from the interview
process corroborate previous works. Our main contribution is to critically evaluate the
main barriers for sustainable finance to thrive.
Wright Capital’s business model incorporates a focus on impact investing and sustain-
able finance. Their institutional material includes citations on Ashwin Kumar et al. (2016)
and Friede, Busch, and Bassen (2015). For their clients, at least 1% of their portfolio must
be allocated in narrowly defined impact investments through a dedicated fund (FIC FIM
Wright Social Impact) that charges no management fees. Assets are allocated to invest-
ments related to one or more of the 10 selected Sustainable Development Goals (SDGs)
(Figure 1). The firm is a consumer of sustainable finance products because it does not
invest their clients’ wealth directly. It buys shares in specialized funds in Brazil and
abroad. As such, if a particular investment is related to quality education, one of the
SDGs in the Social Capital fund, Wright Capital’s role is to ensure that the invested
funds meet impact investing criteria.

CONTACT Rodrigo Zeidan rodrigo.zeidan@nyu.edu NYU Shanghai, 1555 Century Avenue, room 1330, Shanghai
200122, China
© 2020 Informa UK Limited, trading as Taylor & Francis Group
2 R. ZEIDAN

Figure 1. Sustainable development goals in Wright Capital’s social impact fund.

At first, Wright Capital’s social impact strategy mostly involved convincing their clients
to increase the share of their wealth devoted to impact investment. Recently, the firm has
added lobbying for changes in financial regulations. Partly, this change in strategy has
been motivated by academic research. Dyck et al. (2019) highlight the importance of insti-
tutional investors as promoters of change. The company aims at influencing decision-
makers by actively participating in associations that drive regulatory change. Their goal
is to accelerate the dynamic processes related to sustainable finance and impact
investment.
One of the main barriers for companies to move away from business-as-usual is organ-
izational inertia. Change can be forced upon companies or may result from pressures from
competitors and consumers. These are the major categories of intervention for increasing
the breadth and depth of sustainable investments: market mechanisms, regulation, and
ideological changes. Table 1 summarizes costs and benefits of each type of intervention.
The interview with one of Wright Capital’s founders has been conducted on 25 May
2020. There are three salient points (Zeidan, Van Holt, and Whelan 2020), one each
related to the supply-side, demand-side and the regulatory framework of financial
markets, both in Brazil, where the firm is located, and globally, as a significant share of
their clients’ wealth is invested outside of Brazil. Points 1–4 below are the main salient
points from the interview.

(1) The limits of Environmental Social and Governance (ESG) factors.

Most corporations today publish sustainability reports in which ESG factors are dis-
closed. However, the quality of the information published by companies varies

Table 1. Types of intervention for more sustainable financial markets.

Supply-side/Market
Benefits Efficient economically; Self-
reinforcing mechanism.
Costs Coordination costly; Outside lag.
Intervention
Regulation
Outside lag; Customized to local,
industry and global threats.
Inside lag; Inefficient economically.
Demand-side/Ideological
Efficient economically; Self-
reinforcing mechanism.
Coordination costly; Outside lag.
 JOURNAL OF SUSTAINABLE FINANCE & INVESTMENT 3

significantly, and investors cannot easily distinguish between value-creating sustainable

initiatives and green-washing. There are numerous ESG-related funds, but there is no con-
sistent evidence that screening companies for ESG factors generates long-term financial
returns in excess of risk factors. At most, we can state that it is possible to build portfolios
that, when screening for ESG factors, do not perform worse than most traditional-built
portfolios (Alessandrini and Jondeau 2020). Funds who screen for ESG factors still rely
on ‘intuition that the laggard’s cash flows are riskier and therefore demand a higher
cost of capital and thus be valued using a high discount rate’ (Davis and Lescott 2019,
49). ESG factors have one limitation: they present only risks, and not opportunities
(Zeidan, Boechat, and Fleury 2015). As such, sustainability-initiatives that are value-
enhancing are not captured in regular environmental funds. There are clear practical
difficulties about allocating funds to high-performing ESG screened companies for consu-
mer of financial products. Without dealing with such issues, it will be hard for sustainable
finance to thrive.

(2) Shareholder pressure

On the demand-side, ‘companies will go as far as shareholders will take them, and no
further’, according to the founder of Wright Capital. Of course, some market-pressure
should lead to greenwashing (Marquis, Toffel, and Zhou 2016). Yet pressure from share-
holders, especially for large corporations without consolidated ownership groups, should
limit value-neutral initiatives. Managers cannot keep hiding from shareholders if the
signal is clear for companies to improve environmental and social outcomes.

(3) Institutional investors

Scale matters. Institutional investors are key stakeholders in the sustainable finance
domain. Among all types of shareholders, institutional investors could accelerate environ-
mental and social improvements the most. Dyck et al. (2019) show that institutional inves-
tors from certain countries with a strong community belief in environmental and social
issues (E&S) transplant their social norms regarding E&S issues around the world. Never-
theless, such processes take time. Improving the regulatory framework (Table 1) may
speed up the process. Regardless, without institutional investors pressuring companies,
small wealth management companies should continue to struggle to find competitive
ESG dedicated funds.

(4) Covid 19 and sustainable finance.

‘Money talks’. Amidst a global crisis, the search for financial returns (or minimizing
financial losses) takes precedence among all else, in financial markets. There are reasons
to expect that, at first, impact investing and sustainable finance should be negatively
affected by the covid19 Institutional complexity fosters organizational inertia (Luo,
Wang, and Zhang 2017), which increases the probability of greenwashing. In addition,
Stieglitz, Knudsen, and Becker (2016) show how, in dynamic environments, the best-per-
forming organizations are generally more inert than less successful organizations.
4 R. ZEIDAN

Nevertheless, there is some silver lining regarding the evolution of sustainable finance:
resiliency. Companies that survive will not come through unchanged and will seek ways to
prepare for the next crisis. Environmental and social factors should become more impor-
tant for companies and investors as the global economy recovers. Nevertheless, the
dynamic evolution of ESG or other ways to measure non-financial outcomes by companies
will continue to rely on shareholder pressure, new regulations and behavioral changes.
Small boutique companies, from a systemic point of view, are more relevant as promoters
of regulatory and behavioral changes, than as allocators of financial resources.

(5) Final remarks

One can’t manage what can’t be measured. While ESG factors have allowed companies
to disclose important information on environmental and social sources of risks, there are
limits to its usefulness. There is little standardization in disclosure, and no major evidence
that portfolios that screen for ESG factors outperform traditional portfolios.
Nevertheless, business-as-usual has become less valuable amidst a global pandemic, and
resilient companies should turn more valuable as the global economy recovers. As the
regulatory pendulum swings again, this time to allow more lending for distressed compa-
nies, financial regulators can include disclosure rules on environmental and social out-
comes as conditions for access to credit.

Disclosure statement
No potential conflict of interest was reported by the author(s).

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