The Rotman Review: Why Sustainable Finance Is Critical To MBAs

During my first year, I was sitting in 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 one thing she wished she had done was take a course on sustainable finance. Her reflection on how important this skillset is for incoming finance professionals emphasized the high degree of relevance for elements like ESG ratings within the industry.

I took that piece of advice seriously. When the opportunity to take electives came in my second year of the 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 had always been future-oriented. And financing sustainability is a necessary step to unlocking solutions that address both social and environmental issues.

SUSTAINABLE FINANCE ENCOURAGES A MARKET-DRIVEN APPROACH

One aspect I appreciated throughout the course was an understanding of “how things work”. It was easy for me to say, in a broad sense, that governments should spend more money to fight climate change. Still, this statement was much harder to defend when I realized the amount of capital needed to address climate change and the importance of private investors to make the necessary capital available. Therefore, to finance sustainability projects, we need to demonstrate that their investment generates value.

One assignment I worked on with fellow MBA students examined carbon capture, utilization, and storage projects. The political and financial costs of paying for these projects through public funding proved to be an enormous barrier. Additionally, there is great uncertainty as to whether this emerging technology would ever result in profit generation. Therefore, creative methods of financing have been touted as the solutions of choice.

FROM THE CREATIVE TO THE MAINSTREAM

Some funding models that have been proposed to fund climate initiatives deviate significantly from conventional methods such as raising debt or equity. For example, sustainability-linked bonds are securities where the cost of debt is linked to key performance indicators agreed upon prior to issue. However, the money raised in this way does not have to be used for the purposes of advancing climate projects. For example, sustainability-linked bonds may offer automobile companies seeking to transition towards a greener operation an affordable source of financing. However, should the company fail to meet its agreed upon key performance indicator — for example increased emissions — the interest on the bond is increased.

Another approach on sustainable financing is green bonds. These are securities where money is raised from investors to finance environmentally-friendly projects. They are supported by governments that incentivize investors through tax credits investors gain through their purchase of green bonds. Ultimately, these methods of financing intend to overcome the challenges currently faced in funding sustainability projects and support new technologies and initiatives to come into the market.

TAKING STEPS INTO THE FUTURE

My personal investing journey began during my MBA where I felt more confident and equipped as a market participant. Sustainable finance took my finance education one step further, and I intend to follow this topic closely as I am confident that it will make me a better-informed investor. I especially appreciated gaining an understanding of ESG ratings. Learning more about its current flaws and potential painted a more realistic picture of their role in finance. Beyond finance, as an aspiring leader, I also believe that in order to lead companies into the future, it will be necessary to consider the impact of ESG issues to best position businesses for growth and resiliency.

Sustainability has never been more important than now. But in the fight against climate change, finance needs to be the hero, rather than the villain. To become prepared as future business leaders, it is critical to learn about what society is doing in the face of climate adversity. Sustainability-linked bonds and green bonds are just the tip of the iceberg in terms of what you can learn in a sustainable finance class. From ESG ratings to social bonds, the number of emerging subjects in sustainable finance is only growing. Now is the time to invest into the future, and developing an expertise in sustainable finance is one major step forward in the right direction.

Dr. Peter Zhang, PharmD is an MBA candidate at the University of Toronto’s Rotman School of Management. Through the unique combined Doctor of Pharmacy/MBA degree program, he has explored the intersection between life sciences and commercial strategy. Additionally, he has published research works in peer-reviewed academic journals and opinions in national media outlets in Canada.

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