Two colleagues in the office discussing
The change required for many finance teams is substantial © Getty Images

Chief financial officers, chief ­investment officers and their teams are in a prime position to help embed ­sustainability in their organisations — from strategy and operations to financing and reporting. Yet the change required for many finance teams is ­substantial.

A recent survey of senior finance professionals by the charity Accounting for Sustainability suggests that the profession is responding: 88 per cent agree that it is “very important” or “essential” to transform financial decision making to address the opportunities and risks posed by environmental and social issues.

Most organisations have developed at least some tools to integrate sustainability, alongside traditional financial data, into decision making.

But only 9 per cent reported they were able to do so in a fully comprehensive way. Fifteen per cent felt they had the tools and techniques in place that they needed, though 46 per cent said these were under development.

Those of us who teach and conduct research in finance and accounting have a role to play to meet this demand.

We took part in a recent discussion between finance and accounting —professors and the Financial Times about best practices, successful innovations, and important concepts and themes.

It is now relatively uncontroversial to argue that climate change and nature loss bring direct risks to the profitability and cash flows of companies.

Physical risks arise from direct manifestations of climate change and include risks to firm facilities, operations, and supply chains.

Transition risks and opportunities arise for business as regulatory incentives and consumer preferences push towards, for example, a lower emissions economy.

Mobilising private capital towards mitigation of, and adaptation to, environmental change is vital. The rules of the road, as defined in finance textbooks, must be refined to help understand and manage these risks.

But there are divergent views on how to respond. Some participants in the discussion felt a responsibility as professors to inspire a fundamental overhaul of finance and accounting pedagogy, and thought the fiduciary duty of financial officers must be redefined to view climate and social action through the lens of “citizen investors”, who consider many non-financial objectives.

For them, a core course in finance would seek to question the very purpose of finance. Ideally, it would pursue what appropriate actions financial officers could take to fulfil their more ­broadly defined duties, what powers they should exercise, what purpose they serve, and what evidence there is of what works.

Other finance professors — a larger group that includes the authors of this article — argue that a stronger focus on climate risks is justified within the existing frameworks we teach, and no big overhaul is needed. Students should consider new sources of extra-market risk, which require a multidisciplinary understanding and fall under the ­conventional responsibilities of both investment and corporate managers.

When we teach about the cost of ­capital, for example, we highlight that stocks exposed to risks require a higher expected rate of return to be attractive, thus reducing the attractiveness of certain investments. Replacing discussion of macroeconomic risks (beyond the standard market risk factors) with others focused on climate and nature would highlight factors managers should take into account.

Another dimension is cash flow. Investing in climate change and sustainability presents a range of opportunities to generate returns and make a positive impact on the environment. These include leveraging tax incentives to invest in renewable energy projects (a booming business for investment banks due to recent legislation in the US and Europe), green bonds, electric vehicles and infrastructure.

This less radical perspective does not mean that non-financial objectives should never be considered in decision making.

Rather, it highlights that ­climate and nature risk management is already required — even of those investors with a narrower fiduciary duty to maximise risk-adjusted returns.

Innovative teaching approaches on sustainability and finance through real-time case studies, industry speakers, data-driven exercises, out-of-the-box readings, and engaged, project-oriented learning experiences are welcome. The more creative, the better.

At our discussion with the FT, there was a shared belief that deans and other academic leaders in business schools should create more incentives for such forms of pedagogy.

We acknowledge that there is a still larger group of finance and accounting professors who are indifferent, opposed or of the view that sustainability has ­little or no place in core finance teaching and learning. We believe a broader debate will continue and welcome it.

This article is by Marcin Kacperczyk, a professor at Imperial College Business School; Andrew Karolyi, a professor and dean at Cornell University’s SC Johnson College of Business, and an advisory councillor to King Charles’s Accounting for Sustainability project; Lin Peng, a professor at Baruch College’s Zicklin School of Business; and Johannes Stroebel, a professor at New York University’s Stern School of Business. We are grateful to our colleagues David Pitt-Watson, Megan Kashner and John Tobin for helpful comments

Finance and climate: recommended reading from the authors

Climate Finance,” by Harrison Hong, Andrew Karolyi, and José Scheinkman, Review of Financial Studies (Volume 33, Issue 3, March 2020)

Climate Finance,” by Stefano Giglio, Bryan Kelly, and Johannes Stroebel, Annual Review of Financial Economics (Volume 13, November 2021)

Seeking Virtue in Finance: Contributing to Society in a Conflicted Industry by JC de Swaan (Cambridge University Press, 2022)

What They Do With Your Money, How the Finance Industry Fails Us, and How to Fix It by Stephen Davis, Jon Lukomnik and David Pitt-Watson (Yale University Press, 2016)

The Ministry of the Future by Kim Stanley Robinson (Orbit Press, 2020)

Sustainable Investing in Equilibrium,” by Lubos Pastor, Robert Stambaugh and Lucian Taylor, Journal of Financial Economics (Volume 142, Issue 2, November 2021)

Responsible Investing: The ESG-Efficient Frontier,” by Lasse Heje Pedersen, Shaun Fitzgibbons and Lukasz Pomorski, Journal of Financial Economics (Volume 142, Issue 2, November 2021)

Global Pricing of Carbon-Transition Risk,” Patrick Bolton and Marcin Kacperczyk, Journal of Finance (Volume 78, Issue 6, December 2023).


Recommendations from a wider group of finance professors:

Investments by Bodie, Kane and Marcus

Principles of Corporate Finance by Brealey, Myers, Allen, Edmans 

Climate Finance by Giglio, Kelly and Stroebel

Managing Climate Risk in the US Financial System

Grow the Pie by Alex Edmans

Global Reporting Initiative “Double Materiality Concept – Application & Issues”

Woke Inc. by Vivek Ramaswamy

IPCC (2022) “Sixth Assessment Report”

Unsettled” by Steve Koonin BenBella Books

Net Zero Investing for Multi-Asset Portfolios by Hodges, Ren, Schwaiger and Ang Journal of Portfolio Management 

Aggregate Confusion by Berg, Kolbel and Rigobon Review of Finance

Do ESG Factors Influence Firm Valuation? Evidence from the Field by Karolyi, Bancel and Glavas

Biodiversity Finance: A Call for Research into Financing Nature by Andrew Karolyi and John Tobin-de-la-Puente (2023) Financial Management

The Future We Choose: The Stubborn Optimist’s Guide to the Climate Crisis by Christiana Figueres and Tom Rivett-Carn

How to Avoid a Climate Disaster by Bill Gates https://www.penguin.co.uk/books/317490/how-to-avoid-a-climate-disaster-by-gates-bill/9780141993010

False Alarm: How Climate Change Panic Costs Us Trillions, Hurts the Poor and Fails to Fix the Planet by Bjorn Lomborg


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