Guest editorial

Citation

Bianchi, R.J. (2010), "Guest editorial", Accounting Research Journal, Vol. 23 No. 3. https://doi.org/10.1108/arj.2010.40323caa.001

Guest editorial

Article Type: Guest editorial From: Accounting Research Journal, Volume 23, Issue 3

It is my pleasure as Guest Editor to introduce the Accounting Research Journal special issue of “Sustainable Finance”. This publication occurs in the same year as the BP Deepwater Horizon oil rig disaster on 20 April 2010 which resulted in 11 human deaths, 17 injuries and the associated substandard safety practices. The BP Deepwater Horizon incident is the world’s largest oil spill in marine waters at an estimated 4.9-5 million barrels, which is a multiple of the infamous 1989 Exxon Valdez oil spill of approximately 750,000 barrels. Within the shadows of these environmental and safety concerns, it is fitting that this Accounting Research Journal Special Edition shines light on the concept of “Sustainable Finance”.

Whilst there is no clear definition of Sustainable Finance, the International Institute for Sustainable Development provide a related description of sustainable development as “[…] adopting business strategies and activities that meet the needs of the enterprise and its stakeholders today while protecting, sustaining and enhancing the human and natural resources that will be needed in the future”[1]. We can extend this description and define Sustainable Finance as the study of sustainable development within the context of the direct and indirect effects of financial decision making.

As the world shifts towards the paradigm of sustainability, it is important to remember that the concept of Sustainable Finance is not solely limited to the impact on the environment. The reality is that there are multiple stakeholders who are affected by the decisions made by individuals, corporations and governments. Decisions that impact shareholders, creditors, employees, the environment and society at large, all contribute to the concept of Sustainable Finance. The role of government in sustainable finance is also clearly visible with the sub-optimal outcomes from the Copenhagen Climate Change Summit in December 2009. The recent setback in climate change negotiations has questioned the willingness of governments to re-shape global business towards a more sustainable economic and financial pathway.

Critics of the new Sustainable Finance paradigm believe that many businesses will suffer as a result of these new constraints. Put simply, many opponents think that sustainable finance is incompatible with the profit motive. Whilst their concerns may have some currency at face value, financial history informs us otherwise. It was during the industrial revolution in the late 1700s and 1800s that child labour formed an integral part of the cost structure of many business models. When the Factory Acts laws were introduced in England to ban these corporate practices, many firms lamented that their businesses would become financially unviable. And so it was for some. The Darwinian “adapt or die” axiom held true for businesses in these early times and it seems that we have arrived at a similar point in financial history, again. In today’s modern world, many successful businesses thrive without the need of old world thinking and corporate standards. Going forward, businesses have the challenge to adapt or perish as we steadily move towards a world of Sustainable Finance.

Given the level of uncertainty in the future, individuals, businesses and governments are hungry for new information and knowledge to enhance their decision making. Whilst it is easy to take a holistic approach to the benefits of sustainability, it is clear that there needs to be more theoretical and empirical science in the study of sustainable finance. This special issue on Sustainable Finance aims at providing new insights to this emerging body of knowledge in the finance, accounting and economics disciplines in an effort to assist all stakeholders.

In the first paper by Jacqueline M. Drew and Michael E. Drew they examine the fraud vulnerabilities in the emerging market for carbon credits known as the clean development mechanism (CDM). Recent events have demonstrated the difficulties in accurately measuring and verifying the associated certified emission reductions in this market, which heightens the potential for financial fraud. The global financial crisis teaches us that effective regulatory oversight is critical to ensure the trust and integrity of market-based mechanisms. Jacqueline M. Drew and Michael E. Drew argue that fraud detection systems for the CDM are vital to support the future viability of this emerging market.

In the second paper, Richard Copp, Michael L. Kremmer and Eduardo Roca investigate the performance of socially responsible investments (SRIs) in Australia and overseas. Their study provides evidence that SRIs are riskier (as measured by market beta) in comparison to conventional investments during periods of economic downturn. This finding has legal implications for fund managers and trustees who must exercise their fiduciary responsibility in maximising risk-adjusted returns for their investors. Richard Copp, Michael L. Kremmer and Eduardo Roca argue that many investment trust deeds are not legally structured to adequately accept SRIs if their risk-adjusted returns are expected to be lower than conventional investments.

From an economic perspective, the third paper by Clevo Wilson examines the concept of sustainable finance and the challenges faced by government, corporations and individuals. Clevo Wilson argues that the emerging sustainable finance paradigm must address how the true costs borne by society can be adequately priced in the value of goods and services. This is pertinent when considering the societal costs of pollution and biodiversity degradation. Clevo Wilson shows that the optimal market solution of sustainable finance can be attained when all external societal costs are internalized within the production of profit seeking firms.

The fourth paper contributed by Eduardo Roca, Victor S.H. Wong and Gurudeo Anand Tularam explores the global integration of SRI markets. Econometric tests of co-movement estimate that SRI markets in developed countries exhibit interdependence with each other. Whilst these SRI markets are found to be related, Eduardo Roca, Victor S.H. Wong and Gurudeo Anand Tularam estimate that the integration between these markets is relatively low resulting in portfolio diversification benefits for investors. This finding provides the incentive for asset managers to allocate capital to these SRI markets.

The fifth and final paper by Robert J. Bianchi, Michael E. Drew and Adam N. Walk examine the responsible investing (RI) disclosure practices of the world’s largest pension funds. This study measures the level of public disclosure of RI by the guardians of the world’s largest pools of long-term savings. Pension funds that are genuinely committed to RI are expected to publicly advocate this shift towards this new investment paradigm. Robert J. Bianchi, Michael E. Drew and Adam N. Walk show that European funds are more likely to publicly disclose their RI practices than their North American counterparts. Furthermore, the largest pension funds tend to exhibit leadership in the public disclosure of RI practices, however, the evidence revealed in the study remains mixed.

The theoretical and empirical papers in this special issue are diverse in terms of their disciplines and their contributions to the field of Sustainable Finance. We hope they inspire a new generation of researchers who crave the same interest and enthusiasm to build new knowledge in this growing area of interest.

See www.iisd.org/business/pdf/business_strategy.pdf

Acknowledgements

The Guest Editor would like to acknowledge and thank the efforts of Liz Marsland for valuable guidance and assistance with the production of this special issue, and Professor Natalie Gallery (Joint Editor) for facilitating the Accounting Research Journal as an outlet for disseminating this valuable strand of research to a growing and wider audience.

Robert J. BianchiGuest Editor