Corporate Finance and Sustainability: A Teaching Note
22 Pages Posted: 12 Nov 2019 Last revised: 17 Feb 2020
Date Written: February 16, 2020
In the transition to a sustainable economy, companies are increasingly adopting the goal of In the transition to a sustainable economy, companies are increasingly adopting the goal of long-term value creation, which integrates financial, social and environmental value. That raises the fundamental question in corporate finance about the objective of the corporation. The current objective is maximising profit, which boils down to maximising shareholder value. But the shareholder model is holding companies back from sustainable business practices. An enhanced shareholder view recognises that it is instrumental to treat the other stakeholders well in order to preserve long-term shareholder value.
An alternative view is to broaden the objective of the corporate to optimising the integrated value, which combines the financial, social and environmental value. In that way, the interests of stakeholders are ranked equally. Such a move to the stakeholder model requires new rules for corporate governance and decision-making on corporate investments to deal with the various interests of current and future stakeholders.
This Teaching Note can be used in courses on corporate finance. It complements corporate finance textbooks, which usually adopt the shareholder model.
Keywords: corporate finance, corporate governance, sustainability, ESG
JEL Classification: G30, I30
Suggested Citation: Suggested Citation