FIN 7517
Finance and Sustainability
Prof. Tony Okoromadu
This year's theme:
Sustainability, what have you done for me lately?
By the end of this course you should have adequate knowledge of the finance fundamentals required to understand how corporations go about their financial management and investment decisions when they incorporate sustainability considerations and targets - whether these considerations are part of their mission and business value proposition, or imposed by the market prerequisites, competitive dynamics, industry standards, regulatory constraints or other competition exigencies of their business sector. You will also adequately understand how global finance, geopolitics and country-level financial strategy intermingle when faced sustainability dimensions to their economic growth and socioeconomic development, again, whether by choice or by the exigencies of their particular contexts of, say, geography, economy, etc.
Course Description
As stated in the college catalog, this course “extends the rigor of traditional financial theory to the concept of sustainability.” We will be treating, in various formats and sequences, topics that address: sustainability; what are sustainable technologies; the strategies and business models being adopted in this field around the world; the goals and perspectives that managers, entrepreneurs and investors currently deploy; etc.
In order to do this effectively, as also suggested in the college catalog, we shall explore some of the current international standards and guiding targets being developed in the sustainability area (ESG, impact investing, the nascent GIIN, climate certificates, etc.), and this from a finance and investment angle. And so, financial tools that are typically utilized for answering the questions: What is this investment/project/company worth? How can the prospects of this venture, including its risks, be captured in money terms?
Our approach will lean heavily on contemporary (and in some instances, real-time) events and developments in the lives of corporations and global multilateral institutions. The field of sustainability is a rapidly evolving one and we will do our best to come up to speed with its current state.
Little finance knowledge? Small problem
A hearty “Welcome!”, to the “finance-converted”, “yet-to-be-converted”, and the “don’t-care-to-be-converted-but-need-to-understand-the-bloody-stuff”; you are in the right place, rest assured. You've gained admission to a graduate program at a leading business school, which strongly suggests that you intellectually are more than capable of becoming securely confident at a level of corporate or global finance that would allow you navigate the economic and financial contexts to corporation and international finance affairs. If we work together through these weeks, I have little doubt that you will emerge at the semester’s end with a confidence and grasp of the subject that should serve you well in your career.
Sustainability, what have you done for me lately?
The sustainability bandwagon looks quite different today than even five years ago, and certainly very different than it appeared to corporations and governments alike, a mere fifteen years back. This continuous morphing does not look like changing and businesses will have to cope with it - a competency at corporation level that has become a competition point and differentiator. Broad enthusiasm across government and businesses is waning and has dropped from the dizzying heights of 2015’s Paris climate conference. Today’s horizon at its best displays a cautious approach to sustainability-related investments by industry and governments; it is more likely to display a sceptical disposition with the consequent spurning of many demands and strategy options that were embraced - or at least welcomed - in recent years past.
And so, we shall be traveling through our course by exploring the question, “Sustainability, what have you done for me lately?”. We will be approaching the enquiry from the perspective of corporations and from that of countries. The intention is for you to choose which of those two standpoints you would wish to adopt, in the process working with like-minded members of the class. In other words, equipped with the finance knowledge and tools that the course will teach you, you will have the opportunity to apply these to projects where you will investigate the business and economic terrain of today’s corporations or countries as they confront the business and economic decisions precipitated by the sustainability question. Ideally, you will be able to set about this in a business industry sector or country geographic region of your preference.
Course Methodology
We will explore the world of sustainable finance from a practical and wide-ranging perspective. The process will frequently utilize contemporary case study situations, and include the inevitable quantitative arithmetic rigor as well, in the associated course segments.
Our format and reading materials will have a practical and contemporary feel, primarily because we will be using companies and contexts from very recent time frames.
As relevant or related events unfold in real time, I will try and incorporate them into our curriculum so that we may see how these real time events vividly illustrate the concepts we encounter and bring the concepts to life.
At the same time, you will learn the crucial conceptual foundations of the various subject matters before delving into them. Thus, for example, we shall: begin with the fundamental concepts of the purpose of a corporation and what constitutes its ecosystem of owners and stakeholders; journey through macroeconomics in order to well understand the business environment in which corporations operate and how this impacts their decision-making; get into the nuts and bolts of company valuation in the cutting-edge context of sustainability imperatives and challenges; and so on.
You may also consider yourselves to be in the course's driver's seat: much of our work - especially the sustainability content portions - will simulate a kind of "guided study program", where you will get opportunities to explore aspects to sustainability that might be of more interest or relevance to your professional (or personal) trajectory. Thus, group projects, for example, would as far as possible involve students with shared industry sector preference.
Our classes will be discussion format throughout. It is important that they be interesting, engaging, and informative, and for that, I will need your help and input: we will engage in a two-way conversation every time. On my part, I shall make certain that our course is rigorous, thorough, in-depth, but also vigorous, inspiring and fun; features that need not be mutually exclusive.
The course content has been developed in close consultation with several practitioner groups, including international finance professionals (at European Union multilateral financial institutions, for example).
Course Structure
There are three stages to our course, with seven chapters across them. The first - a foundational introduction to learning, kinds of business structure, some finance and macroeconomics fundamentals - will serve to situate the context upon which our subsequent forays into finance and sustainability topics will rely. The second will deal with sustainability as currently stands today, with its various morphing encapsulations which can make its study and effective couching a moving target of sorts. The third part involves corporate and global finance, with the inevitable macroeconomics parameters and context.
These three parts will frequently - and inexorably - intersect. Even though they are distinct in their broad themes (ie. the course fundamentals; sustainability; finance) their topics will periodically encroach from one of the three parts into another, like intersections on a Venn diagram. That is inevitable, in similar fashion to how, say, some topics within medical studies will occur in dentistry studies, and economics topics will show up in finance chapters. We will find ourselves segueing across the three parts in a well-ordered and constructive manner.
On our journey, we will make brief detours and work on some adjacent skills and competencies. For example:
Data Visualization Session
- because the ability to effectively and aesthetically convey otherwise complicated information by means of charts might seem a bland skill set; au contraire, it is actually rare and much prized.
Group Presentation
- because being able to efficiently and persuasively deliver your ideas to an audience is a skill that will always give you a competitive edge in your career, and it requires practice.
Career Networking Session
- because networking is indispensable and you want to be adept at it in a manner that is natural and builds a confidence about you in the people you will encounter.
Sprinkled along our travel, and popping up at various points:
Ethics
- because guided by its principles your career and life will convey an authentic self-assurance and conviction that build you a store of resilience.
Real life, real-time corporation case studies
- we will learn by applying corporate finance principles and procedures to real life companies and their latest published business and financial information; frequently, you will yourselves select the focus corporation during our class session. You will learn to use the S&P Capital IQ Pro analytics platform - a financial market intelligence, data and analytics platform, widely deployed across the financial sector.
Your Weekend Read
- carefully curated articles plucked from contemporaneous business media news stories that have a bearing on our class topic(s). You will benefit by seeing class theory played out in real life, in real time.
Your AI is welcome
- we will deploy AI (particularly LLMs) in class as we explore corporations and their financial management practices.
An outline of the three parts, with their chapters and topics, can be seen further down this page, in the Course Content section.
Course Assessment
(further specified in the course syllabus document)
-
Participation
-
Various assignments and tasks
-
Group Project
You with your colleagues will constitute a firm of consultants looking into a set of competing corporations in an industry sector of your choosing; you will comparatively assess their business/financial management outcomes over a particular period of years within a particular set of sustainability constraints. Real companies, real-life constraints, real-life financial statements and declarations.
-
Individual Project
You will be a consultant hired by a corporation and tasked with assessing: the viability of a multimillion dollar (or euro or british pound sterling) multiyear capital investment project. Or you might by this time (last third of the semester) have become interested in a particular line of finance-sustainability related inquiry and wish to propose a topic to explore. Either way, the project should always involve a real life problem, including in its macroeconomic and geopolitical dimensions, and you will have my assistance throughout, should you need it.
Student Outcomes
(further specified in the course syllabus document)
By the time we’re done with our semester, you should be able to confidently discuss issues surrounding the opportunities and challenges that sustainability represents for corporations and governments today, with respect to the financial character of these. You should be able to sit around a management (or board) table and understand the aspects to corporation and country finance deliberations, asking the right questions, drawing the correct inferences, even if your specialty is as far off from finance as, say, advertising.
Plus - quite importantly amongst other outcomes - you would be adept at talking finance in plain enough language, without resorting to stifling your interlocutor with a rapid avalanche of finance terminology, expecting that they surrender to this “inscrutable, complex” field (it isn’t) that is accessible only to the seasoned “experts” (untrue).
You will also come away with two professional class documents that could form impressive parts of your personal portfolio and showcase your finance capabilities to employers and recruiters.
Finance and Sustainability
An Exploratory Journey in 3 Stages
Course Content
(Summarized version. Complete version will be available on Canvas.)
A fuller and more detailed breakdown of the chapter topics, their reading material and learning points take-aways, will be accessible in the course portal on Canvas. The reading materials have been gathered and curated from several diverse but authoritative institutional sources and will make for an exciting and informative collective resource. They will serve as vehicles for communicating the various concepts impacted in each section, and class discussions and deliberations will revolve around them.
By the time you complete the semester, you will look back and be proud (and surprised) to see you have read hundreds of pages of expert articles in top finance/business publications, and have become more confident with exploring and understanding material in that genre.
Stage I
1. Introduction
General overview of the purpose of an education • Critical thinking & analytical reasoning • Societal impact of every individual • Global mindset • Noble ambition • Big picture • Class methodology • Babson College Learning Competencies and Educational Themes • Etc.
Course overview.
2. The Corporation and its Ecosystem
What you will learn
What/who is a company. What and who are stakeholders. Who wants what, owes what, needs what. What are the rights and obligations involved. Corporate social responsibility. Ethics. How a business is typically set up. Etc.
The typical structure of a company: at inception, growth, etc • Forms of business organization • How relevant is an ethical dimension to business? • What - quite frankly - is in it for me? (This is an important question and it demands a cogent response founded on pragmatic real life and not floral niceties.) • How might a corporation's ethics framework affect its performance and competitiveness? Personal ethics • Company ethical and legal responsibilities • Defining and prioritizing stakeholders • What are the rights and obligations involved: who wants what, owes what, needs what? • Corporate Social Responsibility • Entrepreneurship and start-up (ethics) culture • Goodwill and the balance sheet • Etc.
3. The Corporation’s (and Stakeholders’) Macroeconomic Environment of Business
What you will learn
The external financial and economic milieu within which a corporation operates. Much of this external environment is beyond the corporation's control and as such it must manage its many elements as nimbly and pro-actively as possible, always looking to do so in a manner that is consistently superior to, and more efficient than, its rivals’. We will only deal with the minimum necessary here, macroeconomic environment of business is an entire field of study on its own.
Gross Domestic Product • Gross National Income; Real and Nominal Indices • Purchasing Power Parity • Inflation, Interest Rates • Exchange Rates and Currency Valuation • Exchange Rates and Government Direct and Indirect Intervention • Consumers Interaction with the Economy.
Transborder Transactions, Imports, Exports • Foreign Investment; Currency Demand and Supply • Foreign Direct Investment (FDI) and Cross-Border Mergers & Acquisitions: purpose, challenges, pitfalls, successes • Horizontal and Vertical FDI • Economies of Scale • Tangible and Intangible Assets.
International Monetary System • International Banking • International Money Market • International Bond Market • International Equity Markets • Foreign Exchange Market • Exchange Rate Determination • Interest Rate Parity • Foreign Exchange Exposure and Management • Management of Economic Exposure • Multinational Cash Management • International Trade Finance.
Country/Sovereign Risk • Transfer and Convertibility Risk • Operational or Jurisdiction Risk • Political Risk • Geo-Political Risk.
Stage II
4. What - Exactly - Is Sustainability (as Understood Today)?
What you will learn
Sustainability can mean a good many different things to many persons; the term has become more widely used in recent decades, and perhaps just as widely, has taken on many definitions and descriptions, all of them, quite likely cogent and logical. This chapter will attempt to introduce Sustainability in a manner that can make it easy for the student to understand and, in turn, be able to explain. It will also introduce some core components to Sustainability as understood today, as well as core terminologies utilized in its economic, financial, environmental, industrial, etc., contexts.
Much of the learning will be done in class, using various multimedia/audiovisual material. There will also be preparatory reading material.
5. Private and Public Sector Components to Sustainable Finance Today
What you will learn
This chapter attempts to describe the roles that the public sector (country governments; national, international, and multilateral public institutions; etc) and the private sector (privately owned for-profit corporations; privately held non-profit organizations; etc) play in tackling sustainability challenges. These roles can be as diversely understood as the notion of sustainability itself, but there are several common grounds that link both sectors. Those common grounds and mutual interests continue to present opportunities for collaboration towards common objectives; yet they can also present difficult conflict areas that pose formidable obstacles to intended goals. Learning in this chapter, similarly to Chapter 4, will be via a mix of audiovisual and printed material.
Key terms • ESG • Greenwashing • Sustainable Finance • Public-Private Partnerships (PPP) • COPxx - "Conference of the Parties" to the United Nations Framework Convention on Climate Change (UNFCCC) • Etc.
Stage III
6. Financial Statements and Financial Reports: A conversation with the numbers
What you will learn
Financial statements and financial reports interpretation in a sustainability context. Use of S&P Global’s Capital IQ software platform.
Financial statements and financial reports interpretation • Income statement • Balance sheet • Cash Flow projections • Capital investment decision making • Risk/return
7. Investment/Project Valuation: Which expansion option shall we go with?
What you will learn
How money time-travels, and the changing real worth (purchasing power) of the original amount of money at various points in that travel, down the years. The prospective (future) real worth of the money helps determine whether the travel is worth its while. The effort put into the journey might not be worth the while if, at its arrival at destination, the money ends up being worth less (purchasing power) than it was at the journey’s start. (The value of the money at end-of-journey could be less than it was at the beginning-of-journey, even if the nominal money “volume” itself is greater at the end-of-journey. $1,200 might be worth less ten years from now than $1,000 is worth today, because $1,200 might buy you fewer goods in the year 2035 than $1,000 would buy you in the year 2025.) In this chapter you will learn how this factors into a company’s financial projections and how it is an important criterion for decision-making with respect to what projects a company decides to undertake.
Teaching will be via a hands-on real-life case study to be worked together in class.
Capital investment decision making (aka Capital budgeting) • Risk/return • Time lines • Cash flow • Future values • Present values • Hurdle rates • Operating cash flow • Free cash flow (FCF), aka Free cash flow to the firm (FCFF) • Cost of debt • Aggregate ie. “Weighted” average cost of capital (WACC) • Revenue and expenditure forecasts • Net Present Value (NPV) criterion • Investment Rate of Return (IRR) criterion
● ● ●