If you are looking for a financial sustainability definition many would argue that you need to look at the environmental health of the planet.
You don't need to be a Nobel Prize-winning economist to recognise that current global and industrial practices are far from sustainable. The wealth of a tiny segment of the global population has grown dramatically over the past 40 years, while the majority struggle to make ends meet. Environmental disasters have ravaged arable land and clean water supplies, leading to prolonged, severe droughts, oppressive heatwaves, and catastrophic storms.
Are corporations solely responsible for these issues?
Climate change and environmental degradation do have natural components, but human activities exacerbate their extent and intensity. If you and I each had a cow to provide for our families, we would cause minimal harm. In contrast, however, the large-scale processing of meat and dairy has a significant, detrimental impact on the environment and in turn the financial sustainability meaning of the world.
These facts should compel us to undergo a fundamental shift in our thinking. Global organisations are beginning to realise that the resources of the earth are finite and that the stability of our environment and climate are finite. All of this has given rise to a new, collective financial sustainability meaning that encompasses the following:
The challenge is that these endeavours need to happen swiftly and on a grand scale.
A Corporate Social Financial Sustainability Definition
So, what is financial sustainability in business?
There is ongoing debate about whether organisations, genuinely embrace social responsibility, and it's not difficult to understand why. We now have ample evidence that in recent history some industries have deliberately concealed the harm caused by their products and activities. Bizarrely some even claimed that smoking was not harmful and was recommended by doctors. Similarly, they insisted that sweetened drinks made with real sugar were not a health concern.
As social and environmental damage continued to mount, these entities rolled out increasingly superficial initiatives. They urged everyone to contribute to protecting the environment with measures like using wheelie bins for recycling and conserving water in households. They called for an end to food waste. In essence, corporations of all types, from retail food chains to oil companies, shifted blame away from themselves and pointed fingers at each other. This behaviour reflects their primary motivation—the relentless pursuit of profits.
Nevertheless, in discussing corporate and financial sustainability examples, it's important not to view corporations solely through a negative lens. The Industrial Revolution gave rise to major corporations, and for many, corporate activity elevated human existence beyond mere subsistence. Today, we enjoy levels of comfort and access to goods that previous generations could not have imagined.
There are also positive financial sustainability examples from the past. Henry Ford, for instance, paid his workers well and limited their weekly work hours. He provided housing and company stores for employees' convenience and even created entire communities with schools and churches. While his motives were not purely altruistic, he serves as an early example of a financial sustainability definition that incorporates corporate social responsibility (CSR).
Henry Ford profited from his stores and housing for his employees. However, his approach demonstrated that businesses could generate revenue without sacrificing everything and everyone in their pursuit of profit. This is one way to look at the meaning of financial sustainability.
Today, many organisations recognise the importance of investing in communities and people to ensure their continued success. Some of them want to maintain their profit-driven approach but face increasing pressure from public opinion and diligent journalists to fulfil their social and environmental responsibilities. The challenge lies in finding financial stability for others while still pursuing profits.
The Role of the Finance Industry
In exploring financial stability meaning, one needs to look at the tarnished reputation of the finance industry. The global financial crisis of that year exposed the fragility of the world’s economic structures in a harsh manner. In addition, the news of bankers receiving million-dollar bonuses, while investors' pension returns dwindled, only added to the industry's negative image.
The events of 2008 served as a wake-up call to ask the question, what is financial sustainability in business, on several fronts?
While the world grappled with financial turmoil, the United Nations (UN) designated 2008 as the Year of Planet Earth and aimed to explore new resources and identify sustainable ways to use them. Their mission highlighted the need for greater education in earth sciences and encouraged stakeholders at all levels to generate interest in these crucial topics.
Amidst their struggle with a damaged reputation, the finance industry sought ways to rehabilitate its image. Green investing had been in existence since the early 1990s, but the UN's declaration, coupled with the restorative power of good deeds, spurred banks and investment firms to embrace eco-friendly investments.
Some companies chose to avoid investing in the most environmentally detrimental entities and instead directed funds toward nonprofit initiatives and high-profile environmental projects. Others sought to support companies that took their responsibility toward environmental, social, and governance (ESG) seriously. Bear in mind that the term "governance" encompasses both internal self-governance and the management of relationships with employees and communities.
Critics may view green investing as merely another avenue for banks to increase their wealth and acknowledge that profitability is an inherent aspect of business and investment. However, even cynics would agree that participating in such initiatives is a step in the right direction, especially when profits would result in either case.
In finding the meaning of financial sustainability, it does not mean that organisations should throw money at an environmental issue until it ceases to be a threat. Such an approach would not add to financial stability. Rather, it means making enduring contributions to enhance the environment through financial means.
How Financial Stability and CSR Worth Together
Financial sustainability examples are perhaps, the best way to understand the question of what is financial sustainability in business.
Here is one:
Imagine Company XYZ, a manufacturing company with a legacy that dates back to the late 1970s. With numerous factories scattered across the globe, they produce a wide range of products, all bearing the reputable XYZ brand.
While their manufacturing processes are not particularly polluting, they do generate a significant amount of waste. Remarkably, XYZ has prioritised recycling and the reuse of waste materials. In addition, they incentivise their Research and Development department employees with bonuses for every successful innovation. Notably, despite their already low emissions, XYZ was the pioneer among their industry peers for installing scrubbers in their smokestacks, and they have also integrated filters in their sewage drainage systems.
Another standout aspect of Company XYZ is their exceptionally low employee turnover rate. Their workforce is content with competitive pay and feels genuinely valued. Furthermore, the communities that neighbour XYZ's plants reap benefits, as the company actively supports various social activities and generously contributes to worthy causes. Such a commitment to Corporate Social Responsibility (CSR) is precisely what financial institutions seek when exploring investment opportunities.
Unfortunately, all over the world, organisations that mirror these ethical standards are a rare breed. Some companies fail to recognise the significance of adopting such practices, and this is where the finance industry wields influence. Financial institutions often propose substantial investments contingent upon the adoption of these best practices, effectively dangling a financial incentive to encourage companies to improve their corporate citizenship.
On the flip side, a company might actively seek investment to fund research aimed at developing more sustainable practices and products. They could entice a financial firm with the promise of shared publicity or other incentives in return for financial backing.
The key takeaway here is that for-profit companies are inherently different from non-profits.
The CSR shareholder theory stipulates that a company's primary responsibility is to its shareholders, focusing on generating profits and disbursing dividends. Nevertheless, businesses are also bound by the CSR theory of business ethics, which underscores their obligation to operate in ways that do not harm society or the environment and to go beyond mere profit generation for the greater good.
As such, corporate leaders find themselves in a delicate balancing act. They must prioritise profit generation while ensuring no harm is done to anyone or anything.
Financial sustainability offers a practical solution. It allows them to provide returns to shareholders while engaging in actions that benefit society and the environment. In turn, their commitment to ethical principles increases stakeholder confidence often translating into increased profits.
For there to be financial sustainability meaning in society, there needs to be a harmonious interplay between corporate social responsibility and environmental, social and governance principles. And in so doing, the essence of financial stability becomes clearer.
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