Sustainable Europe Research Institute

Sustainability is a key factor in global financial markets: It is relevant for investors as it affects to corporate financial performance. On the one hand, sustainability-issues can lead to massive losses (e.g. US-superfund-legislation), on the other hand it fosters innovation (e.g. fuel cell). Though, the importance of sustainability is still not widely recognized by financial players.

Therefore describing sustainability as well established in financial markets is too early today. Nevertheless, an acceler-ating evolution is already observable especially in Europe: The markets are aroused. Traditional financial players appear in the market and start to mainstream sustainability. The Dow Jones Sustainability Group Index (DJSGI) is both an important exponent and catalyst of the development. The Kyoto-protocol with its flexible mechanisms (e.g. emission-trading) is another essential driver.

Based on the assumption that sustainability is a long term trend, the following table (1) outlines a scenario of possible future financial markets. Already today, this future is tangible for certain issues:

Focus	From the past... ...to the future
Financial Markets	Sustainability is of marginal importance	Sustainability is widely acknowledged as a key factor
Financial Analysts	Only financial con-siderations	Ecological, social and economic performance are integrated into financial analysis
Investors	Neither do investors take sustainability-related issues into consideration nor do they remunerate cor-porate sustainability	Investors both remunerate corporate sustainability and set incentives for continuous sustainability-improvement.
Benchmarks	The Dow Jones Indus-trial Average is the dominant benchmark	The DJSGI is an important mainstream benchmark
Sustainability and Business	Environmental issues are purely regarded as cost-intensive	Environmental and sustainability-performance enhance shareholder value and lead to competitive edge

This scenario implicates both opportunities and threats. To become future market leader and to shape future market condi-tions, companies should act in a proactive way already today.

- Positive correlation between Shareholder Value and corporate Sustainability Performance has been proved: Sustainability-aspects are incorporated in the value drivers (e.g. corpo-rate governance).

- Financial institutions are increasingly interested in sustainability: Consideration of ecological and social as-pects improve their own portfolio�s risk-/return-ratio.

- The present stage of the evolution towards sustainability allow both financial institutions and companies to position themselves early in an emerging market.

- The extent of ecological and social problems increasingly results in economic shortages (water, biodiversity etc): Overcoming these shortages will become a critical factor for business-success.

- International treaties, national legislation, public opinion and other forces ("global governance") put companies under growing pressure.

- Ignoring the importance of sustainability in financial mar-kets may result in missed beneficial effects. Rather should entrepreneurs act in a proactive way to augment their ability to realize business potentials. Mention should be made of the fact that whether or not sustainability will be the business approach of the future depends on the political will expressed by the driving forces of global governance. In this context seems to be reason to be optimistic: As sustainability is increasingly regarded as a societal imperative, political agendas react. It will become difficult for both financial institutions and companies to evade the challenge of sustainability. Thus, companies should analyse possible impacts of this evolution to develop answers to the question: What, if sustainability turns from a "nice to have" in a "must" in finance?