Please stop discussing whether markets value ‘sustainability’
This comment piece is a response to a report by the World Business Council for Sustainable Development, which is also discussed in our most recent article on corporate climate targets.
Markets are designed to value companies, not to assess societal outcomes.
This simple distinction is important for critically understanding studies of sustainability-valuation correlation.
Markets value innovation, trust, growth opportunities and resilience, which are all intertwined with (inconsistent) concepts of ‘sustainability’.
Studies struggle to control for these endogenous factors. Meta-analyses show that correlation results vary widely depending on how endogeneity is handled, showing that markets are pricing these underlying strategic/intangible factors, not a distinct ‘sustainability’ signal.
Company ‘sustainability’ – however defined – is not an indicator of societal outcomes or progress, so fixating on whether markets value entity-level plans and disclosures is a poor compass for, and judge of, progress toward societal goals.
Let me explain why, and why I hope we stop discussing whether markets value ‘sustainability’.
Markets assess a companies’ opportunity and risk, reflected in revenue potential, costs, competitiveness and resilience.
Markets price societal outcomes only insofar as they translate into private value.
Companies pursuing innovative approaches to decarbonisation, efficiency, affordable infrastructure etc often open new markets, gain competitive advantage, and build trust. Markets value these strategies (they also value innovation that undermines sustainability).
When companies anticipate environmental change, technologies and policies, they reduce their exposure to risk. Markets value that.
Of course, risk reduction does not necessarily advance societal goals, as it can be achieved by retreating from vulnerable geographies, or externalising risk.
By contrast, sustainability and climate outcomes depend on understanding and shaping technical transitions, coordination for technological diffusion and integration, and addressing structural barriers to finance.
Many market-driven frameworks conflate market valuation logic, entity-level plans and disclosures, and real economy transformations – undermining effective approaches to each.
A better focus for corporates and markets: understand new opportunities in this era of massive technological growth, electrostate expansion, flexible energy systems and emerging market catch-up, as well as how unprecedented, non-linear climate change is affecting risk.
A better focus for the ‘sustainability and climate’ community would be to understand and support real economy transitions, identify innovative business opportunities, and address structural barriers to finance.
Forward-looking companies and markets will follow.
Lisa Sachs is the director of Columbia University’s Centre on Sustainable Investment. She is an associate professor of professional practice at Columbia Climate School and director of Columbia’s MS in climate finance.