Towards a trade-off between sustainability and return

Companies are confronted with a conflict of objectives, also referred to as trade-off in English. This arises when objectives and financial goals are not compatible. Companies often face the dilemma: should they invest in socially and ecologically sustainable measures or where a financial gain can be expected?

Motivation

On a limited planet, the economy can not grow indefinitely. This insight is based on the model of a post-growth economy, which focuses on sufficiency and the lowest possible consumption of raw materials, energy and land . What does that mean for the companies? A post-growth economy requires companies to operate sustainably and conserve natural resources. Profit-oriented companies easily find themselves in a conflict of goals. Especially corporations (AG, GmbH) often find it difficult to reconcile sustainability and profit.

The Business Case for CSR

Established circles in politics and business like to claim that sustainability and profitability are readily reconcilable, based on the so-called Business Case for Corporate Social Responsibility (CSR). This requires companies to set innovative CSR measures and generate profits. CSR companies should also be able to service a conventional bank loan and generate attractive returns for investors. Against the business case argues that CSR measures are associated with additional operating costs that reduce the profit of the company and give the owners a lower return.
Now, if a company is planning a sustainable investments? with low returns, then it does something for the common good, but is unprofitable from a classic perspective. In this case, investors would have to forego returns and the state would have to subsidize the company so that it does not go bankrupt. And because this is not an option for classic economists, they only allow the favorable case: that CSR companies also need to be able to generate profits and generate a positive return.

Open questions

The trade-off between sustainability and return raises completely new questions:

  • How profitable are sustainable investments?
  • Are companies able to take sustainable CSR measures while generating a return that satisfies both creditors and owners?
  • If not, to what extent is the state required to promote CSR measures?
  • What is the overall economic potential of eligible CSR measures?
  • If the state promotes CSR measures, then how can one exclude that state private-sector
    Profits subsidized?

The topic seems so complex and can not be dealt with the well-known, financial-economic theorems.

Implications

What are the implications of the trade-off between sustainability and return? To investigate this question, a favorable and an unfavorable case should first be considered. In the best case, a company generates a positive return high enough to service a conventional bank loan. In the worst case scenario, the company’s return is low or fluctuates around the zero line. From a classic point of view, such a company is unprofitable and will find it hard to find investors who join the company or get a loan from a bank.

When the economy slows down

In general, starting from the favorable case and a positive performance, seems in the face of recurring crises no longer timely. When the economy slows down, the trade-off between sustainability and return is particularly acute. Companies are more likely to invest in measures that ensure their continued existence than in social and environmental CSR measures. In order not to jeopardize sustainable economic development in such a situation, the state should create favorable conditions for sustainable investment.

Government regulation with taxes and subsidies

The trade-off between sustainability and return can not easily be resolved according to a classical pattern. Market economy concepts reach their limits here. What is needed is a new policy of state regulation with taxes and subsidies. Especially in a weak economy, the state should take countermeasures with fiscal measures and ensure that sustainable companies receive cheap equity and debt.

One instrument to help companies access equity is a special wealth tax on risk-free investments. A tax of 3% on overnight money and time deposits, safe government bonds and other risk-free and quasi-risk-free investments over a tax-free allowance of € 100,000 would be conceivable in order to protect the small savers. If risk-free investments are taxed more heavily, then investors are more willing to invest in companies and provide equity capital to companies.

Another instrument for the targeted promotion of sustainable investment is the interest-free or low-interest development loan, which is awarded according to strict, social and ecological standards. This can be a conventional bank loan, where the state grants a subsidy to cut interest costs. In this way, companies can reduce the interest burden and get the financial leeway they need to carry out social and environmental CSR measures.

 

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