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How Should Sustainability Content Be Integrated into the Core Finance Curriculum? Sylvia Maxfield, Associate Professor of Management, Simmons College School of Management Gautam Kaul, John C. and Sally S. Morley Professor of Finance, Ross School of Business, University of Michigan

Mission Statement: “The Aspen Institute’s Center for Business Education encourages future business leaders to innovate at the intersection of corporate profits and social impacts. Our goal is bold and long-term: to radically re-orient the MBA degree to embrace the principles of corporate citizenship and sustainability.” The Aspen Institute’s Center for Business Education (Aspen CBE)

AspenCBE.org – For information on all of our programs CasePlace.org – Online clearinghouse of free, full-text teaching materials on the social and environmental impacts of business including 1,500 free case studies BeyondGreyPinstripes.org – Free online database of information on business school courses integrating issues of social and environmental stewardship, including 1,000 free syllabi Aspen CBE Resources

How Should Sustainability Content Be Integrated into the Core Finance Curriculum? Sylvia Maxfield, Associate Professor of Management, Simmons College School of Management Gautam Kaul, John C. and Sally S. Morley Professor of Finance, Ross School of Business, University of Michigan

School of Management S I M M O N S

How Should Sustainability be Integrated into the Core Finance Curriculum? Sylvia Maxfield, Ph.D Simmons School of Management

Practitioners and Scholars are Beginning to Incorporate CSR into Financial Management Mckinsey Quarterly, October 2008: “How climate change could effect corporate valuations.” Reformulating CAPM: “The CSR aspect provides useful information in understanding idiosyncratic risk.” Lusk et. al Journal of Financial Management and Analysis, 21:1. Are We Preparing Our Students?

Translating CSR into Financial Valuation Measures Sustainability InitiativeTranslation to Financial ValuationFinancial Valuation Energy Saving/Greenhouse Gas Emissions Reduction for a Beverage Co. Discounted Cash Flow (DCF) Price to Cash Flow Per Share Ration (P/CFPS) Saves co. $2.4 million, or 1 cent per share=$31 million in shareholder value using DCF or 6 to 16 cents per share in total value using P/CFPS and DCF. Community Engagement for a Mining Co. DCFCommunity involvement allows for fast track of a mining project by one year, adding 81 cents per share value=5.5% increase from current trading price per share. Global Corporate Citizenship Award for a Utility Co. Option Pricing ValuationAward reflects track record that contributes to securing operating license in new market. NPV of entry might be negative but the option related to the license has enough value to make the project financial viable.

CSR/Sustainability Extensions by Textbook Topics Typical Corporate Finance TextCSR/Sustainability Extensions/ Examples Overview & IntroductionIntangibles in the differential between market and book value – CSR practice and performance as an unbooked intangible; information asymmetry problem in financial markets Valuation of Future Cash Flows & Capital Budgeting DCF often not used for CSR/Sustainability Projects. Teach use through examples. Risk and ReturnCAPM and idiosyncratic risk. CSR/Sustainability investments and performance can lower idiosyncratic risk OptionsCSR/Sustainability investments/performance can yield valuable real options

Questions for practitioners/scholars/teachers How and when do/should companies translate ESG issues/actions into financial data? What are the current problems with valuing ESG issues/actions? How and when do investors value ESG issues/actions? What are current metrics used for valuation and management? How well to these fit with existing financial models? Do we need to adapt those models? Who are the leading players in ESG valuation? How is ESG valuation information conveyed and received in the financial markets?

Finance and Sustainability Gautam Kaul, Ph.D. Ross School of Business University of Michigan Aspen Web Discussion February 4, 2009  This note has been prepared to motivate a discussion.

13 What is Sustainability? We need to at least attempt to answer the question: What is sustainability? Why should it be taught? The definition needs to, for purposes of this conference, be amenable to developing a module/course

14 Why Finance? Given the definition we come up with, we should be able to articulate an answer to the “why finance” question What specific concepts would be taught in such a course and why? Which courses will these concepts apply to? Core, Valuation, Financing?

15 Cross-Disciplinary Expertise Are the issues cross-disciplinary? Is a typical finance faculty trained/equipped to teach such a course? If yes, we have to ask ourselves why this is not happening? If no, what are the ways in which it can happen?

16 Pedagogy Theoretical versus Practical focus? Lecture versus discussion? Role of students? Passive versus active participants?

AspenCBE.org – For information on all of our programs CasePlace.org – Online clearinghouse of free, full-text teaching materials on the social and environmental impacts of business including 1,500 free case studies BeyondGreyPinstripes.org – Free online database of information on business school courses integrating issues of social and environmental stewardship, including 1,000 free syllabi Aspen CBE Resources