Financial markets could help society achieve both prosperity and equity, but investment in efforts to address pressing social problems is still underfunded, according to a panel of Cornell faculty.

The eighth annual Cornell SC Johnson College of Business Faculty Panel on leading policy issues focused on the state of finance with a social purpose. Five professors from across the college spoke at the event, held March 7 in Warren Hall.

Ravi Kanbur, the T.H. Lee Professor of World Affairs in the Charles H. Dyson School of Applied Economics and Management, began the discussion by pointing to the creation of the World Bank in 1944 as an example of an institution that bridged the divide between financial markets and social need by providing loans to rebuild Europe after World War II.

Yet more than 80 years after the establishment of the World Bank, the gap between sources of finance and social needs still exists. One reason is the continued scandals plaguing the financial industry, said Maureen O ’Hara, the Robert W. Purcell Professor of Management in the Samuel Curtis Johnson Graduate School of Management (Johnson School).

Credit: Noël Heaney/Cornell University

“When we look at finance, one of the things that you usually see is that someone is being fined for something, if not by one regulator then by many,” O’Hara said. “That leads to the view that finance has only served to enrich the few at the expense of the many. I don’t think that’s true, but I do think that there are elements of truth in it.”

O’Hara pointed to several penalties levied against financial services companies, including a $549 million fine imposed by federal regulators on 11 brokerage firms and investment advisers for using WhatsApp and other messaging apps for conducting company business.

“If we want finance to have a social purpose, to improve the well-being of society, then it will have to start with the culture of banking,” she said.

One strategy that may drive companies to invest in initiatives that have a positive impact is focusing on issues that increase employee satisfaction, according to Asis Martinez-Jerez, a professor in the Peter and Stephanie Nolan School of Hotel Administration. Surveys show that projects relating to a company’s commitment to environmental, social and governance (ESG) issues boost employee satisfaction.

“We hear all the time about ESG, the impact on investors and the impact on customers,” he said, “but we don’t talk that much about the impact on employees.”

In a research project on LATAM Airlines, based in Chile, Martinez-Jerez studied the company’s decision to launch an initiative on autism as part of its commitment to diversity and inclusion, which led to the airlines achieving the Autism Double-Checked certification. During the project, more than 10,000 employees received sensitivity and job-specific training to support travelers with autism.

The initiative increased satisfaction of both customers and employees at LATAM, which had filed for bankruptcy in 2020 because of the pandemic. “There’s no way of having a sustainable business if you don’t do something good at the same time,” Martinez-Jerez said.

Kelly Posenau, an assistant professor in the Johnson School, said that when capital is allocated to highly rated ESG firms in public markets, it often fails to generate meaningful impact. “Investors are already competing for ownership of these firms,” she said, “so their capital is primarily benefitting existing owners, not actually expanding the pool of socially valuable projects.”

Private markets, however, “are particularly well-suited in this style of investing,” she said, adding that “impact funds can actually complement a broader portfolio without necessarily sacrificing financial returns.”

One emerging focus in the area of sustainable finance, both for private investors and government funding, is biodiversity, said John Tobin-de la Puente, a professor of practice of corporate sustainability in the Dyson School.

Tobin-de la Puente pointed to the bipartisan bill signed in November by President Joe Biden, which created the U.S. Foundation for International Conservation. The bill, calling for $100 million in annual U.S government funding, requires that every $1 of federal funds be matched with $2 in private funds for conservation efforts in developing countries.

In the private sector, Tobin-de la Puente said, Goldman Sachs Asset Management recently announced a fund for up to $500 million in biodiversity-focused bonds, which he called “the tip of the sphere of innovation in the area of nature finance.”

While climate change has dominated sustainable finance for the past 30 years, Tobin-de la Puente said there is now “a swing in the other direction of this pendulum, which is bringing us back to a place where we were in the early years of focus on climate and a place where we can comfortably put biodiversity finance alongside climate finance as equal partners in this environmental finance activity.”

Sherrie Negrea is a freelance writer for the Cornell SC Johnson College of Business.