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FINANCE AND SOCIAL ENTREPRENEUSHIP
Thomas Lagoarde-Segot, PhD, HDR
COURSE STRUCTURE
Session 1: Sustainability and the reconstruction of finance
Session 2: Flipped teaching – article reviews
Session 3: Flipped teaching – article reviews
Session 4: Flipped teaching – article reviews
Session 5: The social entrepreneurship project
Session 6: Cash flow estimation in developing countries
Session 7: The social return on investment methodology (SROI)
Session 8: Workshop session
Session 9: Business plan presentations
Grading 
Readings presentation
10%
Business plan presentation
10%
Group dossier
40%
Exam (online)
40%
TOTAL
100%
Exam: online essay 
Group dossier: a report gathering your article review + written business plan + other assignments
Dossier to be handed in hard copy only by April 3rd
Groups registered today after the break
Contact: thomas.lagoardesegot@kedgebs.com. 
SUSTAINABILITY AND THE RECONSTRUCTION OF FINANCE
1.
2.
3.
4.
The sustainability principle
Externalities and market failure
Financial ideology and sustainability
Deconstructing mainstream finance
Sustainability: definitions
Sustainability requires that «  current development meets the needs of the present without compromising the ability of future generations to meet their own needs»(Brundtland Report, 1987).
It contains within it two key concepts:
Needs, in particular the essential needs of the world's poor, to which overriding priority should be given; and
Limitations imposed by the state of technology and social organization on the environment's ability to meet present and future needs.
According to the United Nations the cost of environmental degradation could amount to 20% of global GDP by 2050 under the most optimistic scenario – and with strong international disparities
Under the weak form, sustainability requests that macroeconomic dynamics stabilize the aggregate stock of capital:
K= Kn + Kh + Km
Where K denotes the aggregate stock of capital, Kn natural capital, Kh human capital, and Km manufactured capital, respectively.
This is a neoclassical framework in which natural and man-made capital are viewed as substitutes and are assumed to generate the same type of well-being. Sustainability hence results from a standard market adjustment mechanism
Under this definition, the rarefaction of natural capital Kn may be sustainable so long as it is compensated by a reciprocal increase in human capital Kh and manufactured capital Km , so as to maintain the aggregate stock of capital K constant. 
For a given level of demand, the rarefaction of natural resources Kn generates inflation, to which producers respond through innovation. The commercialization of high quality substitutes for natural capital (increase of Kh and Kn) then reduces the pressure exerted on natural resources, ultimately stabilizing the aggregate stock of capital K.
Sustainability: definitions
Under the strong form of sustainability, natural capital cannot be compensated by an increase in the other capital types: The stock of natural capital Kn must be maintained above a critical threshold.
Natural capital, human capital and manufactured capital are no longer seen as substitutes, but rather as complements of production. 
Sustainability requires three necessary conditions: (i) the rate of utilization of natural resources must not exceed their rate of renewal; (ii) the rate of waste emission must not exceed the environment’s absorption capacity; and (iii) the utilization rate of non-renewable natural resources must not exceed their rate of substitution by renewable resources
Strong sustainability therefore considers environmental degradation as a market failure, and assigns policy makers the responsibility of implementing a set of relevant incentives for producers and consumers.
The key challenge is to identify and measure the various elements of critical capital and to develop a set of incentives for producers and consumers.
Sustainability: definitions
In spite of these significant differences, both ‘weak’ and ‘strong’ sustainability rely on a principle of intergenerational equity. The interest of future generations needs to be taken into account in curren decisions
Opting for the sustainable choice induces losses for capital holders
At time t1 economic agents face two alternatives: 
They can either choose to maximize their short-term returns at the cost of unsustainability (the ‘non-sustainable path’), or aim instead for a sustainable strategy, at the cost of lower short-term returns (the ‘sustainable path’)
At a theoretical level, sustainability implies that all external marginal costs associated to the various investment projects are taken into account (« internalized »)
Sustainability: definitions
Sustainability: definitions
SUSTAINABILITY AND THE RECONSTRUCTION OF FINANCE
1.
2.
3.
4.
The sustainability principle
Externalities and market failure
Financial ideology and sustainability
Deconstructing mainstream finance
Externalities and market failure
An externality occurs when one individual’s action affects the welfare of a third party who is not involved in the transaction (i.e; does not pay nor receive anything in return)
If the impact is detrimental, this is a negative extenality, if the impact is favourable this is a positive externality 
In the presence of externalities, the interest of the market goes beyond the buyers and sellers who participate in the market – it also involves the welfare of affected third parties
Given that buyers and sellers neglect the external effects of their purchasing and selling decisions, the market equilibrium is not efficient when there are externaliies.
For instance, the Altéo factory in Gardanne (France, 13) seeks to maximize itt profits and does not pay for the total cost of pollution induced by its emissions of red mud containing heavy metal into the Mediterranean Sea. 
For each quantity, the position of the curve describes the willingness of pay of a marginal customer. It describes the value of the last unit of bauxite purchased by a customer. This value decreases as the quantity owned by thee consumer rises.
The bauxite mine supply curve reflects the production costs as a function of the quantity produced. 
For each quantity, the position of the curve describes the price asked by producers. Factors of production are affected by the law of diminishing returns: increasing output implies an increase in the marginal cost of production, which leads firms to increase their price.
In the absence of governmental intervention, the price adjusts to as to equalize the supply and demand for bauxite mine.
The bauxite mine demand curve reflects the value that consumers give to bauxite mine as measured by the price that they are willing to pay
Externalities and market failure
Price of bauxite mine
Supply (private cost)
Equilibrium price
Demand
(private value)
0
Equilibrium quantity produced
Quantity of bauxite mine
Externalities and market failure
Now assume that for each unit of bauxite mine produced, a given amount of pollution is released into the environment
Given that such pollution creates a risk for marine life and may contaminates halieutic resources, this amounts to a negative externality
Given the externality, the social production cost of bauxite mine is higher than the production cost incurred by the firm which produces it
For each unit produced, the social cost corresponds to the sum of the private cost and the cost borne by third parties affected by pollution
The social cost curve lies above the private cost curve as the former takes into account the external cost imposed on society by producers.
The difference between these two cuves measures the cost of pollution released into the environment 
Externalities and market failure
Price of bauxite mine
Social cost
Supply (private cost)
Optimal price
Equilibrium price
Demand (private value)
0
Quantity of bauxite mine
Socially optimal quantittyEquilibrium quantity
In the presence of a negative externality, the social cost of a good exceeds its private cost. The socially optimal level of production is thus lower than the equilibrium level of production.
 
Cost of pollution
Externalities and market failure
In this context, an omniscient social planifier would seek to maximize the surplus from the market exchange – that it the value that consumers give to bauxite, minus its total production costs
The social planifier knows that the production costs include the social costs of pollution.
One solution consists in enforcing an authoritarian legislation which bans this type of behaviour
The legal concept of ‘crime against the environment’ was put forth duing the COP21 conference. See the following report: Interpol/UNEP: http://web.unep.org/interpol-unep-conference-tackle-most-pressing-environmental-crime- issues
One alternative consists in taxing producers for each sold unit of bauxite mine in order to shift the supply curve upwards (‘pigovian’ tax, Arthur Pigou (1877-1959))
If such tax reflected exactly the social cost of pollution, the new curve would coincide with the social cost curve, and the equilibrium level of production would actually coincide with the socially optimal level of production
Externalities and market failure
Price of bauxite mine
Social cost
Supply (private cost)
Optimal price
Equilibrium price
Demand (private value)
0
Quantity of bauxite mine
Optimal quantity
Equilibrium quantity
Amount of the Pigovian tax
In the presence of a negative externality, the social cost of a good exceeds its private cost. The socially optimal level of production is thus lower than the equilibrium level of production.
 
Externalities and market failure
The economic analysis that precedes assumes that human behaviour can be reduced to a utility maximization function
It rests on a objectivist ontology which assumes that the social world (for instance, the bauxite mine market) is an external eality characterized by a set of universal regularities which could be uncovered through the study of causal mechanisms (for instance, the impact of a tax on producer behaviour)
This analysis is relevant, yet incomplete as it does not open the ‘black box’ of the real behaviour of individuals – which cannot be reduced to the maximization of individual utility functions
A subjectivist interpretation would instead posit that the social world is made of the intersection of the individuals’ subjectivities. Therefore, social reality (the market for bauxite mine) can only be understood as a network of hypohesis and shared subjective signifiers which are shared collectively and modified over time. temps
Focusing on the behaviour of actors raises the question of intentionalities, of the role of ethics in the economy, and of the ideological aspects of « scientific » theories of corporate management
Such questions have led several public and private actors to rethink to role of finance within society
 
Externalities and market failure
SUSTAINABILITY AND THE RECONSTRUCTION OF FINANCE
1.
2.
3.
4.
The sustainability principle
Externalities and market failure
Financial ideology and sustainability
Deconstructing mainstream finance
Finance as an ideology
Financial theory, with its concepts, its models and its techniques, creates an interpretation framework that is used not only to describe the world, but to act on the the world.
Financial theory indeed lies at the heart of economic decision making 
At the microeconomic level, financial theory allows the firm to gather a set of strategic information in order o guide the decisions of managers; and to communicae these informaions to external partners (sharheolders, creditors, tax administrations, etc…) 
At the macroeconomic level, financial theory allows to transfer funds from agents with a financing capacity to agents with a financing need (households, States, local municipalities, etc…) 
But financial theory has a sociopolitical role: the dissemination of the financial language tends to objectify a specific vision of the world.
In the words of Habermas (1968), financial theory conceils and maintain the existing system of domination under a technical veil– whose understanding requires preliminary knowledge of the financial jargon. It is an ideology, not a science
The notion of « value » in finance
In France the Ordre des Experts Comptables (CFA) recommends the use of three main methods in order to measure the « value » of a corporation. 
These three methods are based on the premise that value is defined as the profitability of capital invested in the firm, relatively to other possibilities of asset allocation:
The asset-based approach is a type of business valuation that focuses on a company's net asset value (NAV), or the fair-market value of its total assets minus its total liabilities
The enterprise multiple method establishes a firm’s market value based on observed prices in similar transactions. The price is estimated as a multiple of the firm’s EBITDA, the multiple corresponding to an average observed for similar firms
The discounted cash flow approach measures a firm’s value as the profit that exceeds the cost of capital
The present value of an investment projet is reduced to expected profits (« operating cash flows ») discounted by the required rate of return for capital holders (« r ») and the time horizon (« i »):
N
VAN  
i 1
E(FTD)
i

i
1 
r
 « Value » is then assumed to correspond to the profit that exceed the rate of profits required by capital holders – the latter being naturalized bia specific models such as the CAPM)
In other words, any increase in the remuneration of labour, the incorporation of externaliies in the investment cycle, etc… relatively to the capital factor is not perceived as a modification in the distribution of value, but as a decrease in value
The notion of « value » in finance
« Value » in economics: GDP 
« Value » in finance: enterprise multiple method
“« Value » in finance:
discounted cash flow
Turnover
€30,000
Minus: costs of production (excluding wages)
- €5,000
Gross added value
25,000
Minus : cost of production (wages)
- €5,000
Gross profits
€20,000
Minus: Depreciation 
- €10,000
Earnings before interest and taxes (EBIT)
€10,000
Minus: tax (40%)
- €4,000
Net profit
€6,000
Operating cash flow (net profit + depreciation)
€16,000
The notion of « value » in finance
The present value principle give more importance to short term profits, which leadsto discard projects with long term payoffs. 
This pillar of financial theory and practice runs opposite to the intergenerational equity principle
This paradox is made even more acute by the « shareholder value maximization » logic, which increased required rates of return and leads to an increase in the cost of capital « r », thereby further reducing the present value of long term cash flows.
The notion of « value » in finance
Financial « value »and sustainability
Panel A
0
1
2
3
4
5
6
7
8
9
10
CF
-100
100
100
100
100
100
-100
-100
-100
-100
-100
PV
-100
90.91
82.64
75.13
68.30
62.09
-56.45
-51.32
-46.65
-42.41
-38.55
NPV
43.70
NPV > 0 Acceptance of project
Discount rate
10%
Panel B
0
1
2
3
4
5
6
7
8
9
10
CF
-100
100
100
100
100
100
-100
-100
-100
-100
-100
PV
-100
95.24
90.70
86.38
82.27
78.35
-74.62
-71.07
-67.68
-64.46
-61.39
NPV
-6.28
NPV < 0 Rejection of project
Discount rate
5%
Discounted Cash Flow Analysis with positive cash flows early and negative cash flows late – using different discount rates. 
Example: nuclear power plant; fracking, etc…
A higher discount rate leads to accept the project
Discounted Cash Flow Analysis with negative cash flows early and positive cash flows late – using different discount rates. 
Example: eco-efficiency building renovation, solar energy panels, etc.…Panel A
0
1
2
3
4
5
6
7
8
9
10
CF
-100
-100
-100
-100
-100
-100
200
200
200
200
200
PV
-100
-90.91
-82.64
-75.13
-68.30
-62.09
112.89
102.63
93.30
84.82
77.11
NPV
-8.32
NPV < 0 Rejection of project
Discount rate
10%
PanelB
0
1
2
3
4
5
6
7
8
9
10
CF
-100
-100
-100
-100
-100
-100
200
200
200
200
200
PV
-100
-95.24
-90.70
-86.38
-82.27
-78.35
149.24
142.14
135.37
128.92
122.78
NPV
145.50
NPV > 0 Acceptance of project
Discount rate
5%
A higher discount rate leads to discard the project
Financial « value » and sustainability
Finance and ideology
At an external level, financial theory asserts the triumph of money as a universal language. What cannot be expressed in monetary terms is considered value-less
One may wonder whether the conversion of all aspects of human life in monetary equivalent is possible, and whether it would guarantee an optimal allocation of resources. Some have said that finance « asks the question of money from within money » (Bellet, 1998)
At an internal level, what financial theory calls « value » corresponds to the fraction of income socially produced that is collected by shareholders (« economic value added »)
This amounts to assuming that the interst of shareholders coincides with general interest and that the stabiliy of the system can only be attained through a continuous expansion of financial returns.
These contradictions became apparent when one considers the sustainability constraint
SUSTAINABILITY AND THE RECONSTRUCTION OF FINANCE
1.
2.
3.
4.
The sustainability principle
Externalities and market failure
Financial ideology and sustainability
Deconstructing mainstream finance
The accumulation of formalized financial theories, and their transmission to B school graduates conceals a fundamental reality; the listed corporation, financial markets, profits, etc… are not natural entities.
Financial and economic reality is embedded in a historically determined social context. 
For instance the existence of corporations presupposes institutions such as property laws, commodity markets, labour markets, finance, etc… which are social constructions
This is demonstrated by observing the real economy, which is characterized by the co-existence of several types of organizations with differetn legal status (coops, limited liability corporations, unions, SME…)
More generally, research in the field of anthropology and history has shown that « exchange regimes » can take different forms depending on the location of epoch.
Deconstructing mainstream finance
The usefulness of a commodity differs from the exchange equivalent by which the commodity is compared to other objects on the market. 
One can distinguish between the use-value and the exchange value of a commodity. 
The use value is tied to "the physical properties of the commodity”: that is, the material uses to which the object can actually be put, the human needs it fulfills.
The exchange value: the exchange equivalent by which the commodity is compared to other objects on the market, i.e. via a universal equivalent which is money.
Production in a capitalist society is not production for use, but for exchange. 
This means that we have no inherent interest in the usefulness of our labor outside of its ability to create exchange-value (i..e money)
However exchange is just a particular case  among all forms of circulation
Deconstructing mainstream finance
The « forms of circulation » (Testard, 2007)
Type of relation
Gift
Unilateral relation which does not imply any obligation nor right for the recipient and giver. 
Reciprocity
Bilateral relation without synchronicity nor obligation
Exchanges
Bilateral relation, causal relationship and obligation.
Non capitalist market exchange
Non market exchange
Capitalist market exchange
The exchange is not motivated by price/ value considerations.
The exchange is motivated by access to the use value of the good.
The exchange is motivated by access to the exchange value of the good.
Different forms of ‘circulation’ within or between communities exist depending on whether market exchange is motivated by access to use-value or to the exchange value of the commodity
The first mistake consists of calquing financial theory onto the analysis of social business, which amounts to considering the latter as a malfunction in corporate governance.
Indeed, under the assumption of narrow economic rationality, the inclusion of extra-financial criteria results in a reduction in the rate of investment, an increase in production costs, a decrease in market share, lower financial profitability, and a drop in the firm’s value. Social businesss would therefore have a tendency to disappear because it is evidence of a form of irrationality. This argument, with its roots in the ideas of Friedman (1970), nevertheless appears to be contradicted firstly by worldwide growth in the social and responsible economy.
The second mistake consists of stating that social business investing obeys principles that place it outside the scope of financial theory research from the outset. 
However, this statement immediately leads to another, according to which the sole legitimate subject of finance studies would be a capitalist company and the only form of rationality considered would be utilitarian rationality. This stance becomes problematic once a distinction is established between an “enterprise” (one of the means of taking collective action, independent of time and place) and a “company” (one of the main forms taken by enterprises since the Industrial Revolution) ( 
Two common mistakes about social business
Economic organizations belong to one of the following sectors:
The first system is the profit-oriented private sector
 
Its objective is to maximize returns on investment for shareholders
The second system refers to the operations of the public sector 
The second system focuses on wealth redistribution and the provision of public goods 
The third system refers to enterprises that use market mechanisms to pursue explicit social objectives
These enterprises are based on ‘reciprocity’ and put labor, citizens, or consumers in control of capital. 
These include non profit and for-profit enterprises whose surpluses are shared by its members (rather than the government or private business of any kind)
The three-tiered structure of the economy
Firstsector
Secondsector
Thirdsector
Dominantactor
Market
Government
Community
Rationality
Competition
Distribution
Cooperation
Natureof relations
Exchange
Autority
Solidarity-Reciprocity
Principleofgovernance
Freedom
Control
Participation
Performancecriteria
Profits
Publicgoods
Common good(social, ecological, ethical values)
The three-tiered structure of the economy
Use the conceptual framework in the next slide as a starting point for linking the several articles presented in class together
Read each of the articles
Write a 5 page literature review on « Finance and Sustainability » (2,500 words) discussing the content of each article. Your report should:
Use point 1 above as a framework for linking the articles together
Describe the content of each article in a precise and concise way
Avoid plagiarism – use your own words 
Individual assignment – final exam
Financialization
Article 2: Lagoarde-Segot (2017)
Article 10: Buchanan (2017)
Article 12: van der Zwan (2014)
Sustainability
« top down» reforms
« bottom-up » initiatives
Technology
Metrics
Simulacrum
Hyper-reality
Ideology
Utopia
Article 1: Lagoarde-Segot & Paranque (2018)
Article 3: Lagoarde-Segot (2015)
Article 4: Ansart & Monvoisin (2017)
Representations
Article 6: Schinckus (2008)
« Ambiguous zone »
Social impact bonds
Socially responsible investment
Article 7: Schinckus (2017)
Article 9: Revelli (2017)
Social entrepreneurship
Article 11: Chandra (2017)
Finance reconsideredArticle 13: Jayashankar et.al (2015)
Representations
Article 7: Artis (2017)
Article 8: Paranque and Revelli (2018)
Article 15: EU Report on Sustainable finance(2018)
Financial techniques
Article 14: Baur and Lagoarde-Segot (2017)
Financialization
Article 2: Lagoarde-Segot (2017)
Sustainability
« top down» reforms
« bottom-up » initiatives
Technology
Metrics
Simulacrum
Hyper-reality
Ideology
Utopia
Article 1: Lagoarde-Segot & Paranque (2018)
Article 3: Lagoarde-Segot (2015)
Article 4: Ansart & Monvoisin (2017)
Representations
Article 6: Schinckus (2008)
«) Ambiguous zone »
Social impact bonds
Socially responsible investment
Article 7: Schinckus (2017)
Article 9: Revelli (2017)
Social entrepreneurship
Article 11: Chandra (2017)
Finance reconsidered
Article 13: Jayashankar et.al (2015)
Representations
Article 7: Artis (2017)
Article 8: Paranque and Revelli (2018)
Article 15: EU Report on Sustainable finance(2018)
« Extracting agents from the ideology and practices of financialization »
Financial techniques
Article 14: Baur and Lagoarde-Segot (2017)
https://www.youtube.com/watch?v=a0jZBpauVEk
https://www.youtube.com/watch?v=0Rx2mQ_uu3s
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