Sustainable return - a framework for institutional capital & modern markets
Sustainable return – a framework for institutional capital & modern markets
Sustainable investing has become an important strategic topic for institutional investors, yet capital markets still lack an accepted and comparable methodology to measure sustainability in financial terms. Traditional investment analysis is built primarily on financial metrics, while the societal and environmental effects of corporate activities are largely ignored. This gap makes it difficult for asset owners and asset managers to allocate long-term capital with full visibility on value creation, risk exposure, and resilience. The Sustainable Return framework responds to this challenge by integrating financial performance with monetized externalities, enabling a more complete assessment of corporate value and long-term investment potential.
The core of the framework is the concept of Sustainable Return—a metric that captures both financial value creation and the economic cost or benefit of externalities generated by a company. Instead of labeling companies as “sustainable” based on subjective, qualitative assessments, the framework translates societal and environmental impacts into standardized, monetary indicators. This allows institutional investors to evaluate companies through a familiar financial lens and compare them across industries and geographies.
The underlying methodology builds upon established economic theory. Externalities, a concept rooted in the work of economist Arthur Cecil Pigou, describe costs and benefits arising from corporate activity that are not reflected in market prices, such as emissions, resource use or health impacts. As scientific data, accounting standards and regulatory transparency progress, these externalities can increasingly be quantified and monetized. Incorporating them into investment analysis creates a comprehensive picture of long-term value creation and systemic risk.
For institutional investors - including pension funds, insurers, foundations, endowments and sovereign allocators - the implications are immediate. The Sustainable Return framework supports capital allocation toward companies that generate competitive financial performance while delivering measurable positive externalities. It also enhances long-term risk management by making transition and regulatory exposures visible in economic terms. In this way, Sustainable Return complements existing financial models rather than replacing them, and can be integrated into portfolio construction, equity research, corporate valuation and strategic asset allocation.
From a market perspective, the approach introduces a credible economic language for sustainability. Instead of treating sustainability as a sentiment- or marketing-driven theme, Sustainable Return reframes it as a question of value: How much financial and societal value does a company create per unit of capital employed? This shift is particularly relevant as global regulation moves toward greater transparency on externalities and as institutional allocators seek to align investment strategies with long-term liabilities and fiduciary objectives.
Ultimately, Sustainable Return represents more than a measurement tool. It is a capital markets framework that incorporates the full spectrum of value creation into investment analysis. By making externalities visible and comparable, it supports the evolution of more resilient financial markets that reflect real economic costs and benefits. For institutional investors, this provides a strategic advantage: the ability to evaluate companies, portfolios and asset classes based on long-term value, rather than short-term financial information alone.