For a long time, optimisation models in finance focused on a single objective: maximising shareholder value. Traditional financial optimisation models, for example, seek to maximise expected returns while treating risk as a constraint or parameter. The objective is mathematically convenient: maximise financial value subject to a set of predefined limitations.
However, the world in which financial decisions operate has changed. As discussed in Principles of Sustainable Finance, financial systems increasingly recognise that companies and investments affect not only shareholders but also employees, communities, and the environment. While organisations could choose to ignore these broader impacts, many acknowledge the responsibility that comes with them and actively incorporate social and environmental considerations into their decision-making. As a result, optimisation models must evolve from a purely financial perspective to one that includes broader societal objectives.
The Sustainable Finance framework
The book proposes a typology of Sustainable Finance (SF) that distinguishes approaches according to four dimensions:
- The value created: whether the focus is solely on financial value or also includes social and environmental value.
- The ranking of objectives: whether financial, social, and environmental goals are treated equally or whether some take priority over others.
- The optimisation approach: how these objectives are incorporated into decision-making, for example through a single objective, multiple objectives, or constraints.
- The time horizon: whether decisions primarily focus on short-, medium-, or long-term outcomes.
These dimensions can be applied to many types of decisions, including portfolio construction, investment planning, corporate strategy, supply chains, and infrastructure development. Together, they illustrate how decision-making evolves from purely financial goals towards broader societal objectives.
At the most traditional end of the spectrum is Finance as Usual, where financial value (F) is the only objective. The optimisation problem is straightforward: maximise F, typically with a short-term horizon.
The focus of a first more sustainable approach (SF 1.0) remains on financial value but begins to acknowledge social (S) and environmental (E) impacts. Financial goals still dominate, and models typically maximise F subject to social and environmental constraints. Examples might include minimum service levels for communities, diversity requirements, or upper limits on emissions and pollution. The time horizon generally remains short term.
SF 2.0 broadens the perspective to stakeholder value, often described as the triple bottom line: people, planet, and profit. Here, the objective becomes integrated value (I), where I = F + S + E. The optimisation seeks to maximise this integrated value, typically over a medium-term horizon.
Finally, SF 3.0 focuses on the creation of common good value. In this stage, social and environmental objectives take priority over financial objectives (S and E > F). Optimisation focuses on maximising social and environmental outcomes while ensuring financial viability, and the perspective shifts towards the long term.
What this means for optimisation models
This evolution has important implications for optimisation models. Instead of solving problems with a single financial objective, models increasingly need to incorporate multiple objectives simultaneously. These objectives can be combined, balanced, or constrained depending on the decision context.
Importantly, this approach is not limited to finance. Many decision problems, from investment planning and supply chains to energy systems and infrastructure planning, involve trade-offs between financial, social, and environmental outcomes.
Designing models that capture these trade-offs helps organizations move from optimising one dimension of value to optimising value in a broader sense. If you are interested in exploring how multiple objectives can be incorporated into your optimisation models, feel free to reach out. We would be happy to explore how financial, social, and environmental goals can be considered together.