3.3.5 The financing of firms
Helpful prior knowledge and learning objectives
Helpful prior learning:
Section 1.1.1 The economy and you, which explains what an economy is and how it is relevant to students’ lives
Section 1.1.2 The embedded economy, which explains the relationship between the economy and society and Earth’s systems
Section 1.1.4 Regenerative economies, which explains how circular, distributive and caring, needs-based and sufficient economies can meet human needs within planetary boundaries
Section 3.3.1 The deep design of firms, which explains the major transitions that business needs to make to meet human needs within planetary boundaries
Section 3.3.2 The purpose of firms, which explains the purpose of business and the role of profits
Section 3.3.3 The networks and governance of firms, which explains the relationships of business to internal and external stakeholders and how good governance can ensure that value is shared in networks
Section 3.3.4 The ownership of firms, which explains the various legal types of businesses and how certain business ownership and structure can support regenerative strategies
Section S.1 Systems thinking, which explains what a system is and why systems thinking is useful. (coming soon)
Learning objectives:
discuss the role and importance of finance for regenerative businesses
Unilever is a publicly-held limited company (Section 3.3.4). It owns brands like Dove, Knorr, Close-up, and Ben & Jerry’s. From 2009-2019, CEO Paul Polman supported stronger sustainability goals for Unilever, including cutting new plastic use and paying suppliers a living wage by 2030. Polman also stopped quarterly (every 3 months) earnings reports to focus on long-term goals.
By 2019, other big companies adopted similar ideas. That year, 181 CEOs in the United States in the Business Roundtable signed a statement that businesses should aim to benefit all stakeholders - customers, employees, suppliers, communities - not just shareholders. It seemed companies were shifting toward more people- and planet-friendly business.
Despite this shift, Polman’s sustainability vision has faced challenges since then. Some Unilever shareholders opposed these moves, claiming higher costs reduce profits and hurt the price of Unilever stock relative to competitors (Figure 1). They pressured Unilever's new CEO to scale back social and environmental goals. This shows how a company’s sources of financial capital can affect regenerative goals.
Figure 1. A comparison of the 5-year stock price change of Unilever (dark blue) with a few of its competitors.
(Credit: Google Finance)
Where do firms get money for their business activities?
Entrepreneurs often need large sums of money to start and run their businesses, from buying or renting facilities, purchasing materials to hiring workers. Sometimes they use their own money, but often they rely on external investors who expect a financial return, to earn more money than they invest.
Investors may set conditions, like having some decision-making power or requiring high profit margins or fast rates of business growth, which could conflict with regenerative strategies. If investors require high profit margins, the business may not be able to pay for more costly regenerative strategies, or it might have to set high prices for a product making it unaffordable for people who need it.
Thus, the source of finance, and the expectations of those who provide it, shape the business’s purpose, networks, governance and ownership. Social businesses using regenerative strategies often need more patient capital, which seeks long-term gains over immediate profit.
As you read about sources of finance, consider how well each one may be able to support regenerative business practices.
Figure 2. A business may need to purchase or rent large, costly facilities and machinery to produce its products.
(Credit: Karolina Grabowska, CC0)
Internal Sources of Finance
Internal finance comes from within the business or from its owners. An advantage of this source is that the business keeps control over decision-making. Whether this money is used for regenerative strategies will depend on the business’s purpose (Section 3.3.2), networks and governance (Section 3.3.3), and ownership structure (Section 3.3.4). Internal finance sources include:
personal funds: owners invest their own money, which is risky since they could lose everything if the business fails;
retained earnings: these are profits not paid to owners or shareholders, but are instead invested back into the business. This is less risky, but slows growth (not necessarily a bad thing), as it depends on past profits;
asset sales: selling unused assets like a factory or machines can raise funds, though it may not generate significant money unless the business has valuable assets that it can sell without harming its production.
Figure 3. Businesses may get started with an entrepreneur’s personal funds.
(Credit: Tima Miroshnichenko, Pexels licence)
Figure 4. A business could sell assets, like this fleet of unused trucks, to raise financial capital.
(Credit: Tom Fisk, Pexels licence)
External Sources of Finance
External finance comes from outside the business and includes: equity finance, debt finance, and other options.
Equity finance involves the business giving part ownership to investors in exchange for funding. No repayment is required, but investors may push for high profits or fast growth to enable them to sell their shares in the business for a profit later. This growth and profit pressure can undermine regenerative goals. Types of equity finance include:
business angels: wealthy individuals invest early in businesses and may mentor entrepreneurs;
venture capital: A group of investors, called venture capitalists, provides funds, often larger amounts than a single angel investor.
share capital: Selling shares on the stock market through an initial public offering (IPO) can raise large amounts of finance, but also reduces control (Section 3.3.4). IPOs enable angel investors and venture capitalists to make a profit by selling their shares.
Figure 5. The trading floor of the New York Stock Exchange (2022)
(Credit: Tobias Deml, CC BY-SA 4.0)
Debt finance involves the business borrowing money that must be repaid with an additional amount of interest. The business keeps ownership unless it can't repay the debt. Types of debt finance include:
bank loan: these usually require collateral, which is an asset the lender can take if the loan isn’t repaid.
microcredit: small loans that don’t need collateral and are supported by groups helping each other repay. These loans are often given to female entrepreneurs to improve financial independence (Subtopic 2.3).
corporate bonds: businesses sell bonds to raise money and pay regular interest to bondholders. Green bonds specifically fund environmental projects.
Figure 6. Businesses can borrow money from a bank or other financial institution to fund their work
(Credit: RDNE Stock project, Pexels licence)
Other forms of finance that do not fit neatly into equity or debt categories include state funding and crowdfunding:
state grants and subsidies: A state grant is a payment usually given to a single business for a specific purpose or activity. State subsidies, however, are often given more widely in industries. Subsidies come in different forms (payments, tax breaks or other forms of aid), and are usually given over a longer period of time, aiming to increase industry output or lower prices. Grants and subsidies are not repaid and have no interest payments. The main challenge is funding access because many groups compete for them and applications are time-consuming.
crowdfunding: crowdfunding raises small amounts of money from many people, often through online campaigns on platforms like Kickstarter or Thundafund. Crowdfunding helps build a community, but doesn’t usually raise large sums and can be unpredictable.
What can businesses do to improve their relationship with finance?
It may already be clear to you that some of these forms of finance are more likely to support regenerative business activities than others. You will be able to discuss this further in the Activity below.
Regenerative start-up businesses that design their financing from the beginning can choose a source of finance that is aligned with their regenerative purpose. However, even with forms of finance that have traditionally not supported regenerative practices, like venture capital, can be redesigned to support social and ecological purpose. For example:
flexible profit margins focused on long-term impact rather than short-term gain;
dividend caps, limiting profit payouts to shareholders to have more money to reinvest in the business;
profit sharing with employees, communities or charities;
setting aside funds for social and ecological projects;
impact pricing that lowers product prices to increase positive impact rather than maximising profit.
Figure 7. Finance can serve the purpose of a business, if it is designed well.
Move green slider to see second image.
(Credit: Doughnut Design for Business - Core Tool, CC BY-SA 4.0)
The relationship between finance and a business’s purpose, networks, governance and ownership is powerful. Powerful investors can either support or hinder regenerative business practices. Entrepreneurs must be aware of these dynamics and seek financial partners who align with their regenerative goals.
Activity 3.3.5
Concept: Regeneration
Skills: Thinking skills (critical thinking, transfer)
Time: varies depending on option - see below
Type: Individual, pairs, group
Option 1: Evaluating sources of finance for their regenerative potential
Time: 30 minutes
Individually, with a partner or in a small group, consider what you have learned about different types of finance in this section. Discuss to what extent each source of finance might support or undermine the regenerative mission of a business. Keep in mind that ownership is not the only thing that affects regenerative business practices, but for this activity you are focusing on finance as a factor.
You could start by having individuals put each source of finance on a continuum like the one in Figure 8 below. Draw the continuum on a piece of paper or a digital document and write in where you think each source goes, relative to one another. You should probably use a pencil if hand-drawing so you can revise your ideas as you go.
personal funds angel investment bank loan
crowdfunding retained earnings venture capital
microfinance government grant or subsidy
asset sales share capital green bond
Figure 8. Where would you put each source of finance on this continuum?
Compare your results with another student, or small group of students. Discuss why you put your source of finance where you did, using similarities and differences to get a better understanding of the general factors that impact how well finance sources support regenerative business activities.
Try to clarify these generalisations, explaining under what conditions a particular source of finance will support more regenerative business practices:
“Generally, a source of finance will be more likely to support regenerative business activities if it…. (finish the sentence with the criteria you would suggest).
Option 2: The financing of your school
Time: 20-25 minutes to develop questions, 30 minutes for interview
Invite the person in charge of your school’s finances for an interview with your class.
Considering what you learned in this section, develop a list of interview questions to find out about where the school gets its finance, and how well those sources of finance might be aligned (or not) with the school’s mission and any regenerative strategies your school is implementing or considering. You could also consider or discuss other factors that affect how much freedom the school has to set it’s own goals, but in this interview the focus is on finance.
To do this activity, you should plan on developing questions in one lesson, making sure to get your teacher’s feedback and editing as needed. The interview could be conducted in a separate lesson on a different day, if needed.
Option 3: Acumen Fund impact investing case studies
Time: 25-50 min, depending on weather students share their case studies with other groups or the class
Access the case studies of the Acumen Fund, a global impact investment firm that supports businesses around the world who work to meet human needs within planetary boundaries. Individually, with a partner, or in a small group:
Select one case study that interests you and read the description
Identify the key facts about the business and its funding needs
Identify which elements of the Doughnut Model’s social foundation and planetary boundaries are involved (Figure 9) - how does the business help meet human needs within planetary boundaries?
Consider, or discuss with your partner or group, why it’s important for this business to have “patient capital” rather than investors seeking fast, high returns on investment.
Share your case study and thoughts with another person, group or your class.
Figure 9. The Doughnut Economics model showing the “safe and just space for humanity” (Credit: Kate Raworth and Christian Guthier CC-BY-SA 4.0)
Ideas for longer activities and projects are listed in Subtopic 3.5 Taking action
Checking for understanding
Further exploration
Acumen Fund - the website of a global impact investment firm that works to support entrepreneurs working on meeting human needs within planetary boundaries. The website has profiles of the projects that Acumen supports and case studies where it synthesises learnings from its impact investing activities. Its Acumen Academy has a great course catalogue of courses related to social entrepreneurship and impact investing, many of them free. One of the courses teaches about its approach to patient capital. Difficulty level: easy-medium
Yunus Social Business - Yunus Funds supports social businesses that focus on employment, education, healthcare, clean water and clean energy to millions of people in East Africa, Latin America & India. Yunus Corporate guides multinational companies to help them transform their purpose to strengthen human and ecological systems. Difficulty level: easy
Doughnut design for business case studies - a set of case studies of real businesses using regenerative business design. These can be used in the classroom to help students apply their understanding of the five design elements in real cases. Difficulty level: easy/medium
30 Notable Angel Investors in Climate - a list of prominent female angel investors focusing on climate issues. The article has links to their profiles and it’s interesting to see the backgrounds and interests of these angel investors.
Sources
Doughnut Economics Action Lab (March 2024). Doughnut Design for Business DEAL’s guide to redesigning businesses through Doughnut Economics – Core workshop Version 1.2. https://docs.google.com/presentation/d/1x8flVhi7JKRRzQClrJnlGkdjd7TpIGXeQiVMQotIH0Q/edit?usp=sharing.
Kelly, M. (2012). Owning our future: The emerging ownership revolution. Berrett-Koehler Publishers: Oakland.
Kelly, M. (2013). The architecture of enterprise: Redesigning ownership for a great transition. The Good Society, 22(1).
Raworth, K. (2017). Doughnut economics: seven ways to think like a 21st century economist. London: Penguin Random House.
Sahan, E. (2023, January). Doughnut Design for Business: Introduction to Redesigning Businesses through Doughnut Economics [Video]. YouTube. https://youtu.be/ViHwewmuArI.
Sahan, E. et. al. (2022, November). What Doughnut Economics means for business: creating enterprises that are regenerative and distributive by design. Doughnut Economics Action Lab. https://doughnuteconomics.org/rails/active_storage/blobs/redirect/eyJfcmFpbHMiOnsibWVzc2FnZSI6IkJBaHBBcXNpIiwiZXhwIjpudWxsLCJwdXIiOiJibG9iX2lkIn19--259000ee416367cd44b4e63d37637ded7c89f384/Doughnut%20&%20Enterprise%20Design%20-%20CET_DEAL%20paper%20V.1.0.pdf
Terminology
Link to Quizlet interactive flashcards and terminology games for Section 3.3.5 The financing of firms - in order of appearance
publicly held limited company: a company that does not issue shares to the public, and where the owners have limited liability
sustainability: meeting people’s needs within the means of the planet
living wage: a wage that is high enough for a person to cover their living expenses
stakeholder: a person who has an interest in or is impacted by some activity
shareholder: a person or organisation that ownes a share, or portion, of a business
financial capital: money that can be used in various ways to earn more money
regenerate: the process of restoring and revitalising something
entrepreneur: a person who sets up a business
investor: an individual that puts money into an entity such as a business for a financial return
financial return: the profits a business earns from its investments
profit margin: the percentage of profit earned by a company in relation to its revenue
governance: the process of overseeing the control and direction of something
patient capital: long-term investment, where investors are prepared to wait a considerable amount of time before seeing any financial returns
internal finance: comes from within the business or from its owners, such as personal funds, retained earnings, or the sale of assets
personal funds: a business owner's own funds that can be used to start or run a business
retained earnings: profits not paid to owners or shareholders, but are instead invested back into the business
asset: something that is useful or valuable
external finance: finance that comes from outside the business and includes: equity finance, debt finance, and other options
equity finance: financing that involves the business giving part ownership to investors in exchange for funding
business angel: a person who makes financial investments in companies in exchange for a share of ownership, usually as an individual
venture capital: finance that comes from a group of investors in exchange for partial ownership of the business
venture capitalist: a person who makes financial investments in companies in exchange for a share of ownership, usually with other investors
share capital: financing of a business that is exchanged for partial ownership of the business
stock market: a market where ownership shares of a company are bought and sold
initial public offering (IPO): offering the shares of a company on a public stock exchange for the first time
debt finance: finance that comes from borrowing money from banks or other financial instiutions
interest: the price a borrower pays to borrow a sum of money
bank loan: when an individual or a business borrows money from a bank
collateral: an asset that a person or business promises to a lender in case a loan is not repaid
microcredit: small loans that don’t need collateral and are supported by groups helping each other repay
corporate bond: when businesses borrow money (bonds) to raise money and pay regular interest to bondholders
green bond: when businesses borrow money (bonds) to raise money for socially or ecologically positive projects, and pay regular interest to bondholders
grant: a sum of money given by a government or other organisation for a particular purpose
subsidy: a payment made by the state to a business or individual to encourage certain behaviour
tax: payment from individuals or organisations to the government, used to provide public infrastructure and services
crowdfunding: a financing method that raises small amounts of money from many people, often through online campaigns on platforms
flexible profit margin: a situation where a business accepts varied profit percentages in order to achieve positive impact
dividend cap: a limit on the amount of money that can be distributed to shareholders
profit-sharing: a system in which the people who work for a company receive a direct share of the profits
impact pricing: pricing a product so that it reaches a large number of people; used to sell necessity goods with a positive impact