PALGRAVE STUDIES IN IMPACT FINANCE

Fuzzy Business Models

and ESG Risk
Offering a Sustainable Perspective on
Companies and Financial Institutions
Edited by Magdalena Ziolo
 Palgrave Studies in Impact Finance

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 Magdalena Ziolo
Editor

Fuzzy Business
Models and ESG Risk
Offering a Sustainable Perspective on Companies
and Financial Institutions
Editor
Magdalena Ziolo
University of Szczecin
Szczecin, Poland

ISSN 2662-5105 ISSN 2662-5113 (electronic)

Palgrave Studies in Impact Finance
ISBN 978-3-031-40574-7 ISBN 978-3-031-40575-4 (eBook)
https://doi.org/10.1007/978-3-031-40575-4

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 Acknowledgements

Research results presented in this paper are an integral element of research

project implemented by the National Science Centre Poland under the
grant OPUS16 no UMO-DEC-2018/31/B/HS4/00570.

v
 Contents

1 Introduction 1
Magdalena Ziolo
2 Theoretical Framework of Sustainable Business Models 5
Anna Spoz
3 Fuzzy Logic Concept 29
Iwona B˛ak and Maciej Oesterreich
4 Fuzzy Logic in Finance 53
Anna Spoz and Magdalena Zioło
5 Fuzzy Logic in Business Ethics 73
Beata Zofia Filipiak
6 Cooperation Between Financial Institutions
and Companies: Fuzzy Business Models ESG-Oriented 105
Beata Zofia Filipiak and Magdalena Ziolo
7 Conclusion and Recommendations 133
Magdalena Zioło

References 137
Index 151

vii
 Notes on Contributors

Iwona B˛ak is an Associate Professor, Ph.D. at West Pomeranian Univer-

sity of Technology Szczecin, Poland. She is an expert in the field
of quantitative methods, specializing in analyses regarding the use of
quantitative methods in economic research, with particular emphasis
on international comparisons in the area of sustainable development,
competitiveness of the national economy and regional development, with
experience in working with advanced statistical packages: STATISTICA,
R program, etc. Author and co-author of scientific articles published in
scientific journals from the JCR list, also having practical experience in the
implementation of projects carried out on behalf of public institutions.
Beata Zofia Filipiak is Professor at University of Szczecin, Poland. She is
the head of the Department of Sustainable Finance and Capital Markets
at the University of Szczecin, as well as a Member of the University
Council of the University of Szczecin. Her research and teaching scope
focus on finance, finance management in public sector and sustainability.
She has extensive experience gained in financial institutions and financial
market. Scholarship holder of the Flemish government the University of
Antwerp in 1999. She has received scholarships from DAAD (2007–2008
and 2008–2009) and DPWS (2016–2018), Erasmus +. She is a Member
of the Financial Sciences Committee of PAS (the Polish Academy of
Sciences), Expert of The National Centre for Research and Development
(NCBR). She was an Expert of Polish Accreditation Commission and a
board member of the Polish Association of Finance and Banking. She has

ix
x NOTES ON CONTRIBUTORS

been a licensed financial advisor since 1998. She was involved in 26 scien-
tific projects regarding, corporate financial strategies, financial strategies of
LGU’s and sustainable development. She carries out research supported
by National Science Centre Poland in the scope of financing sustainable
development. She is the author and editor of numerous books, mostly
about financial management and financing sustainable development.
Research interests: sustainable finances; use of financial instruments
(“green financial instruments”) in creating sustainable development; ESG
risk; financial strategies and their connection with business models;
policy of public authorities toward sustainable development (instruments,
decisions, effects).
Maciej Oesterreich Ph.D., is an Assistant Professor at the Department
of Applied Mathematics in Economics at the West Pomeranian University
of Technology in Szczecin and specializes in econometric modeling and
forecasting, as well as the application of quantitative methods in the anal-
ysis of socio-economic phenomena. He is the author or co-author of over
40 scientific papers (articles, chapters of monographs) and a member of
the Polish Statistical Society and the Polish Economic Society.
Anna Spoz Assistant Professor, Ph.D. at the Department of Finance and
Accountancy at the John Paul II Catholic University of Lublin, Poland.
Her research and teaching scope focus on finance, particularly corporate
finance, accounting and tax and sustainable finance. Author and co-author
of numerous publications on finance, accounting, reporting and manage-
ment. She is reviewer of international publications. She combines teaching
and scholarly activities with work in the business.
Magdalena Ziolo is Professor at University of Szczecin, Poland. Her
research and teaching scope focus on finance, banking and sustainability.
She has extensive experience gained in financial institutions. She has
received scholarships from the Dekaban-Liddle Foundation (University of
Glasgow, Scotland) and Impakt Asia Erasmus + (Ulan Bator, Mongolia).
She is a Member of Polish Accreditation Commission, Member of
the Financial Sciences Committee of PAS (the Polish Academy of
Sciences), Member of the Advisory Scientific Committee of the Financial
Ombudsman, Expert of the National Centre for Research and Develop-
ment, Expert of the National Science Centre and the National Agency for
Academic Exchange, Expert of the Accreditation Agency of Curacao. She
was a member of State Quality Council, Kosovo Accreditation Agency
 NOTES ON CONTRIBUTORS xi

and visiting professor of University of Prishtina (Kosovo). She is Principal

Investigator in the research projects funded by National Science Centre,
Poland in the field sustainable finance. She is the author and editor of
numerous books, mostly about financing sustainable development.
 List of Figures

Fig. 2.1 Environmental, social and governance pillars of ESG

(Source https://www.techtarget.com/whatis/definition/
environmental-social-and-governance-ESG [Accessed 14
June 2023]) 6
Fig. 3.1 Graphical representation of the A 1 set (Source own study) 31
Fig. 3.2 Graphic representation of the triangular membership
function (Source own study) 32
Fig. 3.3 Graphic representation of the trapezoidal membership
function (Source own study) 33
Fig. 3.4 Graphic representation of the membership function
with the shape of Gaussian distribution (Source own study) 33
Fig. 3.5 Graphic representation of the S-shaped membership
function (Source own study) 34
Fig. 3.6 Graphical representation of the linguistic variable “Age”
(Source own study) 37
Fig. 3.7 The number of publications containing the phrase “fuzzy
logic” in the Web of Science Core Collection database
and the number of their citations in the years 1990–2022
(Source own study based on Web of Science) 39
Fig. 3.8 Map of links between keywords (Source own study) 42
Fig. 3.9 Classification of fuzzy MCDM methods (Source Kaya et al.
[2019]) 45
Fig. 4.1 Risk management scheme (Source own elaboration) 57
Fig. 4.2 Examples of membership functions (Source own elaboration) 59
Fig. 4.3 Scheme of fuzzy inference system (Source own elaboration) 61

xiii
xiv LIST OF FIGURES

Fig. 4.4 Summary of fuzzy logic applications in crisis prevention

(Source Own elaboration) 69
Fig. 5.1 Two areas are presented, taking into account which
decisions are made (Source Own elaboration) 75
Fig. 5.2 The schematic diagram of the process (Source Own
elaboration Imran and Alsuhaibani [2019]) 78
Fig. 5.3 Inclusion of ESG risk in the risk management process
in entities (Sources Own elaboration) 89
Fig. 5.4 The postulates of including ESG risk in process risk
management using different method (Sources Own
elaboration) 90
Fig. 5.5 Consolidation of key areas of classic and ESG risks toward
fuzzy approach using (Sources Own elaboration on Zou
et al. [2014]) 95
Fig. 5.6 The basic areas (groups) of ESG risk common
to enterprises from various sectors and institutions
constituting potential “fuzzy base” areas (Sources Own
elaboration on Society for Corporate Governance [2020]) 97
Fig. 6.1 The evolution of factors in choosing a financial institution
by enterprises (Source Own elaboration) 109
Fig. 6.2 The passive adaptation level cooperation between financial
institution by enterprises (Source Own elaboration) 114
Fig. 6.3 The creative cooperation level cooperation
between financial institution by enterprises (Source
Own elaboration) 115
Fig. 6.4 The holistic approach development of cooperation allowing
to improve the quality of the decision-making process
between financial institutions and enterprises, taking
into account the impact of the ESG risk and the impact
of climate change (Source Own elaboration on [KPMG,
2021]) 120
Fig. 6.5 Fuzzy business models (Source Own elaboration on Sen,
2017) 126
 List of Tables

Table 2.1 Research subjects in the field of ESG 8

Table 2.2 Publications regarding sustainable business model 12
Table 2.3 Challenges in SBM development and author who
described them 16
Table 2.4 Financial sustainable business model archetypes 19
Table 3.1 Colors: green, red and yellow with RGB system codes 35
Table 3.2 The most frequent keywords in works containing
the phrase “fuzzy logic” 41
Table 3.3 Advantages and disadvantages of using fuzzy logic 43
Table 4.1 Summary of models typically combined with fuzzy logic 65
Table 5.1 The matrix of the general use of the fuzzy approach is
presented—the types (typology) of decisions made 80
Table 5.2 The matrix of the general use of the fuzzy approach is
presented 81
Table 5.3 Application of the fuzzy approach in solving various
decision problems 84
Table 5.4 Identification of common risks (classic and ESG):
methods, tools, and techniques 92
Table 6.1 The factors determining mutual cooperation
between enterprises and financial institutions toward
a sustainable perspective 111
Table 6.2 Areas of interaction between financial institutions
and enterprises on decision-making processes
from the perspective of sustainability end ESG risk 117

xv
xvi LIST OF TABLES

Table 6.3 The levels of integration of ESG risk and sustainability

in the decisions of enterprises and financial institutions 121
Table 6.4 The Triple Layered Business Model Canvas—elements 125
 CHAPTER 1

Introduction

Magdalena Ziolo

Contemporary finance and business are characterized by increasing

complexity and an interdisciplinary approach. The best example is the
growing impact of ESG (Environmental, Social, Governance) factors on
finances and companies. This impact is noticeable primarily in the context
of climate change and the recent experience of the COVID-19 pandemic,
which significantly affected public finances. In the period before the
pandemic, as well as now, finance is transforming and adapting toward
ESG risk, especially climate change.
To varying degrees, financial markets and institutions are exposed to
the impact of ESG risk and its negative consequences. The insurance and
banking markets are particularly exposed to ESG risk. Considering the
impact of ESG risk on their operating activities and financial situation,
financial institutions undertake several adaptation measures and adjust
their business models toward the so-called sustainable business models.
The reaction of financial institutions to new challenges related to the new

M. Ziolo (B)
Institute of Economics and Finance, Faculty of Economics, Finance and
Management, University of Szczecin, Szczecin, Poland
e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature 1

Switzerland AG 2023
M. Ziolo (ed.), Fuzzy Business Models and ESG Risk,
Palgrave Studies in Impact Finance,
https://doi.org/10.1007/978-3-031-40575-4_1
2 M. ZIOLO

sphere of risk and an attempt to adapt to different conditions are visible.

In particular, financial institutions take numerous actions to change busi-
ness models and make them more sustainable, and this is connected with
the need to include ESG risk in decision-making processes or, more
broadly, risk analysis and valuation processes. The consequence of this
approach is a change in the instruments and methods of risk management
and monitoring. Climate stress tests, balanced benchmarks and ratings,
taxonomy, labels, and balanced reporting appear, which are supposed
to reduce information asymmetry and ensure effective risk management.
Risk estimation in a new formula determines the need to develop a new
approach to capital adequacy (including liquidity regulations), valuation
of risk-weighted assets, or the offer of products and services, and calcu-
lating prices for financial services. These issues also impact changing the
nature and levels of competition between financial institutions.
The business sector also includes sustainability issues in its strategies,
especially in the mission and vision, and, in practice, applies solutions
that are part of the sustainable development trend. Entrepreneurs in their
activities for sustainable development take into account i.e., participation
in “green” public procurement, recycling, selection of social distribu-
tion channels, avoidance of orders that are socially and environmentally
harmful, use of innovations with a positive impact on the environment,
limiting the share of water in production, selection of suppliers from
the CSR group, and several other activities contributing to building
sustainable business models. Every business sector nowadays considers
the impact of ESG factors on its management and finances. In sum,
ESG factors are considered in financial performance, financial predic-
tion, financial decisions, accounting, reporting, broadly understood risk
management, and bankruptcy forecasting.
There is a direct relationship between finance, primarily financial
performance, and ESG. At the same time, factors affecting finances,
including ESG factors, are difficult to measure, often needing to be fully
defined and precise. Therefore, there are challenges related to the analysis
and study of financial phenomena precisely and comprehensively. There-
fore, there is a need for methods of analyzing business and finance that
consider their current specificity expressed through inaccurate, incomplete
data or fuzzy data. It applies to all finance and business, from financial
data prediction to financial risk management and bankruptcy forecasting.
With such challenges, fuzzy logic is the best solution. Fuzzy logic has
its history in studying monetary phenomena, from analyzing the value
 1 INTRODUCTION 3

of money in time to more complex formulas such as risk management,

financial predictions, financial crises, or insolvency forecasting. The scope
of fuzzy logic in finance is broad, and its role will grow along with the
importance of ESG risk in finance, which is already being observed. Fuzzy
logic is also an excellent tool for analyzing business models. However,
research on business models and finance with fuzzy approach still needs
to be completed. There are few papers published in this scope. This
book covers the research gap of the fuzzy logic approach in business and
finance. The aim of the book is to fill in the gap in knowledge about rela-
tionship between fuzzy business models and ESG risk. The book consists
of seven chapters. This chapter is introduction.
Chapter 2 presents the issue of ESG and defines the state of research
in this field. The second part of the chapter is devoted to the issue of a
sustainable business model and the challenges that companies face in this
scope. The last part of the chapter describes a sustainable business model
in financial institutions. The chapter especially points out the importance
of the concept of sustainable development which makes the incorporation
of ESG factors into the business model a natural necessity for modern
entities that want to gain or maintain a competitive advantage on the
market. The chapter discusses the role of ESG factors in the decision-
making processes of the companies and its operating strategy.
Chapter 3 presents information on fuzzy sets, in particular the concept,
assumptions, applicability, and limitations. Differences between classical
and fuzzy logic are shown as well. Attention is paid to the spheres of
application of fuzzy logic in many areas of life, e.g., it has been shown
to be extremely useful to many people involved in research and develop-
ment. It is widely used in sciences, e.g.: chemical, aviation, agricultural,
biomedical, computer, environmental, geological, industrial, mechatronic,
and economic. An important part of the considerations is the presentation
and typology of fuzzy MCDA—multi-criteria decision analysis.
Chapter 4 indicates the possibilities of using the fuzzy approach in
finance, particularly in the example of banking and crisis prevention.
In particular, the fuzzy approach is described on a sample of essential
processes such as risk management of financial institutions. The element
of the original approach concerns not only the use of fuzzy logic itself but
also the presentation of risk management from the perspective of financial
risk and ESG risk.
Chapter 5 discusses the possibilities of using the fuzzy approach in
decision-making processes and risk management in business. This chapter
4 M. ZIOLO

identifies the components of the fuzzy approach as an important approach

to making decisions in conditions of reduced information quality. The
chapter presents the possibilities of using and the role of the fuzzy
approach in decision-making processes in enterprises, taking into account
their impact on decision-making process. Attention was drawn to the
differences in the approach to enterprises from the production, services,
and trade sectors and the enterprise’s exposure to ESG risk. The stages
and tools supporting risk management in the classical approach, and a
specific approach and methods that may contribute to a better under-
standing of ESG risk were included in the process. The position of the
fuzzy approach in the ESG risk management process was also shown.
Chapter 6 presents the levels of cooperation between enterprises and
financial institutions and the directions of mutual influence on decision-
making processes from the perspective of spreading the sustainability
process. Standard decision fields referred to business models of finan-
cial institutions and enterprises and the possibilities of using the fuzzy
approach were shown. Fuzzy business models and research in this
area are discussed. Attention was paid to possible cooperation scenarios
between financial institutions and enterprises in building sustainable busi-
ness models with fuzzy logic variables. Chapter 7 is the conclusion and
recommendations.
The book is addressed to a wide range of recipients (readers) ranging
from scientists, students, doctoral students, practitioners, and others inter-
ested in the financial sector from the perspective of sustainability, ESG,
and fuzzy logic, dealing with those issues as part of their professional
work. The group of recipients can also include those who want to acquire
or deepen their knowledge of fuzzy logic in finance because the first part
of the monograph explains in detail and defines the meaning of the fuzzy
logic approach for finance, business, and management.
 CHAPTER 2

Theoretical Framework of Sustainable

Business Models

Anna Spoz

2.1 ESG Framework, Factors and Risks

The concept of sustainable development assumes intergenerational soli-
darity consisting in finding such solutions that guarantee further growth,
which allows for active inclusion in development processes of all social
groups, while giving them the opportunity to benefit from economic
growth. In 2015, the United Nations (UN) developed and introduced
a program for sustainable development. The 2030 Agenda included 17
Sustainable Development Goals (SDGs) and 169 tasks related to them,
which reflect the three dimensions of sustainable development—social,
environmental and economic sustainability (Herrero et al., 2021).
ESG issues can be divided into three main areas: environment, society
and corporate governance (Fig. 2.1). Each of them includes a number of
aspects that can be assessed by stakeholders.

A. Spoz (B)
Department of Finance and Accountancy, John Paul II Catholic University of
Lublin, Lublin, Poland
e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature 5

Switzerland AG 2023
M. Ziolo (ed.), Fuzzy Business Models and ESG Risk,
Palgrave Studies in Impact Finance,
https://doi.org/10.1007/978-3-031-40575-4_2
6 A. SPOZ

3 pillars of ESG

Environmental Social Governance

• Energy usage and • Fair pay and living • Corporate governance

efficiency Climate wages • Risk management
change strategy • Equal employment • Compliance
• Waste reduction opportunity • Ethical business
• Biodiversity loss • Employee benefits practices
• Greenhouse gas • Workplace health and • Avoiding conflicts of
emissions safety interest
• Carbon footprint • Community • Accounting integrity
reduction engagement and transparency
• Responsible supply
chain partnership
• Adhering to labor laws

Fig. 2.1 Environmental, social and governance pillars of ESG (Source https://
www.techtarget.com/whatis/definition/environmental-social-and-governanc
e-ESG [Accessed 14 June 2023])

Environmental factors include the scope and methods of using renew-

able and non-renewable resources, including renewable energy, the
amount of greenhouse gas emissions, efficiency in the management of
natural resources, the amount of waste generated and the method of
its disposal, as well as the impact on the natural environment and
biodiversity.
Social factors include those through which enterprises affect the social
environment, i.e., employees, customers, suppliers and the local commu-
nity. They cover issues such as employee management, employee rights,
consumer rights, health and occupational health and safety issues. The
COVID-19 pandemic that has affected the world in recent years has high-
lighted the importance of the risks associated with the spread of disease
and infection.
The concept of governance should be understood as the company’s
internal supervision system, which consists of policies and procedures as
well as standards and control mechanisms created and implemented in
enterprises in order to streamline decision-making processes and improve
management efficiency, comply with the law and take into account the
needs of a wide range of stakeholders, including in particular investors.
 2 THEORETICAL FRAMEWORK OF SUSTAINABLE BUSINESS … 7

Every company that wants to maintain or improve its position on the

market needs efficient corporate governance rules adequate to its size and
scope of operation as well as individual circumstances.
The key links between all ESG areas and sustainability are people, risk
and capital. People are at the heart of climate and resilience, well-being,
diversity, equity and inclusion (DEI) and sustainability issues. Compa-
nies that engage their employees in achieving their ESG goals are more
successful than those that do not.
The risk of non-financial factors is gaining importance year by year. The
Global Risks Report published every year shows that in recent years there
has been a shift in the focus of risks, i.e., from the category of economic
risk (so far leading) toward environmental and social risk. The latter in the
cost of living crisis sub-category topped the most likely risks in the short
term. The next risks were environmental. In the long-term perspective,
the most important risks include four environmental risks (failure to miti-
gate climate change, failure of climate-change adaptation, natural disasters
and extreme weather events, biodiversity loss and ecosystem collapse)
and one social risk (large-scale involuntary migration) (World Economic
Forum, 2023).
Non-financial risk management includes monitoring and assessing the
impact of ESG factors on the company and recording the costs of poten-
tial actions or their inaction. The entity should consider how and to what
extent ESG issues may affect the process of creating the company’s value
and which of them significantly impacts the company’s market valuation,
its image and revenues generated from operations. Effective ESG risk
management requires a comprehensive and integrated approach to this
issue from the company, including the inclusion of non-financial risks in
the company’s risk management system.
The concept of capital includes both socially responsible investments
made by the company and the financial involvement of the entity in
the implementation of programs aimed at supporting the needs and
development of its employees and the local community.
The influence of ESG elements on modern firms’ operation has led
to many research in a variety of fields being conducted on this problem.
A synthetic summary of research problems related to ESG along with
research results is presented in Table 2.1.
Identification of the impact of ESG factors on the company and its
proper management, in addition to the need to incur expenses, brings
many benefits. If the entity does not control the ESG risk, as well as
 8

Table 2.1 Research subjects in the field of ESG

Subject of study The nature of dependence and an example of research

A. SPOZ

Cost of capital – ESG companies are characterized by:

• Lower credit spreads (Bauer & Hann, 2010)
• Lower interest rates on loans (Chava et al., 2009; Goss & Roberts, 2011);
• Lower cost of equity financing (Albuquerque et al., 2013; Dhaliwal et al., 2011;
Giakoumelou et al., 2022; Salvi, et al., 2020, 2021; Sharfman & Fernando, 2008)
• Lower cost of foreign capital (Dunne & McBrayer, 2019; Eliwa et al., 2021;
Hamrouni et al., 2020; Raimo et al., 2021; Wong et al., 2021)
Valuation – ESG companies are characterized by:
• Positive relation between stakeholder welfare (such as employees, customers and
communities) and positive correlated with Tobin’s Q (Deng et al., 2013; Guenster
et al., 2011; Ioannou & Hawn, 2016; Jiao, 2010; Wrong et al. 2021)
• Negatively correlated with Tobin’s Q (Baron et al., 2011)
Future return, risk return • Performance of SRI indices is comparable to conventional indices (Lee & Faff, 2013;
Schröder, 2007)
• Portfolios with a high CSR rating perform better than those with a low rating (Van
de Velde et al., 2005),
• “An unequivocally positive” contribution to risk-adjusted returns and ESG firms
(Verheyden et al., 2016; Jin, 2018);
• ESG factors show better investment performance over traditional size and value-based
(Maiti, 2021)
• Socially Responsible Investment (SRI) and conventional funds produce similar alphas
(Derwall et al., 2005)
• SRI mutual funds do not, on average, hold socially responsible firms to a greater
extent than conventional funds (Utz & Wimmer, 2014)
Subject of study The nature of dependence and an example of research

Accounting and financial performance: – ESG companies are characterized by:

• Positive and significant relation between environmental and the firm’s
return-on-assets ratio
• ESG scores have a positive association with subsequent stock returns and return on
equity (ROE) (Aydoğmuş et al., 2022)
2

• Significantly increases corporations’ operating performance, measured by their

return-on-assets (Guenster et al., 2011)
• pozytywny zwi˛azek mi˛edzy ESG and financial performance of corporate (Janah &
Sassi, 2021)
Disclosure and Financial Reporting • Corporate social responsibility (CSR) disclosure decreases the cost of capital (Chen &
Jian, 2006; Chi et al., 2020; DeBoskey et al., 2017; Guidara et al., 2014; Khanchel &
Lassoued, 2022; Talbi & Omri, 2014)
• Integrated reporting decreases cost of debt (Gerwanski, 2020; Muttakin et al., 2020)

Source Own elaboration based on Henriksson, R., Livnat, J., Pfeifer, P., Stumpp, M., & Zeng, G. (2018). ESG literature review. SSRN Electron J ,
1–14
THEORETICAL FRAMEWORK OF SUSTAINABLE BUSINESS …
9
10 A. SPOZ

other risks, it may expose it to losses, the amount of which will signifi-
cantly exceed the sum of the costs of actions taken for preventive purposes
and related to proactive management. Additionally, the awareness of a
wide range of stakeholders and their sensitivity to issues related to sustain-
able development may ensure that entities that integrate ESG factors at
the strategic level in their activities and are characterized by high level of
responsibility and transparency in running a business have a better chance
of gaining the trust of the environment (customers, investors, capital
providers). The trust can actually translate into an increase in revenues and
increasing the possibilities and reducing the costs of obtaining equity and
foreign capital, and thus also the possibility of achieving market success. In
this context, it is worth mentioning the role of the financial sector, which,
apart from providing capital for business entities, directs its flow. Financial
institutions can support and stimulate the flow of capital to projects that
fit the concept of sustainable development.
The need of considering ESG factors in their operations is faced by
entities providing investment services, i.e., financial sector entities, and
is related to the entry into force of Commission Delegated Regulation
(EU) 2021/1253 of April 21, 2021. Taking into account ESG factors in
the process of providing investment services aims not only at supporting
sustainable investments already in progress, but also at increasing demand
for them, which indirectly contributes to supporting the implementation
of sustainable development goals, including those related to climate. For
this reason, ESG factors are included in the requirements for product
governance, and therefore also in the study of customer investment
preferences in the ESG area. The changes introduced to the MiFID
II package are aimed at strengthening the impact of the provisions on
disclosure of information related to sustainable development in the finan-
cial services sector (SFDR) and the recently introduced EU Taxonomy,
which is a reference point in the process of qualifying a given activity as
environmentally sustainable activity.
Investment firms dealing with the creation and distribution of finan-
cial instruments have been obliged to take into account ESG factors in
the process of product approval, management and supervision. When
determining the target group for a given financial instrument, finan-
cial institutions are required to consider the sustainability objectives with
which the given financial instrument is compliant. Sustainable develop-
ment factors are also taken into account in the process of examining
 2 THEORETICAL FRAMEWORK OF SUSTAINABLE BUSINESS … 11

whether the financial instrument meets the identified needs and objec-
tives of the target group. In this way, investors are provided with the
opportunity to invest in financial instruments related to the implementa-
tion of projects in line with the concept of sustainable development and,
consequently, increase both the demand for these instruments and the
flow of capital for the implementation of projects related to sustainable
development.
The ESG factors included in a given financial instrument must be
presented to clients in a transparent and understandable manner so that
their presentation allows for proper consideration of any sustainability
objectives of the client or potential client. In practice, therefore, when
conducting an adequacy test of a given financial instrument, investment
firms are obliged to obtain information from clients regarding their pref-
erences in relation to investment products that take into account ESG
factors. In this way, investment firms are obliged to obtain information
from the client regarding his knowledge, experience in investing on the
financial market, financial situation, including the ability to bear losses
and investment objectives, taking into account the appetite for sustainable
investments, including the level of acceptable risk.
In addition to specifying the target group, investment firms are obliged
to carry out regular reviews of the instruments offered. This requirement
is to ensure that the coherence of a given financial instrument with the
needs, characteristics and objectives of the target group, identified at the
time of its creation, is not lost over time. This means that the initial cate-
gorization of an ESG financial instrument to a given target group will not
be final and will be subject to periodic review. Investment firms will be
required to regularly review the financial instruments they create, taking
into account all events that could significantly affect the potential risk for
a specific target group. A financial instrument qualified for a given target
group will have to be consistent with the needs, characteristics and objec-
tives of the target group, including its objectives related to the concept
of sustainable development.
Based on the scientific database Elsevier’s Scopus, the number of publi-
cations on the sustainable business model in the years 2003–2023 was
analyzed (Table 2.2). During this time, a total of 273 papers (containing
a “sustainable business model” in the title or abstract) were published.
The most papers have been published so far in 2020, 45 publications,
while before 2018 a total of 46 papers were published. Publications
most often concerned topics from the areas of Business, Management
and Accounting, followed by Environmental Science, Energy and Social
Sciences.
12 A. SPOZ

Table 2.2 Publications

Total number of publications 273
regarding sustainable
business model Period 2003–2023
2023 35
2022 44
2021 37
2020 45
2019 26
2018 40
Subject area 35
Business, Management and Accounting 163
Environmental Science 144
Energy 109
Social Sciences 92
Engineering 89
Computer Science 35
Economics, Econometrics and Finance 30
Decision Sciences 21
Other 46
Document type
Article 186
Conference paper 33
Book chapter 29
Review 23
Book 1
Editorial 1
Keyword
Sustainable Business Model (s) 131
Sustainable Development 120
Sustainability 100
Business Model(s) 95
Sustainable Business 86
Business Model Innovation 43
Innovation 38
Sustainable Business Model Innovation 22
Business 27

Note One publication may cover several Subject Areas and several
Keywords
Source Own elaboration based on Scopus database
 2 THEORETICAL FRAMEWORK OF SUSTAINABLE BUSINESS … 13

Increasing number of publications on the sustainable business model

in recent years shows how actual this topic is. Although this is not a
systematic increase, the number of publications has an upward trend.

2.2 Sustainable Business Modes---State

of the Art, Concept and Components
Anthropogenic climate changes and the growing awareness of the impact
of human activities on the environment and the living conditions of
current and future generations mean that the importance of the concept
of sustainable development is systematically increasing. The introduced
legal regulations in this area as well as the awareness and sensitivity of
consumers to social, environmental and governance issues made it difficult
for conventional business models to respond to market needs. In search
of a competitive advantage, enterprises began to include ESG factors in
conventional business models, to achieve the goals of sustainable develop-
ment while maintaining productivity and profitability (Schaltegger et al.,
2016). Modifying existing business models (BM) to deal with challenges
related to sustainable development or creating completely new sustain-
able business models is one of the most difficult challenges for enterprises
today (Moratis et al., 2018).
The concept of the business model gained popularity in the 1990s
(Zott et al., 2011). In the literature on the subject, there are many
definitions of the business model describing this concept from different
perspectives. Timmers (1998) and Chesbrough and Rosenbloom (2002)
and Magretta (2002) perceive the business model as a configuration of
company elements (resources, technology, information) that allows it to
generate benefits for various business entities, and in consequence also
profits. It is also understood as a “simplified and aggregated represen-
tation of the relevant activities of the company” (Lemus-Aguilar et al.,
2019) reflecting the implemented business strategy that will allow the
entity to be competitive on the market (Casadesus-Masanell & Ricart,
2010; Richardson, 2008). Teece (2010) pointed out that designing
business models enables the reconfiguration of a company’s business capa-
bilities to adapt it to a changing environment. Most often, the business
model is perceived through the value creation process. Chesbrough and
Rosenbloom (2002), Magretta (2002), Kaplan and Winby (2007), Teece
(2010) and Osterwalder and Pigneur (2010) define a business model
as a description (justification) of how an organization creates, delivers
14 A. SPOZ

and captures value. Creating a business model is about determining how

the company will create value (for the customer) to gain a competitive
advantage and succeed in the market.
The process of developing an innovative business model that will
provide end users with products or services that have not been avail-
able on the market so far is understood as business model innovation
(BMI) (Mitchel & Bruckner Coles, 2004). According to Labbe and
Mazet (2005), BMI is an innovative configuration of elements of an
existing business model or consists in creating new business models in
start-ups. Such an approach to BMI allowed Geissdoerfer et al. (2016) to
distinguish its four configurations, i.e., start-ups, business model transfor-
mation, business model diversification and business model acquisition.
A sustainable business model can also be defined as an innovation of
a conventional business model (Girotra & Netessine, 2013), where inno-
vation adds some characteristics and goals to it. They either: (1) include
sustainability-related ideas, values or objectives; or (2) include sustain-
ability into their value proposition, value creation, value delivery and/or
value capture processes (Lemus-Aguilar et al., 2019).
Creating an SBM is not only about considering ESG factors, but also
about focusing on the needs of stakeholders (Evans et al., 2017). In this
approach, the term stakeholders are extremely broad, as it includes both
employees, shareholders, investors, suppliers, consumers and public stake-
holders (governments, universities and local communities). Stubbs and
Cocklin (2008), the stakeholder also included the environment (nature)
and society. In this approach, the needs and expectations of stakeholders
are very important, because the measure of a company’s success is meeting
the needs of stakeholders. One of the main elements of SBM is building
lasting relationships with stakeholders based on mutual trust (Gulati &
Kletter, 2005).
Stubbs and Cocklin (2008) made six proposals to characterize SBM,
starting with the organizational purpose expressed in terms of ecological,
social and economic outcomes. The main goal is to achieve sustainable
development, while financial profits are treated only as a means to achieve
sustainable development goals. The company’s goal is to meet the needs
of stakeholders, which is why the method of creating value is extremely
difficult and requires a multi-faceted and integrated approach, because the
group of stakeholders is not homogeneous. In turn, Boons and Lüdeke-
Freund (2013) use an approach based on the four pillars of the “Business
Model Canvas” concept of Osterwalder and Pigneur (2010) and claim
 2 THEORETICAL FRAMEWORK OF SUSTAINABLE BUSINESS … 15

that customer value propositions should provide measurable ecological

and/or social value in line with customer value and that it should balance
the needs of the client and society (Lüdeke-Freund & Dembek, 2017).
A combination of the above-mentioned approaches is the definition
of SBM proposed by Bocken et al. (2014). In their view, sustainable
business models (SBM) include a triple bottom-line approach and take
into account a wider range of stakeholder interests (considering the envi-
ronment and society as stakeholders). SBM are important in driving and
implementing corporate sustainability innovation; they can help embed
sustainability in business goals and processes and serve as a key compet-
itive advantage. Sustainable business models can be used as a tool to
coordinate technological and social innovation with sustainability at the
system level.
Despite different methodological approaches, the common charac-
teristics of SBM can be distinguished. These are (i) a clear focus on
sustainability, combining ecological, social and economic aspects, (ii)
an expanded notion of the process of value creating, (iii) an expanded
concept of capturing value in terms of those for whom value is created,
(iv) increasing the importance of meeting the needs of stakeholders, the
concept of which has been significantly expanded and (v) an expanded
perspective on the system in which SBM is embedded and its impact on
the surrounding (Lüdeke-Freund & Dembek, 2017).
The challenges when developing a sustainable business model are
presented in Table 2.3.
To introduce the method of implementing sustainable business models,
Bocken et al. (2014) proposed a categorization of nine archetypes of
sustainable business models.
One of the latest areas of research on a sustainable business model is
sustainable business model innovation. Schaltegger et al. (2016) defined
it as “modification or completely new business models that can serve the
achievement of sustainable development goals, i.e., counteracting nega-
tive or creating positive externalities for the natural environment and
society” (Schaltegger et al., 2016). Similar to business model innova-
tion, these models are seen as a process of exploration, customization,
redesign, acquisition and transformation. A process qualifies as sustainable
business model innovation or business model innovation for sustainable
development when it aims at: (1) sustainable development or a posi-
tive, appropriately reduced, negative impact on the environment, society
and long-term well-being of the organization and its stakeholders, or
16 A. SPOZ

Table 2.3 Challenges in SBM development and author who described them

Challenges Authors

Triple bottom line Hart and Milstein (2003), Stubbs and

The co-creation of profits, social and Cocklin (2008), and Schaltegger et al.
environmental benefits and the balance (2016)
among them is challenging for moving
toward SBMs
Mind-set Johnson et al. (2008), Yu and Hang
The business rules, guidelines, behavioral (2010), Boons and Lüdeke-Freund
norms and performance metrics prevail in (2013)
the mind-set of firms and inhibit the
introduction of new business models
Resources Chesbrough (2010), Zott et al. (2011),
Reluctance to allocate resources to business and Björkdahl and Holmén (2013)
model innovation and reconfigure resources
and processes for new business models
Technology innovation Hart and Milstein (2003), Yu and Hang
Integrating technology innovation, e.g., (2010), and Zott et al., (2011)
clean technology with business model
innovation is multidimensional and complex
External relationship Stubbs and Cocklin (2008), Vladimirova
Engaging in extensive interaction with (2012), and Boons and Lüdeke-Freund
external stakeholders and business (2013)
environment requires extra efforts
Business modeling methods and tools Björkdahl and Holmén (2013), Girotra
Existing business modeling methods and and Netessine (2013), and Yang et al.
tools, e.g., Osterwalder and Pigneur (2010) (2014)
and Johnson et al. (2008), are few and
rarely sustainability driven

Source Evans, S., Vladimirova, D., Holgado, M., Van Fossen, K., Yang, M., Silva, E. A., & Barlow,
C. Y. (2017). Business model innovation for sustainability: Toward a unified perspective for creation
of sustainable business models. Business Strategy and the Environment, 26(5), 597–608

(2) adopting solutions or features that foster sustainability in its value

proposition, creating and capturing elements or their value networks.
Geissdoerfer et al. (2016) similarly to the innovative business model,
proposed four types of innovations in the field of sustainable business
model: (1) sustainable start-ups: a new organization with a sustainable
business model is created; (2) transformation of a sustainable business
model: the current business model is changing, resulting in a sustainable
business model; (3) sustainable diversification of the business model: no
major changes to the organization’s existing business models and an addi-
tional sustainable business model is established; (4) acquiring a sustainable
 2 THEORETICAL FRAMEWORK OF SUSTAINABLE BUSINESS … 17

business model: an additional sustainable business model is identified,

acquired and integrated into the organization.
Creating and implementing sustainable business models and sustain-
able business model innovation is an extremely difficult process that
requires an integrated approach in many areas. However, enterprises that
want to maintain or strengthen their position on the market must take
this fight.

2.3 Sustainable Business

Models of Financial Institutions
A business model describes the way of doing business by a firm. It is
a conceptual tool that can be used for analysis, comparison and perfor-
mance assessment, communication, management and innovation (Oster-
walder et al., 2005). In turn, sustainable business models (SBMs) are tools
that enable businesses to concurrently achieve social, environmental and
economic goals (Nosratabadi et al., 2020).
The financial industry was not the first industry to turn to sustain-
ability. Due to the nature of their operations, financial institutions do not
have such a negative impact on the natural environment as companies
from the production or transport industries. Greenhouse gas emissions,
waste generation and raw material consumption by the financial sector
are relatively low. Despite this, the possibility of achieving benefits and
the expectations of the stakeholders made financial institutions implement
the principles of sustainable development. The most noticeable bene-
fits are improved reputation, increased employee satisfaction, reduced
costs thanks to saving energy, water and materials, and the ability to
promote the brand as environmentally friendly (Nosratabadi et al., 2020).
Currently, financial institutions can not only boast of conducting sustain-
able activities, but also encourage their clients to conduct sustainable
activities. This is done mainly by supporting green projects and restricting
access to services and funds to entities whose activities are harmful to the
environment.
The transformation of the financial sector toward sustainability can
be done in various ways. Initially, sustainability was implemented inde-
pendently of the strategy and business model of the companies. Over
time, it was discovered that effective transformation, ensuring sustain-
able economic growth, is possible only through the transformation of
the organization’s business model into a sustainable one. This approach
18 A. SPOZ

applies not only to the financial industry, but to companies from all indus-
tries. The need to transform business models into sustainable business
models (SBM) arose when it became apparent that the introduction of
eco-design and eco-efficiency by organizations was not sufficient to offset
the growing demand for resources (Bocken et al., 2014) and to stop
environmental degradation. Fundamental changes in the way companies
operate were therefore needed.
Although presence of many definitions of SBM in the literature, but
most of them include economic value capturing while delivering sustain-
able values to stakeholders or contributing to the sustainable development
of both the company and society (Lüdeke-Freund et al., 2019). In
some definitions, society and environment are considered as stakeholders
(Stubbs & Cocklin, 2008). The transition to SBM is related to business
model innovation which goal is to identify new business strategies that will
challenge the established competitive landscape of a market and result in
the creation of new business models (Ireland et al., 2001).
In order to describe mechanisms and solutions that can help create a
business model for sustainability, sustainable business model archetypes
for banking industry have been developed. Yip and Bocken (2018)
proposed eight financial SBM archetypes, grouped in three categories:
Technological, Social and Organizational. The archetypes are presented
in Table 2.4. with description of three components of business models,
proposed by Richardson (2008): value proposition, value creation and
delivery, and value capture.
Before sustainable business models were introduced in financial insti-
tutions, the concept of corporate social responsibility (CSR) emerged.
According to a wide group of researchers, bank’s path to sustainability
began with social responsibility adoption. Another approach to the bank’s
sustainability includes activities contributing to mitigating the negative
impact on the environment, which include saving energy, water and mate-
rials as well as reducing the amount of waste. According to the third
approach, banks can achieve sustainability goals by offering sustainable
products that contribute to sustainable development (Nosratabadi et al.,
2020).
Sustainable operation of banks requires taking environmental social
and governance (ESG) factors into account. The role of banks as finan-
cial intermediaries means that the challenges arising from ESG factors
for the financial system require them to take adjustment measures. These
measures include the development and implementation of ESG risk
Table 2.4 Financial sustainable business model archetypes

Archetype Vale proposition Value creation and delivery Value capture

1. Maximize material and Services that use fewer resources, Focus is on the internal Costs are reduced through
energy efficiency generating less waste and operational process innovation increased operational
(Technological) emissions than the services that efficiency leading to increased
2

deliver similar functionality profits

2. Substitute with digital Reduce environmental impacts Innovation in service delivery Revenue is enhanced by
processes (Technological) and increase business resilience in design (e.g., delivery channels) providing customers more
terms of speed, convenience, cost enhances the speed, convenience, convenience, which may
and accuracy by using electronic cost and accuracy of service result in more frequent
means in service delivery process delivery to customers transactions
Cost saving is achieved by
reducing manpower and
related expenses
3. Encourage sufficiency Solutions that seek to reduce This may involve changing the Customer satisfaction and
(Social) demand (which was generally frontline sales staff’s loyalty may increase that may
inflated before) by correct remuneration to a higher portion lead to more business.
assessment of customer needs and of fixed salary, promoting Compliance risk is lowered
reducing mis-selling of financial need-based selling by correct and reduces the chance of
products and moral hazard in matching of products and penalties by regulators.
lending. The focus is on the advocating sensible borrowing Societal benefit is captured:
customer relationship and reward customers get what they
system really need in the right
quantity and quality

(continued)
THEORETICAL FRAMEWORK OF SUSTAINABLE BUSINESS …
19
 20

Table 2.4 (continued)

Archetype Vale proposition Value creation and delivery Value capture

4. Adopt a stewardship role Provision of services intended to Ensuring activities and partners Stewardship strategies can
A. SPOZ

(Social) genuinely and proactively engage are focused on delivering generate brand value,
with stakeholders to ensure their stakeholders’ well-being. The potential cost savings and
long-term well-being. Broader value chain is ensured to deliver secure future business.
benefits to stakeholders often environmental or social benefits Stakeholders’ well-being
become an important aspect of generates long-term business
the values proposition by benefits. For example, healthy
engaging customers better and happy staff may claim
less sick days and be more
productive
5. Inclusive value creation Inclusive value is created through Process innovation is the key to Increase of market share.
(Social) product and service innovations reduce the risks associated, for More business opportunities
that serve previously un-served example, using credit scoring and may be secured by customer
markets or high-risk customers portfolio management methods to loyalty when customers
manage the risks in SME lending become more profitable in
the future. Societal benefit is
also captured
6. Repurpose for society/ Creating societal benefits and Banks are using sustainability as a Only provide banking services
environment environmental benefits through criterion for selecting customers; to sustainable companies and
(Organizational) specializing in providing banking being an expert in providing the disadvantaged, including
services that match the needs of banking services to this particular “positive screening” against
the customers segment and achieving economies social and environmental
of scale benchmarks
Archetype Vale proposition Value creation and delivery Value capture

7. Resilience in loan Use loan approval process As the sustainability risk is Lending to customers with
granting innovation with sustainability lowered, the cost of capital and no/minor sustainability risk.
(Organizational) criteria to screen out the potential bad debt could be This can directly reduce
unsustainable business (i.e., reduced financial resources to
negative screening) companies with adverse
2

sustainability impacts
8. Sustainable financial Asset-side and liability side Product innovation opens up new Product innovation enables
products products are created for savers/ markets in sustainable finance and participation in sustainability,
(Organizational) investors and borrowers supports sustainable development which may provide a platform
respectively for both savers and borrowers
to pursue financial return in
sustainable business

Source Yip and Bocken (2018)

THEORETICAL FRAMEWORK OF SUSTAINABLE BUSINESS …
21
22 A. SPOZ

management systems, as well as the adaptation of the product and service

offer so that it supports activities for sustainable development and ensures
the implementation of the assumptions of the business model based on
creating sustainable value (Zioło et al., 2020).
ESG risk management by incorporating the risk of non-financial factors
in the decision-making process of financial institutions requires the devel-
opment and implementation of an ESG management strategy whose
shape depends on the adopted model of ESG factor integration. When
developing this strategy, the level of expectations and integration of ESG
factors in the decision-making process should be specified and the types
of ESG risks to which the financial institution is exposed should be
identified. Strategy development takes place in five stages (Zioło et al.,
2020):

1. Determining the level of expectations regarding the degree of

integration of ESG factors;
2. Risk exposure identification;
3. Determining the level of ESG risk acceptable to the institution;
4. Response to the risk;
5. Development of the ESG policy framework and implementation of
the ESG strategy.

Innovative services and products offered by a financial institution are of

great importance for mitigating the ESG risk. They should additionally
support sustainable development, in accordance with the assumptions of
the sustainable business model.
The inclusion of ESG factors and the consideration of ESG risk in
the management processes of a financial institution, together with the
transformation of the business model into a sustainable business model,
lead to achievement of sustainable goals. In the case of banks, such goal
may be sustainable banking. The concept of sustainable banking was
created, based on three pillars of sustainable development: environmental,
social and economic. Sustainable banking includes three concepts (Zioło,
2020):

– green banking–environmental pillar,

– ethical banking–environmental, social and economic pillars,
 2 THEORETICAL FRAMEWORK OF SUSTAINABLE BUSINESS … 23

– socially responsible banking–environmental, social and economic

pillars.

Sustainable banking refers to financial services and products that have

been created to address social needs, protect the environment and still
generate profits for the running activities of sustainable banks (Yip &
Bocken, 2018).
Sustainable business models have great potential for integrating
sustainability principles and integrating the Sustainable Development
Goals into the value proposition, value creation and value capture activi-
ties of the entity. According to Lüdeke-Freund et al. (2019), sustainable
business models are tools to ensure sustainable development taking into
account ESG factors. They aim to apply proactive multilateral gover-
nance, innovation and a long-term perspective to achieve the Sustainable
Development Goals. Sustainable business models therefore effectively
contribute to reducing the harmful impact of business activities on
the environment and society by providing solutions that help entities
(enterprises and financial institutions) to simultaneously achieve their
economic and sustainable development goals. Creating sustainable models
is a difficult process, but every modern market player has to face this
challenge.

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 CHAPTER 3

Fuzzy Logic Concept

Iwona Bak
˛ and Maciej Oesterreich

3.1 Basic Theoretical

Information About Fuzzy Sets
Decision-making is one of the most important activities of a human
being, who realizes that people’s opinions or preferences are permeated
with vagueness and imprecision. Many scientists have tried to solve this
problem by looking for new methods of dealing with uncertainty. At the
beginning of the twentieth century, the Polish scientist Jan Łukasiewicz
proposed a system of three-valued logic, which is the basis for fuzzy logic,
which is an extension of classical logic. Nevertheless, Lotfi A. Zadeh, who
in 1965 published the article “Fuzzy Sets” (Zadeh, 1965), is considered
to be the author of the theory of fuzzy sets and fuzzy logic. He proposed
a new methodology for dealing with vagueness and imprecision, based on

I. B˛ak (B) · M. Oesterreich

Faculty of Economics, Department of Mathematical Applications in Economy,
West Pomeranian University of Technology, Szczecin, Poland
e-mail: [email protected]
M. Oesterreich
e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature 29

Switzerland AG 2023
M. Ziolo (ed.), Fuzzy Business Models and ESG Risk,
Palgrave Studies in Impact Finance,
https://doi.org/10.1007/978-3-031-40575-4_3
30 I. BAK
˛ AND M. OESTERREICH

the concept of “fuzzy or gradual membership” to a set, which he called

“fuzzy set” (Farhadinia & Chiclana, 2021). Zadeh applied Łukasiewicz’s
logic to each element of the set and derived a complete algebra of fuzzy
sets.
Fuzzy set theory and fuzzy logic are important technologies forming
the area of computational intelligence that identify a set of methods to
solve real-world problems that are not satisfactorily solved by traditional
(classical) methods (Herrea-Viedma, 2015).
Classical (crisp) logic is based on two values, most often represented by
0 and 1 or true and false. The boundary between them is clearly defined
and unchanging. Fuzzy logic is an extension of classical reasoning. It puts
values between the standard 0 and 1; it “blurs” the boundaries between
them, giving the possibility of values between this range (e.g., almost false,
half true) (Sadowski et al., 2018). Thanks to this, it is possible to describe
ambiguous phenomena that cannot be captured by classical theory and
two-valued logic.
The fuzzy set A in some numerical space of considerations X is the set
of pairs:

A = {(μ A (x), x)}; x ∈ X, (3.1)

where: μ A is the membership function of the fuzzy set A, which assigns

to each element x ∈ X the degree of its membership in the fuzzy set.
The degree of membership assigns each element x of a given variable a
certain value from the range [0;1] in the fuzzy set A : μ A (x) :→ [0, 1].
This value informs to what extent the element x belongs to the fuzzy set
A (Ross, 2010, pp. 34–35).
To describe the fuzzy set, we usually use the following notation:

A = {μ A (x)/x, x ∈ A, μ A (x) ∈ [0, 1]} (3.2)

In this case, the “/” symbol does not mean division, but only informs
about the value of the membership function assigned to a given element
of the set (Bojadziev & Bojadziev, 2007, p. 10).
 3 FUZZY LOGIC CONCEPT 31

Example
The set A1 describes the similarity of numbers to the number 3:

A1 = {0.33/1, 0.66/2, 1/3, 0.66/4, 0.33/5} (3.3)

This notation means that the values of x ∈ A1 : 1, 2, 3, 4 and 5 were

assigned the following values of the membership function μ A1 (x): 0.33,
0.66, 1, 0.66 and 0.33. Figure 3.1 presents the A 1 set in a graphical form.
A fuzzy set is defined as normalized when the membership function
for at least one of the elements of this set A reaches a maximum value of
1, otherwise, the set is called unnormalized. An unnormalized set can be
transformed into a normalized one by dividing the value of the member-
ship function of individual elements by the maximum value (max μ A (x))
in the set (Bojadziev & Bojadziev, 2007, p. 10):
μ A (x)
(3.4)
max μ A (x)
The membership function (μ A (x)) is a curve that determines the
degree to which an element of the set (x) (input space) is assigned to
the fuzzy set A and takes values between 0 and 1. The most commonly
used mathematical forms of the membership function are (Chaira, 2019,
pp. 6–7):

1
Membership function

0
1 2 3 4 5
x

Fig. 3.1 Graphical representation of the A 1 set (Source own study)

32 I. BAK
˛ AND M. OESTERREICH

• triangular functions (Fig. 3.2):

⎧
⎪
⎨ 0, a ≤ x
μ(x) = b−a x−a
,a ≤ x ≤ b (3.5)
⎪
⎩ c−x , b ≤ x ≤ c
c−b

• trapezoidal functions (Fig. 3.3):

⎧
⎪
⎪ 0, a ≤ x
⎪
⎪
⎪
⎨ b−a , a ≤ x ≤ b
x−a

μ(x) = 1, b ≤ x ≤ c (3.6)
⎪
⎪
⎪ d−x
⎪ ,c ≤ x ≤ d
⎪
⎩ d−c
0, x > d

• with the shape of Gaussian (normal) distribution (Fig. 3.4):

 
1 (x − m)2
μ(x) = √ exp − (3.7)
σ 2π 2σ 2

where: σ —the standard deviation, m—mean.

0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Fig. 3.2 Graphic representation of the triangular membership function (Source

own study)
 3 FUZZY LOGIC CONCEPT 33

0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Fig. 3.3 Graphic representation of the trapezoidal membership function (Source

own study)

0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Fig. 3.4 Graphic representation of the membership function with the shape of
Gaussian distribution (Source own study)
34 I. BAK
˛ AND M. OESTERREICH

0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Fig. 3.5 Graphic representation of the S-shaped membership function (Source

own study)

• S-shaped functions (Fig. 3.5):

⎧
⎪
⎪ 0, a ≤ x
⎪
⎪ 
⎪
⎨ 2· (x−a)
2
(b−a) , a < x < 2
a+b
μ(x) =  (3.8)
⎪
⎪ (x−b)
2
⎪ 1 − 2 · (b−a) , 2 < x < b
a+b
⎪
⎪
⎩
1, x > b

3.2 Fuzzy Logic

As already mentioned, in classical logic, the so-called intermediate values
are not taken into account. This means that a given statement can be true
or false. Fuzzy logic, in turn, due to its multi-valued nature, is closer to
the natural human thought process, which is not always “zero–one”.
 3 FUZZY LOGIC CONCEPT 35

Table 3.1 Colors: green, red and yellow with RGB system codes
Green Red Yellow

R: 0; G: 255; B: 0 R: 255; G: 0; B: 0 R: 255; G: 255; B: 0

Source own study

Example
Table 3.1 shows the three colors—green, red and yellow—with their
corresponding RGB system codes. Based on this information, the state-
ment that:

Gr een = Y ellow

according to classical logic is false—green and yellow are two different

colors. However, looking from the point of view of fuzzy logic, such a
statement is not entirely false, nor is it entirely true—green is, after all, a
component of yellow. The degree of this similarity will be defined by the
value of the membership function.
A detailed description of logical operations on fuzzy sets, which
include, among others:

• union,
• intersection,
• complementation,

can be found in: (Piegat, 1999, pp. 112–154; Chen & Pham, 2001,
pp. 69–75; Buckley & Eslami, 2002, pp. 21–29; Valášková et al., 2014).
Due to the multi-valued nature of fuzzy sets, in their description
linguistic variables are used. The values of these variables are words,
expressions or sentences in a natural or artificial language (Zadeh, 1975).
These variables are characterized by five parameters (Klir & Yuan, 1995,
p. 102):

x; T (x), U, G, M̃ (3.10)

where:

• x —name of the linguistic variable,

• T (x)—a set of linguistic values (definitions) assumed by the variable,
• U —space of considerations (universe),
36 I. BAK
˛ AND M. OESTERREICH

• G—semantics/grammar, generating linguistic values T,

• M̃—a semantic rule assigning to each linguistic value t ∈ T an
appropriate fuzzy set m(T ), as a subset of the space X.

Example
Using the notations presented in formula (9), let us define the linguistic
variable “Age”. For this purpose, let us use the methodology of Eurostat,
which distinguishes three main groups of the population in terms of age:

• young people: 0–14 years old,

• working age people: 15–64 years old
• elderly people: 65 and over.

The linguistic variable “Age” can take the following form:

v = Age;
T ∈ “young”, “working age”, “older” ;
X ∈ [0, 100];
G ∈ ∅; 
M̃ young = u, μyoung (u), u ∈ [0, 100]
⎧
⎨ 1, u ∈ [0, 14]
μyoung (u) 1 − x−14 11 , u ∈ [15, 24]
⎩
0, u ∈ [25, 100]
 
M̃ working age ⎧ = u, μworking age (u), u ∈ [0, 100]
⎪
⎪ 0, u ∈ [0, 14]
⎪
⎪
⎪
11 , u ∈ [15, 24]
x−14
⎨
μworking age (u) 1, u ∈ [25, 59]
⎪
⎪
⎪
⎪ 1 − 6 , u ∈ [60, 64]
x−59
⎪
⎩ 0, u ∈ [65, 100]
M̃(older)⎧= {u, μolder (u), u ∈ [0, 100]}
⎨ 0, ∈ [0, 59]
μolder (u) x−59 , u ∈ [60, 64]
⎩ 6
1, u ∈ [65, 100]
 3 FUZZY LOGIC CONCEPT 37

Figure 3.6 presents a graphical representation of the linguistic variable

“Age”.
In the classical approach, relationships between variables can be repre-
sented by correlation coefficients, whose absolute value and sign indicate
its strength and direction. In fuzzy logic, due to the fact that the values
of the membership function for individual elements of sets can take values
in the range [0,1], it is difficult to build a measure that determines the
strength of relationships between variables (see Chiang & Lin, 1999;
Wu & Hung, 2016). In this case, the description of the process or
phenomenon is most often defined by the researcher using a rule base.
This means that it must independently determine the importance of indi-
vidual variables, the strength and direction of their interconnections and
the impact on the described phenomenon. Such a fuzzy base rule consists
of single rules of the form “if -> then” (Shepherd & Shi, 1998):

IF x is A THEN y is C (3.11)

where the elements X and

 Y are related by the levels of the membership
function (µA (x) i µC y ) and A and C are some fuzzy variables.

1
Membership function

0
1
5
9
13
17
21
25
29
33
37
41
45
49
53
57
61
65
69
73
77
81
85
89
93
97

Age

young working age older

Fig. 3.6 Graphical representation of the linguistic variable “Age” (Source own
study)
38 I. BAK
˛ AND M. OESTERREICH

Example
Suppose we want to describe the demand for some goods. This
phenomenon would be described by a linguistic substitute: UDemand ∈
decrease, no change, increase . We assume that demand will be affected
by two variables described by two linguistic variables: AType of good ∈
basic, higher order oraz BPrice change ∈ {decrease, increase}. In this case,
the rule base can take the following form:

IF AType of good = basic AND BPrice change

= increase THEN UDemand = no change

IF AType of good = basic AND BPrice change

= decrease THEN UDemand = no change

IF AType of good = higher AND BPrice change

= increase THEN UDemand = decrease

IF AType of good = higher AND BPrice change

= decrease THEN UDemand = increase

Inference based on the rule base can be carried out in two ways
(Kuniszyk-Jóźkowiak, 2012, pp. 64–65):

1. Aggregation and then inference (FATI).

2. First Infer Then Aggregate (FITA).

A very important stage related to fuzzy reasoning is the process of

defuzzification (sharpening), in which the fuzzy value is transformed into
a specific numerical value (Rotshtein & Shtovba, 2002). For this purpose,
the center of gravity method can be used, which is described by the
formula (Van Broekhaven & De Beats, 2006):

• in the case of a continuous membership function:


μc (x) · xdx
x∗ =  (3.12)
μc (x)dx
 3 FUZZY LOGIC CONCEPT 39

• for the discrete membership function:

n
∗ i=1 μc (x i ) · x i
x =  n (3.13)
i=1 μc (x i )

3.3 The Spheres of Fuzzy Sets and Fuzzy Logic:

Advantages and Disadvantages of Its Application
Fuzzy logic is a frequently used research tool, as evidenced by the number
of published scientific papers—only in the Web of Science Core Collection
database, 31,429 papers containing in key words the phrase “fuzzy logic”
are indexed. Figure 3.7 graphically presents their number and the number
of citations in individual years, starting from 1990.
Figure 3.7 shows that both the number of publications and their cita-
tions have been steadily increasing, reaching their maximums in 2019
(2064) and 2014 (23,294), respectively. After 2019, the number of
publications decreased to 1808 in 2022, the number of citations to 5217.

2500 25000

2000 20000
Publications

1500 15000
Citations

1000 10000

500 5000

0 0
1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

2022

rok

Publications Citations

Fig. 3.7 The number of publications containing the phrase “fuzzy logic” in
the Web of Science Core Collection database and the number of their citations
in the years 1990–2022 (Source own study based on Web of Science)
40 I. BAK
˛ AND M. OESTERREICH

The analysis of keywords in works containing the phrase “fuzzy logic”

performed using the VOSviewer program, version 1.6.19, shows that
out of 58,649 expressions, 38 are repeated at least 200 times. They are
presented in Table 3.2, along with information on the number of occur-
rences and the assigned cluster. Their connections in graphical form are
presented in Fig. 3.8.
Fuzzy logic is used in many areas of life. It is widely used, for
example, in device control (Filo, 2010; Sadowski et al., 2018), as a
teaching aid (Das et al., 2019; Machado et al., 2016). It is extremely
useful for many people involved in research and development, including
engineers (electrical, mechanical, civil, chemical, aerospace, agricultural,
biomedical, computer, environmental, geological, industrial and mecha-
tronic), mathematicians, computer software developers and researchers,
natural scientists (biology, chemistry, earth sciences and physics), medical
researchers, sociologists (economics, management, political science and
psychology), public policy analysts, business analysts and lawyers (Gupta,
2022; Singh et al., 2013).
Hernández and Hidalgo (2020) conducted, based on the Scopus
database, a bibliographic analysis of the applications of fuzzy logic in busi-
ness, administration and accounting. At the same time, they pointed to
the increasingly common use of quantitative methods in decision-making.
They also emphasized that the future lies in the application of modern
techniques in these fields, e.g., based on artificial intelligence, neural
networks, genetic algorithm and others.
Kuniszyk-Jóźkowiak (2012, pp. 136–144) presented a review of
proposals for using fuzzy logic in medical diagnostics. They concern e.g.,
analysis of ECG records, processing of medical images (MRA examina-
tions), monitoring of vital functions, drug dosing and control of medical
equipment, as well as systems supporting the diagnosis of diseases. In
turn (Phuong & Kreinovich, 2001), they presented an example of the
operation of a diagnostic system for lung diseases based, among others,
on fuzzy logic.
In the work of Suganthi et al. (2015), an attempt was made to review
the applications of models based on fuzzy logic in renewable energy
systems. The authors found that these models support the optimization
of the level of generated power, the choice of location or the monitoring
of the functioning of systems in the field of speed control (wind energy)
or temperature. It will also highlight the wide range of fuzzy modeling
research related to this type of energy.
 3 FUZZY LOGIC CONCEPT 41

Table 3.2 The most frequent keywords in works containing the phrase “fuzzy
logic”

Keyword Occurrences Cluster Keyword Occurrences Cluster

anfis 239 1 adaptive control 379 3

artificial neural 321 1 clustering 299 3
network
fuzzy logic 1908 1 fuzzy control 336 3
control
fuzzy logic 1962 1 fuzzy logic system 538 3
controller
fuzzy logic 400 1 fuzzy logic 326 3
controller (flc) systems
genetic 778 1 nonlinear systems 200 3
algorithm
membership 206 1 sliding mode 270 3
function control
mppt 242 1 type-2 fuzzy logic 227 3
optimization 522 1 uncertainty 437 3
particle swarm 262 1 wireless sensor 227 3
optimization networks
pid controller 225 1 expert system 285 4
simulation 282 1 neural network 621 4
artificial 458 2 Decision-making 237 5
intelligence
artificial neural 282 2 fuzzy sets 349 5
networks
data mining 216 2 image processing 218 6
expert systems 218 2 classification 280 7
fuzzy logic 20,661 2
fuzzy logics 203 2
genetic 515 2
algorithms
machine learning 312 2
neural networks 952 2
soft computing 226 2

Source own study

As pointed out by Cádiz (2020), fuzzy logic can be helpful in many

areas of musical creativity, such as music composition, sound synthesis,
gesture mapping in electronic instruments, parametric control of sound
synthesis, audiovisual content generation or sonification.
Valášková et al. (2014) constructed a fuzzy model of car safety
taking into account the vehicle, its manufacturer and intelligent transport
42 I. BAK
˛ AND M. OESTERREICH

Fig. 3.8 Map of links between keywords (Source own study)

systems (ITS) to show how fuzzy sets help to make informed purchasing
decisions. Kumar et al. (2013) proposed a fuzzy logic based model for
supplier evaluation in 66 Indian textile enterprises.
Zimmermann (2001) presented examples of fuzzy logic applications
in decision-making, management and engineering. They are concerned,
among others, solving linear and dynamic programming problems, fuzzy
logic applications in logistics, marketing and banking.
The most frequently recurring advantages and disadvantages of using
models (systems) based on mutation logic are listed in Table 3.3.
 3 FUZZY LOGIC CONCEPT 43

Table 3.3 Advantages and disadvantages of using fuzzy logic

Advantages Disadvantages

• simple construction • fuzzy logic works on both precise and

• models (systems) require a small amount imprecise data, therefore the accuracy
of data of the obtained result should be
• simple results interpretation approached with caution
• the model (system) can work with any • lack of a systematic approach to
type of input data, regardless of whether describing and solving problems using
it is imprecise, distorted or noisy fuzzy logic
information • lack of a precise, mathematical
• Provides a highly effective solution to description of problem by the model
complex problems in all areas of life as it (system)
resembles human reasoning and
decision-making

Source Own study based on MasterClass (2022), FTL (2023)

3.4 Sets and Fuzzy Logic in Decision-Making

Multi-criteria decision making (MCDM) was introduced as a promising
and important field of research in the early 1970s. MCDM is concerned
with constructing and solving multi-criteria decision and planning prob-
lems to support the complex decision-making processes that people
develop in their daily lives.
MCDA is a set of methods and mathematical tools that enable the
comparison of decision variants, taking into account various, often contra-
dictory, criteria. The aim is to achieve such an effect that will maximize
the multi-criteria objective function of the form (Zioło et al., 2020):

F(x) = max( f 1 (x), f 2 (x), . . . , f j (x) (3.14)

on the assumption x ∈ Adop , where: Adop —set of admissible solutions,

f j (x)—individual partial criterion functions for j = 1, 2, . . . J .
The process of using MCDA usually consists of several steps:

1. Selection of decision variants that will be analyzed during the

decision procedure.
2. Selection of criteria (measurements) to be used as the basis for eval-
uation and prioritization of criteria according to their importance by
assigning weights to them.
3. Selection and application of the appropriate method.
44 I. BAK
˛ AND M. OESTERREICH

There is a whole range of multi-criteria methods and categories of their

division, as well as a rich literature describing their application. Carlsson
and Fuller (1996) list four families of MCDM methods:

• methods based on outranking relations (e.g., group of ELECTRE

methods, PROMETHEE methods, TOPSIS, ORESTE, TACTIC
methods).
• multi-attribute utility theory methods (e.g., MAUT, AHP,
DEMATEL, UTA).
• Analytical Hierarchy Process (AHP).
• theory of group decisions, consensus and negotiation.

Many decision situations typically involve imprecise, uncertain, indefi-

nite and subjective data that are difficult to represent and manage. Fuzzy
tools turned out to be useful in modeling and solving such problems.
The first fuzzy approach to decision-making was introduced by Bellman
and Zadeh (1970). Since then, many other fuzzy approaches have been
defined for each of the four families of MCDM methods listed above
(Fodor & Roubens, 1994; Kacprzyk & Fedrizzi, 1990; Kahraman et al.,
2015; Zimmermann, 1987).
According to Kaya et al. (2019), Fuzzy MCDM methods can be classi-
fied by using methods based on distance, outranking, pairwise comparison
and others (Fig. 3.9). According to the authors:

• fuzzy AHP and ANP are used to calculate the relative importance
values of criteria and alternatives using a pairwise comparison matrix,
• fuzzy TOPSIS and VIKO methods use the principle that in these
methods alternatives are evaluated on the basis of their distance from
ideal solutions,
• fuzzy ELECTRE and PROMETHEE methods belong to the
outranking methods, where the Fuzzy ELECTRE method uses
advantage relations to evaluate alternatives, and the PROMETHEE
method is also an overestimation method used for partial and full
ranking of several alternatives,
• other methods are: fuzzy DEMATEL method that is used to deter-
mine interrelationships among criteria, fuzzy Axiomatic Design that
is used to rate alternatives and criteria by expressing quantita-
tively and semantically and fuzzy Choquet Integral that is used
to determine conjunctive or disjunctive behaviors between criteria
methods.
 3 FUZZY LOGIC CONCEPT 45

AHP

Pairwise Comparison
ANP
Based Methods

MACBETH

PROMETHEE
Outranking Methods
ELECTRE
Fuzzy MCDM
Methods
VIKTOR
Distance Based
Methods
TOPSIS

AXIOMATIC
DESIGN

Other Methods DEMATEL

CHOQUET
INTEGRAL

Fig. 3.9 Classification of fuzzy MCDM methods (Source Kaya et al. [2019])

Different types of fuzzy MCDM methods and their applications can

be found in the literature. These methods offer many ways to model and
manage problems and variables that are difficult to quantify in economics.
The MCDM model is a popular strategy that is successfully used in many
sectors to make optimal location decisions based on several competing
criteria. The fuzzy TOPSIS method was used, for example, to select
industrial areas in rural areas in central Iran (Chu, 2002), the location
of the Yong plant (2006) and the location of shopping centers (Erdin &
Akbas, 2019). The fuzzy method of AHP Lee et al. (2008) was used to
assess the country’s competitiveness in the hydrogen technology sector,
and Wang et al. (2011) used this method to assess the environmental
impact of energy consumption. Cavallaro and Ciraolo (2013) used the
46 I. BAK
˛ AND M. OESTERREICH

fuzzy PROMETHEE method to compare a group of solar energy tech-

nologies. Kaya and Kahraman (2010) used the integrated VIKOR and
AHP methodology in a fuzzy environment to determine the best energy
policy for Istanbul.
Puška et al. (2022) used fuzzy MCDM methods to select the green
suppliers (GSS) that will best help agricultural producers to adopt green
agricultural production using uncertainty in decision-making. As part of
the work, the validation of the results and the sensitivity analysis of the
model were carried out by carrying out the procedure of comparing the
obtained results with the results obtained by other MCDM methods and
changing the criteria weight coefficients. The article uses the methods
of multi-criteria analysis (MCDA), namely: the fuzzy LMAW (Loga-
rithm Methodology of Additive Weights) method and the fuzzy CRADIS
(Compromise Ranking of Alternatives from Distance to Ideal Solution)
method.
Su et al. (2023) presented an improved, fuzzy, multi-attribute decision-
making method to realize the green selection of supply chain members as
part of the green innovation vision. According to the authors, the multi-
attribute decision method proposed in their work takes into account the
shortcomings of the original, fluctuating, fuzzy multi-attribute decision
method, taking into account the optimization of attribute weights, and
then proposes a three-point estimation method for the ranking of schemes
and optimizes the attribute weights by quantifying the equilibrium
coefficients of the original decision method.
Solo (2012) proposes the use of fuzzy sets for the application of asking
and answering queries about quantitatively defining imprecise natural
language linguistic terms in politics and public policy. Fuzzy logic is
needed to properly ask and answer the question of how to quantify the
“rich”. An imprecise natural language word like rich should be consid-
ered to have qualitative definitions, crisp quantitative definitions and fuzzy
quantitative definitions.
MCDA is also successfully used in medicine. Kumar (2023) used a
multi-criteria decision-making technique to diagnose diseases and rank
them among patients. In his opinion, the applied method is very effec-
tive in introducing appropriate treatment of the diagnosed disease. Kumar
and Jain (2018) proposed a fuzzy medical decision-making system for
identifying the type of malaria. Ortiz-Barrios et al. (2023) presented a
hybrid, fuzzy, multi-criteria decision-making model for evaluating emer-
gency department (ED) performance and creating targeted improvement
 3 FUZZY LOGIC CONCEPT 47

interventions. In recent years, many studies have been published using

the MCDM-based approach to assess the readiness of healthcare facilities
in the event of a COVID-19 outbreak or any disaster (Gul & Yucesan,
2021; Hosseini et al., 2019). Al Mohamed et al. (2023) used a fuzzy
multi-criteria decision model in choosing the location of a pandemic
hospital.
Kaya et al. (2019) reviewed articles that use fuzzy MCDM methods
to solve problems related to energy policy and decision-making, in terms
of some characteristics, such as: types of fuzzy sets, year, journal, fuzzy
MCDM method, country and document type of papers that use fuzzy
MCDM methods to solve energy policy and decision-making problems
have been analyzed with respect to some characteristics such as types of
fuzzy sets, year, journal, fuzzy MCDM method, country and document
type. According to the authors, there are many different areas of appli-
cation of fuzzy MCDM techniques in energy decision-making problems.
These include, among others: selection of the location of the power plant
(nuclear, solar, wind, etc.), assessment of energy storage options, assess-
ment of alternative methods of electricity generation and determination
of energy policy for various countries. In addition, the authors found
that Turkey and China are the countries that have the largest number
of publications related to fuzzy MCDM methods in energy problems.

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 CHAPTER 4

Fuzzy Logic in Finance

Anna Spoz and Magdalena Zioło

4.1 Application of Fuzzy Logic

Approach in Finance and Banking
A review of research on fuzzy logic in finance indicates that this is not
a popular research trend, and there are relatively few publications in this
field. Due to its specificity, fuzzy logic is suitable for researching finan-
cial phenomena due to the possibility of using imprecise, incomplete, and
unclear data in the analysis (Sanchez-Roger et al., 2019). Fuzzy logic was
originally used in finance to study how money changes over time. Buckley
was the first to study the mathematics of fuzzy logic in finance in this area.
Among other areas of financial research with fuzzy logic are bankruptcy

A. Spoz (B)
Department of Finance and Accountancy, The John Paul II Catholic University
of Lublin, Lublin, Poland
e-mail: [email protected]
M. Zioło
Faculty of Economics, Finance and Management, University of Szczecin,
Szczecin, Poland
e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature 53

Switzerland AG 2023
M. Ziolo (ed.), Fuzzy Business Models and ESG Risk,
Palgrave Studies in Impact Finance,
https://doi.org/10.1007/978-3-031-40575-4_4
54 A. SPOZ AND M. ZIOŁO

forecasting, stock market predictions, and portfolio optimization. Fuzzy

logic is used in banking research to analyze categories such as:

• risk,
• credit scoring,
• banking crises,
• bank restructuring processes,
• liquidation of banks.

Fuzzy logic allows for a more in-depth understanding of these

phenomena, which is important because the consequences of banking
crises have an impact on public finances and taxpayers because, as practice
shows, states engage the bulk of public funds to rescue banks and, more
broadly, financial institutions and counteract the socio-economic conse-
quences crises (Sanchez-Roger et al., 2019), which ultimately burdens
their budgets and results in an increase in public debt and an increase in
the cost of servicing it.
Sanchez-Roger et al. (2019), reviewing the literature on the use of
fuzzy logic in finance, diagnosed that most articles in this area were
devoted to:

• financial markets (60% of all publications),

• corporate finance (35%),
• public finance (about 3%),
• household finances (1%),
• other (2.52%).

Bahrammirzaee (2010), analyzing the research methodology used in

finance, pointed to better and more accurate results of analyzes obtained
using methods such as artificial intelligence methods, such as fuzzy logic,
or neural networks compared to the methodology based on: parametric
statistical methods such as—discriminant analysis and regression; or non-
parametric statistical methods including decision trees (Sanchez-Roger
et al., 2019).
When reviewing selected articles on fuzzy logic in finance, it is worth
paying attention to research topics related to banking. Darwish and
Abdelghany (2016) proposed a fuzzy logic model for credit risk rating
 4 FUZZY LOGIC IN FINANCE 55

commercial banks in Egypt. The model uses indicators such as prof-

itability, debt repayment capacity, operational capacity, and liquidity,
which allows us to determine their impact on the credit rating. As a result
of the study, the authors indicated that the fuzzy logic technique is more
scalable, reliable, stable, and different from classical methods.
Costea (2014) used fuzzy logic and machine learning techniques in
financial performance predictions. Fuzzy C-means clustering and arti-
ficial intelligence algorithms were made to compare the assessment of
the financial performance of non-banking financial institutions (NFIs) in
Romania.
Mohamed and Salama (2013) proposed a fuzzy logic-based model
for predicting commercial banks’ financial failure. The model allows for
the effective prediction of bankruptcy of commercial banks. Based on
the model, financial decision-makers can determine the risk of default in
commercial banks, take preventive measures, and strengthen the values of
financial ratios.
Hachicha et al. (2011) used fuzzy logic to explain price dynamics by
taking into account the essential explanatory variables (profit, system-
atic risk), microstructural (SMBt effect size and HMLt book-to-market
effect), and behavioral approach (investor sentiment). As a result of the
study showed that modeling the return using the optimized fuzzy system
improved compared to the classical logic system (both for the emerging
market and the international market). Salih and Hagras (2018) developed
a novel genetic type-2 fuzzy logic model for decision support to minimize
financial default in the banking sector.
Brkic et al. (2017) dealt with fuzzy logic as a tool supporting the
assessment of corporate customer credit risk in the commercial banking
environment. The results of this paper present a new approach to the
use/assessment of soft data to incorporate them into a new and excellent
model of fusion of soft and hard data for customer credit risk assessment.
Hernández and Hidalgo (2020) assume that fuzzy logic in busi-
ness, management, and accounting applications has specific characteristics.
Fuzzy logic help decentralize decision-making processes to be standard-
ized, repeatable, and documented. Fuzzy methods play a very important
role in business because they help to reduce costs and thus generate more
profits. They can also help companies compete effectively and reduce
costs.
Fuzzy logic is also used for the financial analysis of enterprises. Korol
(2018) uses fuzzy logic in forecasting financial ratios and predicts the
56 A. SPOZ AND M. ZIOŁO

financial standing of companies. The approach used by Korol (2018)

“greatly enhances the predictive power of financial analysis and makes it
an economically useful tool for the management of enterprises”.

4.2 Risk Management and Fuzzy Logic

Risk Management Process
Every business activity is exposed to various types of risk. Therefore,
dealing with it is an integral part of the business. Risk analysis and
management is the process of understanding risk and proactively dealing
with it in order to minimize threats. Although risk management may
vary from organization to organization, certain general steps in the risk
management process are common to the vast majority of cases. These
steps are:

– risk identification and analysis—all external and internal risk factors

that may affect organization should be identified and analyzed
regarding their category, scope, and severity;
– risk assessment—identified risks should be ranked regarding possi-
bility or frequency of their occurrence as well as their impact on the
organization;
– risk treatment—at this stage a risk mitigation strategy should be
defined;
– risk monitoring and reporting—as not all risk can be avoided or
eliminated, there is a need of constant monitoring and reporting
them.

As shown in Fig. 4.1, risk management is a continuous process.

Risk management, like many other processes in modern companies, is
often supported by digital tools. Although at all stages of risk manage-
ment process such tools are useful, the risk assessment is a task for which
the support of computer tools is particularly useful. More advanced tools
offer not only the assessment of risk but also support decision-making
based on the assessment. In practice, risk may be often a result of many
factors, therefore mathematical models, and most often statistical models,
are used to assess, predict, and estimate the risk. Accurate risk assessment
is critical to risk management processes, so using the best approach is of
the utmost importance.
 4 FUZZY LOGIC IN FINANCE 57

Fig. 4.1 Risk management scheme (Source own elaboration)

Models in Risk Management

Statistical models, based on classical probability, are most often used types
of models in risk management. They represent a quantitative approach,
allowing for risk assessment taking into account many factors. Financial
institutions commonly use models to assess credit or investment risk.
Statistical models are also used for risk assessment in projects, e.g., in
construction. Another use of models is to predict the occurrence of events
such as a financial crisis or company bankruptcy.
58 A. SPOZ AND M. ZIOŁO

The types of statistical models used for risk assessment depend on the
type of risk. For example, in credit risk assessment, regression models are
most popular. Such statistical methods typically make assumptions about
the variables involved, such as (i) normal distribution, (ii) lack of rela-
tionship between independent variables, (iii) high discriminating ability
of sorting creditworthy from non-creditworthy customer, (iv) complete
information, and (v) clear and exclusive definition of membership into
one of the groups (creditworthy and non-creditworthy). Discriminant
analysis and logistic regression, often applied to build credit scoring
models, assume, multivariate normality and homoscedasticity, which are
features not often present in datasets of real-world credit institutions
(Fonseca et al., 2020). Assumptions of statistical models are one of their
shortcomings.
There are also other issues with methodologies for assessing the risks
of companies or projects, as they are often based on common economic
parameters and quantitative indicators, which do not capture the so-called
soft factors.
Among others, the above disadvantages of assessment methods were
motivation to introduce different approach, combining numerical and
qualitative parameters. Qualitative parameters allow to describe the real-
world variables using human language. While quantitative variables take
values from strictly defined numeric ranges, more natural characteristics
such as low, medium, or high can be assigned to qualitative variables.
However, this requires methods different from classical probability, such
as soft computing techniques.
Soft computing techniques of model approximation allow to solve
complex problems. Most popular soft computing techniques are: fuzzy
logic, genetic algorithms, artificial neural networks, machine learning, and
expert systems.
Main feature of soft computing, unlike statistical methods, is their
ability to handle imprecisely defined problems, and incomplete data,
which commonly appear, for example, in credit requests and business
bankruptcy prediction. Soft computing techniques are also appropriate
for dealing with contextual changes in dynamic and evolving contexts.
Statistical modeling assumes variable precision, reliability, but precision
and certainty generate cost; thus, the assumption of soft computing is
that decision-making should be more “tolerant” to aspects such as impre-
cision, vagueness, and incompleteness whenever possible (Fonseca et al.,
2020).
 4 FUZZY LOGIC IN FINANCE 59

Fuzzy Sets and Fuzzy Logic

One of soft computing techniques, fuzzy logic is broadly perceived as a
system for dealing with reasoning in approximate way rather than exact
way (Klir, 1995). Thanks to successful practical applications, fuzzy logic
has gained significant attention.
Fuzzy logic was introduced by scientist L. A. Zadeh, along with fuzzy
sets which he defined as classes of objects with a continuum of grades of
membership. Fuzzy sets are “characterized by a membership (character-
istic) function which assigns to each object a grade of membership ranging
between zero and one” (Zadeh, 1965). This is the main difference from
traditional logic, where an object can only be a member or non-member
of a set. In fuzzy logic, a variable’s membership in one set can be for
example 80% true, and at the same time, its membership in a different set
can be for example 10% true. In other words, it is a member of the first
fuzzy set to degree 0.8, and a member of the second fuzzy set to degree
0.1. The grade to which a variable is a member of a fuzzy set is determined
by a membership function. Membership functions are in most cases linear,
with triangular or trapezoidal shape. However, other shapes like Gaussian,
generalized bell, sigmoidal, or polynomial can also be used. The example
of combination of trapezoidal (left-sided and right-sided) and triangular
(two-sided) membership function is presented in Fig. 4.2.
The membership functions in Fig. 4.2 define three fuzzy sets: low,
medium, and high. Variable x = 2.75 is a member of medium set with

μ (level of truth)

Low

Medium
0.45
0.3 High

x
0
1 2 2.75 3 4 5

Fig. 4.2 Examples of membership functions (Source own elaboration)

60 A. SPOZ AND M. ZIOŁO

truth level µmedium (x) = 0.45 and a member of high set with truth level
µhigh (x) = 0.3.
Applying membership functions give several values as an output, which
is not useful in practice. To obtain a single output value further action is
required, which involves operations on fuzzy sets. Operations on fuzzy
sets are different from operations on classical sets, as they are based
on membership functions. Instead of AND operator for conjunction
minimum function is used, and for disjunction, maximum function is used
instead of OR. Negation operator NOT is replaced by 1 − µ(x). In case
of the above example of membership function, the output indicating that
the variable x belongs to the conjunction of “medium” and “high” sets,
will take the value 0.3, which is the minimum of the values 0.45 and 0.3.
If the output were to indicate that the variable belongs to the disjunction
of both sets, the result would be the maximum value, which is 0.45.

Fuzzy Models in Risk Management

Fuzzy Inference Systems
Thanks to their specificity, fuzzy logic models can be used to calculate
the risks in cases with incomplete knowledge and inadequate data. Fuzzy
logic provides a framework for risk analysis using such data and human
rational (Fakhravar, 2020).
The knowledge of risk may be developed in two ways with use of fuzzy
logic models:

– The model allows risk managers and experts not to deal with the
inference part for many risks, but to focus on cause-and-effect
relationships based on their experience and knowledge.
– The results of risk assessment are transferred to the risk decision-
making process, and the outcome of the decision can then be
fed back into the model to improve the fuzzy sets, rules, and
understanding (Shang & Hossen, 2013).

Fuzzy logic models can be divided into three common classes:

(1) models in fuzzy continuous-time (MFC)—employed in estimates

to make real financial decisions using trapezoidal numbers;
 4 FUZZY LOGIC IN FINANCE 61

(2) fuzzy pay-off method (FPOM)—based on triangular distributions,

scenario-based real option valuation method;
(3) models in fuzzy discrete-time (MFD)—adapt the binomial model
to the fuzzy logic allowing to predict the upward and downward
movements (Díaz Córdova et al., 2017).

In risk management, fuzzy logic models are expected to support risk

assessment as well as decision-making. Such models are implemented into
fuzzy inference systems (FIS) that offer automation of decision-making,
thanks to the fact that, based on their own assessment, they qualify the
risk as acceptable or not. However, great knowledge and experience of
experts are required to build an effective model, which is one of fuzzy
logic systems’ disadvantages.
Simplified fuzzy inference system is presented in Fig. 4.3.
The majority of fuzzy systems used in risk management, are based on
Mamdani FIS (Mamdani & Assilian, 1975) or Sugeno FIS (Takagi &
Sugeno, 1985). They are slightly different but general concept of both is
the same.
Mamdani FIS operates in the following steps:

1. A set of fuzzy rules is determined

2. The input variables are fuzzified using the input membership func-
tions
3. The fuzzified inputs are combined according to the fuzzy rules to
establish a rule strength (Fuzzy Operations)

Fuzzy Rule
Base

Input Fuzzy output

Fuzzifier Inference Defuzzifier
variables variables
Engine

Fig. 4.3 Scheme of fuzzy inference system (Source own elaboration)

62 A. SPOZ AND M. ZIOŁO

4. The consequence of the rule is found by combining the rule strength

and the output membership function (implication)
5. The consequences are combined to get an output distribution
(aggregation)
6. The output distribution is defuzzified (this step is only if a crisp
output (class) is needed) (Mamdani & Assilian, 1975).

The fuzzy rules are “IF-THEN” rules, and they define the output
values of dependent variables based on values of independent variables.
For example, if the model has three independent variables x1, x2, and
x3, and each can have the value “low”, “medium” or “high”, it requires
to define rules for all combinations of these values and determining the
value of dependent variable y for each of these combinations, e.g., IF (x1
is low) AND (x2 is low) AND (x3 is low) THEN (y is low); IF (x1 is
medium) AND (x2 is low) AND (x3 is low) THEN (y is low), etc. In
practice, for multivariable models, number of such rules can be large.
Development of fuzzy inference system is not a one-time effort but an
iterative process.
The first and possibly most significant step in developing a fuzzy model
is to discover the parameters that influence a risk and decision based on
risk assessment (Dahal et al., 2005). In this step, based on subject matter
experts’ and business managers’ knowledge and experience, key factors
that may cause any risk, the value of each factor for existing business,
any known cause-and-effect relationship, any risk measures that could be
used, and any relationship with other risk types need to be identified. In
the second step, collected information is analyzed for and any conflicting
or inconsistent opinions are consulted with experts for explanation. Then,
a fuzzy logic model is proposed to experts and their feedback is gathered.
After this stage the model is finalized, and risk monitoring starts. The
fuzzy logic model is used to generate regular reporting on the present
risk exposure. The reports are presented to experts for feedback and
information. Experts’ opinions may be revised based on model results,
previous experience, a changing environment, or greater understanding.
The model must be reviewed and updated on a regular basis.
In addition to the selection of factors that will become independent
variables of the fuzzy model, it is extremely important to define appro-
priate membership functions. This is not an easy task because it requires
translating the qualitative description into a quantitative measure. What
is worse, there may not be enough data for the majority of risks handled
 4 FUZZY LOGIC IN FINANCE 63

by fuzzy logic models. The model’s rationality is primarily determined

by experts or corporate management. Comments on the inference rules
or the membership functions may have a significant impact on the risk
assessment outcome. However, if experience data is available, back testing
can be utilized to validate or improve the models. After developing the
fuzzy logic system, one approach is to compare actual experience with the
model. The membership functions can be changed or calibrated based on
the experience data to better predict the output variable.
Tracking each expert’s inputs may also reveal how well they suit the
experience data and allow to adjust the weight on each expert’s opinions
accordingly. Furthermore, when enough data is obtained, it may have an
impact on the experts’ understanding of the issue and may affect their
inputs, such as inference rules and membership functions. Finally, with
enough data, fuzzy logic models may be transferred to models based on
probability theory.
The ultimate purpose of any risk-assessment system is to enable
decision-makers make informed decisions to better manage the risk.
Although fuzzy logic systems can be used to predict risk exposure numer-
ically, the ranking of risks is more relevant. This allows decision-makers to
identify the main risks and better understand the relative size of the risks
(Shang & Hossen, 2013).
Fuzzy logic systems of course have several disadvantages, and probably
the biggest of them is the dependence of the model on the knowl-
edge and experience of experts and the proper use of this knowledge
when creating fuzzy rules. The emerging discrepancies in the opin-
ions of experts regarding the significance of the risk and its impact
on the organization cause problems when developing fuzzy inference
systems. Fuzzy logic models also require broad validation, which in their
case is qualitative rather than quantitative, making them more open to
interpretation.

Applications of Fuzzy Logic in Risk Management

Fuzzy logic models for risk assessment are useful in cases where statistical
models do not perform well or cannot be used. The advantage of fuzzy
over those model logic is ability to handle with inaccurate or incomplete
data.
It is obvious that the use of fuzzy logic models by companies may vary
depending on the type of their business activity. For example, in organi-
zations related to accounting fuzzy logic can be applied in five areas of
64 A. SPOZ AND M. ZIOŁO

business, with problems concerning: portfolio selection, financial math-

ematics, capital budget, technical analysis, credit analysis, and financial
analysis (Díaz Córdova et al., 2017).
Financial institutions use fuzzy logic in operational risk (OR) manage-
ment. OR exposures are often complex, diverse, and context-dependent,
thus, their assessment, differently from market risk and credit risk,
requires models that do not rely on quantitative data. The use of a fuzzy
inference systems is a worthwhile alternative since it uses human reasoning
and expert knowledge to explain qualitative and quantitative inputs while
addressing the multifactor, highly non-linear system that underlies OR.
FIS enables for the integration of OR measurement with the other stages
of OR management. Fuzzy model allows not only for identification of
OR sources, but also for evaluating risk management decisions ex-ante
(León, 2009).
Fuzzy logic systems allow you to simplify large and complex risk
management frameworks. They help model cause-and-effect relationships
for risks that lack a proper quantitative probabilistic model. Fuzzy models
allow for risk assessment as well as its ranking based on data and expert
knowledge. Fuzzy inference systems are particularly useful in compa-
nies with diversified business, operating in different locations around the
world, which makes them exposed to many types of risk. Monitoring and
analyzing risk in such companies is costly and resource-intensive, espe-
cially when there are many different risk factors that are interrelated. The
use of fuzzy logic in risk management systems saves resources and at the
same time provides information about the connections and dependencies
between the monitored risk factors. This significantly facilitates the iden-
tification of the most important risk factors and allows to focus on them
when developing a risk mitigation strategy (Shang & Hossen, 2013).
One of the typical applications for fuzzy logic inference systems is
credit risk assessment, both for individual and corporate clients. Although
FIS are rarely used compared to other methods, they are often more effec-
tive than the most commonly used regression models or even other soft
computing methods (Louzada et al., 2016).
In order to achieve better results in risk management, fuzzy logic can
be combined with other techniques such as decision trees, artificial neural
networks, or Bayesian networks. Depending on the application, a method
which advantages will complement the advantages of fuzzy models should
be chosen. A summary of the features of the models most commonly
combined with fuzzy logic models is presented in Table 4.1.
 4 FUZZY LOGIC IN FINANCE 65

Table 4.1 Summary of models typically combined with fuzzy logic

Model Advantages Disadvantages Applications

Artificial – Allows for – Requires large – Modeling complex issues

Neural sophisticated amount of data where the relationships
Network pattern – Relationships between the variables are not
recognition, detected only on well known, but the amount
prediction and the basis of data of collected data is sufficient
classification are often – Issues with multiple
– Learning unintuitive explanatory variables
algorithms – The degree of
offer extremely complication
wide range of makes it difficult
applications to understand
Decision – Easy to – Suitable only for – Decision-making for
Tree understand decision-making noncomplex issues, where
– Suitable for (not for risk number choices are limited
discrete assessment) (mostly binary—accept or
variables – Not suitable for reject)
– Directly helps complex problems
in decision- with multiple
making with variables and
limited choices relationships
– Poor at identifying
linear relationships
Bayesian – Shows – Not suitable for – Modeling noncomplex issues
Network relationships complex problems – Decision-making for
between with multiple noncomplex issues
variables in variables
easy to – Finding
understand way relationships and
– Provides conditional
estimation of probability may be
conditional expansive
probability and – Determination of
distribution conditional
probability may be
difficult without
experience data

Source Own elaboration based on Shand and Hossen (2013)

One of the most interesting hybrid systems is neuro-fuzzy systems,

combining the advantages of fuzzy logic and artificial neural networks
(Sreekantha & Kulkarni, 2012). They are particularly useful in cases where
it is difficult to obtain expert knowledge needed to model risk. Thanks to
66 A. SPOZ AND M. ZIOŁO

the learning ability of neural networks all necessary rules can be learned
from data (Konrad & Philip, 1994; Santana et al., 2018).

4.3 Fuzzy Logic and Financial Crisis Preventing

Crisis and How to Prevent It
Financial crisis is an unstable situation, when asset prices see a sharp
decrease in value, firms, and individuals are unable to pay their loans,
and financial institutions face a shortage of liquidity. A panic or bank run
that occurs when investors sell off their assets or remove cash from savings
accounts out of fear that their assets’ value will decline if they remain in
a financial institution is frequently linked to a financial crisis. Multiple
factors may contribute to a financial crisis. In general, an overvalued asset
or institution can trigger a crisis, which can then be worsened by irrational
or herd-like investor behavior.
The ability to predict future financial conditions and identify
impending economic crises has become essential for preparing countries
for an economic downturn. Crisis prediction is a first step to its successful
prevention and the earlier and more accurately the prediction is provided,
the more adequate and effective measures can be taken to counteract the
crisis.
Preventing a crisis requires the identification of risk factors that may
cause a crisis or indirectly contribute to its occurrence. Therefore, it is
impossible to prevent a crisis without risk analysis and identification and
assessment of risk factors that may affect the crisis. In the next stage,
it is necessary to take action to eliminate or reduce the risk, and finally
monitor risk factors. Crisis prevention is largely about managing the risks
that may cause a crisis.
In addition to identifying and assessing risk factors, an equally impor-
tant element of crisis prevention is anticipating its occurrence. This
requires the preparation of appropriate methods to detect the impending
crisis. Such methods are based on the assessment of selected factors
influencing the possibility of a crisis.
Despite risk monitoring and the implementation of a crisis prediction
system, it is not always possible to avoid it. During a crisis, effi-
cient management is of significant importance, the key aspect of which
is decision-making. Therefore, proper crisis preparedness should also
include the development of a decision support system.
 4 FUZZY LOGIC IN FINANCE 67

Fuzzy Logic in Crisis Preventing

Fuzzy logic is an excellent tool for simulating imprecise, uncertain, and
ambiguous occurrences. Because a company’s financial situation is influ-
enced by many factors (economic, political, psychological, etc.) that
cannot be precisely defined by quantitative measures, the fuzzy logic
approach improves the accuracy of prediction of financial analysis and
transforms it into a practical tool supporting enterprise management. In
the area of enterprise management, fuzzy logic is used to assess company’s
stability and predict its bankruptcy. Financial ratios such as current assets,
short-term liabilities, revenues from sales, dynamics of short-term liabili-
ties, ratio of fixed capital to equity, current liquidity ratio, and many others
can be used for this purpose.
Korol and Korodi (2011) and Korol (2018) showed, that the fuzzy
logic model used to analyze financial ratios was able to predict the
bankruptcy of companies with high accuracy. Thanks to the fuzzy logic
model, which takes into account the dynamics of changes in factors, it was
possible to identify risks resulting from an inappropriate capital structure
in the analyzed companies. It is significant that these risks were visible
two years before the bankruptcy. Interestingly, the traditional statistical
model did not detect a significant change in these factors. This means
that the fuzzy logic model allows you to identify risk factors affecting
bankruptcy well in advance. The link between the crisis and financial situ-
ation of companies is obvious; therefore, their analysis can be a way of
predicting the impending crisis. Of course, for that purpose, the anal-
ysis needs to cover a large part of the market, and not just individual
companies.
Factors other than financial indicators can also be used to develop a
fuzzy model for crisis prediction. A relatively simple early warning system
for a financial crisis was proposed by Sztojanov et al., 2016) based only on
two describing variables: “annual credit growth rate” and “annual growth
of real estate prices”. The output of the system indicated a crisis warning
or its absence. This shows that although fuzzy models are suitable for
multiple variable issues, they also can be successfully used in noncomplex
issues. The effectiveness of the system has been validated on test data.
Such systems can serve as additional support in financial crises prediction.
They also have the advantage of being improved by using a wider set of
reference data and by combining them with another technique, such as
68 A. SPOZ AND M. ZIOŁO

neural networks. In addition, the use of data from a specific country or

region allows the model to be adapted to local market conditions.
Decision-making is crucial in crisis management. Fuzzy inference
systems (FIS) can be extremely useful in such situations. The advantage
of FIS is their ability to handle imprecisely defined problems and incom-
plete data. During crisis, it is often difficult to obtain precise numerical
description of problems and complete data, therefore, fuzzy logic is well
suited to supporting decisions in crises. Various methods based on fuzzy
logic are used to build decision support systems, e.g., fuzzy compu-
tation for crisis classification, fuzzy rules to control decision variables,
and fuzzy-multicriteria decision-making methods for ranking decision
scenarios (Nokhbatolfoghahaayee et al., 2010).
Interesting implementation of fuzzy logic in crisis management is
crisis modeling. Such applications, where characteristics of crisis environ-
ment have been modeled and fuzzy inference techniques employed to
add temporal modalities, allowed to simulate the flow of events during
crisis which can be helpful in decision-making and resource manage-
ment. Modeling future environment state by use of prediction algorithm
provided temporal relationship description without need of experts’
involvement (Alnahhas & Alkhatib, 2012).
Since risk prevention is one of the most important ways to prevent
a crisis, it is of great importance to assess the ability of an organiza-
tion or authority to deal with risk. The ability to effectively manage
risk may determine whether the risk will be identified, properly assessed
and whether the necessary preventive measures will be undertaken. The
risk management capability means the ability of administration to reduce,
adapt, or mitigate risk which were identified in risk assessment to accept-
able levels. This capability is assessed regarding financial, technical, and
administrative capacity allowing adequate:

– risk assessments;
– risk management planning for prevention and preparedness;
– risk prevention and preparedness measures (Zlateva et al., 2015).

Fuzzy logic is suitable for assessment of risk management capability as

it allows using linguistic description of variables. This allows the descrip-
tion of variables to be based on questions that are easy to understand and
answer (precise numerical answers are not required). The role of financial
 4 FUZZY LOGIC IN FINANCE 69

institutions, especially banks, in preventing a financial crisis is crucial. The

disturbed financial stability of banks can trigger a crisis, and high stability
can prevent a crisis caused by factors coming from outside the financial
system (pandemic, natural disasters, etc.). Fuzzy logic methods can be
used to assess the stability of the financial system. The usefulness of the
fuzzy inference system in assessing the stability of the banking system was
demonstrated by Blahun et al. (2020) on the example of the Ukrainian
banking system. In the analysis, they took into account selected factors
(state of assets and liabilities formed by banks, the level of efficiency of
banking operations, the volume of formed assets and liabilities in foreign
currency, and the state of the interbank market) and created the stability
index from them. The summary of selected applications of fuzzy logic
methods in crisis prevention is presented in Fig. 4.4.
The results showed that the indicator of the state of the banking
system determined by the fuzzy model coincided with the actual events
from the analyzed period that had a negative or positive impact on the
banking system. This confirmed that the fuzzy model can effectively

Assessment of the risk responsible for the

financial crisis

Crisis prediction based on assessment of

financial or non-financial factors

Decision support systems

CRISIS
PREVENTION
Crisis simulations

Assessment of risk management capability

Assessment of financial system stability

Fig. 4.4 Summary of fuzzy logic applications in crisis prevention (Source Own
elaboration)
70 A. SPOZ AND M. ZIOŁO

predict the state of the banking system based on selected factors. Iden-
tification of the relationship between the stability of the banking system
and the economic situation on the domestic or global market would allow
predicting the occurrence of a crisis in the future based on the assessment
of the condition of banks.

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V6.612
 CHAPTER 5

Fuzzy Logic in Business Ethics

Beata Zofia Filipiak

5.1 Fuzzy Logic in Decision-Making

Processes of Enterprises
Does the integration of environmental, social, and governmental aspects
become an important aspect of decision-making in entities and their risk
assessment? The answer to this question is important not only from the
point of view of climate change but also from the point of view of the
decision-making process and the market position of entities in the envi-
ronment. Adequate risk management, including ESG risk, in many cases
requires a different approach due to the specificity of the industry as
well as the lack of structured information, especially such that allows for
unambiguous formulation of recommendations.
Entities (enterprises of various industries—commercial or manufac-
turing services, as well as institutions, especially financial ones) should take
into account the incorporation of climate—and environmental risks in
their activities. Due to the occurrence of ESG risk, in particular with high

B. Z. Filipiak (B)
University of Szczecin, Szczecin, Poland
e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature 73

Switzerland AG 2023
M. Ziolo (ed.), Fuzzy Business Models and ESG Risk,
Palgrave Studies in Impact Finance,
https://doi.org/10.1007/978-3-031-40575-4_5
74 B. Z. FILIPIAK

exposure to environmental risk related to climate change, and due to the

characteristics of the industry and the markets of operation they should
pay particular attention to: (1) directional guidelines for the conducted
activity and the quality of information that underlies the construction of
business models, strategy, and current operational decisions; (2) devel-
opment of procedures to integrate ESG risk and environmental risk into
decision-making and risk management; (3) change your risk management
attitude to incorporate climate-related and ESG risks into their risk
management framework, with a view to identifying, assessing, managing,
and monitoring these risks over a sufficiently long-term horizon; (4)
change the value system and take into account ESG factors as responding
to changes in the environment that are positively perceived by customers.
Entities decision-makers need to know how they should react to ESG,
in which direction decisions should go and transform their business
models due to ESG risk and the impact of climate change. Based on
this knowledge, the support system adjusted toward ESG risk is worth
reconsidering. Entities (enterprises of various industries—commercial or
manufacturing services, as well as institutions, especially financial ones)
benefit from learning about sustainable business models in the contexts
of risk management and ESG factors. Finally, companies use knowledge to
further the adaptation process toward corporate sustainability. It has been
inferred that good decision-making model in such situations must be able
to function in unstructured problems and must tolerate vagueness, ambi-
guity, or inaccurate data (Lumbroso & Vinet, 2012; Škoda et al., 2021).
The way that companies incorporate ESG into their decision-making
process is determined by each company’s sector, size, and geographical
location (Zioło et al., 2023). To minimize errors, risk resulting from the
activities conducted in the environment, related to the complexity of ESG
risk, methods based on fuzzy approach are extensively used in such situa-
tions (Dominiak, 2013; Dwivedi et al., 2017; Shahzad et al., 2017; Chou
et al., 2020; Agarwala & Chaudhary, 2021; Feng et al., 2022a, 2022b;
Xu et al., 2022; Wang et al., 2022).
The transition to a circular economy, but also a change in the relation-
ship between enterprises and financial institutions based on the creation
of a common value that takes sustainability into account is a complex
process. This process makes it possible to create and maintain positive
relationships between the company’s goals, its resources, the environ-
ment, and the changing environment toward sustainability (Yu et al.,
2011; Ziolo et al., 2021). This process includes both the traditional
 5 FUZZY LOGIC IN BUSINESS ETHICS 75

approach typical of the decision-making process, which means that it

consists of a set of guidelines for decisions and actions taken by decision-
makers in a specific time, in specific areas, and in relation to specific
resources. (Pajak, 2008) But it also covers new areas that support the
circular economy and the implementation of sustainable development
goals. The last two decades of literature studies, analyses and numerous
empirical studies, unequivocally that the main paradigm of contemporary
development is paradigm od sustainable development, including quality
of life (Izdebski & Jacyna, 2018; Cieśla et al., 2020; Ziolo et al.,2021,
Kaczorek & Jacyna, 2022).The latter area consists of a set of decisions
regarding the use of circular economy principles, ESG risk reduction,
cooperation with financial institutions based on the principles of respon-
sible business, or the use of GRI taxonomies and principles. In Fig. 5.1.
Two areas are presented, taking into account which decisions are made.
One should also remember that business based on the circular
economy, due to its scale and implemented solutions to achieve SDG’s
goals, covers numerous interactions. In the literature, a trend can be
observed to group these impacts as follows (Ziolo et al., 2023):

• social impact,
• environmental impact,
• social responsibility, and
• economic impact.

•a specific time
the traditional approach typical of the decision- •a pecific areas
making process •a specific resources
New
standards of
•principles of circular economy, business
•ESG risk, towards
•cooperation with financial institutions based on the sustainability
the sustainable approach typical of the principles of responsible business, by enterprises
decision-making process in circular economy •GRI standard,
•taxonomy,
•business responsibility.

Fig. 5.1 Two areas are presented, taking into account which decisions are made
(Source Own elaboration)
76 B. Z. FILIPIAK

Decision-making is becoming an important activity in the changing envi-

ronment where companies operate in the face of crises and climate
change. New solutions supporting this process are constantly being
sought. (Abdullah, 2013) The general theory of decision-making formed
a basis for more systematic and rational decision-making especially in the
situation where multiple criteria need to be accounted for, and these
criteria take into account uncertainty and striving for change toward
sustainability. The general decision theory making is defined as follows
(Chaudhuri et al., 2013; Kapoor, 2013):

1. A process that results in the selection from a set of alternative courses

of action, that course of action which is considered to meet the
objectives of the decision problem more satisfactorily than others
as judged by the decision-maker.
2. The process of logical and quantitative analysis of all factors
that influences the decision problem assists the decision-maker
in analyzing these problems with several courses of action and
consequences.

The literature on the subject indicates that fuzzy logic is a logic trying
to be as close as possible to human thinking and perception. It is based
on the assumption that people are not thinking in the exact variables
(yes/no), but distinguish a range of “fuzzy” values (rather yes, much
yes, maybe no, and yes, and no). This means that decision-makers in
the decision-making process operate with cloudy concepts and blurred
boundaries, criteria, and judgments. The problems can be presented by
some degree of truth and falsity, which makes them fuzzy (Ďuračiová,
2014; Valášková et al., 2014; Naeem et al., 2023).
The fuzzy approach takes into account three key elements (Zadeh,
1965; Mckone & Deshpande, 2005):

• Fuzzy sets. In contrast to classical sets, fuzzy sets include objects

with partial membership.
• Fuzzy logic. Fuzzy logic provides rules for operations on fuzzy sets
and is therefore key to building models of fuzzy systems.
• Fuzzy arithmetic. In addition to logic operations, interval arithmetic
operations apply to fuzzy sets.
 5 FUZZY LOGIC IN BUSINESS ETHICS 77

Fuzzy logic is mainly used as a form of decision-making in conditions of

uncertainty (Buckley & Eslami, 2006; Naeem et al., 2023). This theory
is determined “how much” element belongs to the set or not (variable
x and its set membership are defined as µ (x) in the range from 0 to 1,
0 means completely non-membership and 1 full membership in the set).
(Zadeh, 1965).
The decision-maker is unaware of all available alternatives and the risks
related to the consequences of each alternative. Each element in the fuzzy
set (FS) is given a membership degree, ranging from 0 to 1, indicating
its quality or effectiveness. Indeed, quality or effectiveness makes FSs
important in human decision-making. (Naeem et al., 2023).
The fuzzy approach allows for situations in which an element x may
belong to the set only to some degree, or it may also belong to the set and
its complement at the same time. According to the formulated definition,
the fuzzy set FS in the space X is the set defined as follows:

F S = {(x, µ A (x)); x ∈ X, µ A (x) ∈ [0, 1]}

where µ A (x) is a function of membership of the element x ∈ X to the

fuzzy set FS.
For the fuzzy logic approach, it is important to present the concept of
a linguistic variable. This term should be understood as a variable whose
values are words or sentences in a natural or artificial language. We call
the above words or sentences the linguistic values of a linguistic variable.
(Zadeh, 1975) We describe the mathematical form of a linguistic variable
as follows (Konopka, 2013):

(X, T (X ), U, G, M)

where

X—he name of the linguistic variable (e.g. ESG risk),

T(X)—set of linguistic terms, e.g. {“low”, “moderate”, “high”},
U—universe of discourse (e.g. variable development interval),
G—grammar creating linguistic values T(X),
M—meaning, where M(X) is a fuzzy subset in the space U.

Carrying out inference, i.e. basing the decision-making process on fuzzy

logic, requires the introduction of an inference algorithm (model) based
on a set of rules and an inference module with at the same time the
78 B. Z. FILIPIAK

so-called input module. Fuzzification is the first input element and at

the output follows the so-called sharpening (defuzzification) as the final
element. The schematic diagram of the process is shown in Fig. 5.2.
Blurring involves assigning a “sharp” value of the input to the appro-
priate subset of terms of the linguistic variable, specifying the value
of the membership function. Sharpening computes the sharp value of
the output based on the resulting membership function. This value is
computed using defined calculation methods. The set of rules is a set
of logical sentences using the plural operators IF, AND/OR, THEN,
which describe the relationships between the “input” crisp values of the
reasoning model and the “output” values of this model. (Smolarkiewicz,
2010; Kayacan & Khanesar, 2016). Usually simple logical rules in the
form of operators are used (Kaczorek & Jacyna, 2022):
 
IF (x1 is A) AND (x2 is B) THEN y is C

where

x1 and x2 – “input” crisp variables;

y – “output” crisp variables;
A, B, C – linguistic terms;
AND, THEN – plural operations on membership functions.

Inference using a set of rules, which allows the calculation of the resulting
membership function, is a three-stage process. Initially, the so-called
variables

„x1” &
crisp
„x2”

Aggregation of
Fuzzyfication Rule evaluation Defuzzyfication
the rule outputs
variables
„y” crisp

Fig. 5.2 The schematic diagram of the process (Source Own elaboration Imran
and Alsuhaibani [2019])
 5 FUZZY LOGIC IN BUSINESS ETHICS 79

aggregation, i.e. it determines the degree of fulfillment of the predeces-

sors of individual rules. Then, the so-called activation, i.e. the degree
of membership of the successor of individual rules is determined. The
third stage is the so-called accumulation, i.e. determining the resultant
membership function based on the degree of activation of successors.
It should be remembered that fuzzy logic should be treated as a kind
of automata that base their operation on the laws of logic fuzzy in
order to make a decision under uncertainty. The system has a knowledge
base (base of the rules) and inference rules. On the basis of “observa-
tions, i.e. registered data in the knowledge base”, he makes a decision.
(Imran & Alsuhaibani, 2019) From the point of view of enterprises and
their decision-making process, it is important to include in the “observa-
tions” database-specific variables (observations) for a given entity useful
for the decision-making process. These specific variables (observations)
should concern the specificity of the activity, environment, relations with
the environment, or internal processes of entities.

5.2 Similarities and Differences

in the Application of the Fuzzy Approach
in Enterprises from the Production,
Services, and Trade Sectors
The purpose of introducing the concept and theory of sets and the very
application of fuzzy logic fuzzy was the need to mathematically describe
these phenomena and concepts that are ambiguous and imprecise. In the
case of enterprises, increasing decision-making certainty is of fundamental
importance. The fuzzy logic theory allows to determine the partial affilia-
tion of a point (object, phenomenon, variables) to the considered decision
set. Instead of sentences taking the values of true or false, we use linguistic
variables that take imprecise concepts of spoken language as values.
However, certain limitations of an objective nature are pointed out.
Gorzałczany (1987) states that formal fuzzy set representation is not often
adequate. It may be difficult for a decision-maker to provide an exact
value of the degree of membership of an element. (Hanine e al., 2021) In
many real-world issues, decision-makers may express their opinions even
when they are not certain about them, inducing a potential hesitation
degree (Xu, 2007; Xu et al., 2008) and may additionally imply decision-
making errors. To tackle this challenge, Atanassov (1995) introduces the
80 B. Z. FILIPIAK

intuitionistic fuzzy set (IFSs) as another extension of the fuzzy set. This
eliminates this inconvenience for all types of decision-makers, in all types
of enterprises.
The fuzzy approach can be used in various decision-making areas both
in enterprises from the production, services, and trade sectors. The matrix
of the general use of the fuzzy approach is presented in Tables 5.1 and
5.2. The division was made based on the types (typology) of decisions
made and the decision spheres (internal and external).
Making a decision using fuzzy logic is, therefore, associated with
obtaining a lot of important information and directing the decision to
specific solutions. It allows for a broad look at the decision-making
process itself (as shown in Table 5.1.). In addition, industry differences
are shown, as different information will be collected at the level of the

Table 5.1 The matrix of the general use of the fuzzy approach is presented—
the types (typology) of decisions made

Typology of decisions Entities of production Entities of services Entities of trade

made sectors sectors sectors

Production YES NO NO
decisions
Service creation NO YES YES (restricted
decisions by sector
specifics
Trade decisions NO YES (restricted by YES
sector specifics
Financial decisions YES YES YES
Investment YES YES YES
decisions
HR decision YES (in terms of YES (in terms of YES (in terms of
strategic HR strategic HR strategic HR
modeling) modeling) modeling)
Logistical decisions YES YES YES
Technical decisions YES YES (restricted by YES (restricted
sector specifics) by sector
specifics)
Technological YES YES (restricted by YES (restricted
decisions sector specifics) by sector
specifics)

Source Own elaboration

Table 5.2 The matrix of the general use of the fuzzy approach is presented

The decision spheres Entities of production Entities of services sectors Entities of trade sectors
sectors

Internal Decision-making areas

Development of the – X X
sphere of services
Development of the X – –
sphere of production
Ongoing YES (restricted by sector YES (restricted by sector YES (restricted by sector
implementation of the specifics and the scope of specifics and the scope of specifics and the scope
strategy tasks resulting from the tasks resulting from the of tasks resulting from
strategy) strategy) the strategy)
External and strategic Competitiveness X X X
5

decision Development of the X – –

production and market
structure
Development of the – X X
service and market
structure
Development of the – X X
trade and market
structure
Changes in X X X
organizational forms or
management structure
Creating essential X X X
components of the
environment
FUZZY LOGIC IN BUSINESS ETHICS

Source Own elaboration

81
82 B. Z. FILIPIAK

production industry and production companies, while others will be dedi-

cated to service or commercial companies. Fuzzy approach allows you to
obtain two types of information:

• prospective—used at the strategic level, regarding the future and

• retrospective—relating to the past and applicable to operational
activities in both trade, service, and production companies.

There are four basic areas of strategic decision-making in enterprises

and it is in them that the role of the fuzzy approach should be noticed,
which allows to determine the optimal strategic directions in relation to
the external sphere. Matrix presented in Table 5.2. indicates a significant
involvement of fuzzy logic in strategic decisions. It can be put as follows
(Dominiak, 2013; Dwivedi et al., 2017; Shahzad et al., 2017; Chou et al.,
2020; Agarwala & Chaudhary, 2021; Feng et al., 2022a, 2022b; Xu et al.,
2022; Wang et al., 2022):

1. The area of “achieving, maintaining, strengthening, and consoli-

dating the competitiveness of the enterprise” through the appro-
priate shaping of the company’s resources and skills, appropriate
use of sources of competitiveness and shaping the current market
competition strategy;
2. The area of development of the production and market structure
of the company for production companies or the service and market
structure for a service company or the trade and market structure for
a company with a commercial profile, through the implementation
of new products, access to new markets, or new segments thereof;
3. The area of changes in organizational forms and management
structures is to lead to expansion, but also mergers and acquisitions;
4. The area of formation, according to long-term goals, of sophisti-
cated components of the environment;
5. The organizational culture, entrepreneurship, IT, industry orienta-
tion, technology adoption decisions, social media, and consumer
behavior;
6. The area of sustainability, an important element of influencing the
environment, shaping business responsibility, constituting the basis
of the business model, and building bonds with financial institutions
and potential clients.
 5 FUZZY LOGIC IN BUSINESS ETHICS 83

Different methods that are used in the fuzzy approach solve different
decision problems. The approach to the problem builds a distinguishing
feature of different types of decisions made in different industries. In
Table 5.3application of the fuzzy approach in solving various decision
problems was presented.
All three sectors have a common element that they must analyze in
their decision-making processes. It is the environment and the impact of
the ESG factor on commercial, production, and sales processes. However,
due to the specificity of these industries, the knowledge base (rule base)
may differ in the content of variables. However, the common applica-
tion is mitigation against climate change, compliance of decisions with
environmental requirements, or taking into account ESG factors and
reporting in operations. It should be pointed out that, in addition to
the use of different methods to solve various problems in the produc-
tion, service, and trade sectors, differences in the input-knowledge base
(base of the rules) should be acknowledged. This fact is indicated by the
approach used by Li et al. (2018), which shows two approaches to trade
and production. The procedure for applying the fuzzy approach is the
same, i.e. as described in Fig. 5.1.
It should not be forgotten that some decisions are shared in the process
itself. These decisions include personnel decisions or decisions in the field
of logistics. Here, both the methods and the scope of decision-making,
or some of the knowledge bases (base of the rules), may be similar.
However, the differences will always result from the specificity of the
industry, region, as well as the specificity of the entity itself (including
its size).
At the end of the presented analysis of the problem of differences
and similarities in the application of the fuzzy approach in enterprises
from the production, services, and trade sectors, general barriers that all
three sectors may encounter in the fuzzy approach application should
be pointed out. The studies analyzed in this chapter show the following
problems as barriers to the use of the fuzzy approach: limited resources,
bureaucracy, lack of appropriate competences of decision-makers, inap-
propriate organizational structure, size of the company, and the legitimacy
of using the approach in relation to the inputs related to the achieved
effects, the occurrence of conflicts (competency conflicts or in the
selection and selection of variables for the knowledge base).
 84

Table 5.3 Application of the fuzzy approach in solving various decision problems

Sector type Authors Description of the problem being solved (method)

Production Marek-Kolodziej & Determining the order of execution of orders. Orders prioritizing in
sectors Lapunka (2020) manufacturing and service providing enterprises based on financial and beyond
financial factors, METLAB was used
B. Z. FILIPIAK

Rogowska Enterprise inventory management, logistics

Adenso-Dı́az et al. (2004) Application of fuzzy approaches to production planning in complex industrial
environments
Chen (2019) A fuzzy approach for production planning was used
Solomon et al. (2019) A Fuzzy Approach for Solving Production System Problem was used
Li et al. (2018) Solving an integrated production, mathematical models with multi-objectives
(including optimizing the production cost, processing time, and customer
satisfaction), NSGA-II algorithm, a crowd density sorting method based on
improved niche dimensions were used
Zegordi et al. (2010) A production and transportation scheduling problem was analyzed, using a mixed
integer programming model was established
Services sectors Jakšić et al. (2016) An approach to comparative research was used, in particular, the assessment of
banks respecting the relative importance of financial performance and their values
was made;
model based on Fuzzy Technique for Order
Performance by Similarity to Ideal Solution (FTOPSIS)
Bhattarai and Yadav Usage of FAHP application is growing, especially in the situation of global
(2009); financial crisis.
Chatterjee and Mukherjee,
(2010);
Sector type Authors Description of the problem being solved (method)

Hsu i Lin (2006) Presented a fuzzy multi-criteria approach for measuring consumer perceived
travel risk
Chou et al. (2008) Using the fuzzy multi-criteria decision-making model
(FMCDM) for the selection of hotel locations by international tourist
Ziyadin et al. (2019) Models of sustainable tourism development strategic management were
constructed, combination of the results of economic benefits with environmental
and social indicators was shown, Fuzzy Logic Toolbox environment of MATLAB
was used for the modeling process
Kowalczuk & Orłowski Described the model of information technology management (MITM) and its
(2014) component models (contextual, local) describing initial processing (IPP) and the
Client–Supplier/Provider–Project (CSP) maturity capsule as well as a
decision-making system represented by a multi-level sequential model (MSM) of
IT technology selection, which eventually acquires a fuzzy rule-based
implementation
5

Hallerbach (2004) Suggested a multi-criteria decision framework for managing an investment

portfolio in which the investment opportunities are described in terms of a set of
attributes, and part of this set is intended to capture the effects on society
Rodríguez-Cándido et al. Applying a fuzzy approach to the decision-making process on stock and
(2021) cryptocurrency markets
Trade sectors Makhazhanova et al. Lending to small businesses operating in trade
(2022)
Tomasiello & Alijani Showing the application of different fuzzy-based approaches for agri-food supply
(2021) chains
Nuroğlu & Kunst (2012) Applying a fuzzy approach to analyze the effects of exchange rate volatility on
international trade flows

(continued)
FUZZY LOGIC IN BUSINESS ETHICS
85
 86

Table 5.3 (continued)

Sector type Authors Description of the problem being solved (method)

Naranjo et al. (2018) Fuzzy modeling of stock trading

Shukla et al. (2014) The use of fuzzy approach in improving overall supply chain performance,
coordination of supply chain of trading partner plays a crucial role, application of
B. Z. FILIPIAK

TOPSIS and AHP

Li et al. (2018) Solving an integrated distribution, mathematical models with multi-objectives
(including optimizing the production cost, processing time, and customer
satisfaction), NSGA-II algorithm, a crowd density sorting method based on
improved niche dimensions were used

Source Own elaboration

 5 FUZZY LOGIC IN BUSINESS ETHICS 87

5.3 Implications of the Fuzzy Logic

Approach in ESG Risk Management Process
ESG (Environmental, social, and corporate governance) parameters are
involved: in investing-related decision-making, concerning alternative
business models, choices of alternative policies or strategies. Factors, and
especially their impact, recognized as ESG factors are related represents a
complex task, which should be studied under severe information shortage
(which is why a fuzzy approach is used). It is increasingly difficult to treat
ESG factors as less important. But not every ESG factor will have the same
impact on a small or large enterprise, on a given industry or region. Thus,
individual ESG factors should also be considered as parameters completely
or it takes it as less important. (Škapa et al., 2023).
It is indicated that for uncomplicated decision-making problems
concerning climate impact or environmental issues, including ESG risk,
simple, straightforward, and easily understandable common sense algo-
rithms, of different natures, represent a significant advantage (Miller
et al., 2013; Škapa et al., 2023). ESG experts, especially at the very
beginning of any analysis, a decision-making process, do not use math-
ematical/formal models as the basic framework for their reasoning for
just uncomplicated environmental goals and decisions, which means that
the basis (draw heavily) on knowledge represented by common sense of
the decision-making process. (Bredeweg & Sales, 2009).
The impact growing of non-financial factors, crisis situations, as well
as the unpredictable course of classic risks burdening the activities of
business entities means that ESG risk is increasingly identified as part
of the risks to which enterprises are exposed. Among the factors that
determine ESG risk, the impact of environmental risk was identified the
earliest and the following factors were referred to: climate change, envi-
ronmental pollution (air, water, land), environmental degradation, and
resource scarcity (Bua et al., 2022; Escrig-Olmedo et al., 2019). In
numerous studies, environmental risk is presented in the context of risk
management process (Annamalah et al., 2018; Poon et al., 2022; Srinivas,
2019). The second element of ESG risk is social risk, the impact of which
began to be analyzed separately, and only later was it recognized as an
important non-financial factor affecting the scope of economic activity of
enterprises. Currently, it is analyzed in the context of the impact on the
decision-making process in a broad concept and has the potential to grow
the fastest. (Society for Corporate Governance, 2020; Cohen, 2022).
88 B. Z. FILIPIAK

Governance risk is closely related to the decision-making process and is

considered as an important factor affecting the quality of the decisions
themselves in the context of: employee relations, relevant staff compen-
sation, tax, and legal compliance, (Karwowski & Raulinajtys-Grzybek,
2021) the prevention of corruption and bribery, transparency (Muñoz-
Torres, 2019, Society for Corporate Governance, 2020) risk management
(Srinivas, 2019).
Decision-makers, politicians as well as entrepreneurs need environ-
mental data and ESG risk modeling data. The demand for data in the
decision-making process should be based on the ability to choose from
potentially competitive policies, from potentially competitive investments
or development programmes. There is also a need for specific deci-
sions, burdened with ESG risk, regarding changes toward sustainability.
Appropriate methods for comparative assessment of such policies, invest-
ments, or programs are therefore needed (Browne & Ryan, 2011; Chalabi
et al., 2017). These methods include cost-effectiveness analysis (CEA),
cost–benefit analysis (CBA), and multi-criteria decision analysis (MCDA).
The literature on the subject points to the imprecision of the ecolog-
ical impacts and the frequent lack of quantitative information (especially
in the area of ESG risk and the programming of legal rules regarding
the ESG area), fuzzy theory provides a useful approach to the envi-
ronmental impact evaluation. It is advisable to use a fuzzy approach to
define the environmental parameters through fuzzy numbers (Enea &
Salemi, 2001). It is also advisable to use a fuzzy approach when decision-
makers should use flexible approaches to decisions designed to improve
environmental quality having regard to uncertainty. (Fisher, 2006).
Considering the fact that risk management is a planned and a struc-
tured process aimed at helping the managers (decision-makers) and teams
makes the right decision at the right time to identify, classify, quantify the
risks and then to manage and control them. A particular risk is ESG risk,
the theory of which is still developing and needs to be refined. The aim
is mitigation against risk indicators, in particular limiting the impact of
ESG risk and climate risk on the entity’s operations. Risk management
is a continuous process which is to be implemented in any project from
inception to completion. However, in order to realize the full potential
of entities (enterprises or institutions), ESG risk management should be
implemented together with the classic risk management process. Risk is
an uncertain event or condition that, if occurs, has a positive or negative
effect on entities objectives. (Srinivas, 2019) This postulate is presented
 5 FUZZY LOGIC IN BUSINESS ETHICS 89

in Fig. 5.3. Taking into account the definition formulated by Zou et al.
(2014), indicating that the risk management process is “a systematic way
of looking at areas of risk and consciously determining how each should
be treated”. Moreover, they point out that this process provides tools
that allow identifying sources of risk and uncertainty, determining their
impact, and developing appropriate management responses.
Thus, the indicated approach in Fig. 5.3. Requires the inclusion in the
decision-making process of new tools that will strengthen the cognitive
and decision-making value.
Most of the ESG ratings and data providers provide reports and data.
This increased transparency undoubtedly paves the way for a better oppor-
tunity to scrutinize approach to ESG risk, with the focus being on: (1)
the differences across firms on what ESG factors are considered mate-
rial, (2) the measurement of ESG factors, (3) the weight given to ESG
factors, and (4) the sources used to carry out the evaluation. This creates
an opportunity to build a decision support area in various types of entities
for fuzzy approach. Because independent ESG ratings and independent
data provider function side by side, there is a lack of consistency and
uniform presentation rules of provide reports and data. (Berg et al., 2019)
This creates uncertainty and makes it possible to use fuzzy approach for
decision-making purposes.

a new
ESG risk factors approach to
risk
management

risk factors taking into

classical factors,
account ESG risk and
recognized in the risk
climate risk in the risk
management process
management process

Fig. 5.3 Inclusion of ESG risk in the risk management process in entities
(Sources Own elaboration)
90 B. Z. FILIPIAK

The introduced ESG reporting standards and agreement on what

should be deemed as material for each sector has led to ESG data
regarding risk are difficult for companies to manage their narrative
on sustainability and determine how best to allocate internal resources
regarding sustainability reporting. It can be stated that there are some
common and separate approaches (elements) regarding the inclusion
of ESG risk in the risk management process using a fuzzy approach.
The postulates of including ESG risk in process risk management using
different method are presented in Fig. 5.4.
Effective management of risks would be possible if these risks are
managed using a fuzzy approach. Accordingly, classic (i.e. previously
recognized risks, such as customer risk, market risk, or financial risk) are
allocated into different project phases of production, service, or commer-
cial as per their possible time of occurrence. Many risks may arise over
time, and in addition, the fuzzy approach allows you to consider risks
both typical for a given industry and related to the market, as well as
allows you to estimate the ESG risk (even by using a fuzzy approach).
Given the increasing importance of ESG data and ratings, the use of a

Plan risk
qualitative risk
management assesment
using the
knowledge bases
Outcome of
(evaluate of risk, supplementing the base
in entieties ranking), posible
(base of the
rules) - using a
the risk
(enterprices, using of fuzzy
base)
fuzzy approach response
institutions)

risk respons
identify risk - qualitative risk planning
traditional and assesment (idenrtify monitoring and
ESG risk (use (likelihood, options, select controlling of the
info. from fuzzy impact, level of the best strategy risks
base) risk, factors, ESG) or choosing the
optimal path

fuzzy approach application directions

Fig. 5.4 The postulates of including ESG risk in process risk management using
different method (Sources Own elaboration)
 5 FUZZY LOGIC IN BUSINESS ETHICS 91

fuzzy approach in risk management allows for: (1) an overview of the

ESG data and ratings landscape; (2) key takeaways for companies to navi-
gate this increasingly difficult issue; and (3) combine traditional risk (so
far included in the analyses, referring to the specificity of the activity) with
ESG risk. The use of the database will be supplemented with information
from the analyses carried out, which will additionally affect the quality of
decision-making in the future (as shown in Figs. 5.2. and 5.3).
The literature on the subject points to methods typical for risk manage-
ment. In order for the approaches indicated in Fig. 5.4. were full, they
should be supplemented with a presentation of methods, tools, and
techniques that will be characteristic of combined risks, i.e. ESG risk
and classic risk, typical for the industry. This approach is presented in
Table 5.4.
As already indicated, the fuzzy approach gives the opportunity to look
more broadly, including its processes, products, and services, but also
customers, contractors, government relations, or external economic enti-
ties, in order to diagnose and use gaps that entities have not yet noticed
(Fig. 5.5).
These key risks, affecting the production process or the provision of
services, are categorized into important areas from the point of view
of the decision-making process, but also from the point of view of the
product life cycle. It is easy to judge that a majority of risks occur in
the pre-operation stages, but also ESG risk factors show that they have a
significant impact in the first and last phases, when products and services
reach the final recipients.
It should be remembered that each type of enterprise (trade, service,
or production) has its own specific key risks. It also has specific processes
that are affected by risk. On the other hand, customers (clients), suppliers,
contractors, or stakeholders (owners) are the common area of risk impact
in various types of enterprises. In addition, regulations related to exclu-
sion, social responsibility, ESG factors, and externalities are a new, poorly
structured area that requires special support. It should be remembered
that the use of a fuzzy approach is to lead to the achievement of
decision-making goals in operational and tactical terms.
The indicated areas carry a potential risk, but are also burdened with
the possibility of a potential occurrence of uncertainty resulting from
inference (abductive reasoning), or data uncertainty resulting from the
fact that they are missing, incomplete, or incorrect. The use of fuzzy
approach variables in this respect allows to take into account both data
 92

Table 5.4 Identification of common risks (classic and ESG): methods, tools, and techniques

Parameter Methodology—traditional (classic) Methodology—fuzzy approach

approach

Documentation reviews (Inputs) Structured review of These requirements confirm the

documentation, study of history of need to conduct a reliable analysis
execution of similar processes and of the financial and business
B. Z. FILIPIAK

projects, and quality of plans as impact of ESG factors on the

well as the consistency between company’s value and strategy.
those plans and activities Documentation and existing
requirements/assumptions would procedures are analyzed. First of
be an indicator of risks; taking into all, it will be necessary to include
account the relationship between non-financial factors in an orderly
activities and the strategy and and holistic manner in operational
business model. processes. Without a long-term
management vision and a
connection with the business
strategy, there is no value security.
The use of the fuzzy approach
gives the opportunity to look
more broadly, including the
company’s operations, its
processes, products, and services,
to diagnose and use gaps that the
competition has not yet noticed
(Fig. 5.5.)
The result will be the
reconstruction of documentation
and processes and the inclusion of
ESG in existing processes
Parameter Methodology—traditional (classic) Methodology—fuzzy approach
approach

Information gathering techniques • Brainstorming • Classical Zadeh’s (1965) fuzzy

• Delhi technique approach
• Checklist analysis • Cost-effectiveness analysis
• Cause and effect diagram (CEA)
• Questionnaires • Cost–benefit analysis (CBA)
• SWOT analysis • Multi-criteria decision analysis
• Expert judgment (MCDA)
• TOPSIS
• AHP
• NSGA-II
• MITM describing initial
processing (IPP)
• Client–Supplier/
Provider–Project (CSP)
5

• Multi-level sequential model

(MSM)
• Fuzzy multi-criteria
decision-making model
(FMCDM)
• Fuzzy Technique for Order
Performance by Similarity to
Ideal Solution (FTOPSIS)

(continued)
FUZZY LOGIC IN BUSINESS ETHICS
93
 94

Table 5.4 (continued)

Parameter Methodology—traditional (classic) Methodology—fuzzy approach

approach

The output of quantitative risk Prioritized list of quantified risk • Risks list that poses the greatest • Positioning on the list of ESG
threat or presents the greatest factors
opportunity
B. Z. FILIPIAK

• Clustering of ESG and

• List of the risk with the greatest climate-related risks
impact on decisions made in
entities
Analysis results • Overshooting stated objectives • Insights gained through fuzzy
to acceptable levels logic and fuzzy arithmetic,
• Establishing a trend that leads using knowledge bases (base of
to conclusions affecting risk the rules)—using a fuzzy
responses approach and effect of fuzzy
• Historical data analysis gives approach
performance reflects new • Preparation the ESG report
insights gained through
quantitative process
• Preparation of the form of
quantitative risk analysis report

Sources Own elaboration onSrinivas (2019)

 5

Fig. 5.5 Consolidation of key areas of classic and ESG risks toward fuzzy approach using (Sources Own elaboration on
FUZZY LOGIC IN BUSINESS ETHICS

Zou et al. [2014])

95
96 B. Z. FILIPIAK

on historical results and relationships, as well as expert knowledge. Identi-

fying the possible occurrence of risks in each stage of the decision-making
process and making appropriate actions to cope with them are significant.
On the other hand, the process of mitigating and managing the effects of
crises is important as well as predicting the impact of non-financial factors
related to the impact of ESG risk on all areas of activity. In doing so, a
consolidation of key risks, stakeholders, ESG risk, and key areas of the
entity’s activity is shown in Fig. 5.5.
ESG risk has a feature that is described by the principle of double
significance (as shown in Fig. 5.4. This principle indicates that (1) the
subject (enterprise or institution) affects the environment and (2) the
environment affects the subject. This means that not all risk factors can
be quantified, so a descriptive approach is required, and this creates a
field for the use of a fuzzy approach. In particular, it is the risk factors
typical of the “S” and “G” factors that require a qualitative approach and
description. The basic areas (groups) of ESG risk common to enterprises
from various sectors and institutions are shown in Fig. 5.6.
But fuzzy logic has at least two limitations for decision-making process
and impacts ESG factors for processes in entities. One problem is its
strong reliance on subjective inputs. The literature indicates that this
problem in any type of assessment, and fuzzy methods might provide
more opportunities for the misuse of subjective inputs. (Mckone &
Deshpande, 2005) Moreover, it is indicated that good effects for the
decision-making process can also be achieved from the use of standard
statistical descriptions. The second limitation is the lack of certainty that
fuzzy logic will provide a full guarantee of obtaining the best solution to
a given problem. Based on fuzzy logic, we get closer to the optimum,
but there is no certainty that the provided risk solution will be the most
optimal.
Take into account the fact that taking into account ESG factors in the
risk analysis regarding all aspects of the functioning of entities on the
market is a global trend to transform the enterprises sector and develop
new sustainable business models, so as to protect the environment, but
also act with respect for the rights of society and while maintaining
corporate social responsibility.
 5 FUZZY LOGIC IN BUSINESS ETHICS 97

Groups of risk factor environment "E" Groups of risk factor society Groups of risk
•climate change, described by the "S"
impact of: CO2 (I), greenhouse gases factor
•human capital management
(I), energy consumption (I) and
(I+D) governmental "G"
energy efficiency (I), reduction in
waste (I), reduction in single-use •environmental, health, and •security (I+D) and
plastics (I), recycling (I) , Emissions safety (EHS) (I+D) cybersecurity (I +D)
Management (D), Climate Threats •diversity: diversity on
(D), Climate Opportunities (D) •corporate governance
supervisory boards (I),
•green products (I+D), gender equal pay index (I) (D) and policy (D+I)
•Natural resources: water use (I), •employment: job rotation •business ethics: good
supply chain and third-party practices (D), code of
(I), freedom of association
contractors (I+D), impact on
biodiversity (D), waste and pollution and collective bargaining (I), ethics (D), violations (D)
(I+D) job security (I+D)
•human rights (D)

D - descriptive
I – indicator

Fig. 5.6 The basic areas (groups) of ESG risk common to enterprises from
various sectors and institutions constituting potential “fuzzy base” areas (Sources
Own elaboration on Society for Corporate Governance [2020])

5.4 Conclusion
In recent years, many entity activities that need to run their business
taking into account environmental factors have changed, both trading,
service, and manufacturing enterprises have changed. Their links with
financial institutions have also changed. The basic feature of this change is
the growing influence of ESG factors with very high uncertainty of infor-
mation and business conditions. (Feng et al., 2022a, 2022b; Xu et al.,
2022; Wang et al., 2022).
Enterprises are moving away from their traditional business models,
taking into account ESG factors, but also seeing the need for creating
new value and new business connections, as well as fostering new values
toward sustainability. Growing risk in the classical sense and ESG risk
creates a new space for the development of decision support methods, but
also for filling databases with information for decision-making purposes.
A valuable solution, the use of which is growing, is the use of a fuzzy
approach in decision-making processes regarding the impact of ESG
98 B. Z. FILIPIAK

risk. As indicated by the literature review, the applications of the fuzzy

approach in the decision-making process are constantly increasing and
different methods are used.
Despite the ever-growing stock of new challenges, including expected
regulatory changes, commercial, manufacturing, and service enterprises
approach ESG risks, change toward sustainability and environmental
activities in a structured manner. Topics that enterprises are already
doing and should be doing with include, but are not limited to: (1).
building new business models toward sustainability, taking into account
the modeling of the impact of ESG risk on the conducted business; (2).
defining the potential impact of ESG risk based on a fuzzy approach
(fuzzy logic); (3). they should define their degree of integration of
sustainability into business and the impact of ESG risk on their business
(threats, the need to mitigate risks) using a fuzzy approach; (4). Impact of
ESG factors on pricing (integrated value) and evaluation for stakeholders,
which is important for managing relations with stakeholders.
Decision-making is becoming an important activity in the turbulent
environment where ESG risk is present, despite being applicable with
various updated technology advancements-assisted decision tools. Tech-
nology alone sometimes fails to deliver a decision without considering
human cognitive capability. But also cognitive abilities without adequate
quality of information will not be fully optimal. Fuzzy approach enabling
continuous measurement and correction of values, enabling the descrip-
tion of phenomena and processes that cannot be described by logic in the
classical sense.

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 CHAPTER 6

Cooperation Between Financial Institutions

and Companies: Fuzzy Business Models
ESG-Oriented

Beata Zofia Filipiak and Magdalena Ziolo

6.1 The Levels of Cooperation Between

Enterprises and Financial Institutions
Toward a Sustainable Perspective
Cooperation with banks is an integral element of enterprise operations.
However, the needs, as well as models of cooperation can be diverse. This
diversity is related to the specificity of the activity: trade, services, produc-
tion. Diversity can also be the result of factors such as politics, culture

B. Z. Filipiak (B) · M. Ziolo

Department of Sustainable Finance and Capital Markets,
University of Szczecin, Szczecin, Poland
e-mail: [email protected]
M. Ziolo
e-mail: [email protected]; [email protected]

© The Author(s), under exclusive license to Springer Nature 105

Switzerland AG 2023
M. Ziolo (ed.), Fuzzy Business Models and ESG Risk,
Palgrave Studies in Impact Finance,
https://doi.org/10.1007/978-3-031-40575-4_6
106 B. Z. FILIPIAK AND M. ZIOLO

and tradition, supplier specificity. An important factor differentiating

cooperation may be the ESG risk exposure factor.
Many authors see the success of doing business in business models,
but also in the effective cooperation of enterprises and financial institu-
tions. However, this approach or introducing the idea of sustainability
to business (Zoot & Amit, 2010; Gerster, 2012; Čihák et al., 2012;
Saebi & Foss, 2014) is nothing new, for example: how to “do busi-
ness” (Zott et al., 2011) and how to create financial value (Teece, 2010;
Wirtz et al., 2016), how to integrate into one whole basic elements
such as systemic analysis, planning, mapping communication as well as
configuration (Doleski, 2015) and how to use to create value a strategic
asset for competitive advantage and performance of company (Afuah,
2004). Models of cooperation toward sustainability financial institutions
and enterprising are also indicated (Zioło et al., 2023).
In view of the rapid changes in the environment caused by climate
change, significant exposure of the business to ESG risk, the need
to adapt to the changing requirements, trends or expectations of the
society, the answers to a number of decision-making issues are unclear
and ambiguous. They require the search for more effective methods
than before, and the existing business models, even those adapted to
sustainability, require verification.
Enterprises will increasingly look for financing instruments, green
products in which they could invest, as well as examples of good practice
or new knowledge that financial institutions can provide. The elements
of green finance require more transparency, more information from and
to the client, to the investor than is the case with traditional instruments.
(Ziolo et al., 2021).
Cooperation with financial institutions is a very important manage-
rial domain. The scope of this cooperation can be classified into various
categories, as listed below:

• Programmed decisions, which can be described as routine and

repetitive decisions taken by managers. (Kozioł-Nadolna & Beyer,
2021) These decisions are short-term, less tactical. They refer to the
issue of constant cooperation with financial institutions, sometimes
long-term cooperation.
• Non-Programmed decisions, which are typically one-shot decisions.
(Kozioł-Nadolna & Beyer, 2021) Their nature depends on the
subject of the decision. If they concern an investment that is related
 6 COOPERATION BETWEEN FINANCIAL INSTITUTIONS … 107

to a strategic decision (concerning in particular development), they

are highly structured and prepared. Changing the financial institu-
tion is related to the optimization of financing. “Non-Programmed”
decisions may also apply to the tactical sphere, when enterprises are
looking for a partner and want to verify a financial institution in
cooperation. These decisions are usually less structured.
• Decisions can also be made under pressure, in crisis situations and
can be about both short-term and tactical cooperation, but they are
less structured than programmed and are made in unforeseen condi-
tions. The essence of continuous cooperation between companies
and financial institutions can be analyzed from the point of view of
the needs associated with conducted business activity, in different
time horizons.

According to the classic division of financial services provided by banking

institutions and financial markets, they include (Kwiecień, 2019):

• the provision of daily services for the company in the sphere of

various financial operations,
• the possibility to use various kinds of available cash accumulation
forms
• and seeking sources of financing, both for current and investment
activity.

The literature on the subject points to many factors that guide customers
when choosing a financial institution. It is also indicated that it is
necessary for financial institutions to understand the preferences of the
customers to offer the services. (Kamakodi & Khan, 2008; Aliero et al.,
2018; Joseph & Mung’atu, 2018; Kwiecień, 2019; Zelie, 2023). There
are many factors that can be classified as economic (offer activity, price
conditions, costs of providing services for products and services), but also
those related to access to services (capital potential, location, the speed
and flexibility of decision-making) and promotion and marketing issues
(security and prestige, recommendations). The evaluation of the selection
criteria is visible, which can be defined as constant factors: economic, but
those that have developed along with a change in awareness, under the
108 B. Z. FILIPIAK AND M. ZIOLO

influence of the current situation and market pressure, as well as finan-

cial institutions themselves. The Fig. 6.1 shows the evolution of factors in
choosing a financial institution.
As indicated in Fig. 6.1 changes occurring in the environment of
enterprises and institutions caused by the European Action Plan for
Financing Sustainable Growth of 2018 and the Renewed Sustainable
Finance Strategy recently adopted by the European Commission intro-
duced a number of new regulations for financial institutions such as
banks, stock exchanges and financial markets. Responsibilities such as:
reporting information on the topic of environmental impact, decarboniza-
tion strategy and estimation of ESG risks and the impact of climate risk on
business mean not only additional costs, but also significant organizational
changes on the part of financial institutions as well as enterprises and insti-
tutions. These challenges affect the decision-making process regarding the
choice of the financial institution with which the company will cooperate,
but also the new business model of financial institutions, especially banks,
will make it necessary to influence the companies with which the financial
institution will cooperate.
In addition, the most important actors in the financial system (central
banks, commercial banks, pension funds, insurance companies or govern-
ment entities) are taking action to change financial products toward
sustainability. This influence is manifested in regulatory activities as well
as in the attitudes of financial institutions, such as banks or financial
markets. Changes are indicated by ESG benchmark reports and assess-
ments made by independent institutions. This responsible action changes
the level of cooperation between financial institutions and enterprises. It
can be pointed out that changes in the financial market ( Schoenmaker &
Tilburg, 2016; Stern, 2016), striving to change the business models of
financial institutions and the impact of central banks in response to the
actions of international institutions for the climate (Zioło et al., 2020), as
well as the classic approach to the factors of choosing financial institutions
allow for formulation of two levels of cooperation between enterprises and
financial institutions toward a sustainable perspective:

• passive adaptation to new business models of financial institutions;

• creative cooperation.
 externalities

17 SDG's

Economics
new funds for
sustainability
adaptive
6

transformation
towards circular new funds for
economy transformation
Promotion
Access to and ESG elimate taxonomy
services marketing Risk changes
issues new legal regulations towards
sustainability

good practices in
financial institutions

Economics

old criteria
Promotional
Behavioral
and Security

Governance /
Ecosystem/
Social
Environment
responsibility

new criteria

Fig. 6.1 The evolution of factors in choosing a financial institution by enterprises (Source Own elaboration)
COOPERATION BETWEEN FINANCIAL INSTITUTIONS …
109
110 B. Z. FILIPIAK AND M. ZIOLO

In Table 6.1 factors that are determinants of mutual cooperation between

enterprises and financial institutions toward a sustainable perspective are
included.
Passive adaptation to new business models of financial institutions is
an activity based on existing cooperation, and changes toward sustain-
ability result from the changing business models of financial institutions
(Fig. 5.2). It is financial institutions and their stakeholders that force
companies to change toward sustainability. Financial institutions are
changing their cooperation requirements, changing the assessment criteria
(access to financing products), pushing out customers who are "brown".
Along with the change of the financial institution’s business model, the
motives for cooperation, the criteria for cooperation change, but also
the activities stimulating changes that are transferred to customers begin.
Awareness is changing, the factor of social responsibility is gaining impor-
tance, the importance of ESG factors is growing and the product offer
is being modified, which is an important factor in influencing customers
(Fig. 6.2).
The level of creative cooperation includes mutual cooperation in
creating changes toward sustainability (Fig. 6.3). At this level, cooperation
covers both traditional needs, but taking into account the needs resulting
from changes in enterprises toward sustainability, as well as supporting
partners in managing climate and ESG risks, and exchanging data (infor-
mation). Entities cooperating create new opportunities for products and
services. They create cooperation networks for the development of new
financial products and services. An important area is promotion, proper
reporting, taxonomy and responsible promotion of good practices.
Under the influence of mutual cooperation and attitudes toward
sustainability, the values and business models of cooperating partners—
financial institutions and enterprises—are changing. This cooperation
means that the attitudes of other enterprises, stakeholders of financial
institutions and enterprises may change through good practices. It should
be remembered that the area of climate change, ESG risk management,
as well as focusing on the problems of achieving goals related to sustain-
ability raise a number of decision-making problems that require support
and it is not always possible to obtain clear data or obtain unambiguous
answers. Therefore, cooperation between enterprises and financial institu-
tions toward a sustainable perspective must be based on innovative tools
and use a different approach to the way of making decisions. This area
allows for a fuzzy approach.
Table 6.1 The factors determining mutual cooperation between enterprises and financial institutions toward a
sustainable perspective

Group of factors in Characteristics of the factors The point of view of Level of cooperation
cooperation between
enterprises and financial Financial institutions Enterprises
institution
6

Offer Selection of services; ease of M M M->C

obtaining loan/bonds issue;
wide range of product
Availability Working hours of the bank, O O A
speed of service and decision,
convenient branch location;
availability of parking space;
convenient ATM location
Channels Collaboration (access) using M M M->C
internet links; mobile
Costs Low interest rate on loan/ O->M (relative - the strategy of M A
bonds; low service charges; low higher service costs for
penalty charges customers qualified as
toward-unsustainability)
Safety Safety of fund; safety of O M A
transaction; reliability
Adjusting the offer to Innovative product; sustainable A N A
new needs products; green products

(continued)
COOPERATION BETWEEN FINANCIAL INSTITUTIONS …
111
Table 6.1 (continued)
112

Group of factors in Characteristics of the factors The point of view of Level of cooperation
cooperation between
enterprises and financial Financial institutions Enterprises
institution

Quality/service Good complaint handling; O M M->C

friendliness service efficiency; service
quality; friendliness personnel
Benefit Paying higher interest rate on O->M (relative -changes toward M A
savings account; automatic shaping benefit toward
procedures for managing sustainability)
financial surpluses
B. Z. FILIPIAK AND M. ZIOLO

Promotion / special offers Friendly relations, additional M (relative – toward M A->C

offers, shaping social relations sustainability)
Reputation Social responsibility; reliability; M N C
recommendation.
Group of factors in Characteristics of the factors The point of view of Level of cooperation
cooperation between
enterprises and financial Financial institutions Enterprises
institution

Additional services Additional services offered to M M C

clients, e.g., training, new
6

knowledge, consulting
Cooperation in the Risk management, support in N N C
mitigation of risks the mitigation of ESG risk,
shaping changes in terms of
impact on society and
improving the quality of
governance

Designations: M—qualitative changes of the cooperation factor toward sustainability; O—factor remaining unchanged; N—a new factor of cooperation
toward sustainability; A—level of adaptation; C—level of creative cooperation; M–>C—the factor of change leads to modification of the level of
cooperations; A–>C—flexible of change leads to modification of the level of cooperation; O–>M—flexible of change of factors
Source Own elaboration
COOPERATION BETWEEN FINANCIAL INSTITUTIONS …
113
114 B. Z. FILIPIAK AND M. ZIOLO

climate changes
ESG risk SDG's

impact of legislative changes

towards sustainability stakeholders building
(national/international ) the idea of sustainability

Bank Enterprise

Spheres of influence:

strategy strategy
business partners

distribution channels
business model business model
key activities / spheres of
activity

customer segments

strategic resources
creative
changes to taxonomy
existing
products cre a ti ng changes
new green i n mutual
product knowledge ESG risk
and
coope ration
base reporting towa rds
new customer services
service and s us tainability
evaluation
procedures
towards mentoring
sustainability activities

ne w s ustainable business models

ne w cooperation model - passive
=> cha nges i n products a nd ta xonomy and re porting
adaptation
s e rvi ces

Fig. 6.2 The passive adaptation level cooperation between financial institution
by enterprises (Source Own elaboration)

6.2 Mutual Influence of Enterprises

and Financial Institutions on Decision-Making
Processes from the Perspective
of Sustainability End ESG Risk
Since climate change causes unpredictable disturbances both in the envi-
ronment and in the business environment, the decision-making process
must be focused on taking into account climate risk factors. A number
of activities related to the implementation of the SDGs require time
to learn about their effects. Actions taken by financial institutions and
enterprises aimed at sustainability and ESG risk mitigation must be long-
term actions for two reasons. Firstly, one-off actions do not bring the
intended effects or benefits for the environment, society or entities under-
taking them (e.g., creating new value). Long-term operation allows for
 6 COOPERATION BETWEEN FINANCIAL INSTITUTIONS … 115

climate changes
ESG risk SDG's

impact of legislative changes

towards sustainability stakeholders building
(national/international)
the idea of sustainability

Bank Enterprise

Spheres of influence:

strategy strategy
business partners

distribution channels
business model business model
key activities / spheres of
activity

customer segments

strategic resources
creative
changes to taxonomy
existing
products crea ting changes
new green i n mutual
product knowledge ESG risk
and
cooperation
base reporting towa rds
new customer services
service and s us tainability
evaluation
procedures
towards mentoring
sustainability activities

new s ustainable business models

new cooperation model - passive
=> cha nges i n products a nd ta xonomy and reporting
adaptation
s ervi ces

Fig. 6.3 The creative cooperation level cooperation between financial institu-
tion by enterprises (Source Own elaboration)

increasing awareness, consolidating desired patterns of behavior, but also

consolidating bonds of cooperation and building a portfolio of products
and services based on the inclusion of sustainability. The cooperation of
financial institutions and enterprises allows for the development of joint
116 B. Z. FILIPIAK AND M. ZIOLO

activities for the recognition of ESG risk, its mitigation and impact assess-
ment, so that stakeholders will appreciate additional activities, which is a
side effect of investing in sustainable development. Secondly, enterprise
does not have to take such steps alone. It is looking for business part-
ners (financial institutions) who will financially support the undertaken
activities, have experience in mitigating climate risk and ESG risk and
additionally also often share the same environmental ideas, i.e., their busi-
ness models also consider the SDGs and activities for ESG risk mitigation
(ESG reporting, increasing transparency, impact on biodiversity).
As indicated in the literature (Ziolo et al., 2020), it should be expected
that both financial institutions and enterprises will have business models
tailored to the SDGs and ESG risk. This activity directing business models
to the SDGs and ESG risk will allow to achieve a business advantage is
experienced in sustainability and implementation of new environmentally
friendly development projects. Recognizing the strength of coopera-
tion, both financial institutions and their customers, and in particular
enterprises, will seek common elements, or even common ground of
understanding, which may be the area of ESG risk management and
presenting your achievements in this area.
Financial institutions, as participants in the Sustainable Banking
Network (sustainability knowledge network) interact with companies to
(SBN, 2023): (1) increase the efficiency of ESG risk management, (2)
increase the flow of capital toward financing pro-environmental and
socially responsible investments, (3) increase the level of knowledge about
sustainability, ESG risks by sharing experience and transferring good prac-
tices. In this area, financial institutions are influencing the dedications
of companies in terms of both short-term and long-term perspectives.
Table 6.2 provides a summary of the directional impact areas of financial
institutions and enterprises in the short and long term.
ESG risks must be analyzed in various perspectives of the activities
of financial institutions but also their impact on the enterprises them-
selves and their activities should be expected. Therefore, cooperation
and cooperation for the creative implementation of the idea of sustain-
able development requires taking into account all the above-mentioned
perspectives. This requests a holistic approach when embedding them
into the risk management framework both on the side of the financial
institution and the enterprise. This makes the ESG risk area and the
sustainability area an area of creative cooperation starting with a sound
risk governance and a sensible risk strategy before implementing these
Table 6.2 Areas of interaction between financial institutions and enterprises on decision-making processes from the
perspective of sustainability end ESG risk

Areas of interaction on Financial institution Enterprises

decision-making processes from the perspective
of sustainability end ESG risk

Developing measures of sustainability and (1) Action for development, (1) Knowledge of the metrics makes it
6

progress toward sustainability implementation, measurement; possible to adapt to the

(2) Adaptation to national and regional requirements of the institutions, but
specificities, inclusion of metrics in also to use this instrument to build
decision-making procedures for benchmarks with other players in
cooperation with actors the market in order to better
position themselves;
(2) A better assessment position gives a
better bargaining position for
obtaining funding to develop
toward sustainability.
Instruments for sustainable financing (3) Building instruments toward (3) Decisions to adapt one’s own
sustainability situation toward the requirements
(4) Development of credit risk assessment of financial institutions.
procedures for different financing (4) Strategic decisions to link the
instruments object of investment in sustainable
(5) Analysis of the bond market, social development with the offer of
and environmental financing financing instruments
instruments (5) Debt impact assessment
(6) Environmental impact assessment
and consideration of ESG factors related
to the planned investment toward
sustainability.
COOPERATION BETWEEN FINANCIAL INSTITUTIONS …

(continued)
117
Table 6.2 (continued)
118

Areas of interaction on Financial institution Enterprises

decision-making processes from the perspective
of sustainability end ESG risk

Data and disclosures related to sustainability (6) Collection and management of data (7) Use of good practice data on ESG
and ESG risk on ESG disclosures and risks disclosures and risks
(7) Improvement of procedures (8) Broadening its own knowledge base
with information and good
decision-making practices on the
impact of ESG risks.
Assessment of the implementation of the (8) Assessing the implementation of (9) To direct decisions toward existing
sustainable funding framework climate change financing procedures solutions, to take advantage of
B. Z. FILIPIAK AND M. ZIOLO

and regulations information offers

(9) Raising ESG risk management (10) Benefit from good risk
standards management practices and the
(10) Engaging the private sector in opportunity to present their own
financing sustainable climate change solutions
projects and activities (11) Be involved as a partner in efforts
to finance alternative sustainability
projects

Source Own elaboration on (SBN, 2023; Stojan & Iorgulescu, 2019)

 6 COOPERATION BETWEEN FINANCIAL INSTITUTIONS … 119

risks into the risk management cycle. To this end, common areas for coor-
dination should be prepared, especially financial ones, as well as those
related to sustainability and ESG risk. In Fig. 6.4 a holistic approach was
presented and development of changes taking into account the ESG risk
and the impact of climate change. Both financial institutions as well as
enterprises and their stakeholders are interested in developing sustain-
able solutions that allow the inclusion of both financial and non-financial
(ESG) factors in common standards, allowing to raise cooperation to a
new level.
The developed solutions increase the decision-making area, but also
affect the quality of decisions made, as financial institutions and enter-
prises increase the amount of information by using a common knowledge
base, which will contribute to a better implementation of these risks into
the risk management cycle. In addition, an important area related to the
risk management cycle is the possibility of using a fuzzy approach in the
processes of ESG risk management and environmental risks.
Including ESG factors in the decision-making processes of both finan-
cial institutions and enterprises themselves is a long-term process that
evolves and the scope of ESG-related information included in decisions
increases at its various levels. The use of a holistic approach as well as
support for this fuzzy approach process takes time and must take place at
the operational and strategic level.
The use of a holistic approach as well as support for this fuzzy approach
process takes time and must take place at the operational and strategic
level. It requires a period of transition after the first stage, at the level
of which actions are preventive and reconnaissance. The highest level is
the level that allows the implementation of new solutions. The Table 6.3
shows the levels of integration of ESG risk and sustainability in the
decisions of enterprises and financial institutions.
Cooperation in the inclusion of ESG factors from the sustain-
ability perspective in management, decision-making and risk management
processes brings measurable benefits to both partners. These benefits
apply not only to the mitigation and reduction of potential losses related
to the risk of non-financial factors. They make it possible to capture the
achievement of goals in the area of sustainability, faster adaptation to
changes caused by the transition to a circular economy, but above all,
they result in the selection and implementation of decisions that result in
the creation of a positive impact on society and the environment.
120 B. Z. FILIPIAK AND M. ZIOLO

FINANCIAL INSTITUTIONS STAKEHOLDERS ENTERPRICES

New financial ratios

Industry Financial ratios (towards
Financial ratios - Climate change factors sustainability end
basic causing excessive ESG risk- basic
impact risk exposure impact

the power of impact / force

influence - of change -
estimation estimation

Exposure to ESG risk

Cash flow figures Cash flow figures

change-inducing risk
Equity ratio investments Operating result Equity ratio
factors
Cash flow
risk factors that may
Revenue trigger changes ? prices
? Revenue Revenue

changes in the
changes that have industry
Short-term debt Lock-up of capital Short-term debt
occurred caused by ESG
risk factors

Gross margin other other Depreciation Gross margin

Other Other

Financial ratios - Financial ratios -

dedicated to dedicated to
cooperation cooperation
(limitation and (limitation and
specificity of specificity of
cooperation) Taxonomy, GRI, ESG cooperation)
reporting, new
collaboration solutions, Knowledge bases
other and currently supporting decisions,
ESG ratios (new unknown factors including bases based ESG ratios (new
assessment of on fuzzy approach assessment of
adaptation to adaptation to
sustainability sustainability
requirements) requirements)

Credit rating / Credit rating /

Evaluations Evaluations

Fig. 6.4 The holistic approach development of cooperation allowing to

improve the quality of the decision-making process between financial institutions
and enterprises, taking into account the impact of the ESG risk and the impact
of climate change (Source Own elaboration on [KPMG, 2021])
Table 6.3 The levels of integration of ESG risk and sustainability in the decisions of enterprises and financial institutions

The levels of integration Characteristics of activities Decision-making cooperation approach

Level 1—Basic response to climate • Adjustment actions taken as a result of • Institutional adjustment of financial
change and ESG risk factors the occurrence of ESG risk and caused entities under the influence of
(operational) by climate risk; supervisory institutions and
(type of cooperation passive) • Fragmented integration of activities with institutional regulations;
6

the areas of climate risk, sustainability • Financial institutions affect the

and ESG risk; adjustment changes of enterprises;
• Law-enforced adaptation (e.g., through • Decision-making compulsion toward
the need to implement taxonomies or sustainability, co-operation compulsion
GRI standards); toward sustainability, knowledge blurs
the impact of ESG risk, gathering
information and good practices;
• Base cooperation;

(continued)
COOPERATION BETWEEN FINANCIAL INSTITUTIONS …
121
Table 6.3 (continued)
122

The levels of integration Characteristics of activities Decision-making cooperation approach

Level 2—Active imitation (operational • Fragmentary perception of the need to • Implementation of good practices;
advantage over tactical) implement SDG goals on the part of • Implementation of standards;
(type of cooperation passive) enterprises, greater awareness of financial • Searching for information and building
institutions in this decision-making area; knowledge bases;
• Active imitation, development of • Lack of clear decision-making
standards, striving to integrate ESG risk standards;
into the risk management process, e.g., • Lack of an integrated decision-making
by developing policies dedicated to approach;
high-risk sectors and integrating these • Cooperation in the field of products
policies with the risk management and services offered by financial
B. Z. FILIPIAK AND M. ZIOLO

process; institutions;
• Increased awareness of the impact of risk
on the operations and shaping of the
financial institution–enterprise
relationship;
• Development of mechanisms for
controlling ESG risk and climate risk in
the activities and cooperation of entities;
cooperation in the field of ESG risk as
well as the implementation of SDG
objectives is fragmentary and
unsystematic;
The levels of integration Characteristics of activities Decision-making cooperation approach

Level 3—Systematic observation and • Risk is fully incorporated in partners’ • Application of integrated
development (tactical toward strategic) activities and their decision-making decision-making processes;
(type of cooperation passive toward processes; • Inclusion of ESG risk management
creative) • Addressing the issues of sustainability and procedures filling knowledge gaps
ESG risk in a tactical and strategic based on available sources;
6

framework; • No information exchange;

• Inclusion of non-financial risk and the • Use of decision support technologies;
implementation of ESG objectives as an • Cooperation in the field of products
element of business models with the and services offered by financial
processes of creating new value; institutions;
• Implemented taxonomy procedures, ESG
reporting and promotion of environmental
activities;

(continued)
COOPERATION BETWEEN FINANCIAL INSTITUTIONS …
123
Table 6.3 (continued)
124

The levels of integration Characteristics of activities Decision-making cooperation approach

Level 4—Creative cooperation and • The implementation of the SDG • Creative inclusion in sustainable and
impact on the environment (strategic) objectives has become the dominant ESG decision-making processes;
(type of cooperation creative) strategic decision-making area; the impact • Applying fuzzy approach in
of ESG risk is a dominant strategic issue; decision-making processes;
• Process integration focused on ESG; • Exchange of good practices between
• Integration with financial institutions in enterprises and financial institutions;
the field of mitigation, ESG perception • Creative imitation toward sustainability;
and reporting; • Exchange of approaches to improving
• Exchange of knowledge bases based on a the ESG risk management process;
fuzzy approach; • Permanent changes in decision-making
B. Z. FILIPIAK AND M. ZIOLO

• All decision areas have been processes based on the “idea of a

ESG-oriented (financial, organizational, learning organization” and flexible
HR, investment, cooperation with the adaptation to changes in the areas of
environment, value creation, etc.); sustainability and ESG;
• Creating new solutions and products • Supporting changes toward
(services) for sustainability and ESG risk sustainability and ESG with modern
mitigation; integrated decision-making methods;
• Promotion and communication, taking • Using only financial products and
into account sustainability and ESG; services toward sustainability and ESG
• Cooperation with the environment based
on values based on sustainability

Source Own elaboration

 6 COOPERATION BETWEEN FINANCIAL INSTITUTIONS … 125

The cooperation of financial institutions and the enterprise will not

only lead to qualitative changes toward the sustainability of the latter, but
will also bring systemic solutions, increase the cognitive value of knowl-
edge bases based on the fuzzy approach and improve the decision-making
process based on sustainability priorities, but also allow for the achieve-
ment of social goals. Mutual ties based on common pro-environmental
values create a platform for building new values toward sustainability.

6.3 Fuzzy Business Models

Using fuzzy logic to study business models is one of the research trends
in their analysis. Research on the fuzzy approach in business models is
modest, and more needs to be published in this area. Fuzzy logic is
suitable for analyzing business models due to many parameters of busi-
ness models that are imprecise; this applies, in particular, to sustainable
business models in which fuzzy parameters can be used in particular for
the analysis of non-financial components, i.e., environmental, social and
governance included among other things in The Triple Layered Business
Model Canvas (Table 6.4).
The Triple Layered Business Model Canvas is a tool for analyzing
innovative, sustainability-oriented business models. It extends the original
business model approach with two layers: an environmental layer based on
a life cycle perspective and a social layer based on a stakeholder perspective

Table 6.4 The Triple Layered Business Model Canvas—elements

Economic business model Environmental life cycle Social stakeholder business

canvas business model canvas models canvas

Partners Suppliers and out-sourcing Local communities

Activities Production Governance
Resources Materials Employees
Value proposition Functional value Social value
Customer relationship End-of-life Societal culture
Channels Distribution End-user
Costs Use Phase Scale of outreach
Revenues Environmental impacts Social impacts
Environmental benefits Social benefits

Source Own elaboration based on: A. Joyce, R. L., Paquin: The triple layered business model canvas:
A tool to design more sustainable business models. Journal of Cleaner Production, 135 (2016)
pp. 1474–1486
126 B. Z. FILIPIAK AND M. ZIOLO

(Joyce & Paquin, 2016). The TLBMC was proposed by Osterwalder and
Pigneur (2010). TLBMC offers an easy-to-use tool to support the inno-
vation of sustainable business models. First, as a multi-layered business
model canvas, TLBMC provides a straightforward and relatively easy way
to visualize and discuss a business model’s multiple and diverse implica-
tions (Joyce & Paquin, 2016). In each of the TLBMC layers, sustainable
value is built, which can be achieved through pro-environmental activ-
ities, e.g., implementation of eco-innovations, social activities, e.g., the
performance of social impact investment, or in the field of governance,
e.g., gender quota in the area of board composition, each of these activ-
ities can be analyzed using fuzzy logic tools, which gives a more precise
image of the organization and its achievements than traditional research.
Sen (2017, p. 104) directly referred to fuzzy business models, pointing
out that “The formal principle structure of a business model can be
represented with a set of causative (input, antecedent) and a single result
(output, consequent) variable” (Fig. 6.5).
Other research approach uses fuzzy maps to analyze business models.
Fuzzy Cognitive Maps (FCM) are used by Glykas (2004) as a primary
performance modeling tool to simulate the operational performance of
complex and imprecise functional relationships and to quantify the impact
of process reorganization activities on the business model. Preliminary
research indicates that the proposed hierarchical and dynamic network
of interconnected FCMs supports setting performance quantifications
that complement typical Performance Driven Change (PDC) projects’
strategic planning and business analysis phases. Vatankhah et al. (2019)
used the fuzzy AHP method to evaluate the composition of business
model attributes in the aviation sector and its corresponding hierarchy of

Trade

Economy Fuzzy Expected output

Cooperation business
Customer models
Market

Fig. 6.5 Fuzzy business models (Source Own elaboration on Sen, 2017)
 6 COOPERATION BETWEEN FINANCIAL INSTITUTIONS … 127

evaluation index. The paper proposes a procedure to diagnose the most

crucial attributes of airline business models including low-cost carriers.
Leppänen (2017) analyzes the interdependence and complementarity of
business model design themes and competitive strategies. Based on a
fuzzy set qualitative comparative study, the author analyzed high- and
low-performing configurations of 232 publicly traded firms of two sorts;
online businesses and computer companies. The paper concludes that
the absence of cost leadership is required for high performance and that
the expected high-performing combinations of the design themes and
strategies do not appear consistently effective. Husain et al. (2021) rank
business models for successful adoption of the circular economy based
on criteria using the appropriate Multi-Criteria Decision-Making Method
(MCDM). The research is based on a fuzzy technique of determining
the order of preferences according to similarity to the ideal solution
(Fuzzy TOPSIS). As a result, eleven business models were identified and
analyzed based on nine business model success criteria (Husain et al.,
2021). Córdova et al. (2017) applied fuzzy logic to analyze financial risk
(CAMEL model and risk rating) based on selected financial indicators.
The Authors conclude that fuzzy logic allows “understanding the busi-
ness information in a broader context, and not only evaluate the quantity
but also the qualities of the different ranges”.
Both financial institutions and the business sector can use fuzzy logic
to analyze their business models and build sustainable value. In the case
of financial institutions, activities aimed at creating sustainable business
models include, among others, the digitization of processes; using finan-
cial innovations to reduce the level of ESG risk; the economical use of
materials and energy; using modern technologies; pro-social approach to
customers and employees; care for staff; ethical action; offering sustain-
able products and services; incorporating ESG risk into decision-making
processes. The postulate of developing the risk assessment methodology
with ESG components is emphasized by the Environmental Program
Financial Initiative (UNEP FI).
Fuzzy logic may be used in several scenarios of cooperation between
financial institutions and the business sector, considering the impact
of financial institutions on enterprises’ business models through the
transfer of good practices. Examples of variables considering in analyzing
fuzzy business models are as follows (both for companies and financial
institutions) (Zioło et al., 2020):
128 B. Z. FILIPIAK AND M. ZIOLO

• offering environmentally friendly products and services;

• use of energy-saving technologies;
• reducing water consumption in production;
• supporting charity campaigns;
• saving office materials through the use of electronic technologies;
• application of employee-friendly policy;
• using innovation to reduce the risk of environmental pollution;
• selection of suppliers only from the group of CSR companies;
• selection of environmentally friendly distribution channels;
• using innovation to reduce negative impact on the environment;
• cooperation only with entities using the CSR strategy - corporate
social responsibility.

As part of their cooperation with clients, financial institutions are compe-

tent to define the terms of such collaboration (financial and non-
financial), considering the principles of partnership, ethics and good
business practices under the conditions dictated by the competitive
market. The terms of cooperation depend on many factors, including the
type of client, the scope of collaboration, risk and profitability. Consid-
ering that every enterprise conducting economic activity must have a bank
account for settlements, the scale of the potential impact of banks on
entrepreneurs is wide. Scenario 1 assumes that banks primarily influence
the transformation of companies’ business models toward sustainability.
These institutions will provide financing for social and environmental
projects. However, depending on the market and demand, sustainable
adaptation and funding of sustainable development will mainly concern
either pro-environmental or pro-social activities (development of finance
for environmental protection or development of social financing, respec-
tively). Scenario 2 assumes the dynamic development of sustainable
business models of companies based on the capital market. In this case,
it is also recognized that this development can be sustainable (applies to
implementing projects in both social and environmental pillars in parallel)
and unsustainable (projects from the environmental pillar dominate over
the social one or vice versa). In the case of the development of sustain-
able business models based on the capital market, the dominant role is be
played by the green bond market and the social bond market. Scenario 3
predicts that the development of sustainable business models will progress
moderately. The financial sector will be highly differentiated regarding
the degree of advancement of individual institutions in adopting and
 6 COOPERATION BETWEEN FINANCIAL INSTITUTIONS … 129

implementing voluntary regulations for sustainability. It is assumed that

some institutions will only adopt partial regulations due to their cost and
market potential (e.g., lack of customers reporting demand for sustainable
financial products and services). Compulsory laws will be implemented
following the requirements and will cover a significant part of the market.
Leading banks/institutions in sustainable financing will emerge, which
will dictate the strategies of operation and funding.
Common elements characterize the business models of financial insti-
tutions and enterprises. Entrepreneurs with sustainable business models
select suppliers according to the same key (having a sustainable business
model), which means they cooperate with sustainable financial institu-
tions. At the same time, financial institutions with a sustainable business
model cooperate with a sustainable “clean” business because the cost of
losing reputation risk is incommensurable with the costs created by the
risk of cooperation with clients from the “dirty business” sector.

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 CHAPTER 7

Conclusion and Recommendations

Magdalena Zioło

The ongoing demographic, climate, and socioeconomic changes have a

financial dimension and create a new type of risk, the ESG risk (Envi-
ronmental, Social, and Governance). Mitigating ESG risk and related
negative consequences like climatic, demographic, and socioeconomic
changes is done by implementing and respecting the postulates of sustain-
able development, especially implementing sustainable development goals
(SDGs). Such action requires a high degree of coordination and cohe-
sion between the activities of all market actors. Modern economies are in
the process of transformation to the requirements of sustainable growth
and development, and in this process, they face many challenges. For
example, this applies to issues such as the internalization of external costs,
the problem of measuring and valuing ESG risk, the lack of a compre-
hensive approach to sustainable financial reporting, and the dominant
short-termism in the decision-making process.

M. Zioło (B)
Faculty of Economics, Finance and Management of the
University of Szczecin, Szczecin, Poland
e-mail: [email protected]; [email protected]

© The Author(s), under exclusive license to Springer Nature 133

Switzerland AG 2023
M. Ziolo (ed.), Fuzzy Business Models and ESG Risk,
Palgrave Studies in Impact Finance,
https://doi.org/10.1007/978-3-031-40575-4_7
134 M. ZIOŁO

The transformation of the economy toward sustainability requires

financing, hence the critical role of financial markets in this process.
Currently, no market sector has been specified or has yet to undergo
adjustment measures to function in the conditions of ESG risk. Numerous
regulations of a mandatory nature facilitate this (EU taxonomy for
sustainable activities, the European green deal, The Sustainable Finance
Disclosure Regulation, others) and optional (numerous international
initiatives, e.g., The Principles for Responsible Investment). Regulations
substantially impact large entities, including financial institutions such as
banks or insurance institutions. This results in a change in the business
models of these institutions toward sustainable ones. The diffusion of the
sustainability process in financial markets results in sustainability spilling
over to other business sectors cooperating with the financial market.
Therefore, there are visible interdependencies between sustainability in
financial institutions’ business models and enterprises’ business models.
This phenomenon is associated with many unexplored threads; in partic-
ular, it concerns the challenges in examining changes in business models
under the influence of ESG risk. It is indicated that traditional research
methods need to entirely precisely allow to study of ESG risk and its
impact on business models due to deficiencies in databases, and inaccu-
rate or unclear data, hence the field for such methods as fuzzy logic. Fuzzy
business models are a phenomenon that needs to be better researched and
described; this field requires systematic research to bridge the research
gap. The monograph attempts to do so. As a result of the consider-
ations, three types of recommendations were formulated—general, for
companies, and financial institutions.
The general recommendations include the following issues: inclu-
sion of ESG risk in the risk management system and decision-making
processes; ensuring the compatibility of financial and non-financial
databases; adapting information systems to collect, process, and store
non-financial data; adapting accounting systems to the needs of non-
financial data, in particular, management accounting and changing the
perception of the role of accountants in organizations—a business partner;
using and offering sustainable product and services; building business
models based on the Triple Layer Business Model Canvas; building
a market advantage based on sustainability; using sustainable value to
build market position; inclusion of sustainability in the management
system, including strategic management; effective monitoring of sustain-
ability regulations; providing financing for business transformation toward
 7 CONCLUSION AND RECOMMENDATIONS 135

sustainability; communicating actions taken in the field of sustainability

and their consequences for the business; customer segmentation taking
into account the ESG risk criterion.
Recommendations for enterprises focus on activities in the field of:
monitoring business models in terms of ESG and creating ESG bench-
marks; cooperation with financial institutions for ensuring financing for
the transformation of business models toward sustainability; ensuring
the bankability of investment projects; reducing reputation risk; using
the relationship banking model to ensure sustainability; implementation
of early warning systems and internal ESG risk ratings; taking system-
atic actions to reduce the ESG risk in business; if possible, submit to a
sustainable rating assessment.
Recommendations for financial institutions concern the following
issues: conducting climate stress tests; analysis of acts in terms of ESG
risk burden; complying with international ESG rules and recommenda-
tions; participation in organizations associating environmentally friendly
and pro-social financial institutions; transfer of sustainable knowledge for
the enterprise sector; active role in stimulating the processes of greening
the economy.
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 Index

A C
accounting applications, 55 Canvas, 125, 126
advantages, 42, 43 Challenges in SBM development, 16
application, 3, 40, 43–47, 59, 64, 65, circular economy, 74, 75, 119, 127
68, 69, 79, 83–86, 98, 123, 128 climate risk, 88, 108, 114, 116, 121,
archetype, 15, 18, 19 122
company, 7, 13, 14, 18, 57, 67, 74,
82, 83, 92, 106–108
B company’s internal supervision system,
banking, 1, 3, 18, 20, 22, 23, 42, 54, 6
55, 69, 70, 107, 135 consolidation, 96
banking crises, 54 conventional business model, 13, 14
bank restructuring processes, 54 corporate social responsibility (CSR),
business, 1–4, 10, 12, 13, 15–21, 23, 2, 9, 18, 128
40, 55, 56, 58, 62–64, 75, 82, COVID-19, 1, 6, 47
85, 87, 92, 97, 98, 106–108, credit scoring, 20, 54, 58
114, 116, 126–129, 134, 135 crisis preventing, 66, 67
business model, 1–4, 13–18, 22, 74,
82, 87, 92, 97, 98, 106, 108,
110, 116, 123, 125–129, 134,
135 D
Business Model Innovation (BMI), decision making process, 4, 85
12, 14–16, 18 disadvantages, 42, 58

© The Editor(s) (if applicable) and The Author(s), under exclusive 151
license to Springer Nature Switzerland AG 2023
M. Ziolo (ed.), Fuzzy Business Models and ESG Risk,
Palgrave Studies in Impact Finance,
https://doi.org/10.1007/978-3-031-40575-4
152 INDEX

E fuzzy logic, 2–4, 29, 30, 34, 35, 37,

entity, 7, 13, 23, 79, 83, 88, 96, 97 39–43, 46, 53–55, 58–65,
environmental factors, 6, 97 67–69, 76, 77, 79, 80, 82, 94,
environmental impact, 45, 75, 88, 96, 98, 125–127, 134
108, 117, 125 fuzzy logic advantages, 64, 65
Environmental, Social, Governance fuzzy logic applications, 42
(ESG), 1–11, 18, 22, 74, 87–92, fuzzy logic applications in crisis
94, 108, 116, 118, 119, 123, prevention, 69
124, 127, 135 fuzzy logic disadvantages, 39
ESG factors, 2, 3, 7, 8, 10, 11, 13, fuzzy MCDM, 44–47
14, 18, 22, 23, 74, 83, 87, 89, fuzzy MCDM classification, 44
91, 92, 94, 96–98, 110, 117, fuzzy models in risk management, 60
119 fuzzy pay-off method (FPOM), 61
ESG risk, 1–4, 7, 18, 22, 73–75, 77, fuzzy set, 3, 29–31, 35, 36, 41, 42,
87–91, 96–98, 106, 108, 110, 46, 47, 59, 60, 76, 77, 79, 80,
113, 114, 116, 118, 119, 127
121–124, 127, 133–135
ethical banking, 22
ethics, 128 G
EU Taxonomy, 10, 134 Gaussian shaped membership
evaluation, 42, 43, 88, 89, 98, 107, function, 33
127 general decision theory making, 76
external, 16, 56, 80–82, 91, 133 green banking, 22
GRI taxonomies and principles, 75

F
finance, 1–4, 21, 53, 54, 106, 118, I
128 internal, 19, 56, 79–81, 90, 135
financial crisis, 57, 66, 67, 69, 84
financial institution, 1–4, 10, 17, 18, L
22, 23, 54, 57, 64, 66, 69, 74, linguistic variables, 35–38, 77–79
75, 82, 97, 106–108, 110–117, liquidation of banks, 54
119, 121–125, 127–129, 134,
135
financial ratios, 55, 67 M
financial standing, 56 machine learning techniques, 55
fizzy logic disadvantages, 43, 61, 63 matrix, 44, 80, 82
forecasting, 2, 3, 54, 55 membership function, 30, 31, 35, 37,
fuzzification, 78 38, 41, 59–63, 78, 79
fuzzy base rules, 37 methodology, 29, 36, 46, 54, 127
fuzzy business model, 3, 4, 126, 134 MiFID II package, 10
fuzzy inference systems (FIS), 61–64, models in fuzzy continuous-time
68, 69 (MFC), 60
 INDEX 153

models in fuzzy discrete-time (MFD), S

61 sector, 2, 4, 10, 17, 45, 55, 74, 80,
models in risk management, 57 81, 83, 90, 96, 118, 122,
monitoring, 2, 7, 40, 56, 62, 64, 66, 126–129, 134, 135
74, 134, 135 SFDR, 10
social factors, 6
social impact, 75, 125, 126
socially responsible banking, 23
N S-shaped membership function
non-financial factors, 7, 22, 87, 92, functions, 34
96, 119 sustainability, 2, 4, 5, 7, 10–12,
non-financial risk, 7, 123 14–18, 20, 21, 23, 74, 76, 82,
Non-financial risk management, 7 88, 90, 97, 98, 106, 108, 110,
normalized fuzzy set, 31 112–119, 121, 123–125, 128,
129, 134, 135
sustainable business model (SBM),
1–4, 11–18, 22, 23, 74, 125–129
P Sustainable Development Goals
pandemic, 1, 6, 47, 69 (SDGs), 5, 10, 14, 15, 23, 75,
parameter, 35, 58, 62, 87, 88, 125 114, 116, 133
prediction, 2, 3, 54, 55, 58, 65–68 sustainable value, 18, 22, 126, 127,
production, services and trade sectors, 134
4, 80, 83
prospective, 82
T
The financial industry, 17, 18
The Global Risks Report, 7
The transformation of the financial,
R
17
recommendations, 4, 73, 112, 134,
three pillars, 22
135
trapezoidal membership function, 33
research, 3, 4, 7, 15, 39, 40, 43, 53,
triangular membership function, 32
54, 84, 125–127, 134
Triple Layered Business Model
Research subjects in the field of ESG, Canvas, 125
8 typology, 3, 80
retrospective, 82
risk management, 2–4, 7, 22, 56, 61,
64, 68, 73, 74, 87, 88, 90, 91, V
110, 113, 116, 118, 119, 122, value, 2, 7, 13–16, 18, 20, 23, 30,
123, 134 31, 34–38, 44, 55, 58, 60, 62,
risk management process, 4, 56, 66, 74, 76–79, 84, 89, 92, 97,
88–90, 119, 124 98, 106, 110, 123–125