At present the world is facing growing challenges from climate change and social inequality. Our financial system can influence the existing economic model and shape the world we currently live in. There is a rising sense of urgency for people and businesses to find sustainable alternatives to environmentally damaging behaviors. To combat environmental issues businesses are increasingly looking for ideas and suggestions to integrate sustainability into the very core of their business operations.
Moreover, to prosper over time, companies will have to do more than just deliver financial performances. They must make a positive contribution in the society they are operating in. Keeping all this in mind, financial institutions have begun incorporating sustainable financial practices in their main area of strategic importance. Sustainable Finance will give market participants a chance to act responsibly and support positive change in day-to-day business activities.
What is Sustainable Finance?
The term Sustainable Finance refers to incorporating environmental, social, and governance (ESG) criteria in business and investment decisions for the lasting benefits of all stakeholders including clients and customers, employees, and society at large.
A sustainable financial center involves players in the financial industry, consisting of commercial, retail and private banks, contributing to sustainable growth and value creation in economics, environmental and social terms.
These sustainable practices will improve economic efficiency and competitiveness in the long-run, while simultaneously protecting and restoring ecological systems and fostering fair distribution and equality and inclusion in society and around the globe. Some of the activities that fall under the heading of sustainable finance are sustainable projects, sustainable funds, green bonds, microfinance, impact investment, and the development of the whole financial system in a more sustainable friendly way.
The private sector will play an essential role in redefining businesses by giving the necessary support to transition from exploiting resources to restoring the environment and society they work in Financing environmentally friendly projects has both financial and societal benefits, which is the reason why sustainable finance continues to gain attention.
Importance of Sustainable Finance
Nowadays, businesses play a crucial role in maintaining the ecological system of our planet. And, when they invest in local or global causes related to sustainability, they act as leaders of positive change, which in turn help them improve their brand reputation. Other than the environmental, societal and reputational benefits of investing in sustainability, organisations are also seeing financial benefits.
When it comes to sustainable finance, professionals look beyond the normal metrics of investments in order to include environmental, social and governance (ESG) ways as part of their analysis. It typically addresses the following concerns in the analysis report:
Environmental – Carbon emissions, Waste management, Energy efficiency, Pollution, and Deforestation
Social – Equality, Gender and diversity, Customer satisfaction, Working conditions, Human rights and Community relations
Governance – Board composition, Political lobbying, Tax strategy, Bribery and corruption, and Executive compensation
Moreover, businesses are now choosing to provide sustainability data in their annual reports, listing factors like business exposure, greenhouse gas emissions, raw materials, gender inclusion, social impacts on communities and waste. Integrating sustainability and increasing visibility by sharing information about performance against ESG goals, the organisation will not only gain the trust of investors and shareholders but also create a positive reputation with the public.
In addition, investment managers readily accept that considering ESG factors doesn’t hamper investment returns and can deliver risk and performance benefits and are compatible with fiduciary duty. The UN Principles for Responsible Investment go as far as to say that fiduciary duty requires investors to incorporate all value drivers, including environmental, social, and governance (ESG) factors, in investment decision making. As per a report by BCG (Boston Consulting Group), non-financial performance indicators are significant in predicting the valuation multiples of corporations in various industries. There are other pieces of evidence present that can confirm the financial benefits of ESG factors.
This means, even if companies were to turn a blind eye to any ethical imperatives in order to commit to ESG and for stakeholders to consider ESG factors, there appear to be significant financial rewards from adopting Environmental, Social and Governance as best practice.