Sustainable Finance: investing in the planet to get a better return
It may sound like a difficult concept, created for the top managers of financial institutions and corporate boards of directors. In fact, Sustainable Finance has a significant impact on all aspects of our lives, and we all have a role to play in ensuring it, as a key tool for improving the sustainability of our planet.
With social, economic, and environmental development as a backdrop, Sustainable Finance comprises all services, products, and financial decisions which incorporate sustainability criteria in their design or execution. They are a crucial tool for meeting global innovation or infrastructure improvement needs, while promoting the efficient use of available resources, minimizing negative environmental impacts, and contributing to the stability of financial markets. So-called traditional banking and financial organizations already offer Sustainable Finance products, but there are several startups focusing on this type of investment, which, like more classic investments, ranges from equity funds to securities and bonds. The difference is that they are driven by the wish not only to get a good return, but also to make a positive difference in the real world.
According to the UN - which in 2015 set out several Sustainable Development Goals for 2030 - the financing needed to achieve these goals “will greatly surpass all current development finance flows, but can be also raised from the large amounts of investable resources available globally.” Because financing and investment are relevant to the various SDGs, the UN has included Sustainable Finance in the 17th and final SDG - 'Partnerships for Implementing the Goals.' On the other hand, while the measures put in place by countries and companies are important for achieving sustainable investment practices, supporting countries and regions where financial difficulties pose an obstacle to sustainable development is no less crucial.
What are Environmental, Social and Governance factors of Sustainable Finance?
These are aspects/events that fall under the environmental, social and governance pillars and are associated with impacts arising from the development of the organization's activities (impact materiality), as well as with impacts that are external to the organization's environment and that may compromise its performance (financial materiality).
There is no common list of ESG factors, and it has also been noted that this list is not constant over the years. It is therefore dynamic.
In addition, it is not the same for the various sectors, because the issue of materiality is always taken into account when identifying sustainability risks.
It is a challenge to convert ESG factors into financial impacts:
| Easy | Difficult | Difficult |
|---|---|---|
| more efficient use of resources can be directly linked to the cost of raw material, energy and related savings | strong antibribery and corruption management, and independent directors on the board of a company | health and safety and good working conditions, which has a direct bearing on a company’s license to operate, its reputation and the motivation of its workforce. |
The power of sustainable investment
In recent years companies, financial institutions and governments have stepped up their investment in sustainability, in an effort to address societal challenges and the scientific community's warnings regarding the effects (some of which already irreversible) of climate change. Offering products and solutions to channel sustainable products and selecting sustainable investment opportunities are not only concrete initiatives toward change - in terms of energy efficiency, protecting natural resources, and reducing carbon emissions - but also clear signs of attraction for international markets. At the same time, society is reacting and coming up with initiatives which prefigure changes in the direction of public and private investment.
What is changing?
“(...) the trend now is towards impact investing and building in impact across the whole portfolio rather than putting a small portion of capital towards philanthropy.”
“Oliver Gregson of J.P.Morgan Private Bank identified five key drivers creating change in sustainable investing – our changing world, investor preferences, public policy, risk and return, and greater availability of sustainable projects in which to invest.”
“He said the risk and return agenda has moved on leaps and bounds, with profit no longer the primary driver for private clients. Investors now understand this is what good looks like going forward. He added that companies with high ESG [environmental, social and governance] ratings see better returns and experience lower risk.”