Sustainable finance refers to any form of financial service that integrates environmental, social, and governance (ESG) aspects into business or investment decisions.
Sustainable finance is an umbrella term that includes:
- Environmental factors such as mitigation of climate crises, use of sustainable resources, preservation of biodiversity, pollution prevention, and the circular economy.
- Social factors such as human and animal rights, labor relations, investment in human capital and communities, and workplace inclusion.
- Governance factors such as employee relations, management structures, and compensation practices at public and private sector organizations.
As per the European Union’s (EU) policy, sustainable finance is described as finance that supports the economic growth of society without putting pressure on the environment and taking into account social and governance aspects.
Transparency is at the core of the sustainable finance ideology. This includes keeping the clients and stakeholders aware of any risks related to ESG factors that may have an impact on the financial system. At the same time also implementing a strategy for mitigation of such risks through appropriate governance of financial and corporate actors.
Growing Popularity Of Sustainable Finance
We live in an era where global warming and climate change have become a reality. “Going green” is no longer a fad but mother nature’s cry for help. Private and public sector organizations are aware of the role of finance in delivering this environmental and social impact.
But in addition to the social, environmental, and cultural returns that come with investing in sustainable finance, companies that focus on ESG issues are more highly valued and can perform better. According to an MSCI report, companies that invest in sustainable finance are more resilient as have a lower cost of capital due to their superior risk profile.
The Role Of Banks In Sustainable Finance
New government regulations are in support of sustainability for business and finance. For example, the EU plans to develop a climate mitigation classification system, a green bond standard, benchmarks for low-carbon investments, and guidance on corporate disclosure of climate-related information.
And in China as of 2020, all listed companies and bond issuers will have to disclose ESG risks to stakeholders and the government.
Since many industries depend on banks for financing aid, they can be a powerful tool in promoting change. They can blacklist industries that contribute towards environmental degradation, deforestation, or sectors that violate human rights. Instead, banks can support sectors such as microfinance, renewable energy, blended finance, and local industries.
The role of banks in driving sustainable development through finance is a crucial one. Many established banking institutions are leveraging the popularity of sustainable business and do offer sustainable finance solutions.
The financial sector holds the power to drive environmental, cultural, and social change. As more and more private and public organizations dabble with sustainable finance, the green revolution is now slowly transforming from a grassroots level to a highly impactful transformation.