Sustainable finance refers to financial services where ESG (environmental, social and governance) criteria is integrated into business and investment decisions. Therefore, those involved in sustainable finance will consider both environmental and social factors when making said decisions, which will further contribute to the investment made in sustainable, long-term activities.
Helping to ensure that both social and environmental factors are effectively considered, both public and private institutional governance is required, making up the “G” in the ESG acronym, and includes such issues as employee relations and management structures. Each of the three components within ESG are essential for sustainable finance and economic development.
Activities that could be classified as sustainable finance include the following:
- Sustainable funds
- Impact investing
- Green bonds
With issues surrounding inequality and climate change remaining prevalent across the world, sustainable finance can be of great help. Investing sustainably can not only offer attractive financial returns, but also helps to build a better future, supporting operations that want to make the world a more sustainable place. The University of Cambridge Sustainable Finance online short course offers a great opportunity to learn more about financial strategies that can create value for your organisation and society.
What Challenges Can Sustainable Finance Help Tackle?
Sustainable finance leads to an investment, and further a prolonging, of sustainable activities. It helps to fuel measures in tackling some of the biggest challenges across the globe, including our impact on the environment as well as social injustices. For environmental challenges, this can include mitigating climate change, as well as the risks associated with the environment on a broader scale. For example, natural disasters. For social challenges, sustainable finance can help to combat inequality issues, promote inclusivity and enhance labour relations.
Why Has Sustainable Finance Become So Popular?
Whilst sustainable finance has been an important issue for quite some years, with help from the Paris climate change agreement of 2015, the impacts of climate change both environmentally and economically have been amplified across the globe. This agreement raised awareness to this issue not only within society more generally, but also had a further-reaching impact on the finance industry; considering SDGs (Sustainable Development Goals) and climate change as influential factors in their investment strategy.
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The Paris climate change agreement was a landmark event, being the first universal and legally binding agreement concerning global climate change. The agreement lays out a framework to help avoid climate change reaching dangerous levels, attempting to limit global warming to 1.5°C, and to reduce greenhouse gas emissions by a minimum of 40% by the year 2030. Additionally, the agreement also includes a commitment to “align financial flows with a pathway towards low-carbon and climate-resilient development.”
In order to achieve the 2030 targets that were agreed in Paris, an estimated investment gap of 180 billion EUR per year will need to be filled, of which cannot be done solely by the public sector. Through such momentous actions as the Paris 2015 agreement, it’s easy to see where many have developed a key interest in sustainable finance, and how its benefits are becoming increasingly well-known across the globe.
Why Invest in Sustainable Finance?
Sustainable finance is a worthy concept within the modern-day world, helping to promote sustainable development as well as value creation within environmental, social and economic terms. Sustainable finance strives to improve the efficiency, and further prosperity, of the economy not only today, but throughout the longer term, all the while helping to protect the environment and improve social wellbeing.
Investing sustainably can help to support the economy and provide financial returns. Studies have shown that sustainable companies will often have higher employee retention rates, more customer loyalty, and less lawsuits and accidents, all of which can also help to facilitate a greater financial performance from the company.
In general, it’s also been reported that sustainable investments perform the same, if not better, than regular investments (on average), meaning there can often be a great deal to gain and not a whole lot to lose when making the switch to sustainable investing. Finance can be a powerful tool in helping to fuel sustainable outcomes across a range of different issues both socially and environmentally. The sector holds a unique and powerful influence over the ways in which business operates, and by investing sustainably, can help to further transform industries to operate in a more conscientious way.