The Basics of Sustainable Finance
What is Sustainable Finance?
What if investments could do more than just grow wealth? What if they could also promote sustainable development and improve inequality issues while simultaneously increasing companies’ share prices?
As the world faces challenges with climate change, the financial sector is transitioning towards sustainable finance to balance profit with purpose. Sustainable finance is the practice of evaluating environmental, social, and governance (ESG) factors when making investment decisions for an economic project or activity. Examples of each ESG factor are listed below:
- Environmental factors: climate change adaptation and mitigation, pollution prevention, and preservation of biodiversity
- Social factors: inequality, human rights issues, and consumer protection
- Governance factors: (involves both public and private institutions) management structures, employee relations, and compensation policies
Why is Sustainable Finance Important?
- The Bigger Picture — Long-term Viability
Traditionally, businesses aimed to maximize as much profit for short-term gains, regardless of the cost to society or the environment. However, rather than solely maximizing profits, some companies today adopt a holistic perspective to ensure their profit-generation methods are sustainable based on ESG factors. These factors enable companies to look ahead and consider all the consequences of their actions in advance, enhancing their ability to operate.
Since ESG standards emphasize environmental preservation, social equity, and corporate governance, companies that comply with these criteria may avoid environmental fines, legal liabilities, and reputational harm. Additionally, companies with ESG practices are more equipped to proactively anticipate and mitigate negative effects, such as economic recessions or natural disasters. Thus, considering ESG factors helps these companies ensure long-term viability and strengthen their economic systems so that they can withstand unexpected challenges more effectively.
2. Addressing Climate Change & Promoting Social Equity
The principles of sustainable finance prioritize investments in projects and companies that reduce greenhouse gas emissions, boost renewable energy, and increase energy efficiency.
For example, sustainable finance promotes investments in environmentally friendly technologies, such as solar glass panels, carbon capture and storage (CCS), and electric vehicles. Furthermore, sustainable finance supports investments that minimize inequality and improve community well-being. For instance, sustainable finance targets investments towards affordable housing developments and projects that offer job opportunities for marginalized communities.
3. Better Returns & Happy Shareholders
In 2020, the largest asset management firm in the world, BlackRock, conducted an analysis revealing that more than eight out of ten sustainable investment funds outperformed share portfolios that did not follow ESG standards. According to data conducted by a financial service firm, Morningstar, businesses with high ESG ratings have experienced rapid share price growth over the last five years, as well as increased dividend payments to content shareholders. This research highlights the power of sustainable finance, as it can contribute to the success of companies and enhance shareholder engagement and satisfaction.
What Can You Do?
- Subscribe to the Youth Climate Action Team’s Medium Blog! YCAT will be releasing more articles centered on sustainable finance and other related topics to help people stay updated with the latest insights.
- Engage with Companies that Prioritize Sustainable Finance: Regarding jobs that prioritize sustainable finance, there are many opportunities within the accounting field. PricewaterhouseCoopers (PwC), announced a new strategy called “The New Equation” that aligns with their plan to hire more than 100,000 new employees to help with ESG challenges. For college and university, pursuing a minor in sustainability can help boost the chances of receiving an offer from companies such as PwC.
- Invest Responsibly: Investing in green bonds or sustainable funds can support firms and projects that promote environmental, social, and governance sustainability. Before investing in a company, conduct research on the extent to which their financial goals align with sustainable values.
