Sustainable finance, when put into practice, means businesses closely consider environmental, social, and governance (ESG) implications before making investment decisions. Essentially, companies focused on sustainable finance practices are looking to invest in a combination of economic growth while simultaneously working towards eliminating their environmental footprint.
It’s important to note that the practice of sustainable finance goes well beyond investment strategies. It also represents a more holistic approach to how companies position themselves, prioritize ethics and transparency, and make decisions focused on a more equitable future.
Benefits of Sustainable Finance
Sustainable finance has become a crucial aspect of business operations for more reasons than one. Adopting strategies that serve the environment isn't just about bettering the world – it can also offer significant advantages to a company's growth. Benefits include:
Financial Returns
One of the biggest advantages of sustainable finance is higher financial returns. Let's look at the real estate market as an example. ECO-friendly buildings, which are built to minimize energy and water consumption and have a positive impact on modern-day urban planning. Not only that, because they are less common, they tend to attract environmentally conscious tenants and maintain significantly lower vacancy rates, making the return on investment marginally higher than other buildings.
For publicly traded companies, evidence shows that companies investing in sustainable practices tend to perform better on the stock market.
Environmental Impact
A more obvious benefit when we think of sustainability is the impact it has on the environment. By investing in sustainable finance, companies could be promoting renewable energy, energy efficiency, environmental innovations, climate controls, and combating climate change, or potentially looking at other sustainable practices, such as green finance.
Social Impact
Sustainable finance practices also include the ability to make a positive social impact. Examples of this could include investing in initiatives that have a positive impact on local communities, focus on reducing social inequalities, or have positive impacts on labor practices.
Challenges with Sustainable Finance
Lack of Standardization & Data
One of the primary issues sustainable investing faces is the lack of standards for measuring ESG factors. There is currently no global standard for measuring sustainable finance, which has led the International Sustainability Standards Board (ISSB) to work on developing a comprehensive global baseline.
Since there is no credible way to evaluate ESG scores, it's easy for businesses to claim they are sustainable without having to be held accountable to specific standards.
Lack of Education
Education is key for the successful use of sustainable finance strategy. A mere decade ago, sustainable finance was considered a new transdisciplinary concept that was hard to place into already existing theories.
Although the situation has improved and more resources have become available in recent years, there are still many challenges when teaching sustainability. Since the topic is not standardized and has several methodologies, finding the perfect implementation method can be tricky.
Lack of Accessibility
Although one of the goals of sustainable finance is to make the economy more equitable, it has increased global inequalities in developing countries.
Before, high-income countries were in control of 80% of global assets. Nowadays, they are managing 97% of recently established sustainable investment funds. Meanwhile, Sub-Saharan Africa only has a tiny part (1.5%) of green bonds by number and even less (0.3%) by their value. The upside is that innovative financial tools (like sustainability bonds and debt swaps) could improve the long-term situation.
Proposed Improvements to the Challenges
Development of Standards
As mentioned before, one of the main challenges of sustainable finance is the lack of agreement on ESG data. Since there is no framework for analyzing and comparing data between different companies, it's tricky to measure the effectiveness of ESG. Beyond this, there are several other initiatives and proposals in the work to help combat today’s challenges.
Improved Education
There are several strategies that could help reduce the gap in education around sustainable finance. Ideally, sustainable finance topics should be integrated into already existing courses at universities and colleges to create a foundational understanding among future professionals. And, to tackle the generations already in the workforce, companies should invest in additional training for key employees and executives to better understand the landscape.
Increased Accessibility
Many countries around the globe still lack the technical and financial capabilities to invest in sustainable finance instruments. One solution to this problem has been to devote more resources to de-risk finance operations in developing countries.
It’s also critical to improve training and support services for officials, regulators, and other experts in these areas. Consequently, this will allow them to create more effective policies regarding sustainable financing.
Sustainable Finance Makes the World a Better Place
It's clear that sustainable financing is the future, in all meanings of the word. When implemented successfully, it can provide many benefits, including contributing to a better global economy, reducing environmental impacts, and tackling several social issues faced today.
The good news is that while there are challenges, the world is becoming a better place one step at a time. Sustainable finance is expected to continue its fast growth, and companies will need to adapt to new sustainability reporting requirements to manage the risks associated with greenwashing.
Summary
Sustainable finance is an ethical investment approach focused on environmental and climate protection.
The main benefits of sustainable financing are higher financial returns and positive environmental and social impacts, such as resource efficiency and reduced social inequalities.
Key challenges of sustainable finance include a lack of standardized ESG measurements, educational gaps, and limited accessibility in developing countries.
Addressing these challenges involves developing global ESG standards, integrating sustainable finance into educational curriculums, and enhancing accessibility support in developing countries. This will pave the way for a more sustainable future.
