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What Is Sustainable Finance? The Ultimate Guide

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Individuals, governments, and companies are becoming increasingly conscious of the importance of sustainability. More and more people are realising that a sustainable future for the planet and humankind needs a coordinated effort across all sectors and industries worldwide. 

Not only does the financial sector need to be included in this effort, but this sector arguably has the power to lead the world to a greener future.

There’s no denying that global commerce and industry play a major role in the climate crisis, pollution, resource scarcity, and environmental degradation. Therefore, a sustainable future means integrating sustainability as a core idea into the fundamentals of business operations and how they are financed.

Furthermore, the financial sector has the power to finance eco-friendly projects and critical research, as well as generate awareness of environmental issues and support businesses to become more sustainable. 

Let’s take a look at the sustainable finance industry, starting by answering the question, “What is sustainable finance?”

 

Sustainable Finance

What is Sustainable Finance?

In essence, sustainable finance is about making investment decisions based on environmental, social, and governance (ESG) factors. This is sometimes referred to as the triple bottom line. Rather than only focusing on the single bottom line of revenue and profit, this approach also considers the impact on the people and the environment.

This powerful movement encourages long-term investments that will, over time, create more sustainable economies. Sustainable finance also encourages institutional investors and economic regulators across the globe to manage their assets in a more sustainable way.

Sustainable finance takes into consideration:

  • Environmental factors such as the climate crisis, pollution and environmental degradation, as well as the sustainable use of the earth’s resources.
  • Governance factors related to employee relations, effective organisational management, and business practices, including fair and just labour laws.
  • Social factors encompassing the protection of all civil, human, and animal rights, diversity, and consumer protection.

In this way, sustainable finance aims to not only help the planet, but also offer greater returns to investors. BlackRock, the biggest asset management company in the world, found that during the pandemic 8 out of 10 sustainable investment funds performed better than companies whose share portfolios were not based on ESG criteria.

 

Why is Sustainable Finance Important?

Business does not exist in a bubble: it operates on earth, and therefore the success of any company is intertwined with the health of both society and the planet. Any risk to the environment can also be a business risk.

For too long, too many businesses have operated in ways that are harmful to the natural environment. Businesses and financial capital are exposed to unnecessary risk because of a failure to consider sustainability as part of their decision-making processes.

Sustainable finance has the potential to not only limit damage to the environment, but, more importantly, come up with solutions for a more sustainable future. 

A study by the IPCC showed to limit global warming to an increase of 1.5 degrees celsius a year, 2.5% of annual global GDP (nearly $2.4 trillion) must be invested in energy systems by 2035. An increase in temperature of more than this amount could have devastating impacts on the planet as well as on human and animal life.

Sustainable finance will help to create a circular economy that makes the most of the earth’s precious resources, and promote climate-resilient initiatives that ensure a sustainable future for the earth and everyone living on it.

 

Who are the Main Actors in the Sustainable Finance Industry?

The major actors in the sustainable finance industry include institutional investors, banks, international financial institutions, governments, and policy regulators. Some of these actors are responsible for implementing policies and regulating others to ensure a sustainable financial system.

Government policies like carbon pricing and subsidies for renewable technology help to support sustainable finance. Corporations can also play their role by investing in green initiatives, as well as developing their own. Though green investments involve large volumes of private capital, they will have immeasurable positive effects over the long term.

 

How Sustainable Finance Can Create Jobs and Support Company Growth

Sustainable finance is gaining momentum, and jobs in this area are on the rise. Businesses are looking for finance professionals who are familiar with this growing field and know how to integrate sustainability into how they do business.

Increasingly, organizations are looking for candidates with expertise in sustainable business thinking. They want professionals who can effectively manage, analyze, and report on business metrics relevant to greenhouse gas emissions, organizational culture, business ethics, gender pay disparities, and other ESG factors.

For companies, taking a sustainable approach allows them to more effectively manage risk, tap into the increasing market of eco-conscious consumers, and so promote long-term company growth.

How to Work in Sustainable Finance

Sustainable finance is the future. As the market for sustainable finance is growing rapidly all across the globe, the demand for green bonds has also accelerated. The sustainable finance sector is rapidly expanding, driven by new investment instruments, presenting a range of employment and entrepreneurial opportunities.

EDHEC’s MSc in Corporate Finance will provide you with the necessary skills to drive a company’s financial and sustainable growth.

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