What is sustainable finance, what does it mean and why is it important?

Sustainable finance aims to achieve economic growth while reducing environmental impact, greenhouse gas emissions, and waste. This sustainable practice helps to protect the planet and its resources, create a fair society with equal opportunities, and drive sustainable change.

It is the moral duty of businesses, individuals, and organisations to reduce negative environmental and social impact and to play a positive role to make the world a better place for future generations. From a business standpoint, companies in the financial sector follow an ESG-compliant agenda to limit environmental damage and create a wider discussion about sustainable solutions.

With sustainable finance, investment from the financial sector, and their active involvement in developing sustainable business practices, global environmental and social issues can be eliminated. At this late stage, this is only possible with the compliancy of organisations, businesses, and countries worldwide.

Environmental, social, and governance (ESG) are the set of standards that measure a business’s impact on society and the environment, and how transparent and accountable they are. ESG is also used to evaluate the overall financial performance of organisations to determine their future. These pillars are often informally referred to as people, process, and product.

ESG framework attracts investors, builds customer loyalty, improves financial performance, and makes business operations sustainable. Following the ESG framework and business organisation strategy helps businesses manage their ESG commitments.

An eco-friendly enterprise should follow the highest environmental standards to reduce impact. This impact can be measured by conducting audits that confirm environmental compliance. Energy usage, carbon footprint, climate change, water management, pollution monitoring, and natural resource conservation should all be considered to abide by the ESG criteria.

The ESG criteria also state employee welfare, vendor relationships, local social welfare programmes, healthcare initiatives, and equality are all social factors that should be evaluated before business investments and decisions are made.

Transport accounting methods, business ethics, political influence, legal practice, and whistle-blower policies are the governance factors mentioned in the ESG criteria that sustainable businesses are required to follow.

ESG considerations are important to sustainable finance because they lead to long-term investments in sustainable economic activities. While promoting ESG factors, sustainable finance can provide businesses with financial returns. Whereas previously, business investors had to decide between making a profit and helping the environment, ESG pillars allow businesses to maintain growth and development while contributing positively to the environment and society.

The ESG performance of businesses in the financial sector is influencing investment decision-making, lending criteria considerations, and showing commitment to change. Businesses that are unable to implement ESG strategy are at risk of being costed out of business. Those who invest in ESG are more favourable to lenders and those who don’t will be vulnerable in the future.

All publicly listed companies are required to submit a report on ESG performance and already, banks and lenders are looking at ESG ratings when approving loans and bonds. The worse the ESG rating, the more expensive the loan and the risk of losing investors.

Considering ESG factors when dealing with sustainable finance allows businesses to measure the social, environmental, and governance impact of their sustainable business investment decisions.

Sustainable finance can provide businesses with better returns short and long-term by generating positive value in society and operating within ESG guidelines. High ESG ratings and compliance rates appeal to investors, consumers, stakeholders, and employees to improve financial performance.

Increasing consumer interest in sustainability is reflected in their purchases and brand alignment. Businesses with high ESG ratings provide lower volatility and low-risk exposure which translates to higher return rates. Low-rated ESG companies will be exposed to challenges and speculation which puts their existence at risk.

Investors have an increased interest in seeking opportunities and financial returns in businesses that have high environmental, social, and governance priorities. Taking an active role in key social and environmental issues such as climate change and social justice is appealing to investors for sustainable returns.

Companies that achieve high ESG scores can experience higher stock returns as the number of investors increases. Strong governance and a clear commitment to environmental and social change enable businesses to have higher valuations and reputations.