A catalyst for change?
There is much talk nowadays about sustainable finance – it appears to be of growing importance, as governments, businesses and individuals are engaging with it.
But let’s discover what it actually means, and how much it impacts the sustainability of our modern economics and – ultimately – how it impacts our planet.
Introduction to sustainable finance
Let’s start off with a definition put forward by the European Commission: According to their website:
…sustainable finance “refers to the process of taking environmental, social and governance -ESG- considerations into account when making investment decisions in the financial sector, leading to more long-term investments in sustainable economic activities and projects…”
This definition refers to the concept of ESG, which is an increasingly popular term and is often based on actual measurable factors, which can result in ESG ratings for corporations. Popular data banks include the MSCI ESG Rating and S&P Global ESG Scores, among others. These are more and more used in order to evaluate the prospects of investing in companies.
A higher demand for transparency
Focusing beyond ESG aspect, the element of transparency is also essential, especially in relation to risks connected to ESG factors. For too long, risk factors such as social or environmental costs have been neglected in the banking and investment sector. This often led to the externalization of costs but could also result in dropping stock prices for the responsible corporations.
Governments are engaging
Sustainable finance is moreover linked to several government initiatives, like the growth strategy presented by the European Commission. This European green deal aims to make the continent climate-neutral by 2050 and invests in sustainable projects.
“Ecological and political turmoil is going to fundamentally change the financial sector. Companies which are prepared to adapt will not only be doing their part to realize European climate protection goals, they will also be able to pioneer new business areas and improve their own reputation.” Ullrich Hartmann, Partner, Head of Sustainable Finance at PwC Germany
Banks are adapting
This quote highlights once more the importance of a sustainable transition in the financial sector. The change and increasing tendency can also be seen in the value of sustainable financing by Barclays PLC bank, with much higher values in 2020 compared to 2016. Similar trends can be observed in other global players. Overall, banks receive more external and internal pressure to adapt to the demands for more sustainability, leading to increases in sustainable finances.
Finances are essential
The financial services sector is a crucial part in the transition towards a sustainable economy, which makes these developments all the more important. Funding sustainable projects and businesses enables them to scale up, increasing their influence. In this manner, the banks have a guiding role in sustainability matters, by steering companies a certain way through finances. Ideally, they could serve as a catalyst for positive changes in the economy.
On an individual level
On another level, us as consumers also have the opportunity to make an impact: our purchasing decisions as well as our investment choices affect businesses. Consequently, we have the possibility to invest in green companies that are acting responsibly and strive towards sustainability. Also, we have the option to divest companies which do not align with our environmental and social values, or to pressure banks to do so as well.
Lastly, and similar to sustainable investments, there is the element of loans: For instance, banks could approach the stance of giving out loans with a lower interest rate to private individuals wanting to use the money for sustainable investments or purchases. Otherwise, they might do the same for companies with a sustainable business model. Through this method, sustainable developments are encouraged and facilitated.
Lastly, there are many more aspects to be discussed when it comes to sustainable finance. This article served more as a starting point for further research and aimed to introduce the topic. Overall, the financial services sector is currently undergoing huge changes, and the sustainable developments are able to have great spillover effects to other industries as well.
This month is about sustainability and financial institutions – become part of our Komoneed community to learn more and contribute by leaving some comments down below!
More specifically, we would like to know…
- Have you heard of the term ESG before?
- Does your bank also publish data on their sustainable financing? If yes, what does this data show?
- Are you currently investing in stocks? If yes, do you invest according to ESG assessments?
- What do you think about the EU Green Deal?
- Overview of sustainable finance | European Commission (europa.eu)
- ESG Scores | S&P Global (spglobal.com)
- ESG Investing: ESG Ratings – MSCI
- A European Green Deal | European Commission (europa.eu)
- Sustainable Finance – PwC
- Barclays-PLC-Annual-Report-2020.pdf (home.barclays)