Finance has remained apart from the sustainability trend for a long time. However, everything has changed. The world has started taking the climate threats of the future more seriously, as we are witnessing some of the significant manifestations of them today. The awareness of environmental, social, and governmental (ESG) challenges in society and business is increasing.
The financial sector has responded with sustainable finance as a hot topic for investors, financial companies, and corporations globally. It is considered a pivotal lever to impact sustainable outcomes and redefine business as restoring nature instead of destroying it. As this field of finance evolves, new financial terms and products emerge, more sophisticated and socially responsible. Impact investing, green finance, SRI and ESG investing - these concepts can define the future of finance and the planet.
What is Sustainable Finance?
Sustainable finance encompasses all activities of financial companies aimed to minimize harm to the environment, increase social engagement, and promote sustainable corporate governance. In the European Union’s policy context, sustainable finance refers to finance that maintains economic growth while decreasing pressures on the environment and taking social and governmental factors into account.
The environmental aspect implies climate change mitigation, pollution prevention, and preserving biodiversity. Social considerations include protection of human rights, issues of inequality, inclusion, and investments in human capital. Governance refers to employee management aimed to ensure the inclusion of environmental and social factors in the company’s decision-making process.
Sustainable finance can contribute to meeting the 2030 agenda for sustainable development and building a safe future for our planet. It is an important aspect of modern finance that can potentially scale to become a new imperative for everyone in the financial world.
Why Sustainable Finance Is Gaining Traction Today
The advances at the governmental and industry level are critical to helping sustainable finance gain traction. However, the choice and action of every single financial service provider makes a difference as well.
Individual organizations can access enormous opportunities while participating in the development of sustainable finance and sustainable thinking. There are multiple benefits for financial organizations of integrating sustainability. Based on an analysis of 656 companies conducted by the International Finance Corporation (IFC), companies with an environmental and social sustainability focus performed 2.1% better in terms of return on equity. Another evidence is a recent report from MSCI, according to which organizations focused on ESG are highly valued because they have a lower cost of capital due to their superior risk profile.
Sustainable finance plays a crucial role in reaching the climate and sustainability goals of the European Green Deal, which include the following:
- To decrease greenhouse gases by at least 40 percent as compared to 1990;
- To grow the use of renewable energy sources to at least 32 percent;
- To increase energy efficiency by at least 32.5 percent.
This can be achieved by channeling private sector investments into the shift towards a circular, climate-neutral, and resource-efficient economy. The urgency of sustainable finance development is also created by the need to rebuild the economy and ensure sustainable recovery from the consequences of the COVID-19 pandemic.
The financial sector will be the biggest driver for this global transformation as it plays an important part in funding it. The main focus should be on steering these funds towards sustainable investments.
The Role of Banks
Banks play a fundamental role in advancing sustainability. They own a powerful tool - financing - capable of bringing sustainable thinking and attitudes to a new level. They can invest in sustainable businesses and blacklist industries that expose nature and human existence on Earth to significant risks now or in the future. These industries include coal-fired power, agriculture sectors that participate in deforestation, as well as niches where human rights interference is common. On the contrary, they can fund industries that promote sustainability, such as renewable energy, microfinance, and waste recycling.
A number of banks have already acknowledged the risks of climate change and put sustainability at the heart of their decisions and activities. They reorient investments towards more sustainable businesses and technologies and integrate sustainability into investment advising processes.
Achievements and Future Vision
Along with the massive promotion of sustainability across different industries, the transition to a circular economy has already started. Although climate action is inconsistent in various aspects and needs to be massively increased to achieve the objectives of the Paris Agreement, we can also see important achievements so far. Low-carbon solutions and climate-neutral markets have sparked the years since the Paris Agreement has come into force. A sustainable approach offers many business opportunities for early adopters since there are increasingly more private investments in environmentally and socially responsible businesses. Also, there are more investments into the work related to research and development of innovations, technologies, and methodologies poised to establish a circular economy.
In 2021, we expect to see the rise of green retail banking. Green neo-banks and new investment models that target climate-conscious and tech-savvy customers will become more popular because people want their money to match their values today. ESG investing is gaining momentum as well. Last year, ESG stocks showed to be more resilient to economic shocks and addressed investor concerns related to climate change and social inclusion issues amplified by COVID-19.
Furthermore, financial companies that haven’t yet integrated sustainability considerations into their processes will be required to create or buy new tools to measure, monitor and decrease their impact on the environment and fulfill social goals which is required by new regulations such as the FCA’s TFCD.
How Hennii Supports a Shift to a Sustainable Economy
Hennii supports sustainability in finance by developing a social-financial technology powered by conversational artificial intelligence. With inclusion and accessibility as our key priorities, we created Hennii AI assistant to enable sustainability in financial services. We believe that the collaboration of tech innovators and socially and environmentally responsible banks can become a great input in a better future for people and the planet.