“Sustainable Finance”, a term alien to a lot of us but a term that is the need of the hour. Sustainable Finance, like Sustainable Development is the sustainability of finance with respect to the environment. Continue reading to understand further!
“Sustainable Finance”, a term alien to a lot of us but a term that is the need of the hour.
Sustainable Finance, like Sustainable Development is the sustainability of finance with respect to the environment. Formally, it refers to any form a service related to finance, integrating environmental, social, and governance (ESG) criteria into businesses, firms, investments, and corporate decisions which would benefit both the client, and the society, as a whole.
Sustainability, all in all, should be the forefront of finance as both sustainability and finances are inter-connected. Greater sustainability leads to greater rapport with the clients eventually raising the finance opportunities. Greater finance, however, in return, leads to a more idealistic approach to not only think about profit maximisation but also contributes in greater things – survival of the nature. After all, if the nature does not survive, none of us will.
ESG factors do not hamper investment returns, rather delivers benefits, study shows. The International Finance Corporation conducted an evaluation that showed more than 650 companies with good environmental and social records performed more than 2 percentage points better than the ones who were way behind in the race of sustainable growth.
Environmental degradation is not a new realisation, and has been a concern for many years now. The raising concern persuaded The United Nations to introduce the concept of Sustainability through Finance. However, the concept of sustainable finance is comparatively new. The UN Global Compact, a non-binding UN initiative, was launched in 2000 which encouraged businesses worldwide to adapt ESG policies. The first Green bond internationally was issued in 2008 by The World Bank and the graph of the idea has only seen an upward slope since then. Despite that, there is still a long way to go in order to regenerate the lost touch.
The first truly global commitment to fight the climate crises took place in 2015, known as the Paris Agreement, which was signed by 197 countries, summarising to every single nation present on Earth including the war-zone Syria as the latest signatory. However, particularly in India, the concept came into picture only in 2015 when YES Bank issued India’s first ever Green bonds raising 160 million USD. This was the first step towards fuelling sustainable finance in our country.
The UN has taken great steps to inculcate sustainable finance in financial decisions by laying out a broad menu of principals, guidelines, things to be kept in mind while being associated with sustainable finance and the importance of it. They urge every firm, big or small, global or not, to play their respective roles in contributing towards the ESG criteria to make the world a better place, for us and for the coming generation.
The notion being discussed is extremely significant in the era we have been living in keeping in mind the increasing deforestation due to industrialisation, the depletion of ozone layer and rise in global warming, the wildlife in danger, the urban sprawl, increase in waste production, and the list is endless.
Sustainable Finance comes into picture to encourage betterment of the Earth and the biodiversity through financing business projects via sustainable/green bonds, sustainable/green loans, and sustainable/green equity. Such finances are provided to any enterprise’s projects coinciding with the idea of a positive social change in the environment and work on the basis of a particular Green Loan Framework. Such financial instruments have been gaining popularity in the recent years as almost
every corporate institute now has a Corporate Social Responsibility (CSR) Structure which involves contributing to the societal aspects of the world.
Such companies which devote a segment of their working towards the environment and its regeneracy are more highly valued and are always in the good books of financial institutions.
In addition to the green economy, there is also a blue economy with blue bonds as the blue financing products. The main focus of a blue economy is towards the oceans and the depleting aquatic life due to overfishing, huge oil spills and water pollution.
Not only are the companies aligned with societal forces benefitted through a green economy/sustainable finance framework but us, as consumers and investors, as well, have greater benefits in the basket than we think we do. To invest in sustainable bonds/equity is like to invest for the common benefit of oneself and the wildlife nurturing us. These green bonds or green equity helps financing environment friendly projects, as discussed above from the company’s point of view. To compensate for the degeneration, each one of us have contributed somehow, somewhere in our lives, the least we can do is to shift to sustainable financial instruments and support the green and blue economy, to turn so much so, again.
Opportunities to invest in such financial instruments have seen a thorough spike over the years with more and more businesses coming into picture with renewable energy, environment regeneration techniques, plastic substitutes, and a ‘new normal’, swinging us away from the ‘hazardous normal’ that we have been contributing into for decades.
The only risk involved in a green bond market is the lack of liquidity. As the market is still expanding and is not at its largest market cap yet, entering and exiting is not as easy as in the usual financial markets. However, this is not going to be a story in the long run as the trend of green bonds is going to continue and witness a substantial raise in the market size soon.
Multiple measures have been brought into picture relating sustainable finance in the business working and making people understand the concept and its working better. One such famous example is that of the EU Taxonomy, which is broadly a tool to help investors understand whether an economic activity is environmentally sustainable, and is helping towards navigating a transition towards a low carbon economy. Such a tool helps in making investment decisions apropos sustainability criteria and makes it easier for the investors to help choose their portfolio to plough money into. This tool also allows the investors to look for their already existing investments and if they are meeting the standards of the sustainability touchstone.
The budding market for the green economy and the increasing favour and realisation of imbibing sustainable finance has made it easier for people to get associated with it than it was probably a decade ago. More and more people are now concerned about the environment’s deteriorating health and wish to contribute in its rectification. But there is still a long way to go to reach the required sight.
All the talks about sustainable finance and green economy sums up to the current long term goal laid-out by The United Nations called by the name of ‘Agenda 2030’. The agenda aims at eradicating poverty and to achieve sustainable development world-wide. Furthermore, the sustainable financial
instruments are not to be left behind and are a proper necessity not only for today or tomorrow, but till the rest of the mankind’s lives.
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