There are mounting concerns about the state of the environment and this in turn is putting pressure on companies to finally take action.
Indeed, it is no longer just up to individuals and non-profits to work towards the United Nations’ Sustainable Development Goals and the Paris Climate agreement. Sustainability as a goal has become more mainstream in the fashion, automotive, and yes, even financial industry. While it may not be the first thing that pops up in someone’s mind when talking about climate change, the finance industry has a crucial role to play in curbing the planet’s deterioration. Read on to find out more about sustainable finance and how it can impact the environment.
What is Sustainable Finance?
Sustainable finance does away with the old notion of investing solely for profit’s sake, and takes into account the bigger picture. This larger goal involves the integration of environmental, social or governance (ESG) criteria into investments and services in the industry. More and more business leaders are embracing this green trend, with the Economist revealing that 26% of all management assets in 2016 were “socially responsible investments” hinged on ESG issues. What’s more, the amount of green bonds being issued is at an all-time high, reaching a whopping $163 billion in 2018. This number is a far cry from the $500 million in 2008, which means that more proceeds have been going towards environmental projects.
Instead of taking the focus away from profitability, companies that put emphasis on ESG scores actually end up outperforming those that don’t. The numbers don’t lie: Lower ESG scores translate to worse financial performance rates from 3% to 8%. Business leaders are becoming increasingly aware of the fact that ESG investments are not just good for society, but for their company as well.
The Finance Industry and Climate Change
Public opinion is one of the main factors that drives companies to strive for higher ESG scores. With worrying news about climate change and the environment, consumers expect business leaders to do more than just rake in profits. It doesn’t help that the latest studies point towards a terrifying future, with The New York Times reporting that catastrophic effects from higher global temperatures will be felt as early as 2040.
Some of these negative impacts have already been observed around the world, with super typhoons and record-breaking hurricanes affecting the poorest countries. Save the Children’s carbon mapping report confirms that climate change affects the world’s poorest people and communities. The devastating effects of the environment’s deterioration are most evident among society’s most vulnerable groups, especially women and children.
This intertwined relationship between companies and the environment is not lost on business leaders, as all signs point towards a more sustainable future across industries. Andrew Bailey who is the Chief Executive at the Financial Conduct Authority captures this shift best in his statement: “Climate change presents a disruptive and potentially irreversible threat to the planet. The impact of climate change on financial markets is uncertain but legal frameworks – at a global, European and UK level – have already begun to adapt to reflect a move to a low carbon economy.” In revisiting legal frameworks, the finance industry’s potential is particularly far-reaching, as they have the power to blacklist companies that operate on non-renewable energy or promote deforestation.
Conversely, banks can actively finance and support sectors that help the environment by financing those that show sustainability efforts. Future investors can expect more green bonds from banks in every country, as the global movement against climate change has slowly but surely become a necessity.
Want to learn more about how Finance Actors and Regulatory Regimes are responding to Climate Change? Check out this book!