Sustainable or green financing, or even impacting investment, are the terms used to describe the process of addressing environmental, social and governance (ESG) considerations in the financial sector when making investment choices, driving more long-lasting investments in sustainable businesses, technologies and projects. Climate change mitigation, preservation of biodiversity, inequality, inclusiveness, investment in human capital and communities, management structures, and employee relations can all fall under the umbrella of ESG considerations.
Put simply, the focus in finance is transferred from acquiring pure financial profit to prioritizing the planet and the people by injecting cash to green energy projects, for example, or investing private money in companies that demonstrate social values such as social inclusion or good governance. According to the European Union “sustainable finance delivers on the policy objectives under the European Green Deal by channeling private investment into the transition to a climate-neutral, climate-resilient, resource-efficient and fair economy, as a complement to public money.”
According to Professor Cary Krosinsky, co-founder at the Sustainable Finance Institute (SFI) and the World Sustainable Finance Association (WSFA), “sustainable finance is actually many things not just one, or what we call the Seven Tribes of Sustainable Investing, namely negative and positive screening, impact and thematic investing, ESG integration, shareholder engagement and applying minimum standards to sectors.”
Sustainable Finance Pays Off
The obvious advantage is a shift to better human life and facilities as well as sustainable developments focused on restoring nature. But this is an ever-ongoing process; to get things going, green or environmental initiatives are first given priority for investment over usual business investments that may or may not be sustainable. This leads to faster sustainable growth and to the creation of more jobs and business opportunities.
Luigi Pettinicchio from Asper Investment Management (whose mission is to build up new energy infrastructure, local communities and supply chains under the lens of socially sustainable practices) goes beyond the obvious to state the need of sustainable financing: “Human society is going through a phase of historically high instability: not only because of climate change, but also the loss of biosphere, unsustainability of our waste flows and of the food supply chain, the risks to our energy flows/security of supply. This is creating new, still poorly understood risks to our industrial, financial, and human capital. Finding ways to invest sustainably is not simply a matter of good conscience, it’s a critical factor for risk management.”
If humanitarian and risk management factors are not enough, the icing on the cake is that there are financial benefits for companies and associations which pursue green investing. Investors who take ESG criteria into account generally have a lower risk exposure as they are wary of the financial risks posed by climate change and employ stricter risk monitoring methods. They also enjoy greater profitability and performance since they are innovation-oriented and attract a more talented workforce. Increasingly, green lenders are celebrated more amongst peers as the appetite for such investments grows globally.
Financing a Better Future
The economic, environmental, and social benefits of impact investing are undeniable, as more surveys come out annually to prove so. ‘Green money’ practices are gaining traction over traditional investment and non-sustainability-focused companies are under pressure to change as they are not investors’ favorite choice. Sustainable investment is the way to building a better society as Krosinsky claims: “Lending practices enable behavior, so the rise of green, social, and sustainable bonds is one route to helping improve long-term outcomes. Public companies increasingly see pressure from investors helping ensure they put in place the right strategies; they need to be in line with the majority view of investors in order to advance.”
Naturally, the financial system is a key player in the advancement of most aspects of society. The right allocation of funds affects positively everyone involved along the chain of investment, invention, production, and distribution. “The financial system can support entrepreneurs and companies to have a meaningful impact on the sustainability transition, while creating value for all stakeholders. This principle then applies to all stages of the financing cycle (from early stage technologies, all the way to very large scale financings) and channels/instruments (debt and equity, listed and private). Fully leveraging the private sector is the only way we can mobilize the sums needed for the transition, in an efficient way,” argues Pettinicchio.
A Complicated Process
As ideal and profitable for everyone as it all sounds, it does not come without obstacles. Many ‘traditionalists’ – from politicians to investment managers – have their own agendas which are sometimes not aligned with ESG considerations or are not in tune across nations (causing inconsistency for the selected project and confusion for the investors). Some lose patience as returns from new, innovative technologies may take longer than the norm, or present bigger risks than already well-established projects.
Bureaucracy is often an issue, as Pettinicchio claims: “Despite the urgency of the crisis, large scale asset deployment is still slowed down massively by legacy interests (from the local hotel with views on a wind project filing an appeal to planning permission, to slow and bureaucratic grid operators, to “die hard” subsidies to fossil fuels etc.).”
One of the biggest challenges faced by the sustainable finance market is the lack of agreement on and availability of actionable ESG data. Such discrepancies among companies lead to obscure practices and work in favor of those against sustainable financing. Greenwashing is a common example; misleading information provided by the company about their sustainability efforts for marketing purposes. At an attempt for a solution, the International Financial Reporting Standards Foundation formed the International Sustainability Standards Board (ISSB) aiming at “a comprehensive global baseline” for sustainability disclosure standards to help meet the information needs of investors.
The Role of Associations
As for every other financial sector, associations play a crucial part in overcoming these challenges and advancing green investment. In their role as community builders, they can help align the stakeholders necessary to realize a sustainable project with finance being the missing final link to glue everything together. Pettinicchio says: “Finance is one piece of a bigger puzzle when it comes to infrastructure, where many stakeholders need to be somehow aligned to create change. From planning authorities to environmental studies and local community acceptance, everyone needs to give the green light for the project. In this sense, associations are very important nodes that can connect the various stakeholders.”
Associations can also help raise awareness on the value of engaging in a new project, not just among the public, but also among their members when they are involved in a green initiative. They can be effectively a conduit for the importance of the positive revolution the community (stakeholders and local residents alike) is taking part in, highlighting the impact each stakeholder has on the end product.
“Sustainable Finance needs to become a profession, much as is the case with lawyers, doctors, architects and pilots – there needs to be regular training and certification, for professionalism and safety. Yet there hasn’t been an industry association for individuals for this space,” says Krosinsky. Which is why his association manages the standards of the Certified Sustainable Finance Analyst (CSFA™) and providesCSFA™ training through its partner, the Sustainable Finance Institute.
Sustainable financing is a multi-layered process which still needs exploring. Helping the planet and saving the world may be the obvious advantage and end goal, but responsible capital allocation requires careful harmonization of stakeholders, data transparency and effective education. Associations, yet again, the name of the game.
This article is graciously sponsored by Business Events Scotland, whose values align with the Building Back Better concept.