Sustainable Finance, or “green finance”, refers to emerging investment decisions that incorporate an economic activity's environmental, social and governance (ESG) impacts into the overall value of an investment or project. Traditionally, investment profits have not accounted for negative externalities such as environmental impacts of operations or unfair compensation. Sustainable finance aims to stimulate positive social externalities by incentivizing consumers to invest in companies that utilize an internal sustainability framework, or corporate social responsibility objectives, to measure ESG impacts.
Source: Olsen, H.F. 2021. What is ESG? [image]. Fiduciary Trust. Available at: https://www.fiduciary-trust.com/insights/sustainable-investing/
Financial brokers like Fidelity have begun promoting green investments to help consumers navigate the sustainable finance market. On the same note, a recent study revealed a demand for ESG-conscious products, showing 50 percent of U.S. Gen Z shoppers are willing to pay more for products that they believe are produced by companies with sustainable production practices. As a reflection of this trend, global sustainable finance investments saw a 55 percent increase from 2016 to 2020 across five major financial markets. In addition, Refinitiv’s 2021 Global Risk and Compliance report, reviewing changes in the financial risk landscape, found that 43 percent of compliance and risk professionals agreed that the global pandemic has heightened the importance of ESG factors in decision making.
Source: Refinitiv. n.d. Where there’s green, there’s growth [figure]. Available at: https://www.refinitiv.com/en/resources/special-report/cop26-data-driven-approach-tackle-climate-change#cities
The sustainable finance industry faces challenges in addressing unsustainable economic growth and the neglected impacts of consumption that have been normalized by capitalism and industrialism. In addition, a study conducted by Euromoney found that regional and global leaders of sustainable finance identified challenges in standardized risk metrics, green finance incentives and a more structured approach to a full transition to green finance.
The corporate and investment bank BBVA identified sustainable finance as an important factor in the future of finance to address environmental risks and economic impacts as consequences of climate change, but there are still bridges that need to be built to create a global financial system that considers economic and social risks while minimizing negative environmental impacts.
