Sustainable Finance : Too little too late or just right?


With recent global conferences such as the COP 27 or the UN Climate Change conference, sustainability in business is now more relevant than ever. With warning signs everywhere, there is a rise in policies that ensure that businesses that keep climate goals in check are the ones that see larger financial backing. But are policies that put the planet before profit the only way to ensure action?

The World Bank states that sustainable finance is the process of taking into account the Environmental, Social and Governance (ESG) goals and initiatives of companies before making investment decisions into those organisations.

Large organisations have now poured in substantial amount of resources into ensuring that they set up SOPs that help them achieve ESG goals. Even traditionally carbon heavy industries are ensuring that they offset the footprint by other activities.

But why is sustainable finance so important? Finance is a lever that influences change and outcomes. Changes that can help in offsetting exploitation and ensuring that we restore nature. But who defines a sustainable practice? Various bodies such as the European Union, Asian Development Bank, United Nations etc, set up principles that define the standard. These goals help balance development with environmental damage.

One of the largest reasons why sustainable finance makes sense is that the majority of the wealth, close to $68 trillion, generated from these organisations will be transcended back to millennials. It is said that 45% of these millennials have an evolved outlook of the planet vs profit debate and favour earth-friendly initiatives. They view such initiatives as their chance to make a mark and create positive impact within society. This has forced banks and financial institutions to recalibrate their long-term risk models to include social governance and environmental factors as material for their investment portfolios.

These financial institutions slot organisations across 2 segments based on their ESG and financial performance.

First is the Negative or Exclusionary Sustainable Finance. This category is risk screened against a range of non-financial performance metrics such as employee welfare, happiness, diversity and inclusion, transparency, strong worker ethics and loyalty etc. This screening results in divestments of high risk ESG investments.

Second, is known as the Positive or Integrated Sustainable Finance. This screening involves investments in one or many of the United Nation’s Sustainable Development Goals.

With world leaders signalling that climate change is crucial, do you think sustainable finance is still at its nascency and a ramp up is needed to undo the damage caused by organisations? Do let us know your thoughts.