The Shift to Sustainable Finance

Published on: 03 October 2022
by Aaroshi Rathor
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Companies all around the world have drastically shifted their business models since the pandemic arrived. From adapting to the new hybrid model of working to reshaping business requirements for the changing needs of customers and employees, corporations are trying out new and innovative ways to adapt to the new environment which will not only be beneficial for their business in the long-term, but also for the environment. This, therefore, raises the question of the relation between finance and sustainability and its effect on businesses worldwide. How can we pursue healthy profitability by also adopting a sustainable financial business model?

Better Financial Returns 

According to the World Bank, sustainable finance is the process of taking due account of environmental, social, and governance (ESG) considerations when making investment decisions in the financial sector, leading to increased long-term investments into sustainable economic activities and projects. According to a study by Fidelity, ESG investments in all assets made from 1970-2014 showed better market performance when compared to other investments which did not take into consideration any sustainability factors. Sustainable businesses tend to make good financial returns while making the world a better place by keeping in mind critical environmental factors, and indeed, many institutional investors, asset managers, and regulators have taken the initiative in sustainable finance investing. According to an analysis by Bloomberg, Global ESG investments are on track to exceed USD 53 trillion by the year 2025. So, for businesses to flourish or even stay relevant in the future, they need to explore and adopt a sustainable finance strategy.   

Transition Towards Net Zero 

Sustainable financehelps large corporations and businesses slowly transition towards a much more desirable net zero world. According to the European Union’s Green Deal Investment Plan, an estimated USD 1.14 trillion is being raised to make Europe net zero by 2050. According to an analysis by BlackRock, eight out of ten sustainable investment funds performed better during the pandemic than portfolios that didn’t prioritise sustainability criteria. Many companies worldwide play a decisive role in decarbonising the global economy and have taken net zero pledges to motivate their progress. For example, Siemens AG has signed the commitment to be net zero carbon by 2030. They have invested 65 million euros in energy-efficient products, along with their Energy Efficiency Program that helps their clients to take action in optimising sustainability. The world’s third largest automaker, Ford, is also aiming for net zero carbon emissions by 2050. Solid commitments from major industrial players such as this will help make the decarbonisation of the economy an industrial aim in of itself, while creating jobs for a more sustainable world. 

Improved Employee Retention

In our article on Youth ESG investments, it was mentioned that the younger generation of investors and job seekers are more driven by companies that provide sound sustainable investments and make sustainability their priority in their business outlook. The goals and visions of young employees and investors have taken a major turn since the pandemic arrived and they are opting to work and invest in companies with shared values. Common shared values and interests help in forming better shareholder and investor relations, along with attracting and retaining a young workforce. According to research by McKinsey, sustainable companies are better able to win major contracts and save costs by using fewer resources, retaining their best talent along with saving money on carbon-intensive processes. According to a Reuters report, sustainable finance bonds issued were at their highest in 202,1 with USD 859 billion as compared to the previous year’s USD 534.3 billion. Along with improved employee development and retention, companies also help to create a positive brand image for their business in the marketplace.  

Regulating Bodies

To ensure that companies are fully committed to delivering on their sustainability promise, prominent global accounting bodies like the International Sustainability Standards Boards have been launched to regulate corporate sustainability claims. They help international investors by steering companies to provide transparent and high-quality reporting on climate and other major environmental, social, and governance issues, along with providing the associated sustainability risks and opportunities to make informed investment decisions. Companies and businesses can track their ESG progress and compare their ESG ratings with those of other competitors. 

Outlook

Large corporations and businesses stand to benefit by adopting sustainable finance policies, with better demonstrated commercial returns on their investments versus ‘traditional’ investment pathways. Investors can also now be environmentally conscious while targeting profits in longer-term investment choices, and don’t have to choose between the two. Sustainable finance is helping businesses to develop a long-term outlook when it comes to investing their money and staying relevant in the slowly transitioning sustainable world.

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