The number of announcements and efforts on Environmental, Social and Governance (ESG) and sustainable finance have been increasing in the previous six months, making it difficult to keep pace with what’s going on in the realm of “green investment.” A few of the updates came in June 2021 from the G7 Summit. Leaders pledged not just to “embed climate change and biodiversity loss issues into economic and financial decision-making,” but also to “green the global financial system” so that financial choices are made with climate considerations in mind.
The talk is backed up by actions as well. The European Commission launched an ambitious strategy in July 2021 to assist in improving the flow of money to finance the transition to a sustainable economy. Venture Capital firms are divesting from firms that do not fulfil their sustainability requirements, and central banks are increasingly considering climate change concerns in their talks. As a result of their unique and strong position in capital flows, financial services organisations have a unique and powerful role to play in fostering long-term growth across the global economy. And because there is rising evidence of demand for sustainable financing, this should now be considered as a major commercial opportunity.
Despite this, there is still a perception that sustainable finance is a niche offering among many in the industry. So, to help financial services organisations expand the scope and profitability of sustainable financing, here are some crucial factors.
Establish a clear understanding of what sustainable finance implies to the organisation (ESG, SRI – Socially Responsible investment, impact investment, etc.) and the plan, including long-term goals for the role it will play in the business. Companies who are serious about this space should think about and be open about how divestiture will fit into their entire strategy.
Consider how the company may influence others and effect real change, based on where it is in the value chain. Asset owners, for example, are now at the top of the investment chain as venture capitalists, and their actions have an impact on the global economy. A word of caution: always check to see whether the company is talking the talk. If not, this effect, as well as the impact it has, maybe greatly diminished.
Prepare to share the specifics and advantages of sustainable finance projects and offers with as many people as possible. It’s one thing to have certain items and a portfolio, but they’re a lot less likely to become really widespread unless they’re known in the market among comparable products, providing shoppers with an option. This isn’t only a matter of marketing and communications; commercial and marketing teams will need to be retrained in order to credibly discuss sustainable financing offers and relative performance.
To enhance interest and Venture Capital Funds towards sustainable finance, we must guarantee that financial mechanisms, products, and services are constantly innovated. HSBC, for example, has released a new form of sustainability providing support on the United Nations Sustainable Development Goals, which will be used to fund initiatives that would benefit both people and the environment. It’s also worth mentioning that the event was three times oversubscribed, illustrating the tremendous demand and commercial potential for organisations that are aggressively addressing and developing in the field of sustainable finance.
Incorporating these concerns into a strategic approach would assist to guarantee that enterprises in the industry are playing a key role in mainstreaming sustainable finance and promoting much-needed global sustainable growth.
In 2022, the tremendous amount of contact between investors, issuers, and borrowers projected in 2021 will drive sustainable finance, particularly green and sustainability-linked bonds (SLBs), into the mainstream of financial markets. According to market statistics from Natixis Green & Sustainable Hub, global sustainable issuances have nearly quadrupled to USD 902 billion year-to-date November 22 2021, with the amount of SBLs alone jumping to USD 105 billion in 2021 from just USD 13 billion in 2020. Some of the reasons for the substantial growth in the amount of sustainable financing in such a short time by the issuers and investors are:
1) For investors, climate change is no longer a theoretical concern.
Green finance is becoming an important factor for Angel investors and companies alike in the UK, thanks to the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) and the creation of the Green Finance Strategy (GFS). Climate change is now influencing the robustness and resiliency of investor portfolios, thanks to increased industry knowledge and public calls for companies to divest from fossil fuels.
2) When it comes to climate mitigation, investors are shifting from A to C
Because the financial services industry has always been risk-averse, it has been reluctant to respond to climate change. Those in the sector, on the other hand, feel that public awareness of climate change is growing. Previously functioning in the “A” bracket of risk avoidance, Venture capitalists and investment firms have now firmly shifted beyond “B” and into the “C” bracket of actively helping climate mitigation by offering a variety of green goods to help finance sustainable infrastructure.
3) A special institute is assisting in the mobilisation of new financial services.
The formation of a dedicated institute that could mobilise new green finance initiatives across a variety of industries was one of the Green Finance Taskforce’s primary recommendations. The Green Finance Institutes are now open for business. They’d help “expand the green finance industry” while also assisting banks in “financing green” by focusing on entrepreneurial ventures and projects.
4) Climate action is increasingly viewed as a great opportunity for investors.
CDP revealed that a group of 221 large corporations that shared climate-related data on its platform approximated that shifting to low-carbon products, services, and business models will indeed generate USD 2.1 trillion in additional revenue over the next five years, compared to a USD 311 billion Angel investment. Discussions at The Economist’s Climate Risk Summit revealed that the financial community shares this optimism about the potential for climate adaptation and mitigation. This will be beneficial to both entrepreneurs and investors, who are beginning to invest in the tools, goods, and services required to address and analyse prospects as the problem’s magnitude develops.
Sustainably financed debt has a bright future ahead of it, and stability is progressively increasing. Further advancement will be primarily determined by data standardisation, product standards, and monitoring, as well as important stakeholders’ decision-making, particularly central banks. The necessity of well functioning, liquid, sustainable credit markets will only grow as ESG and credit markets become more intertwined. Financial services companies have a significant opportunity to assist us in transitioning to a net-zero economy and navigating the direct effects of climate change. The magnitude of the financial requirements is tremendous.
It does, however, need guidance from the very top of the industry. Sustainable finance cannot be viewed as a niche area. It has to be mainstreamed.