What is sustainable finance? Key information to know
The concept of sustainable finance has gained significant attention in recent years as the world becomes increasingly aware of the need to address environmental and social issues. The principles of environmental, social, and governance (ESG) have come to the forefront, emphasizing the importance of responsible business practices that not only minimize negative impacts on the environment (E), but also promote positive relationships with employees, partners, and customers (S), and promote good corporate governance (G). Simply put, businesses are becoming more willing to invest in sustainable projects to make the world a better place.
The demand for sustainable finance has grown as investors and businesses recognize the potential for positive social and environmental impact, as well as the potential for long-term financial returns. Governments and international organizations have also begun to develop regulations and guidelines to promote sustainable finance.
In this article, we will discuss what is sustainable finance in more detail, discussing the principles and practices that make up sustainable finance, and examining the regulations and guidelines that have been developed to promote sustainable finance. We will also look at the potential benefits of sustainable finance for businesses, investors, and the environment.
Definition of sustainable finance
First, let’s break down sustainable finance’s meaning. Sustainable finance refers to financial practices and investments that consider environmental, social, and governance (ESG) factors, with the goal of promoting sustainable economic development. This includes implementing responsible business practices, investing in sustainable projects, and promoting good corporate governance.
Simply put, the definition of sustainable finance is any structured financial activity that takes into consideration environmental, social and governance (ESG) issues and risks, with the aim of increasing long-term investments in sustainable economic activities and projects. This concept encompasses the use of revenues from any financial instruments, such as loans or investments, for sustainable initiatives.
In practice, sustainable finance will help to channel private money into green projects, technologies, and companies and increase longer-term investments into sustainable economic activities and projects. The European Union's Green Deal investment plan aims to raise $1.14 trillion to help ensure that the EU achieves its goal of Europe being a zero emissions continent by 2050.
Now that we have looked into the meaning of sustainable finance, let’s talk about its benefits.
What are the benefits of investing sustainably for companies?
Sustainable investing is a growing trend in the business world, as companies are starting to recognize the numerous benefits it can offer and interest is growing in the integration of environmental, social, and governance (ESG) factors into financial decision making. This approach aims to create long-term value for companies by addressing societal and environmental issues that could have a negative impact on business operations and financial performance.
Help to manage risk.
One benefit of sustainable finance and investing for companies is that it can help to manage risk. By considering ESG factors, companies can identify and address potential issues before they become major problems, such as a natural disaster, labor disputes, or regulatory changes. This can help to mitigate the financial impact of these events and protect the company's reputation.
Improved financial performance.
Companies that prioritize ESG issues are often more efficient in their operations, have better employee morale, and attract more customers and investors who are interested in socially responsible investing. This can lead to higher revenues, lower costs, and greater investor confidence.
Be more resilient and adaptive to the changes in the global economy.
For example, companies that prioritize environmental sustainability will be better positioned to navigate an economy that is increasingly focused on reducing carbon emissions and transitioning to clean energy.
Achieve greater transparency and a regular influx of investment in environmental causes.
Sustainable finance policies prioritize social or environmental initiatives over conventional business investments, which may not be sustainable. By focusing on this type of funding, firms can attain enhanced transparency and secure consistent funding for environmental initiatives through investment. This can also help to create more jobs and business opportunities. In summary, sustainable finance and investing can benefit companies by managing risk, improving financial performance, and making companies more resilient in the long term. It is a smart approach for companies that want to ensure their long-term viability and success in a rapidly changing world.
How to invest sustainably?
Investors can use environmental, social, and governance (ESG) criteria to evaluate and select investments that align with their values. One approach to incorporating ESG into investing is through ESG integration, which involves analyzing and incorporating ESG factors into the investment process alongside traditional financial analysis. This approach can help investors identify companies that have strong management of environmental, social and governance risks, which can lead to better long-term financial performance.
Another approach is through impact investing, which involves investing in companies and funds that are focused on achieving specific environmental and social outcomes. Investors can also use ESG ratings and scores provided by third-party rating agencies to compare and evaluate the ESG performance of different companies and funds. It all depends on how the company are defining their sustainable finance strategy.
Investors can use tools such as the EU Taxonomy and Principle Adverse Impact (PAI) indicators to make sustainable investments more quantifiable and improve the comparability of investment opportunities, while also complying with European standards and legislation. By using a standardized framework, investors can better ensure fair comparison between investment opportunities. For example, it could be difficult to compare sustainability performance between a renewable energy company based in one EU member state, and a green manufacturing company based in another member state. Using a standardised reporting standard such as the taxonomy or PAI can help investors compare companies against the same framework, standards, and metrics and get a better view of the true impact of the companies through detailed performance data.
Let's take a closer look at both of these tools.
The EU Taxonomy is a set of criteria developed by the EU to help investors identify and classify environmentally sustainable economic activities. The criteria are designed to help investors understand if the companies or projects they are investing in are environmentally sustainable. The EU Taxonomy includes six environmental objectives. For an investment to be deemed sustainable, it must make a substantial contribution towards reaching at least one of the six climate and environmental objectives:
- Mitigation of climate change;
- Climate change adaptation;
- Water and marine resource management and preservation;
- Shifting to a circular economy;
- Prevention and control of pollution;
- Protection and renewal of biodiversity.
EU Taxonomy requires large, public-interest companies to disclose the proportion of sustainable economic activities. Learn more about what EU taxonomy is and how to comply with it.
Principal Adverse Impact (PAI) indicators are a set of metrics used to assess the potential negative environmental and social impact of an investment. These indicators are intended to help investors understand the environmental and social risks associated with their investments, and to identify opportunities to reduce or mitigate those risks.
PAI indicators are typically grouped into several categories, such as:
- Environmental indicators, such as emissions of greenhouse gases and CO2 footprint
- Social indicators, such as labor rights and human rights
- Governance indicators, such as anti-corruption policies and board diversity
These indicators are intended to provide a comprehensive assessment of a company or project's environmental and social performance, and they are often used in conjunction with other sustainability metrics such as the EU Taxonomy. PAI indicators are relevant to Article 8 and Article 9 funds under the SFDR.
Consider Celsia your trusted partner
Celsia is the market-leading software solution for regulatory required sustainability reporting, supporting companies and investment firms across Europe in assessing and reporting on EU Taxonomy and PAI indicators. Used by a number of publicly listed companies and some of Europe’s largest investment firms, Celsia’s solution helps hundreds of users with taking care of sustainability reporting in a way that is simple, quick and efficient. Sustainable finance starts with measuring sustainability in the same way, and in Europe, that means applying the EU Taxonomy and the PAI indicators.
Celsia's EU taxonomy reporting software is specifically designed to meet all of an investor's sustainability assessment needs. While hiring an organization for the same purpose can take a significant amount of time and money, working with our software relieves you of that burden and gives you ownership over the process and results. Our experts have 25+ years of experience in sustainability, and are ready to help you get started both with understanding regulatory requirements that apply to you and technical preparation that will ensure that you use Celsia to its full potential.
A great example of the successful use of Celsia can be demonstrated through the experience of one of our clients. A venture capital firm based in Norway uses sustainability as part of its investment criteria, and used the EU taxonomy to assess the activities of their fund.
The process is done efficiently, requiring minimal effort from our clients' investment managers and portfolio companies. Portfolio companies got an assessment of their sustainability performance aggregated in measurable metrics that can be used to track progress.
This is just one example of the successful use of Celsia to measure sustainability. Check out our other case studies for more information, or contact us to see the full benefits of the platform for yourself.