Exploring the Impact of Sustainable Finance on the World
- The Dichotomy Between Profit and Saving the Planet No Longer Exists for Investors.
- Prioritizing Environmental-Friendly Businesses: The Focus of Sustainable Finance.
- Beyond Environmental Concerns: Ethical Business Standards and Inclusion in Sustainable Finance.
As the world shifts towards sustainability, the impact of our investment choices on our savings and pensions has become a critical concern. This is where the emerging field of sustainable finance comes into play.
In contemporary times, Environmental, Social, and Governance (ESG) considerations have become the principal drivers of investment decisions. Essentially, the aim is to invest in ventures that contribute to the betterment of the world.
Decoding Sustainable Finance: A Comprehensive Overview
Sustainable investing encompasses a wide array of activities, ranging from investing in eco-friendly projects to supporting companies that prioritize social values, such as ethical governance or social inclusion – for instance, having more women in their leadership teams.
In the world’s quest to achieve net-zero emissions, sustainable finance is poised to play a critical role by directing private capital towards carbon-neutral initiatives. To support this transition, the European Union has launched its Green Deal Investment Plan, which aims to raise $1.14 trillion to facilitate Europe’s net-zero carbon emission goal by 2050.
To ensure that sustainable investments live up to their promises, the International Financial Reporting Standards Foundation – a global accounting body – has established the International Sustainability Standards Board to create new regulations that verify the validity of sustainability claims.
Unlocking the Potential of Sustainable Finance for Enhanced Returns
In addition to promoting a sustainable planet and a fairer and more inclusive society, mounting evidence suggests that sustainable businesses have the potential to yield greater returns for investors.
A research conducted by Fidelity, an asset management firm, examined the global performance of various ESG investments from 1970 to 2014. The study revealed that half of these investments outperformed the market, while only 11% displayed negative performance.
Another analysis by BlackRock, the world’s largest asset management company, discovered that amid the COVID-19 pandemic in 2020, over 80% of sustainable investment funds performed better than share portfolios not based on ESG standards.
According to research conducted by financial website Morningstar, companies with high ESG ratings not only pay higher dividends to shareholders, but they have also experienced stronger increases in their share price over the past five years.
This finding is significant because financial institutions, such as pension funds, make the majority of stock market investments. In the United States, organizations that manage other people’s money hold 80% of listed equity in leading companies.
While individuals may opt for a lower rate of return to support sustainable investments, institutional investors and pension fund trustees are bound by fiduciary duty to act in the best financial interest of their investors.
The rise in returns on sustainable assets implies that trustees no longer have to choose between sustainability and profit. The Transformational Investment report by the World Economic Forum cites the example of New Zealand’s state pension fund, whose trustees shifted to a sustainable finance strategy after recognizing climate change as a risk to funding pensions. Since its inception in 2003, the fund has outperformed similar investments by 1.24% per year, translating to a total difference of $7.24 billion (NZD10.65 billion).
But why do ESG-friendly investments tend to perform better than conventional investments?
How Sustainable Finance is Shaping Markets
There is a growing trend among customers to buy from companies that share their values, with two-thirds of US consumers preferring to do so. This figure rises to 83% among millennials. Moreover, a global survey has found that consumers are four to six times more likely to buy from brands with a corporate purpose they endorse, while three-quarters said they stopped buying from brands that did something they disagreed with and encouraged others to do the same.
These changing customer attitudes are putting pressure on carbon-intensive industries, such as coal, oil, and gas, which are finding it increasingly difficult and costly to raise capital as leading lenders refuse to do business with them. In contrast, sustainable companies are more likely to win contracts, save costs by using fewer resources, have less regulation, retain the best people and avoid losing money on outdated carbon-intensive processes, according to research by McKinsey.
In response to these shifts, sustainable finance is rapidly gaining traction. In 2021, global companies raised a record $859 billion in sustainable investments, including $481.8 billion in green bonds that raised money for specific environmental projects, according to Reuters. Analysts predict that the total value of ESG investments will exceed $53 trillion by 2025, accounting for more than a third of all global investments, as reported by Bloomberg.