What is sustainable finance and why is it the way to go?
It was true that investors could focus only on their financial performance without considering other factors such as social injustices and environmental impact. However, this is no longer the case. The global climate crisis is getting worse by the day, exposing the financial sector to significant risks. On top of that, sustainable funds are said to outperform their conventional counterparts, so there is a financial incentive to adopt sustainable practices.
But what does sustainable finance involve and how are the key players in this niche working to generate funds for restoration, conservation, climate protection and green energy? Read on to find out how finance can impact repairing ecological damage.
What is sustainable finance?
In its simplest terms, sustainable finance describes investment strategies that take into account more than just financial returns. Other factors considered by sustainable investors include environmental impacts, societal issues and governance. Sustainable finance is also known as “green finance”, and these terms are widely used to describe multiple investment approaches.
The European Union’s definition of sustainable finance describes it as a way to stimulate economic growth while reducing environmental pressures and taking into account social and governance issues. These last two points refer to topics such as inequalities, human rights and management structures. However, the main objective of sustainable finance in the eyes of the European Union is of an environmental nature.
However, while environmental considerations are at the heart of sustainable finance, other organizations focus on other sustainable practices. For example, the financing of green public policies to facilitate the use of green energy is often presented as fundamental for sustainable finance.
So why is this important?
Public awareness of the current climate crisis is at an all time high. It is becoming increasingly clear that without massive societal changes, we will face challenges such as widespread shortages of food and other resources. This leaves everyone with no choice but to change the way we operate in an attempt to mitigate the environmental damage of the past 100 years.
It has been suggested that restoring landscapes and ecosystems is one of the most effective ways to tackle climate catastrophe. Ultimately, changing the way humanity approaches problematic processes like deforestation and agriculture could play an important role in tackling climate change.
Global goals are already set by governments that aim to promote reforestation and ecological restoration. However, these projects are probably just a drop in the ocean in the fight against environmental damage. Projects that aim to tackle deforestation and agricultural problems currently receive less than 3% of funding for climate improvement.
Estimates suggest that humanity will need to invest between 600 and 800 billion USD every year to face the ecological crisis by 2030. This is where sustainable finance approaches seek to make a difference. The huge financial demand to tackle the climate issues we face will require cooperation between public and private entities at the local and global level. As we quickly head towards one of the most significant global extinction events in history, politicians and investors are moving towards sustainable finance.
Where does sustainable finance come from?
Green finance can come from various important players in the financial sector. Traditional financial institutions like banks play a critical role in allocating money towards sustainable initiatives. As a result, banks are often tasked with allocating resources to businesses that strive to reduce environmental and societal damage to humanity. Banks often achieve this goal by providing lucrative loans to these companies.
These financial institutions increasingly tend to finance sustainable business practices. These include low-emission industries such as green fintech. This new sub-category of the fintech niche includes organizations using technological innovations to make financial activities more sustainable.
Businesses also represent a significant portion of the sustainable financing available today. Companies increasingly tend to develop corporate social responsibility (CSR) policies through which they aim to have a positive societal and environmental impact. Many companies are now investing large sums in sustainable strategies such as renewable energies or environmentally friendly transport through CSR initiatives.
Other key sources of sustainable finance include international financial institutions, global nonprofits, climate funds, and national governments. The need to develop innovative means to deal with the environmental crisis encourages these entities to invest in green solutions.
Why you should integrate sustainable finance into your business model
Aligning your business model with environmental, social and governance (ESG) criteria can be of tremendous benefit to your operations and society as a whole.
One of the main reasons for taking a more sustainable approach is that it can give you an edge over your competition. For example, if a bank pays more attention to broader societal and environmental issues, it can build its brand as a sustainable business. It can help businesses attract new customers and retain existing customers.
In addition, employees are increasingly aware of the need for sustainable business models. In fact, a large portion of the workforce (especially the younger generations) requires their business to act in an environmentally friendly and socially sustainable manner. This means that you risk losing employees if your business fails to put in place sustainable financing and comply with ESG criteria. This can have a significant impact on the profitability of an organization.
If you are wondering how to integrate sustainable finance into your business, consider the Cambridge University Sustainable Finance Online Short Course. Learning more about sustainable finance online is a great way to make sure your business stays at the forefront of environmental finance. Short courses in finance can provide you with the information you need to promote sustainability in your organization and maximize the benefits associated with social and ecological responsibility.
How sustainable finance supports restoration
Currently, the number of impact funds that aim to support forest and landscape restoration is low. However, their number is increasing rapidly. These funds aim to support regenerative agriculture, reforestation and conservation.
In addition to non-profit funds, there are also a growing number of private sector entities sharing these goals. Many of them leverage public money to create financial incentives to reduce land degradation (a crucial aspect of sustainable agriculture).
Many national funds also exist. These include initiatives such as conservation trusts and reforestation funds which provide essential funds to improve the sustainability of land use. Although these tend to operate in specific countries, some funds have a broader reach. For example, the Food and Agriculture Organization (FAO) is working in 18 countries to restore landscapes globally. In addition to this, groups like the World Bank are using their international reputation to promote sustainable supply chains for important agricultural resources.
Ultimately, these sustainable finance funds work to support programs aimed at mitigating humanity’s impact on the climate. These represent an encouraging trend towards green finance in the global economy. However, there is still a long way to go if we are to meet the targets set for 2030.
Green finance is very promising. Now that investors are prioritizing goals other than the pure financial gain of their investments, companies have an increased financial incentive to act responsibly. Overall, as these incentives become more lucrative and more prevalent, we may start to see a shift towards more sustainable business models in the future. With the availability of green finance courses and the opportunities to reduce the industry’s environmental impact, there is growing hope that companies can help tackle the threat of climate change.