Sustainable finance

Sustainable finance is a growing trend in business that considers environmental, social, and economic factors as the primary reasons for investment decisions. The movement began in the 1980s and early 1990s. It slowly grew in popularity as global concerns about climate change and other social issues began to rise. Businesses that practice sustainable finance can take several steps to accomplish their goals. They can make internal investment decisions that make company policies and processes more environmentally and socially friendly. They can also channel their investment funds into education, clean energy, sustainable agriculture, and similar businesses. By the early 2020s, an estimated $520 billion had been invested in U.S. companies that adhered to sustainable finance guidelines.

Background

Concern over human impact on the environment dates back to the ancient world, but it was not until the nineteenth and twentieth centuries that environmental conservation efforts became more widespread. During the 1960s and 1970s, governments around the world began implementing legislation to protect the environment from pollution, which had emerged as a major negative by-product of industrialization. Many businesses also took steps to lessen their impact on the environment by changing their manufacturing and distribution processes to curb pollution.

The increasing amount of carbon dioxide and other greenhouse gases in Earth’s atmosphere was among the chief environmental concerns. Greenhouse gas emissions had been on the rise since the onset of industrialization in the early nineteenth century. In the mid-twentieth century, scientists began theorizing that the increasing gases could cause a rise in global temperatures; however, the effects of the warming process did not gain widespread attention until the 1980s. In 1988—a year that was, at the time, the hottest on record—the US Senate heard testimony from scientists warning of the consequences of the rise in Earth’s temperature. A year later, the United Nations (UN) established the Intergovernmental Panel on Climate Change (IPCC) to study the political and economic impact of global climate change.

Overview

In 1992, the United Nations held its third Earth Summit in Rio de Janeiro, Brazil. Combatting climate change was among the main topics discussed at the event. Based upon the IPCC’s assessment report, the United Nations Environment Programme (UNEP) presented a framework agreement to stabilize greenhouse gas emissions and reverse the effects of climate change. UN representatives also created the United Nations Environment Programme Finance Initiative (UNEP FI), a group of thirteen international banking and finance leaders. The goal of the UNEP FI was to promote a shift in investment strategies toward businesses that work to reduce greenhouse gases and fight climate change.

In 1999, Wall Street created the Dow Jones Sustainability Index, which tracks the performance of companies that meet and promote sustainability goals. The index is designed to identify environmentally and socially conscious stock opportunities for investors. The Asian-Pacific financial markets adopted a similar index in 2009. At the turn of the millennium in 2000, the UN unveiled guidelines to help companies meet their sustainability goals. The UN also clarified the definition of sustainability to include environmental, social, and economic objectives, such as investing in developing nations. The UN updated and expanded its goals for sustainable investing in 2015, including more of a focus on narrowing the investment gap between the world’s financial powers and low-income nations.

The European Investment Bank began issuing green bonds to finance projects related to climate change in 2007. Green or climate bonds typically involve tax incentives such as tax exemptions that make them more attractive investments and help promote the practice of green finance. The practice caught on and began to spread worldwide, with an estimated $247 billion in green bonds issued in 2018. In addition to climate-related issues, the bonds have also been used to fund projects that support social and economic projects. For example, a bond was issued to help the Republic of Seychelles in the Indian Ocean protect its marine areas; another bond was issued to support workplace safety and fair labor practices in the Bangladesh shipping industry.

The idea of sustainable finance has grown significantly throughout the first two decades of the twenty-first century. By 2018, about 93 percent of the world’s top 250 companies filed reports on their compliance with the UN’s sustainability guidelines. While being proactive in battling climate change is a main environmental factor that attracts investors, sustainable investment practices also support businesses that preserve natural ecosystems, prevent pollution, and promote recycling. Social factors may include businesses that combat inequality by hiring a more diverse workforce, fostering good labor relations, promoting human rights, and investing in emerging economies or low-income communities. On the economic side, sustainable investing focuses on the makeup of a business’s management structure, employee relations, and the salaries of company executives.

Historically, investors have put their money into places where they could earn the best return on their investment. Sustainable finance altered that way of thinking by making concern for environmental and social causes a large part of the equation. However, proponents of sustainable finance maintained that the practice was the most efficient way for investors to manage their investments. Companies that have been at the forefront of environmental and social issues are better positioned for success in a future business climate where those factors will be more in demand and a future where renewable energy replaces the use of fossil fuels.

Some of the most obvious targets for sustainable investing are companies that provide renewable energy, such as hydroelectric, solar, and wind power. Other popular investments include auto companies that are increasing their focus on creating electric vehicles. Sustainable finance can also include supporting established corporations that have taken steps to reduce their carbon footprint. This can include large steps like a delivery company that replaces its truck fleet with electric vehicles or a grocery chain that only buys produce farmed with sustainable agriculture practices. However, it can also include small steps, such as a company starting its own in-house recycling program or a restaurant chain that eliminates a whitening agent made from animal products in its tabletop sugar.

In 2021, the International Sustainability Standards Board (ISSB) was created to provide standards for the growing number of financial disclosures of entities involved with sustainable finance. In addition to creating and adopting standards, the ISSB was chartered to meet the information needs of investors and facilitate interoperability among stakeholder groups.

In 2022, the US sustainable finance market size was estimated at $520 billion. From 2023 to 2030, its compound annual growth rate (CAGR) was expected to be 22.6 percent. Assets Under Management (AUM) of American funds devoted to sustainable finance was $37.80 trillion. This market increase was assessed as stemming from continued concerns about environmental and social issues and the economic opportunities the shift to sustainable businesses and products will bring. This became a global sentiment. As an example, the Green Deal Investment Plan, undertaken by the European Union, set a goal of raising $1.14 trillion in its drive to make Europe net zero in terms of carbon emissions by 2050.

Bibliography

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