Why Is Sustainable Finance Important?
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Sustainable finance refers to how investments or financing are made not only to benefit financial returns, but also to benefit the people and their environment by considering these three factors, Environmental, Social, and Governance (ESG).
What is Sustainable Finance?
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The concept of sustainable finance has long been implemented by global leaders to pursue the goal of developing the environment, the people and the governance in a sustainable way.
In other words, sustainable finance ensures to adopt sustainable development that does not bring harm to anyone or anything while considering the ESG factors.
Environmental: This factor involves investing in projects and businesses that prioritise sustainable environment which includes investing for renewable energy, clean technology, waste management, and conservation efforts that can contribute to long-term sustainability.
Social: This factor focuses on public impact which includes investing in affordable housing, healthcare, education, employment, and community development to help improve people’s lives and contribute to social well-being.
Governance: This factor emphasises investing in companies with strong governance structures, human rights advocation, promotion of diversity and inclusion, and compliance to ethical standards to ensure reliability, fairness, and integrity in financial activities.
In a nutshell, sustainable finance involves organisational efforts worldwide to invest in sustainable projects. Naturally, there are different types of investments depending on the spectrum of sustainable finance.
- The higher you go on the spectrum, the less prioritisation of maximising profits.
Sustainable Finance on a spectrum:
Traditional Financing (Level 0): Investments are made without considering the sustainability criteria. There are little to none organisational efforts made globally.
- Incorporating ESG (Level 1): Investments are made by screening out projects that do not contribute to sustainable finance. Organisation executes risk management and mitigation to ensure the integration of ESG. All decision-making incorporates ESG.
- Impact Investing (Level 2): Essentially, as the name explains, investments are made to create a change or an impact towards the environment, society and the government while generating profit from it. Types of investments include investing in renewable energy, providing loans and bonds, and allocating housing initiatives.
- Green Finance (Level 3): Green Finance leans more towards investments that prioritise environmental sustainability and its positive impacts in the long term. This may include investing in organisations that use green technology, sustainable agriculture, green bonds, water and waste management, and much more.
- Socially Responsible Investing (Level 4): Socially Responsible Investing (SRI) leans more towards helping society as a whole to improve their quality of life and taking care of their well-being. Investments can be made by implementing fair policies and treatment to labourers, providing financing to small businesses, and offering loans to disadvantaged communities.
- Philanthropic Investments (Level 5): Fundamentally, philanthropic investments are projects that aim to help society and the environment without maximising profits. These projects prioritise on creating a significant positive impact while managing the finances wisely, which include investing in nonprofit organisations, charities, community development, and much more.
Origins of Sustainable Finance
Prior to sustainable finance, traditional financing has achieved success from being implemented to stimulate the promotion and growth of industrial and commercial businesses resulting in banks going from local investing to national and international investing.
Despite the continuous accomplishment, there was a growing concern from individuals and organisations that their investments were being used in several crisis events, such as the Vietnam War and the South African apartheid, causing a negative impact on the livelihood of the society and the destruction of the environment.
Consequently, financial institutions have started exploring and executing sustainable finance in hopes to improve the environment and the society in the long term.
Global leaders have started enforcing government laws and regulations to stimulate global efforts while organisations, financial institutions, and individuals embarked on financing diverse investments that promote sustainability.
Impacts of Sustainable Finance Globally
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With the global awareness and continuous efforts on promoting sustainable finance, improvements can be seen in government policies, green innovation, corporate responsibilities, climate change mitigation and much more.
Governments are also giving out incentives to organisations that carry out green investments resulting in new green technologies and a low-carbon economy.
Conclusion
Sustainable finance is about investing that benefits both on maximising profits while boosting green investments. As we continue to practise sustainable finance, more and more improvement can be seen in society and the environment.
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