Sustainable Finance: How social governance influences Investment decisions

 BY ARNAV MALIK

Sustainable Development has taken centre stage in the socio-economic discourse of the past decade and with that corporations, investors and even financial institutions are incorporating the concept of ‘Sustainable Finance’ in their investing and operating decisions speculating long-term gains from shifting trends towards Environmental, Social and Corporate Governance. In this article we will delve into the scope of ‘Sustainable Finance’ and its influences on our Investing decisions.


So, what's Sustainable Finance all about? It's like adding a touch of conscience to financial decision-making. It entails incorporating Environmental, Social and Governance ( ESG) criteria into financial decision making leading to increased long-term investment into sustainable economic activities and projects. The Fundamental idea behind sustainable finance is to align investment decisions with the broader goals of environmental sustainability and social responsibility


When talking about investing in sustainable finance, you can invest in three broad categories: Environmental, Social and Governance, thus giving its alternate term ESG Finance. Environmental finance is like backing companies tackling climate change head-on, investing in green technology, like solar power and carbon capture, to address environmental challenges. Social finance is about supporting innovative enterprises that address societal shortcomings in areas like healthcare, education, and employment. Governance finance, sometimes intertwined with environmental or social finance, focuses on companies that follow international standards for their employees or have a strategic aim to bring purpose into their governance structures.


So how does one go about investing in sustainable Finance? Well, there are several instruments investors can use to invest in any sustainable finance projects. Green bonds, Social Bonds and Impact Investing are some of the most preferred means of investing in sustainable finance for ordinary retail investors. Green Bonds and Social Bonds work just like any ordinary debt instrument issued by the government or a corporate entity, the only catch is that they are specifically issued to fund projects with a positive environmental or social impact. Impact investment Funds are specialized funds that specifically target companies or projects with a positive social or environmental impact. These funds may invest in startups, established businesses, or projects with a clear mission to create positive change. In a nutshell, if the underlying institution, you lend your money to or buy a stake in, through these financial instruments, works on an ESG Model, you are investing in sustainable finance.

 


At this point, a significant question arises, why should people invest in Sustainable Finance? The answer to that could be twofold: financial gain and positive impact on the planet and society. For some this approach to investing allows individuals to put their money to work in a way that aligns with their values and principles. For others, who purely look for gain on investments, sustainable finance often provides resilience against long-term risks, promotes innovation and growth, and leverages the increasing demand for sustainability-based products and services. It is important to note that the sustainable Finance market is worth about $4.3 trillion with $1.1 trillion worth of Green debt instruments issued in 2021 alone. While some point out lower yield on green debt instruments than conventional bonds, the overall returns in the sustainability market outperformed the non-ESG gains and the prospects with increasing shift towards ESG looks promising.


In conclusion, it is imperative to recognize the role Sustainable Finance can potentially play in our effort to achieve complete sustainability in the long run. In the past decade, it has rightfully emerged as a means to channel not only more funds but also public interest towards sustainable development. Investors in some cases are actively sacrificing higher returns for the sake of the “higher good”  of the society. To ensure a shift towards ESG finance we not only need the rightful efforts of the government and international agencies but also from each investor in the market. It is only if we can percolate the concept of ESG Finance down to the grassroots level, that we expect it to make a considerable impact in our march toward sustainability. 


References

    • weforum.org
    • worldbank.org
    • kpmg.com
    • lse.ac.uk
    • goldmansachs.com