What is sustainable finance?

Sustainable finance refers to the integration of environmental, social and governance (ESG) criteria into financial services. A newer approach to financial analysis, it goes beyond the traditional focus on profits and losses to consider issues such as how companies respond to the climate crisis and how they treat employees, customers, and shareholders, among others.

Investors are increasingly using this strategy to evaluate financial risks, identify opportunities and express their values. As more companies build sustainability and ESG factors into their business model and culture, sustainability reporting will likely become standard practice in finance.

Responsible Investment Strategies (Eurosif)

Best in Class

An approach where leading or best-performing investments within a universe, category, or class are selected or weighted based on ESG criteria

Engagement & Voting

Engagement activities and active ownership through voting of shares and engagement with companies on ESG matters. This is a long-term process, seeking to influence behaviour or increase disclosure.

ESG Integration

The explicit inclusion of ESG risks and opportunities into traditional financial analysis and investment decisions based on a systematic process and appropriate research sources.

Exclusion

An approach that excludes specific investments or classes of investment from the investible universe such as companies, sectors, or countries based on specific criteria.

Impact Investing

Impact Investments are investments made into companies, organisations and funds with the intention to generate social and environmental impact alongside a financial return.

Norms Based Screening

Screening of investments according to their compliance with international standards and norms.

Sustainability Themed

Investment in themes or assets linked to the development of sustainability.

Why is sustainable finance important?

Financial service providers play a key role in the transition towards a sustainable economy and society. Sustainable finance unlocks investment for economic activities and projects that deliver better outcomes for people and the planet. In this way, it has a key role to play in funding the Sustainable Development Goals (SDGs) and the transition to a resilient, efficient, and equitable global socio-economic model.

Integrating SDG and ESG factors into investment decisions can also help identify risks and opportunities that traditional analysis may not uncover. This can future-proof investments and in some cases boost returns.

Key Numbers

ESG Analysis

ESG analysis is a factor in at least US$ 35.3 trillion of assets under management (AUM), or more than a third of AUM in five of the world’s biggest markets, according to the Global Sustainable Investment Alliance.

Sustainable investment assets under management make up a total of 35.9% of total assets under management, up from 33.4% in 2018.

Sustainability-Dedicated Investments

The UN Conference on Trade and Development estimates that the value of sustainability-dedicated investments amounted to US$ 3.2 trillion in 2020, up more than 80 percent from 2019. These products include sustainable funds (over US$ 1.7 trillion), green bonds (over US$ 1 trillion), social bonds (US$ 212 billion) and mixed-sustainability bonds that combine green and social projects (US$ 218 billion).

SDG Financing Gap

Reaching the 17 goals set forth in the 2030 Agenda for Sustainable Development requires an estimated investment of US$ 5 trillion to US$ 7 trillion per year between 2015 and 2030. This includes US$ 3.3 trillion to US$ 4.5 trillion per year for developing countries. While the annual outlay amounts to less than 2 percent of the total assets held by banks, institutional investors, or asset managers, it far surpasses the capacity of public resources.

What is SDG-aligned financing?

ESG investing focuses on conduct and operations:Does the business produce goods in an environmentally responsible way? Is it treating its workers well? Does it engage positively with the community? SDG-aligned finance is more concerned with purpose: What products are produced and for whom? Do they help or harm society? Do they consider multiple positive benefits, across social, environmental and governance related outcomes?

There is growing awareness of the importance of the SDGs as a framework for sustainable finance. Many already disclose information on their SDG performance alongside their ESG reports. Institutional investors such as pension funds are also committing to this strategy, recognizing its potential to open opportunities and tackle global challenges.

 

How can we fill the SDG financing gap?

More capital should be aligned with the SDGs and deployed in developing and transition economies where it would have the biggest impact.

In 2020, the Organisation for Economic Co-operation and Development (OECD) and UNDP  introduced a plan to help public and private actors identify and prioritize investments contributing to the SDGs. Aligning capital flows with the SDGs can unlock the volumes of finance needed to meet the goals.

Achieving the SDGs will have a transformational impact on lives around the world in the form of better economic opportunities, improved health and wellbeing, and a safe, clean and sustainable environment. According to theBusiness and Sustainable Development Commission, achieving the SDGs opens some US$ 12 trillion of market opportunities and 380 million new jobs.

How is sustainability measured?

Investors rely on third-party reports and ratings to measure evaluate and sustainability performance, but the methods and scope vary widely. The lack of consistent, comprehensive, and comparable data has raised concerns that companies can misrepresent their sustainability performance.

Regulatory initiatives are underway to bring more transparency for investors focused on ESG issues. The Sustainable Finance Disclosure Regulation, which came into force in 2021, imposes standardized ESG disclosure obligations on asset managers selling financial products into the EU. Starting in 2022, further disclosures will be required under the EU Taxonomy Regulation, which sets conditions an economic activity must meet to qualify as environmentally sustainable. In the U.S., the Securities and Exchange Commission is working on a rule to increase climate disclosers by stock issuers.