Sustainable finance refers to any form of financial process which supports economic growth and incorporates environmental, social and governance (ESG) considerations to drive sustainable development outcomes. Sustainable finance includes integrating ESG factors in financial decisions and fostering a financial system that is stable by managing ESG risk and opportunities to serve the long-term needs of an inclusive and environmentally sustainable economy.
Air pollution, land contamination, scarcity of potable water, natural disasters and global pandemics have become significant concerns that result in economic damage. Deteriorating environmental conditions, including climate change, have direct and indirect, social and cultural impacts, particularly on food security, public health and economic resilience. Financial crisis are often associated with weak corporate governance. Aside from mobilising capital towards achieving sustainable development goals, strong governance is also critical for organisations to collectively curb mismanagement of environmental and social matters such as deforestation, human rights abuse, inequality and discriminations across the value chain.
Sustainable finance is an inclusive term, covering all environmental, social, economic and governance factors. Other thematic concepts such as low-carbon finance, climate finance and green finance represent a subset of sustainable finance.
Sustainable finance takes on a broader approach in addressing ESG issues and drives a common purpose in contributing to the United Nations (UN) Sustainable Development Goals (SDGs) Meeting multiple objectives will require a detailed understanding of the unique characteristics of different stakeholders to create effective partnerships.
The scope of sustainable finance is consistent with the focus areas of the UN SDGs. The Addis Ababa Action Agenda (“AAAA”) 2015 was introduced to provide a new global framework for financing sustainable development by aligning all financing flows and policies with economic, social and environmental priorities. However, available funding is still not sufficiently channelled towards achieving the UN SDGs. In 2015, the UN estimated that the cost of realising the SDGs would be approximately US$3.3 to US$4.5 trillion a year. With a decade left for action, there is an urgent call to scale up sustainable finance to reach the UN SDGs by 2030. Scaling up sustainable finance to meet the SDGs requires considerable effort by all financial market players including banks, insurance companies, asset managers, pension funds, investment advisers, credit rating and sustainability rating agencies.
Sustainable finance enabled by driving clear ESG criteria
ESG criteria are gaining importance for investors and stakeholders to assess the sustainability performance, ethical practices and economic resilience of an organisation. While organisations typically adopt international frameworks to report on their sustainability performance, a definitive list of ESG criteria does not exist as sustainability considerations are continuously evolving and can vary significantly across different sectors and jurisdictions.
Financial sector organisations have embarked on developing diverse strategies that are unique for their respective organisation to drive sustainable finance agenda, including but not limited to:
- Innovating sustainable investment products
- Considering ESG criteria in credit rating assessments
- Using ESG criteria for investment decision making
- Financing low carbon businesses
- Building trust through transparency and ESG disclosures
In the next few sections we share the definition, investment and risk assessment criteria, reporting requirements and innovations in financing solutions under each ESG criteria as defined in international frameworks and references.
Environmental factors are primarily concerned with the businesses’ impact on the environment and its ability to manage the related risks. The UN Principles for Responsible Investment (PRI) defines environmental factors as issues relating to the quality ...
The governance aspect within ESG refer to the practices and policies by which a company is guided and controlled, including transparency on compensation, independence and shareholders’ rights. Well-governed businesses and organisations...