The push toward sustainability is altering our way of life. And creating a more sustainable future requires all hands on deck, even from the financial sector. Now, this is where sustainable finance comes into play.
Sustainable finance is the practice of making financial decisions that consider environmental, social, and governance (ESG) factors, with the end goal of funneling more money into projects and activities that will help the economy thrive in the long run.
The finance industry has considerable sway in funding and raising awareness of sustainability concerns, for example, through encouraging businesses to adopt fair and sustainable labor standards and facilitating the study of renewable energy. It’s become a formidable movement driven by governments, large investors, and asset managers worldwide.
Taking sustainability into account while making vital business decisions can yield profitable returns and positive environmental impacts. Sustainable finance cuts costs, raises efficiency, aids risk mitigation, triggers innovation, and opens new competitive revenue opportunities.
Let’s talk about how sustainable finance can help build a business that works for the future.
- Increase in ESG investments
Environment, social, and governance (ESG) refer to a company’s financial interests that primarily focus on sustainable practices. More and more companies are showing increasing interest in ESG investments. A recent report published on Morningstar showed that ECG-focused exchange-traded funds increased by 53% last year to nearly $2.7 trillion. These funds are growing to capitalize on a broader set of sustainable businesses.
ESG offers a competitive advantage, attracts investors and lenders, improves financial performance, and makes company operations sustainable. Furthermore, ESG investments reduce risks, lower costs, produce better returns, and may deliver outperformance. If you wish to learn more about ESG investments, consider taking a sustainable finance course from an accredited institute.
- Waste reduction
Waste reduction has been a significant part of sustainability within many businesses, including Coca-Cola, Estee Lauder, Microsoft, and others.
Waste can be a precious resource for businesses if used productively. Transitioning from waste disposal to waste reduction could yield several financial and non-financial benefits for companies. A few benefits include the following:
- Saving money by using technology and raw materials more effectively
- Cutting waste disposal costs
- Improving reputation amongst potential employees and customers
You can prevent waste in several ways, such as reducing the amount of packaging, using toxic-free materials, conserving water, and conserving energy. Further, you can use more durable materials, pause the usage of raw materials not used in the final product, and implement in-process recycling.
Begin your waste reduction journey by following a few easy steps:
- Determine the kind of waste you generate
- Identify waste reduction methods
- Sort your priorities
- Green bonds
Green bonds function similarly to regular bonds, with one crucial distinction: the funds raised from investors are solely used to fund projects with a positive environmental impact. As a result, green bonds are becoming increasingly famous among many countries, especially in the European Union. Reports confirm that the EU issued about $14 million in bonds in October 2021.
Besides decreasing climate change’s impact on businesses, green bonds are an excellent source of income, allow exemption from taxes, and prevent harm. As a result, companies using green bonds usually attract more investors and customers who are aware of and want to combat climate change. Moreover, green bonds trigger diversification, enable projects at a lower cost of capital, and provide issuers with a chance to brand themselves as sustainable and forward-thinking.
You can purchase green bonds through several platforms, such as TIAA-Core Impact Bond Fund (TSBIX), Praxis Impact Bond Fund (MIIAX), VanEck Vectors Green Bond ETF (GRNB), and others.
Interestingly, even though demand for green bonds exceeds supply, investors remain uncertain whether these products create change or are ‘greenwashing’ people. Therefore, it is best to do adequate research and opt for professional opinions before investing in green bonds.
- Addressing climate change and biodiversity risks
The World Economic Forum lists “climate action failure,” “extreme weather,” and “biodiversity loss” as the three greatest threats to the globe in its 2022 Global Crisis Report.
The financial sector has seen that climate change is a problem for the entire economy in recent years, rather than just the environment. Insurance firms have taken a significant blow from catastrophic weather events, the value of coal companies has fallen as the shift to renewable energy sources gathers steam, and supply networks in all industries are feeling the effects of harsh weather.
Crises like the one caused by COVID-19 make it abundantly evident that no one is safe from natural disasters. They can destroy years of savings and investment gains in a matter of days, and their economic consequences can linger for years.
Extreme weather events brought on by climate change or biodiversity loss may have far more far-reaching consequences than previously thought. The financial sector must respond swiftly and on a massive scale to these environmental megatrends.
The way we utilize resources often results in irreversible environmental change. For example, the extraction and processing of quasi-raw materials are energy-intensive processes that may trigger unsuitability.
Many businesses are implementing sustainable resource management to avoid the dangers of inefficient resource usage. Sustainable resource management is managing resources and keeping a healthy and efficient future in mind. In simpler words, sustainable resource management is managing resources to benefit current and future generations.
Good resource management and efficiency are pivotal for companies looking to enhance their sustainability practices. Resource management improves resource utilization, projects profitability better, eliminates unnecessary communication, and aids accurate resource forecasting. The considerable potential for increased competitiveness and job creation is a compelling economic argument for resource efficiency. Furthermore, responsible and efficient resource use will increase social welfare by making it more available.
Companies can save resources in several ways, including reducing energy consumption, recycling and composting, researching different energy suppliers, and using less paper. Moreover, businesses must choose environmentally friendly materials and educate employees about sustainability.
- Technology that fuels sustainability
The success of an organization is heavily dependent on technological advancements. But its effects on the implementation of sustainable financing can be profound.
One side of the coin is that incorporating sustainability into business processes is facilitated by using cutting-edge technology like cloud computing, AI tools, and IoT gadgets, all of which increase productivity across your organization.
In contrast, sustainable finance hinges on making well-considered, long-term decisions about spending money on cutting-edge technology. Thus, you are simultaneously addressing two fundamental aspects of sustainable finance.
In business, sustainable business cognition is a force for change. It was once mere storytelling or a marketing gimmick. However, today’s thought leaders demonstrate how thinking differently about the environment can influence change and generate more business value while leveraging companies to provide better outcomes.
Sustainable finance has become a rising interest amongst many business owners and managers. Studies show that more enterprises are migrating a considerable number of their business processes, including financing, to better, more sustainable methods.