Sustainable Finance | Meaning, Models, Investors

Sustainable finance is a type of financial service incorporating social, ESG governance and environmental criteria into the asset or business choices for lasting and greater profits of both the society and clients in larger aspects. It contributes to the creation of value and sustainable development in terms of economic, environment and society. This type of finance is a marketplace that improves and ensures economic prosperity, competitiveness, and efficiency in the long term. Contribution to the protection and restoration of the ecological system and enhancement of the social well being and cultural diversity are some of the benefits of sustainable finance.

The different forms of sustainable finance are green bonds, sustainable funds, microfinance, credits for projects, impact investing, active ownership and finance development in a more stable way. We can say an organization is financially sustainable if the working process does not collapse, even if the external funding is not present.

Indication of Financial Sustainability

Following are the indication of financial sustainability that leads to the path of success.

  • Maintaining and developing a strong relationship with the stakeholders, staff, donors, and beneficiaries
  • Stocking reserves of finance
  • Managing and accessing risks
  • Obtaining different types of funds including the unrestricted ones
  • Strategically financing and managing overhead costs

What are the different models of Sustainable Finance?

  1. Green Finance: Green Finance combines all the transactions of finance that favors the transition of energy and fight against the change of the climate. In 2010, the market was expecting to expand to a value of 100 billion dollars each year by the end of 2020 through Green bonds. This arm of SRI offers a complementary approach by decarbonization of the portfolios of the investors and financing companies that has a limited ecological footprint.
  2. SRI (Socially Responsible Investing): SRI integrates environmental, social and governance (ESG) criteria systematically into the financial investment and management decisions. It encourages portfolio management of the companies by favoring a responsible economy to select extra finance criteria for the asset values. There was a raise in the year 2016 of 25% compared to 2014 and the sector has reached a total value of 22.89 trillion dollars.
  3. Social Business: Social business refers to those businesses which have a lucrative social end. The businesses also follow viable models of economics. Profits are in turn invested again to battle exclusion, promote development, or protect the environment. There are three types of social businesses. They are:
    • SIB (Social Impact Bonds): SIB is a special type of bond that is repaid to the investors upon expiration, only if the social objective of the project is fulfilled.
    • Micro Finance: It is a way out that assists in access to credit for the most deprived population.
    • Impact Investing: This refers to the investment of someone’s savings into a company that has a strong environmental and social impact.
  4. Social Finance: In social Finance, assets and savings are invested in social products. In 2010, this was an enterprise of 10 billion Euros in France. The sector supplies funding to the projects that are not present in the circuits of classic financing like Housing and social (31%), employment businesses (28%), international solidarity (5%), and the environment (36%). In France, Finansol endorses social and finance products that contain SRI products and observe inclination in social finance.

Who Invests in Sustainable Finance

Sustainable finance is applied to capital from a wide variety of origins like individual investors, institutions of all sizes, investment funds, and companies of all sizes. Now the main question comes who invests in sustainable Finance?

  1. Investment Funds: Private and institutional investors enrich the portfolios for their assets substantially with SRI funds. In 2016, 122 SRI conviction funds enlisted a growth by 20% in the total investment by Novethic.
  2. Investors: Investors take part in financing the organizations and companies and are associated with projects that have high environmental and social value. They invest in this type of project to experience the impact directly.
  3. Wealth Management and Private Banking: For the next 30 years, Baby Boomers and Generation X will transfer more than 30 trillion dollars to Millennials who in return have committed to positively affect the social changes via their investments. According to a report by EY, almost 17% of Millennials wish to invest in companies meeting the highest standards of the ESG. This indicates that the demand for green financial products will only increase over the coming years.
  4. Pension Funds: Pension Funds from different countries like Japan and the USA have started to incorporate sustainable finance criteria in managing the capital.

In other words, sustainable finance combines all the big challenges that society is facing, from environmental protection to human rights. It also offers diversity and inequality into all the decisions and advice provided to the customers.

BNP Paribas- A finance group:

BNP Paribas is one of the major players in the sustainable finance among various international partnerships and green initiatives. As stated by Jean Laurent Bonnafe, banking and finance have to join hands in the frontline to build a low carbon economy. BNP Paribas pursues its commitment to finance in the following ways:

From 2015 to 2016, BNP Paribas has increased its support for the social businesses by up to 38% reaching 641 million including loan transactions of 560 million. In 2016, the total supporting revenue increases to 890 million Euros including microfinance.

In 2017, three international events on energy transition and climate change which are One Planet Summit, Tech for Planet and Climate Finance Day partnered with BNP Paribas. Portfolios of SRI proposed by BNP Paribas allow customers to invest in enterprises active in environmental and social segments and showing potential in the finance department. One such example is launched in 2017 named Parvest Green bond that is made up of 83.5 % green bonds.

Total funding provided to the renewable energy companies soared up high up to 9.3 billion Euros. It is estimated that in 2020, it will jump to 15 billion euros. More than 30 institutions were funded with a loan amount of 250 million Euros from BNP Paribas through micro-financing. It has helped more than 300000 people.

BNP Paribas recognized the top 3 organizations in green bonds that are issued in Euros and has served on operations totaling 2.4 billion Euros as a Joint Leader. The three enterprises are the First green bond of Turkey, IFC’s Forest Bond, and Iberdrola’s Green Bonds. BNP Paribas has been recognized as one of the best banks for sustainable finance in the world in 2018.

Multiple Sources in Support of the Green Finance

Big corporations also play a major role in sustainable finance. 600 million Euros were raised by ADIF who is the operator of the rail network in Spain. To finance projects for energy efficiency, Apple has issued two green bonds out of which one is worth one billion dollars. Starbucks has also released a sustainable financial bond to support the ethical production of the coffee which is 500 million dollars.

Some countries like China also got support from political parties for sustainable or green bonds. In between 2015 to 2016, the total green bond of China increased from zero to thirty-six billion dollars.

What exactly is ESG and its importance in Sustainability Finance

The full form of ESG is Environmental, Social and Governance. ESG factors along with the construction of the portfolio and analysis of investment offer all their investors a long term advantage in sustainability or green financing. By applying these ESG factors along with analysis, the investors identify companies that:

  • Are Leaders in their own segment
  • Anticipates and mitigates risks
  • Are more forward-thinking and superiorly managed
  • Focuses on the long term
  • Meets all the positive standards of the corporate responsibility

Importance of Sustainability or Green Finance

Green finance supports and promotes the financial instruments flow and development and implementation services of business models, trade, investments environmental, economic, and social policies and projects. The intertwinement of the financial sector and green finance is very vital as the former plays a major role in approaching sustainable development in the economy.

Due to the global financial crisis from 2006 to 2009, the advent of global warming and requirement of more practices for sustainable businesses, SDG (Sustainable Development Goals) have shifted their attention from the value creation of the shareholders to the value of the stakeholders (From economic to Economic, Social, and Environmental).

Sustainable finance is the future of financial businesses through innovative mechanisms in finance and support for the investment in projects with sustainable and positive externalities.

Sustainable Finance Trends in the Coming Years

The three trends in sustainable finance that will shape the finance market in the upcoming years are:

  1. The transition of business models of the Companies: Due to Policy and Regulatory acts by the Paris Agreement, the European Commission’s technical group, and OECD, investors are putting pressure on the enterprises to embrace low carbon economy. Through this transition, organizations can demonstrate the contribution of the transition energy and sustainability commitments.
  2. Conversion of Green Bond to Sustainability Bonds: In 2018, a total of 58.8 billion dollars of sustainability bonds were issued. Companies that are struggling to meet the benchmark of a green bond have begun to search beyond green bonds to match the required treasury needs. The companies are looking for assets with major social impact particularly in rising markets like Asia that allows for rapid and flexible growth.
  3. Taxonomies will be leading the way: The European Commission has started an initiative of Global regulatory for sustainable finance to regulate a sustainable finance Taxonomy. Taxonomies identify which activities can be labeled as sustainable or green. It also states what transaction cost will be needed to enter that particular market.

Expert Group of high Level in EU on Sustainable Finance

The European Commission (EU) has appointed a high-level expert group in December in 2016. The group consists of experts from the field of civil and finance sectors, academics from the international institutions and observers from Europe. The group offers advice to the commission on sustainable finance matters such as:

  • How to direct the private and public capital flow towards investments on sustainable finance
  • Deploy all the policies throughout Europe
  • Identify and separate the steps that a financial organization should adapt to protect the financial system from any risk related to the environment, social or governance.

The recommendations by this expert group lead to the formation of an action plan that is adopted by the EU in March 2018. The chief motives of the action plan are:

  • Establishing a clear taxonomy system for sustainable finance activities, thus creating a common stage in the system
  • ESG policies will be strengthened due to transparency. European Commission will make sure that all the reports to the investors are correct by evaluating them perfectly
  • Creating an EU label for all the green products to identify the stuff with green or low carbon factor
  • Measures to ensure the duties of the asset manager and investors of the institution regarding sustainability

At last, we can say that sustainable finance has been able to touch different aspects of society like social business, green finance, and social investment and has taken on several forms. This is one of the biggest trends that investors are concerned about sustainable growth.

Related: Examples of Environmental Sustainability