What is Sustainable Finance ?
Sustainable finance refers to any form of financial service that integrates environmental, social and governance (ESG) criteria into business or investment decisions (SSF). It complements traditional financial analysis (PRI) and is made up of a range of responsible investment strategies* that can be used independently or in combination with one another (Eurosif).
Engaging in sustainable finance can help to mitigate risks, unlock new opportunities, and achieve a positive impact in society.
*Eurosif has identified 7 main responsible investment strategies: best in class, engagement and voting, ESG integration, exclusion, impact investing, norms-based screening, and sustainability themed investment.
The finance industry has a key role to play in the sustainability transition
As corporate citizens
All financial institutions are themselves companies with employees, customers and supply chains. They should lead by example and implement sustainability throughout their corporate governance, systems, and practices.
As capital allocators
Where and how financial institutions direct their capital matters. By making sustainability a key allocation factor, they encourage good practices. In addition through engagement and stewardship they can affect company behaviour.
As powerful market voices
Financial institutions are powerful given their role in directing capital within the economy. They should use this position and their voice to advocate for positive framework conditions for sustainability.
Why pursue sustainable finance?
Glossary
- ESG: Used as a standalone, refers to extra-financial factors, specifically as concerns environmental, social and governance topics
- ESG Integration: Systematic and explicit inclusion of material ESG factors into investment analysis and investment decisions to optimise the risk-return profile of corporate/sovereign issuers.
- Sustainability: Sustainability is the degree to which an activity is “able to be maintained at a certain rate or level” into perpetuity. In 1987, the United Nations Brundtland Commission defined sustainability as “meeting the needs of the present without compromising the ability of future generations to meet their own needs.”
- Sustainable investments: In context of the European Commission’s regulation, “sustainable investment means an investment in an economic activity that contributes to an environmental or social objective, provided that the investment does not significantly harm any environmental or social objective and that the investee companies follow good governance practices”
- Sustainability Factors: Sustainability factors means environmental, social and employee matters, respect for human rights, anti‐corruption and anti‐bribery matters.
- Sustainability Risks: Sustainability risks are ESG-related risk or conditions that could cause a material negative impact on the value of investments if they were to occur. Sustainability risks include but are not limited to climate transition risk, climate physical risk, environmental risk, social risk, governance risk.
- Resilience: The capacity of social, economic and environmental systems to cope with a hazardous event or trend or disturbance, responding or reorganising in ways that maintain their essential function, identity and structure while also maintaining the capacity for adaptation, learning and transformation.
- Climate Change: A consequence of global warming, a change of climate which is attributed directly or indirectly to human activity that alters the composition of the global atmosphere and which is in addition to natural climate variability observed over comparable time periods.
- Global warming: Refers to average temperature change. Global warming is the estimated increase in global mean surface temperature (GMST) averaged over a 30-year period, or the 30-year period centered on a particular year or decade, expressed relative to pre-industrial levels unless otherwise specified.
- Active ownership: Active ownership activities include proxy voting at shareholder meetings and engagement (see below) with issuers property managers, asset managers orthird-party fund managers.
- Engagement: Engagement falls under active ownership. It involves interactions between an investor (or an engagement service provider) and current or potential issuers (companies/sovereigns). Engagement itself does not necessarily pursue responsible intentions. However, in the responsible investing context, it is conducted with the purpose of improving practice on an ESG issue, changing a sustainability outcome, or improving public disclosure. Engagements can also be carried out with non-issuer stakeholders, such as policymakers, standard setters or property managers and tenants in the case of real-estate asset owners. Interactions that are not seeking change or an improvement in public disclosure are not considered engagement.
- Sustainable Develoment Goals: Achievement of the 17 global goals for development for all countries established by the United Nations and elaborated in the 2030 Agenda for Sustainable Development are inherently linked with the Paris Agreement goals
- Best in class: Approach in which a company’s or issuer’s environmental, social and governance (ESG) performance is compared with the ESG performance of its peers (i.e. of the same sector or category) based on a sustainability rating.
- Impact Investing: Process of making investments with the intention of generating positive, measurable social and environmental impact alongside a financial return.
- Positive Impact: deliver a positive impact on one or more of the three pillars of sustainable development (economic, environmental and social), once any potential negative impacts to any of the pillars have been duly identified and mitigated.
- Circular economy: model of production and consumption which involves sharing, leasing, reusing, repairing, refurbishing and recycling existing materials and products as long as possible. In this way, the life cycle of products is extended.