“Sustainable business thinking is a disruptive force in business.” says Kevin Hagen, Vice President of Environment, Social and Governance strategy at Harvard Extension School, Harvard University.
Finance plays an important role in allocating funds towards meaningful investments, thereby directing economic activity. With economies and businesses evolving constantly and individuals being more conscious of their choices, finance has become one of the major driving factors of sustainability. Sustainable Finance is the process of taking due account environmental, social and governance (ESG) considerations when making investment decisions in the financial sector, leading to increased longer-term investments into sustainable economic activities and projects (World Bank,2021).
ESG forms the foundation for sustainable finance: the environmental part works on the mitigation of climate and other natural crises; the social part makes consideration of people and relationships, while, governance forms the standards for maintaining transparency and running a company efficiently. In recent years, these parameters have come to play a dominating role in investments, which in turn have been making companies and other organisations forge steps in the direction of sustainability. PWC’s intention to hire more than 100,000 new employees to assist ESG issues and BlackRock’s proposal to reach net zero by 2050 are some recent examples of this unprecedented issue.
It started with the United Nations conference on sustainable development at Rio De Janerio in 2012, where 17 SDGs (Sustainable Development Goals) were laid down for countries/large corporates to follow. Since then, a rising trend in green project investments has been witnessed.
Global Sustainability Assets
| 2016 | 2018 | 2020 |
Total AUM* of Regions ($bn) | 81,948 | 91,828 | 98,416 |
Total sustainable Investment (AUM in $bn) | 22,872 | 30,683 | 35,301 |
% of sustainable investments | 27.9% | 33.4% | 35.9% |
*AUM - Assets Under Management
Source: GSIA, Bloomberg, Regions include North America, Europe, Japan, Australia & NZ
This rise can be mandated as the direct effect of returns that such investments provide. According to a study conducted for asset manager Fidelity, half of the ESG investments made between 1970 and 2014 outperformed the market. Another analysis by BlackRock – the world’s largest asset management company - found that during the height of the COVID-19 pandemic in 2020, more than 8 out of 10 sustainable investment funds performed better than share portfolios not based on ESG criteria. As a result, pension funds, mutual funds and other financial institutional investors which account for more than 50% of listed equity in leading companies; have also increased their exposure to the field of sustainable finance.
But why do ESG-friendly projects perform better than conventional investments?
As stated before, one of the major factors is the changing consumer behaviour. A study in the US found that two-thirds of consumers of all ages prefer to buy or avail services from companies that share their value. Furthermore, according to a global survey, consumers are four to six times more likely to engage with a brand which endorses its values and accords with a definite corporate purpose. But if a company does something they disagree with, three-quarters said they stopped buying from that brand and encouraged others to do the same. Even so, with sustainable finance dawning upon, carbon-intensive industries are finding it difficult to raise capital as leading lenders refuse to invest in such projects.
Looking at sustainable finance from our economy’s perspective, ESG investment in India is at a nascent stage. Yet, India has emerged to be the sixth-largest country in the Asia-Pacific region in terms of total green bonds issued in 2021, up by 523% from the previous year which clearly shows a great pace for the Indian economy in the field of sustainable finance.
Currently, approximately 10 mutual funds have brought about specific schemes regarding ESG. However, there is a lack of publically available data and reporting mechanisms for these parameters. To curb the same, SEBI (Securities and Exchange Board of India) has mandated the top 1000 listed firms to submit their BRSR (Business Responsibility and Sustainability Report) to the stock exchanges as a part of their annual reports from the financial year 2022-23. This is expected to make a huge difference in the reporting mechanism and in the next few years, we may see more transparent and robust data on ESG parameters in India.
The availability of finance helps realise the disruptions positively and gives the framework to work on them and solve them with greater purpose. Mobilising funds by keeping in mind the long-run impacts is what’s needed because ESG thinking is the start of ensuring consistent growth and development of not just individuals and global economies, but of the world and environment as a whole.
REFERENCES
1. World Bank- Sustainable Finance (August 5, 2021)
2. Harvard Extension School- What is Sustainable Finance and Why is it Important? (October 9, 2021).
3. World Economic Forum- Sustainable Finance and investment: What is Sustainable Finance and How it is Changing the World (January 20, 2022).
4. CFA Institute- ESG Investing and Analysis
5. The Economic Times- India green bonds’ issuance 6th largest in Asia-Pacific region, up 523% in 2021, report
ABOUT THE AUTHOR
Hello folks! I am Srishti Dalal, an Economics student, Finance enthusiast and lover of music. I wish to expand my knowledge horizon and hopefully, someday, contribute to the field.
Hope you like the blog!
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