Companies and the financial world in general evolve and develop at the same pace as society. In particular, businesses are not indifferent to the greater sensitivity of a large number of citizens to issues related to sustainability or to the need that their actions be guided by the highest ethical standards. All this has led to the emergence of different expressions that combine concepts that in the past were very distinct, and sometimes even conflicting, such as green finance or sustainable finance.
These words are intended to refer to a phenomenon that is causing a major transformation in how financial management, investment decisions or business strategies are approached, decisively incorporating ethical, social, environmental and corporate governance criteria into their day-to-day operations.
By sustainable finance, in general, we refer to those investment or financing processes that, in addition to criteria related to profitability or the ability to repay debts, take into account factors linked to the environment or to social welfare.
Types of sustainable finance
At least three types of sustainable finance can be identified. However, their rapid expansion in recent times and the increased demand for products bearing the label of sustainable make it likely that any kind of classification will become obsolete in a short time.
- Socially Responsible Investment (SRI): These are simply investments that include environmental, social and governance criteria in addition to strictly economic ones (risk, profitability and liquidity). Impact investments are also included, which have the fundamental intention of creating some type of direct benefit to society or the environment, trying, in any case, to preserve the invested capital.
- Ethical banking: This consists of those banks that carry out their activities taking into account the criteria of transparency, sound governance and sustainability, in such a way that their products and services are not entirely linked to obtaining the maximum financial benefit. Thus, for example, ethical banking would give priority to granting credit for projects related to fair trade, assistance to vulnerable groups, education and so on, rather than to activities related to tobacco, the generation of energy through strongly polluting processes, or companies with low labour standards.
- Microfinance: This is the provision of simple financial services for low-income groups, small businesses or clients whose level of access to the traditional banking systems is limited or non-existent.
Sustainable finance can be implemented through different financing instruments such as funds or collective investment schemes, green or social bonds, venture capital companies or the direct provision of microcredit. Like any activity in which, in general, there is an attempt to raise public savings, all these products are highly regulated — all the more so when the intention is to appeal to the investor’s sensibility on the basis of possible improvements for society as a whole.
Regulatory considerations in sustainable finance
The public sector is actively working to develop a clear regulatory framework to support the growing interest in sustainable finance. In particular, various initiatives have been undertaken in the European Union in this regard. For example, in the context of the European Action Plan on Sustainable Finance, three key rules are being developed to promote private capital investment in sustainable projects. These laws relate to:
- Enhancing the dissemination of non-financial information on sustainability, by establishing harmonised rules on transparency to be applied by financial market participants and financial advisors in relation to the integration of sustainability risks. These financial market actors should also analyse adverse sustainability impacts in their processes, and disseminate relevant sustainability information for the financial products they sell.
- The development of benchmarks related to climate change and to the reduction of CO2 emissions, with the aim of establishing minimum standards for an index to be considered “green” and of improving the degree of information on environmental, social or governance factors given about these benchmarks. This can help managers and investors in general to pursue index-based investment strategies with a sustainable approach, confident that such investment really does meet those criteria.
- The development of a harmonised taxonomy to identify whether a particular economic activity can be described as “green” or sustainable. The EU taxonomy will provide a general framework for identifying whether the activities carried out contribute to achieving a neutral environmental impact.
The objectives the EU takes into account
To obtain this label, an investment must contribute to at least one of these six objectives:
- Climate change mitigation, to which end it must be shown to be consistent with the medium- and long-term carbon emission reduction targets agreed by the Union.
- Climate change adaptation, which would reward the effort of transforming relatively polluting activities or processes into others with a similar outcome but causing less environmental damage.
- The sustainable use of water and marine resources.
- Promotion of the circular economy, the aim being to reuse and extend the life cycle of existing products, reducing the amount of waste produced.
- Pollution prevention.
- The development of healthy ecosystems.
