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 environmental or social welfare.
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, certainly make that any kind of classification could 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 on 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 credits for projects related to fair trade, assistance to vulnerable collectives, education, etc. rather than to activities related to tobacco, the generation of energy through strongly polluting processes or to 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. Even more when it is intended to appeal to the investor’s sensibility based on possible improvements for the society as a whole.
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 at various levels to promote private capital investment in sustainable projects. These laws relate to:
- 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 the identification of activities that contribute to achieving a neutral environmental impact. To obtain this label, an investment should help to achieve at least one of these six objectives:
- Climate change mitigation, to which end it must be demonstrated that there is consistency with the medium- and long-term carbon emission reduction targets agreed by the Union.
- Climate change adaptation, where costs of transforming relatively polluting activities or processes into others with a similar outcome but causing less environmental damage would be rewarded.
- Use of water and marine resources in a sustainable manner.
- Promotion of the circular economy, in which the aim is to reuse and expand the life cycle of existing products, reducing the level of residues produced.
- Pollution prevention.
- The development of healthy ecosystems.
- 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 on their processes and disseminate relevant sustainability information for financial products they sell.
- The improvement in 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 to improve 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, with confidence that such investment actually meets these criteria.