With the growing concern over climate change and climate-related disasters, humanity is racing against time to save our planet from further climate crisis without sacrificing our global economy, or vice versa. The proposed solution is to integrate sustainable environmental considerations into financial decision-making, adopting a sustainable finance approach.
Definition
The term refers to the process of integrating Environmental, Social, and Governance (ESG) considerations into financial decision-making. The integration of ESG aims to create more long-term investments in sustainable economic practices. These investments will lay the foundation for sustainable development and overall contributions to preserving and restoring the environment.
While related to each other, sustainable finance is not synonymous with green finance, which is a subset of the sustainable financial system. To be precise, green finance is only one part of a broader consideration, namely, environmental considerations.
Core Considerations
What makes sustainable finance different from traditional finance is the aforementioned core considerations. Traditional finance practices often overlook these considerations, usually resulting in disastrous financial decisions that harm our environment.
Environmental Considerations
This aspect aims to integrate climate change mitigation and adaptation into the decision-making process. This aspect also requires decision-makers to consider the environment in a broader context, encompassing not only biodiversity conservation and pollution prevention but also other relevant factors. Advocating for renewable energy investments also falls into this consideration.
Social Considerations
This aspect prompts decision-makers and lawmakers to consider various issues within our community. The inclusion of social problems, such as inequality, inclusivity, and human rights, into our financial decisions will help governments map and find solutions to the presented issues. The improvement of our social issues will help our communities to better understand the severity of our environmental crisis.
Governance Considerations
This consideration refers to how management structures, employee relations, and executive remuneration in both public and private sectors are crucial in ensuring that the other core considerations can be integrated into the decision-making process. Encouraging good governance practices also falls into this consideration.
Why is It Important?
As sustainability becomes increasingly important amid the seemingly worsening global crisis, sustainable finance shows a commitment toward preserving and conserving our planet. There are several reasons why the finance model is important to both industry and the environment:
1. Imposing Risk Management
Institutions adopting a more sustainable approach to their financial decisions are compelled to evaluate the long-term environmental and social risks associated with their operations.
2. Giving a Positive Impact on Society and the Environment
Practicing sustainable finance models is seen as a commitment to the UN’s Sustainable Development Goals (SDGs). In turn, this commitment will gradually drive systemic change for both the industry and the community.
3. Improving Corporate Performance
Demonstrating concern for sustainability is a sign that the institution is committed to a long-term investment in both financial gain and environmental preservation. This practice also attracts investors with similar values who are willing to invest or collaborate with the institution.
Frameworks
As of today, sustainable finance practices lack a clear, universal framework or standardized metrics. While it may seem like a challenge for implementation, the lack of standardized practice allows governments to adjust the implementation of this financial model according to their country’s socio-economic situation.
For example, a sustainable financial model implemented in Indonesia, a vast archipelago in the tropics, will differ from the model implemented in France, a Mediterranean country with four distinct seasons.
However, while the exact implementation may vary according to each country, they are generally implemented in compliance with one or more of these global initiatives and frameworks:
- The United Nations Principles for Responsible Investment (UN PRI)
The UN PRI is a UN organization dedicated to advancing responsible investment on a global scale.
- Sustainable Development Goals (SDGs)
Also known as the Global Goals, the SDGs are a set of goals drafted by the UN in 2015 as a part of the 2030 Agenda for Sustainable Development. The agenda of promoting a more sustainable economic approach in order to save the environment aligns with several goals set out in the SDGs.
- Paris Agreement
The Paris Agreement was signed to strengthen our collective response to climate change by keeping global temperatures from rising even further with various preventive measures, including financial decisions.
- Other International Initiatives and Frameworks
There are many other initiatives and frameworks that have been created as a means to incorporate financial and economic policies into our sustainability agenda.
Afterwords
Decades of traditional finance practices that have paid little to no attention to our collective survival as a community have brought the climate crisis to our doorstep. While programs and initiatives promoting sustainability are abundant, the sustainable finance model remains one of the few that directly affects both our efforts to save the planet and improve our economy.