Over the past two decades, sustainable finance – also known as SuFi – has become a rapidly growing sector that is transforming how we think about and do business, driven by the pledge by most advanced economies to become carbon neutral by 2050 under the Paris Accord.
The sector’s growth is essential to many stakeholders, including investors who want to make money while doing good, policymakers who wish to address climate change and inequality through financial solutions, and consumers who want their banks to be socially responsible.
Sustainable finance: a definition
Sustainable finance is a term that describes the use of financial tools and strategies to achieve environmental and social goals. It encompasses various activities, including ESG (environmental, social, and governance) investing, responsible banking practices, impact investing, and philanthropic funds.
Sustainable finance is also essential for tackling inequality and ensuring that the financial system supports the transition to a more sustainable economy.
The evolution of sustainable finance
Sustainable finance is not a new concept. It began in 1997 when the United Nations Environment Programme (UNEP) launched its Finance Initiative to help reduce the negative impact of the financial sector on the environment.
UNEP created the initiative, and it is currently led by its Sustainable Finance Center, which aims to promote sustainable investments to achieve environmental goals such as reducing greenhouse gas emissions and deforestation.
In 2016, the Group of 20 also committed to making their financial systems more sustainable by setting out a framework on sustainable finance that includes three main elements:
- Promoting an enabling environment for sustainable investment and financing;
- Strengthening policy coherence; and
- Enhancing data collection and transparency.
Meanwhile, over 320 banks globally have committed to the UN’s Principles for Responsible Banking initiative, representing 50% of the world’s banking assets valued at $89.4 trillion.
Through the Principles, banks are taking action to align their core strategy, decision-making, lending, and investment with the UN’s Sustainable Development Goals and international agreements, such as the Paris Climate Agreement, the UN says on its website.
The Principles for Responsible Banking also include the Net-Zero Banking Alliance, which is the climate-focused initiative of this global framework, it adds.
Examples of sustainable finance
There are numerous types of sustainable finance, including:
Green bonds
These are a type of bond that’s issued to fund environmentally friendly projects. While the concept isn’t new, it’s become popular in the United States and Europe.
Green bonds are more transparent than traditional bonds because they list all the details about how the money will be used, so investors know exactly what they’re funding.
Governments and private companies can also use them to fund renewable energy, energy efficiency, or other green projects such as water treatment facilities or wind farms.
Impact investing
This strategy is often used to tackle climate change because it can help reduce the financial risk associated with carbon-intensive activities, such as fossil-fuel extraction or coal power generation.
It can also be used to improve the environmental performance of companies by incentivizing them to reduce their emissions. For example, an impact investor may invest in a company that uses renewable energy sources to benefit from lower costs than competitors who rely on fossil fuels (thereby allowing them to sell goods at lower prices).
In addition to helping tackle climate change, impact investing has been shown to positively affect social issues such as poverty reduction or gender equality thanks to its ability to support microfinance initiatives aimed at women entrepreneurs – who often lack access to traditional forms of finance.
Microfinance
Microfinance provides financial services to poor and low-income clients needing more banking services. Institutions dedicated to microfinance offer loans, savings, and insurance products; they may also provide other services, such as business training or grant financing.
Green investments
These often include funds, such as exchange-traded funds, that invest in a basket of environmentally friendly companies or industries, such as wind farms or solar panels. These funds also include private equity investments, where you buy shares directly from companies rather than through a fund manager.
Importance of sustainable finance in banking
According to our annual global banking survey of nearly 800 senior decision makers, published in the Sopra Steria Digital Banking Experience Report 2022, the rise in hyperconnected customers is pushing banks toward a more personalized, secure, and environmentally conscious approach.
Customers are demanding personalized services and pushing for an acceleration of their banks’ transformation toward more security and advice and digital and environmentally responsible products and services.
Indeed, our research found that nearly one in four customers indicate that the fight against global warming is a key issue, and 55% say that it is becoming more important than investment profitability.
Meanwhile, senior executives recognize their role in integrating environmental issues into their bank’s strategy. “They see it as a source of differentiation and an opportunity to strengthen customer confidence and reduce their environmental impact. The environmental priority is, therefore, on the agenda for 63% of banks,” according to the report.
ESG elements are also a crucial part of their future vision and roadmap, with 25% of banks’ respondents saying that using ESG elements in customer-facing products and services is their highest-ranked priority in the coming years.
Furthermore, most of our banks’ respondents say they plan to increase their investment in ESG over the next 12 months. The benefits of sustainable finance in the banking sector include:
- Increased customer loyalty;
- Increased employee engagement;
- Increased brand value.
The UN’s Sustainable Development Goals
Sustainable finance is a critical element of the Sustainable Development Goals. The level of sustainable finance needed to achieve the 17 goals is estimated at $2 trillion annually by 2030, with an additional $1 trillion required each year after that.
This amount is more significant than any other sector’s contribution to economic growth in developing countries and emerging markets over the next 15 years.
An excellent example of sustainable finance playing a pivotal role in the Sustainable Development Goals is that many banks worldwide have increased access to credit through microfinance programs, which provide small loans or grants to entrepreneurs who lack collateral or access to traditional sources of capital. This helps them start businesses and build assets such as housing or schools in their communities – all while supporting local economies.
It is clear that sustainable finance is the future of finance – and the banking sector is already proving that it will play an increasingly important role in helping to limit global warming amid rising demand from investors and consumers for sustainable finance products.
Based on our research, banks that embed ESG into their business models will have a competitive advantage – and open up new sources of revenue streams.
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