What is sustainable finance?

What is sustainable finance? A short guide to help with your ESG training and explain the essential details. 

Sustainable finance is becoming a crucial aspect of the global financial system – a driver of investment concentrating on projects and companies prioritising long-term environmental, social, and governance (ESG) goals. 

Sustainable finance refers to investment decisions that are grounded in environmental, social or governance principles. It involves the financing of projects and businesses that contribute to sustainable development, with a focus on managing risks and generating long-term value for both investors and society as a whole.

Sustainable finance can take many forms, but the common theme is that any example will focus on ESG-related goals that can be assessed against clear goals, using standard metrics that allow investors to see a quantifiable return at some point in the future. Examples include:

• Green bonds: Debt instruments used to finance environmentally friendly projects such as wind farms, solar energy, or water conservation.
• Sustainability-linked loans: Loans where the interest rate is tied to a company’s performance on sustainability metrics like carbon reduction.
• Impact investing: Investments made to generate positive social or environmental impact alongside a financial return.

Not exactly, but they are very closely linked. Sustainable finance is the literal practice of financing sustainable activities in the marketplace. ESG is not a practice but a framework for assessing company activities against sustainable principles.

In other words, sustainable finance is about plain investing, while ESG is a set of principles used to guide investment.  

Board members play a pivotal role in sustainable finance. First, they need to decide if it’s in their company’s best interests to pursue it as part of their funding or expansion strategy. From there, they need to guide their business through the process in a way that makes strategic sense. 

• Regulatory compliance: With growing regulations like the EU’s Corporate Sustainability Reporting Directive (CSRD), boards must understand how these impact financial reporting and decision-making.
• Stakeholder engagement: It is crucial to engage with investors, regulators, and other stakeholders on sustainability matters. Board members should oversee the communication of sustainability goals and performance, ensuring transparency.
• Long-term value creation: Sustainable finance isn’t just about compliance—it’s a means to create long-term value. Board members should focus on how these initiatives can drive innovation, improve reputation, and enhance financial performance while mitigating risks such as climate change.
• Education and awareness: Board members should stay informed about developments in this area – emerging trends, such as carbon pricing and sustainability-linked incentives.

Sustainable finance is reshaping how companies and investors approach financial markets, aligning economic activities with the need for sustainability. By integrating ESG considerations into financial decisions, sustainable finance can help create a more resilient and responsible economy for the future.