The interest in Sustainable Finance is growing at an exponential rate, with more banks now offering this type of financing as an alternative to traditional lending. The value of sustainable finance has also increased significantly over the last 15 years, with assets under management projected to reach $120 trillion by 2021, up from just $8 trillion in 2006. In the same time period, the number of principles of responsible investment signatories has more than doubled, rising from 50 to 3,800.
The most important factor driving the success of Sustainable Finance offerings is increased environmental awareness. The emergence of green start-ups and a growing focus on environmental protection has made sustainable finance more accessible to companies, and investors are increasingly looking for companies with a commitment to the environment. It’s a win-win situation for all stakeholders. And the future looks bright for companies that embrace the idea of sustainable finance. So how can we use this new approach to our own financial planning and investing?
A bank’s ability to offer sustainable finance products and services is an excellent way to distinguish itself from its competitors. The value of sustainability is best measured in the contribution a financial product makes to the environment and does not negatively impact other environmental objectives. The Taxonomy Regulation has specific criteria for the definition of sustainable finance. A bank’s products must be “carbon neutral” or at least not cause substantial harm to biodiversity. The European Commission has set strict standards for sustainable finance and the Sustainable Finance package is expected to be implemented by April 2021.
To be successful in this new paradigm, banks must offer new services to their corporate clients that support the goals of the Paris Agreement. For example, Shell and Enel have already received premium prices for their sustainable bonds over conventional bonds. Likewise, UniCredit has introduced ESG overdrafts for SME clients. In addition to these new products, banks must also provide green research services to their corporate clients. A successful sustainable finance strategy will require a collaboration of stakeholders, including investors, corporate entities, and governments.
The emergence of sustainable finance as a viable asset class is a major change in the financial industry. Since 2007, more than 30 trillion dollars have been invested in sustainable finance offerings around the world. While many regions have invested in sustainable finance in recent years, Europe is an area where these investments are strongest. These investments are increasingly becoming the norm rather than the exception. The benefits of sustainable finance go beyond the environment. They are also an investment strategy that will benefit both corporate stakeholders and society.
The lack of data and theoretical insights is one of the main challenges for sustainability-oriented regulation. In Europe, the OECD recently adopted an Action Plan on Sustainable Finance. The Action Plan details a series of steps to support international sustainability finance initiatives. Tokenization is one way to implement this value. It pairs sustainability information with cash flows, and enables all stakeholders – including issuers and end investors – to understand a company’s sustainability profile. In addition, the OECD is also committed to promoting global standards for sustainability in finance.