The world of finance doesn’t look at all like it did ten years ago.
There are now new, more sustainable financing models and corporate sustainability practices that foster a positive feedback loop between enterprise value and green impact. One of which has gained quite a buzz in recent years: sustainable finance.
Before we get into how sustainable finance is changing businesses and the world for the better, let us first define what it is.
What Is Sustainable Finance?
Sustainable finance is the process of taking environmental, social, and governance (ESG) considerations into account when making investment decisions in the financial sector. This leads to more long-term investments in sustainable economic activities and projects.
Sustainable finance has three strands:
Environmental
The ESG principles’ environmental component examines how a corporation interacts with its environment.
It evaluates a company’s energy use, waste production, resource conservation efforts, treatment of animals, and solutions for deforestation, among other things.
Social
The social component of ESG looks at how a company interacts with both internal and external stakeholders.
It will examine the company’s performance in areas like diversity and inclusion, data hygiene and security, human rights, stakeholder relations, and the contribution it and its employees have to society.
Governance
When it comes to governance, the ESG standards look at how the business is conducted and how it attempts to influence decision-makers.
It examines shareholder rights, transparency, the composition of its board of directors (including diversity), executive compensation, anti-bribery practices, political contributions and lobbying, and compensation for venture partners.
Sustainable financial practices can include the following:
- Sustainable investing: This allows corporations to put money into ventures that work to improve the planet, such as those that combat climate change.
- Microfinance: This type of banking gives low-income individuals or groups of individuals access to financial services that they would not otherwise have.
- Green bonds: Assist in raising funds for both new and ongoing projects that benefit the environment and promote a more sustainable economy.
- Active ownership: The use of rights and position of ownership to affect the actions or behaviors of corporate investors.
How Is Sustainable Finance Changing Business and The World?
There are several advantages to sustainable finance for your business, society, and our world. These include:
- Sustainable Finance Fosters An Innovative and Eco-Friendly Society
Over the years, we have become more and more environmentally conscious. That’s why you’ll often see companies presenting themselves more authentically and showing true concern for sustainability.
Some of the ways businesses adopt a more sustainable practice are by avoiding fast fashion, encouraging employees to stick to a plant-based diet, using public transportation, or participating in shared bike or scooter programs.
Plus, by modernizing their business models, technologies, and processes, finance teams can drive innovation with the help of long-term integrated thinking.
- Sustainable Finance Increases Revenue
As we’ve seen in recent years, sustainability and environmentally friendly products have been getting more and more popular on the market. That’s why subscribing to sustainable finance may help businesses grow and thrive by boosting their revenue through product sales, services, newfound interest by potential investors, and new clients seeking smarter, greener consumerism.
For instance, sustainable financing allows businesses to offer direct support for the planet, creating innovative ways to make it a more just, functional, and inclusive place to live. Additionally, sustainable finance provides investors with a greater return rate, making any company that practices it a more attractive and successful business to invest in.
- Sustainable Finance Encourages Meaningful Partnerships
Businesses benefit from sustainable finance because it gives them additional opportunities for collaboration.
Even while many Instagram influencers may come across as shallow in their sponsorships, there’s no denying that consumers would rather purchase goods or services from a business that matches their values.
Consequently, a business that practices sustainable finance is more likely to appeal to a larger group of potential clients, employees, and investors.
Remember that word-of-mouth is no longer merely passed about at lunchtime in the era of digital and social media. When someone appreciates a company’s product or service, word of mouth may spread like wildfire in the best possible way.
- Sustainable Finance Improves Employee Development and Retention
Businesses can enhance their resilience and increase their competitive advantage when they place value on social and human capital and invest in their people.
Among these benefits include:
- Stronger connections with stakeholders
- Improved reputation
- Improved productivity and financial savings for the entire company
- Better access to a candidate pool and increased staff retention
- Sustainable Finance Ensures Compliance
Sooner rather than later, governments will enact stricter reporting requirements in response to the COP26 promises. Non-compliant companies may suffer serious reputational damage as a result, both with their funders and customer base.
At the very least, investors will want to verify that their target companies have evaluated the environmental risks and put policies in place to lessen their consequences.
Towards A Sustainable Future With Sustainable Finance
Sustainable companies aren’t just doing their part to protect the environment and save the planet. They are also more likely to win contracts, save money by using fewer resources, have less regulation, keep the best employees, and avoid losing money on outdated, carbon-intensive operations. It’s a win-win for everyone involved—companies, consumers, communities, and our Earth!
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