Sustainable finance for companies and investors in the private sector

How corporate business models and investment strategies are changing with the integration of environmental, social and governance factors into financial decisions

Companies play today a crucial role in the health of our planet. Aside from the environmental and reputational benefits of investing in sustainability, companies are also increasingly reaping the financial advantages, which is why the private sector will play a progressively important role in the future in redefining business models and incentivising investments in sustainable finance.

We are all more and more aware of the consequences that our current economic model can have on the environment, society and the way we live. Several international programmes – such as the United Nations 2030 Agenda or the Paris Agreement – have recognised the need to promote a sustainable economic development model. The financial sector plays an especially important part in funding these models, as financial intermediaries are able to mobilise capital through sustainable investments and loans, integrate sustainability into their risk management processes and strategies, and advise clients and investors in order to foster the behavioural shift required to achieve this profound transformation.

Sustainable finance and the integration of environmental, social and governance factors into financial decisions are at the beginning. Large companies, institutional investors and asset managers are just starting to integrate ESG (Environmental, Social and Governance) factors into their investment policies and strategies.

Governments and central banks are working hard to promote sustainable financial mobilisation, improved risk management and greater transparency. But private individuals, retail investors and SMEs are lagging behind. In this context, adequate financial education for the private sector may have an important role in overcoming certain challenges.

First and foremost, financial decision-makers need better knowledge about sustainability: this includes not only recognising the United Nations’ Sustainable Development Goals (SDGs) and the risks associated with climate change, but also the impact of human activity on natural capital and biodiversity, increasing inequality and the significance of inclusive growth.

Secondly, it is equally important to increase knowledge about sustainable finance: small and large investors in the private sectors as well as companies must understand the different investment strategies, the wide range of sustainable finance products and how they work, the need to integrate ESG risks and the impact of their financial decisions.

Third, it is necessary to translate this awareness and understanding in the decision-making process: financial education, if contextualised and proportionate during key learning moments, has the power to foster the behavioural change needed.

As part of its sustainability strategy recently relaunched through the Green Deal, the European Union is leading the way in promoting sustainable finance thanks to a series of ambitious regulatory initiatives drawn up in response to the priorities included in the 2018 Action Plan for Sustainable Finance.

According to Morningstar, at the end of June 2020, the total value of global investments in 3,432 “sustainable” funds exceeded 1 trillion USD. Europe is at the top of the market with a net flow of new investments amounting to USD 61 billion (86 percent of the total) and an overall stock of USD 870 billion (82 percent of the total) in the first half of 2020.

The uncertainty brought about by the Covid-19 pandemic has not curbed inflows, which reached a record global high in the second half of 2020 (+72 percent on the first half of 2020). The number of products (active funds and ETFs) that include ESG criteria in their investment policies also continued to grow: in the second half of 2020, some 125 new funds were offered to the market, of which 107 in Europe alone.