What Is Sustainable Finance and Why Is It Important?

– Shirley Fong  is the VP of Operations @ Rydoo and Ale Jimenez Aguirre is the Head of Legal Operations @ Rydoo

The average global temperature has been increasing by 1 degree Celsius (1.7 Fahrenheit) since the end of the 19th century, and it will rise by about 1.5 degrees in 2050. It doesn’t take a lot of research to understand that and its effects on the planet are real and that we all need to take action to avoid its consequences. But it goes way beyond individual actions.

Because as the planet faces more challenges, such as climate change, people are paying closer attention to their impact. They’ve become a lot more conscious and strive to make safer choices. As Sebastien Marchon, Rydoo’s CEO, said when he discussed the company’s goal to reach net-zero gas emissions by 2025, “As citizens, we have a responsibility to do everything in our power to overcome global warming, and as a CEO, I have that responsibility as well”.  Thus, individuals are demanding their governments and companies to do the same.

The finance sector has one of the biggest influences on global economic activities, so it also holds great responsibility in the fight against climate change. Making the world a better place requires big changes all around. And what do you need to make those changes happen? Money, and a lot of it. And this is also where the financial world comes in, as it’s essential to help make those changes possible. It might not seem obvious at first glance, but if you take a closer look, it becomes clear that there’s a connection between the two.

Understanding sustainable finance and making some changes in business is no longer an option, but a responsibility.

Sustainable Finance has thus emerged as the answer to these challenges and has become more than just a buzzword. It now represents a shift in the way investments and financial decisions are made. Hence why it’s important to integrate environmental, social, and governance (ESG) criteria imposed by governmental frameworks into financial strategies. That way, the sector can manage risks better but also capitalise on new opportunities presented by the green transition. From green bonds funding renewable energy projects to impact investments targeting specific positive outcomes, sustainable finance is reshaping the financial landscape.

And in a time where protecting the planet is more important than ever before, understanding sustainable finance and making some changes in business is no longer an option, but a responsibility. Knowing everything there is to know about the principles of sustainable finance positions companies at the forefront of a rapidly changing industry, whilst also ensuring they stay compliant.

Sustainable finance is much more than just numbers and profits: it represents a commitment to the broader impact of investment decisions. It’s about supporting economic growth while simultaneously using the power of investment funds to back companies that uphold the highest standards in environmental, social, and governance aspects. 

It’s not simply about where the money goes, but how it’s used to foster a better, more sustainable world. And to further understand this, it’s important to define the three main pillars of sustainable finance: environmental, social, and governance (ESG).

1. Environmental

This dimension looks into the way in which a company respects and interacts with its environment. It evaluates areas such as energy consumption, waste management, conservation efforts, treatment of animals, and actions related to deforestation. 

It’s not just about avoiding harm, but about actively having a good impact on the planet.

2. Social

The social aspect of sustainable finance examines a company’s relationships. How they treat their employees, customers, and the community around them. 

Some of the main areas of focus include diversity and inclusion practices, data protection, its record on human rights, stakeholder engagement, and the broader contributions they make to society.

3. Governance

The last (but certainly not the least) pillar of ESG standards looks at the structures and practices that guide a company’s operations and how it seeks to influence and affect decision-makers. 

It examines aspects like shareholders’ rights, the transparency of their operations, the diversity and function of the board of directors, and executive pay structures. It also takes into consideration the company’s stance on issues like bribery, political contributions, and how they compensate partners in their ventures.

In essence, sustainable finance is a thorough approach to investment. It recognises that true value isn’t just about immediate returns but about creating a world that’s better for everyone in the long run.

For many executives, ESG finance is a new and uncharted land. Sustainable finance has been mostly going under the radar for quite some time and has now reached the point where there are more sources of funding than ever for compliant enterprises. These go from official bodies and supranational institutions or organisations formed by extensive multilateral treaties, such as the UNFCCC and the OECD; to community-based platforms such as online crowdfunding and fundraising focused on environmentally friendly technologies or technologies.

Sustainable finance has now reached the point where there are more sources of funding than ever for compliant enterprises.

For example, with the European Green Deal, the European Commission has adopted a set of policies which aim to transform and modernise the European economy, while consciously protecting society and the environment and achieving carbon neutrality by 2050. This transition will require financial resources too, and it will also entail that investment decisions are made with sustainability in mind.

From individual investors to banks and major institutional funds, everyone in the finance world is pushing towards an ESG-driven approach, and businesses who are looking for some investments can’t afford to ignore the trend. Doing so is not just playing with fire: it’s not looking at the bigger picture.

Investors now look for assurances that companies are also evaluating environmental risks and that they have plans in action to address them.

With commitments such as the Paris Agreement, the European Green Deal, CSRD, or the heightening of the call for climate action, it’s expected that stricter government regulations around sustainability reporting will come into action sooner, rather than later. Non-compliant businesses may find themselves facing repetitional challenges, which can affect their customer loyalty and investor relations.

It’s also becoming clearer that investors expect more than just financial metrics from the businesses they’re targeting. In a world where the private equity landscape has shifted, other metrics come into play. Investors now look for assurances that companies are also evaluating environmental risks and that they have plans in action to address them.

This shift is both a challenge and an opportunity for those in finance. As Kevin Hagen, VP of ESG Strategy at Iron Mountain pointed out in a Harvard Extension School article on sustainable finance, “Accounting functions need to add skills for gathering, managing, analysing, and reporting a whole new genre of business metrics, such as greenhouse gas emissions, gender pay gap results, and ethics and anti-corruption indicators.”

The first thing to consider is that ESG principles can help make investments less risky. When a company is truly committed to sustainability, they’re more likely to be protected against the backlash of poor ESG practices, as they have more understanding of the world in which they operate. 

Having a strong awareness of the environment helps as well. Companies that take proactive actions towards environmental protection can easily avoid the costs of having to fix damages when they occur, protecting them from unexpected financial hits. If a company is already aware of the impact an aeroplane ride will have on the environment as opposed to taking a train, for instance, they will most likely opt for the greener option, thus avoiding having to compensate for the carbon emissions. 

There’s also the allure of funding opportunities that are reserved for green and ethical projects. By having a sustainable strategy in place, organisations are most likely to not only join in the conversation but also get a seat at the table. 

Aside from all this, organisations that follow ESG values tend to be more transparent — and often proud — of their policies. They want to share them with the world, and investors value the gesture, as they get the full picture of the organisation’s structure and culture, which often includes a full review of their social and environmental impacts.

Whilst at first glance it might seem something easy to achieve, the journey to sustainable finance does not happen overnight. It’s not expected for organisations to change and adjust all their operations instantly. It’s a marathon, not a sprint.

Businesses that seek to achieve a more sustainable approach to their finance processes should, first and foremost, have a clear roadmap with a step-by-step transition towards fully sustainable operations. And it’s not just about strategy, but also about embedding a culture within the company. Sustainable principles should be adopted from the top down so it can truly resonate with ESG-minded investors.

The good news is there’s no lack of resources out there for companies who wish to embark on a sustainability journey. Institutions like the OECD (The Organization for Economic Cooperation and Development) for Green Finance, for instance, provide some guidance and highlight opportunities for obtaining grants and favourable loan terms. The Sustainable Europe Investment Plan, which will mobilise public and private funding towards the environmentally friendly economic transition goals of the European Green Deal, should also be kept in mind when on this path.

But before all this, the first step a company should take is understanding the true benefits of adopting sustainable practices. Understanding how ESG can offer genuine and long-lasting opportunities will help gather the support of executives, customers, shareholders and even employees easily.

Then, businesses must embrace that this commitment means continuous learning. The world of sustainable finance is far from static, it stays dynamic with emerging best practices, evolving regulations, and new technological solutions, and companies should keep up with all these changes, so they’re ready to innovate and adapt their practices according to the market. For that, teams should have access to workshops, seminars, and certifications that can provide insights and tools for them to navigate the often-complex landscape of sustainability.

Engaging with key stakeholders, from suppliers to customers and even local communities, asking for their feedback and advice, is also essential for businesses on the path to sustainable finance. Their insights can help better understand the needs and challenges of the community, whilst also uncovering great opportunities for businesses to collaborate. This collaboration not only helps to open doors to innovative solutions but also solidifies the trust necessary for success.

It’s not a walk in the park to make this transition, but the benefits of making the commitment and working towards a more sustainable approach can help businesses achieve great benefits, including the trust and confidence of investors and customers alike. All they need to do is take the first step.