The investment industry has undergone significant changes over the years. Gone are the days when investors only depended on financial factors and numbers before making investment decisions. At present, investors consider numerous aspects before choosing the right company. Sustainable finance is among the most significant changes witnessed by the investment industry. Investors do not prefer companies that directly or indirectly cause deterioration to the environment and society.
Similarly, consumers have become aware of unsustainable businesses. Most unsustainable corporations could run out of business soon. Hence, investors count on banks and advisory firms to help them find better opportunities. As a result, the demand for sustainable finance solutions has increased over the past few years.
Read on to understand the journey of the investment industry towards sustainable finance.
Understanding the concept of sustainable finance and ESG
Businesses should not be allowed to make profit at the cost of the environment and society. With this concept in mind, in 2022, the government launched several compliance norms to ensure companies do not harm the environment and society. Companies have to look after the environment, according to the law. A corporate entity cannot continue to pollute the environment. Similarly, a corporate entity must ensure a safe workplace for its employees. Compliance laws, such as the Prevention of Sexual Harassment (POSH) at workplace, ensure that corporate entities do not create a hostile workplace for their employees. All these laws ensure that companies are taking the right step towards sustainability.
When investors distribute capital based on the sustainability level of the target company, it is known as sustainable finance. Most investors want their portfolio to be full of sustainable companies that positively impact society. Sustainable businesses are likely to offer long-term profits to investors/stakeholders. Consumers are the backbone of any successful corporate entity.
Nowadays, media covers the unsustainable actions of corporates quite aggressively and the information spreads faster than ever. Such corporates get blacklisted by investors and start underperforming. Investors need to look for sustainable corporate entities that will not run out of business.
Investors rely on the overall Environmental, Social, and Governance (ESG) score to understand a corporate entity’s sustainability level. Carbon emissions, greenhouse gas emissions and air pollution are some environmental factors that are used to determine the overall ESG score. Similarly, forced labour, equal representation and workplace safety are some social factors used by investors to assess the sustainability level of a corporate entity. In addition, investors might check an organisation’s internal controls to determine its governance level.
After analysing the ESG factors, an ESG score (between 0 and 100) is assigned to the company. Several independent organisations also distribute ESG ratings. The better the ESG score of a company, the more the chances of getting financial support from investors. Investors and rating organisations count on sustainable finance solutions to determine ESG scores for corporate entities. Not all investors are experts in ESG analysis and might require external support.
How to plan a roadmap towards sustainable finance?
Every investor wants to acquire and own a sustainable portfolio, but only a few succeed. Investors usually depend on investment banks and advisory firms to discover sustainable finance options. It is impossible to discover sustainable finance options in this complex business landscape. Also, investment banks and advisory firms do not have the required sustainable finance solutions to work with. ESG analysis can get complicated and hence requires immense expertise. ESG ratings by independent organisations are not available for all corporate entities. Independent organisations might only rate a few of the top corporate entities.
Since the demand for sustainable finance has increased, investment banks and advisory firms must fulfil client demands in terms of sustainable investments. The best option for banks and advisory firms is to partner with research firms that can provide ESG support on sustainable finance. The research partner will generate ESG reports for customers, helping them take informed investment decisions at a lower cost.
Start moving towards sustainable finance now!