Sustainable finance: what is it and why is it so important today

Sustainable or responsible finance is an important innovation in placing the financial system at the service of collective welfare.
sustainable finance

Sustainable or responsible finance is an important innovation in placing the financial system at the service of collective welfare and is the application of the concept of sustainable development to financial activity.

Thus integrating into it environmental, social and governance principles, summarized by the acronym ESG, which stands for Environmental, Social and Governance.

What are ESG principles

The acronym ESG dates back to 2005. It refers to a set of measurement criteria and standards of an organization’s environmental, social and governance activities. These are parameters that are used by investors to evaluate their investment choices. Resulting in a set of standards by which a company’s operations must be guided to ensure the achievement of certain environmental, social and governance outcomes.

The criteria underlying the letter “E” of Environmental are the environmental ones. Which assess how a company behaves toward the environment in which it is located.

Those linked to the letter “S” of Social are related to social impact. And, they examine the impact and relationship with the territory and people. Namely, employees, suppliers, customers and in general the communities with which it operates or with which it is related.

Finally, the “G” of Governance relates to issues of corporate management inspired by best practices and ethical principles. Such as, logics related to executive compensation, respect for shareholders’ rights, transparency of business decisions, and respect for minorities.

Why sustainable finance is important

Sustainable finance has a key role to play in achieving the strategic goals of the European Green Deal and the EU’s international climate and sustainability commitments.

This, as it channels private investment on the transition to a climate-neutral, climate-change resilient, resource-efficient, and equitable economy.

The transition to a low-carbon economy is strongly supported by the EU. Which has been at the forefront of efforts to build a financial system conducive to sustainable growth.

Responsible finance will be able to make an important contribution. This, to ensuring a sustainable recovery after the Covid-19 pandemic by targeting investments and redirecting them to technologies and companies with lower environmental impact.

In this way, we can move toward creating a low-carbon circular economy. Therefore, sustainable finance is very important not only in improving the health of the planet, reducing damage to the environment and economy caused by weather disasters. But also, in the long term, in attracting new capital.

Sustainable finance worldwide

The principle of sustainable finance defines ethical and sustainable finance operators as those who evaluate financing “with particular attention to social and environmental impact.”

The European financial world stands out globally for its commitment to sustainability issues. This is noted by the EY Sustainable Finance Index. Namely, the global benchmark that compares more than 1100 financial services companies. Thus including banks, insurance, asset and wealth management companies around the world in relation to ESG parameters.

The EY Index ranks the progress of different countries on the road to sustainable development. This, by assigning a score from 1 to 10 to measure the breadth and detail of information related to ESG activities.

Read also: All about GreenVesting: the best opportunities for investing in the green economy

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