Sustainability has become a buzzword that major corporations, news outlets, and even family dinner tables use more frequently than ever, but how do we know what is sustainable and how do we get there?
Sustainability
Sustainability, or sustainable development, has been described by the United Nations as “development that meets the needs of the present without compromising the ability of future generations to meet their own needs.” The term has become nearly ubiquitous, and its meaning is lost in translation as it becomes a staple for car manufacturer goals, the foundation of non-profit organizations, and the 17 Sustainable Development Goals that the United Nations set in 2015.
There are many steps on the path to achieving large goals such as the UN’s 17 SDGs. Recycling, or ensuring that trash is at least reduced in areas like beaches; reducing emissions, sometimes through sustainable transportation that doesn’t emit pollutants, like biking; and pushes towards renewable energy, such as solar and wind.
A Growing Movement
Thankfully, there is no shortage of projects that promote green energy, recycling, or afforestation. Yet, when it comes to putting into place and completing projects of this subject and on a large scale, it is easier said than done.
Sustainability projects, especially large-scale renewable energy ones, are extremely costly. Global investment in clean energy has increased significantly in recent years, while investment in fossil fuels has steadily declined. The World Economic Forum quantifies how more money has been invested in our green future now than ever, as sustainable assets under management surged from $30.7 trillion in 2018 to $35.3 trillion in 2020.
Does Finance Benefit Sustainability?
In 2015, the University of Chicago Booth School of Business published an article titled, “Does Finance Benefit Society?” Today, we must ask another, equally important question, “Does Finance Benefit Sustainability?”
The short answer: yes, it does. Finance is not simply a mechanism to maximize wealth for individuals, but also a blend of intricate pieces that allows the promotion of sustainable development projects, creation of conservation funds, and operation of environmental institutions.
Sustainable Finance
The intersection of finance and sustainable development is labeled, appropriately in my opinion, sustainable finance. KPMG, a major consulting and advisory firm, describes sustainable finance as “the investment process accounting for and promoting environmental and social factors.” Every loan given, bond created, or fund managed that helps promote sustainable projects are participating in an overarching network of sustainable finance.
Partners of funds or banks that issue debt provide what are called sustainability-backed loans – loans invested in projects that aim to achieve certain sustainable linked goals by a deadline. These loans are a great option for companies to increase their sustainability profile. Bonds can be used to finance projects as well. Green and sustainable bonds and sustainability-backed bonds are two types of bonds, or credit issued in public markets, that invest in projects that have intended environmental goals or deadlines. Outside of loans and other debt, there are many other financial mechanisms dedicated to advancing sustainability projects. Green equities are shares of stocks invested in companies and/or funds promoting some positive environmentally-friendly outcome. This could be split into investments in green companies, which are companies that may try to promote positive environmental outcomes, and green funds, which are mutual and/or exchange-traded funds indexed for companies that promote positive environmental outcomes.
An important term to keep in mind is environmental/green finance. Green finance is defined as encompassing all types of projects that are concerned with either optimizing environmental benefits or reducing environmental risks. Some kinds of green finance include climate finance, which refers to financing methods that drive low-carbon development, and climate change mitigation/adaptation, which aims to avoid emissions of greenhouse gases and altering our behaviors to protect the environment.
In our efforts as a society to promote environmental sustainability and a greener future, finance is not an idea that should be left behind. If anything, we will need finance to achieve our sustainability goals, and we may find that it is going to pave the way to a greener future.
