Human actions have shaped the environment. In response, climate change and the current state of nature and biodiversity have reshaped the way we live and the way we work. To combat these negative changes, a new player must enter this challenging landscape and strengthen the initiatives set out to drive sustainable development.
The finance sector is a key player in sustainable development, holding power and capacity to support sustainability projects and initiatives through funding. From aiding sustainable businesses and technology to supporting research and development, the finance sector has a great role to play in promoting sustainability and addressing the challenges brought about by climate change.
Meet sustainable financing, a new way to drive sustainability.
Sustainable finance integrates sustainability and ESG criteria into investment decisions to achieve long-term sustainability in both economic and ESG standpoints. Through sustainable financing, a business is able to boost financial performance but also contribute positively to people and the planet.
Sustainable finance may be confused with green finance yet there are clear distinctions between them. While both share common ground in strengthening environmentally sustainable projects, sustainable financing has a broader scope beyond the confines of creating positive impact towards the environment. Sustainable finance also covers social sustainability and good governance, thus incorporating all aspects of ESG into decision-making.
Spanning all pillars of ESG, sustainable finance covers environmental projects that address issues such as climate change, nature degradation, biodiversity loss, waste management, circular systems, and decarbonization. On the social side of sustainability, sustainable finance moves capital towards initiatives that would address community development, human rights protection, poverty alleviation, labor rights, and access to healthcare, housing, and quality education. Lastly, sustainable finance supports the improvement of practices such as transparency and anti-corruption, creating stable and resilient economies.
There is great value in sustainable financing beyond the support of impactful projects that usher sustainable development. By integrating ESG into investment decisions, a company is able to strengthen their risk management plans and better assess gaps and opportunities for improvement and sustainability integration. This also helps identify and mitigate risks that may not be easily fleshed out in financial analysis and reports, thus future-proofing investments on the long-run without risking financial performance. With sustainability in mind, a business gains an advantage in attracting more customers and investors as well.
There is a new way to drive sustainability. Gearing the financial sector towards making sustainable decisions helps economies adapt to tightening regulations and push themselves closer to global standards and targets. By mobilizing capital for sustainability, new markets anchored on ESG may emerge and create opportunities for employment and innovation.
Sustainable financing spans a diverse range of products and services, including loans, investments, insurance, and asset management, tailored to promote sustainable economic activities and projects.
Green loans finance projects with an environmental benefit. Under green financing, green loans aid borrowers in raising capital for green projects such as sustainable supply chain management, circular systems, and renewable energy development.
A loan is considered to be a green loan if it follows the Green Loan Principles, an international standard that provides guidance on this lending agreement. First, there must be a clear use of proceeds wherein the borrower must explain the green project and its benefits towards the environment, which are also to be measured and reported. This is then followed by project evaluation and selection. Here, the borrower narrates how the assessment and selection process works. The borrower will also disclose risk sustainability risk management plans for eligible projects. To ensure transparency and the proper use and management of the proceeds, the borrower is to track the proceeds and report the impact and results of the green project.
Green loans are suitable for mid-sized to large enterprises interested in leading sustainable development through environmental projects.
Like green loans, green bonds also fall under green financing. These exclusively finance or refinance projects with a clear objective of providing a positive impact on the environment, such as waste management, energy efficiency and renewables, and sustainable infrastructure. Its exclusivity towards green financing has made it attractive when one wants to invest on initiatives with an environmental impact and also strengthens transparency and reporting, ensuring accountability on the proper use of the bond.
The Green Bonds Principle is observed when using green bonds. These four components ensure transparency and provide guidelines on using these funds towards a greener and sustainable economy. Under the principles lies exclusivity towards green projects. Green bond issuers also have to disclose the criteria they use when considering proposals. Given the bond’s purpose to finance environmentally sustainable projects, the principles also state that issuers should track and report the use of the proceeds and its impact.
Green bonds usually have a bigger volume in comparison to a green loan and thus may be more appealing to larger-sized companies.
Protecting coasts, oceans, its ecosystems, and overall condition and health can be done through blue bonds. These bonds, which can fall under green bonds, are debt instruments used to raise capital from investors to support ocean-related initiatives that yield positive financial and environmental results. Typically, these projects consist of ecosystem management, conservation, and restoration, and marine waste management. Outside conservation and protection initiatives, blue bonds can also be used to fund projects that support sustainable industries and communities linked to oceans and coasts. These can include sustainable marine transportation, fisheries, and value chains, coastal protection and tourism, and water quality.
When issuing blue bonds, entities must disclose that the projects are not just to attract financing but a part of their corporate strategies. These projects should also fall under the United Nations Sustainable Development Goals to eradicate poverty and protect the planet, especially life under water and other related communities.
Reporting is also essential when issuing blue bonds. Besides its impact, information regarding the projects, its related studies and research, and its use of resources are to be disclosed.
Sustainable social impact can be brought to life through social bonds. These debt instruments, like green and blue bonds, exclusively cater to financing new and existing social impact projects. While green and blue bonds strengthen environmental initiatives, a social bond supports populations and communities that are more vulnerable, such as low-income communities, displaced persons, marginalized groups, gender minorities. With these sectors in mind, a social bond can be used to fund projects that provide access to affordable housing, quality education, essential services, sustainable food systems, and employment opportunities.
Following the Social Bonds Principles, social objectives, the process of determining projects that can be considered as a social project, the evaluation criteria, and the sustainability risk identification processes should be disclosed to investors by the issuer.
Similar to green and blue bonds, transparency and accountability is important when using a social bond. Reporting the management of the proceeds and its social outcomes is a required practice.
It is also good to know that there may be occurrences of a social project also yielding an environmental benefit, given the interconnectedness of the sustainability pillars. Yet for better clarity when classifying a bond under sustainable financing, the primary objective and its target populations or ecosystems should be considered first. In the occurrence of a project that combines both social and green projects together intentionally, this can be classified as a Sustainability Bond.
Sustainable financing is a vital method of steering growth and sustainable development. It opens up the finance sector in mobilizing capital towards supporting sustainable projects for the people and the planet, driving innovation, and contributing to economic growth. By properly observing these principles and practicing accountability and transparency, the finance sector can spearhead endeavors towards building a sustainable future.
At Keslio, we are deeply passionate about sustainability, equipping us with the expertise and extensive network needed to guide clients through their sustainability journey effectively and efficiently. Our expertise is particularly valuable for companies looking to embed sustainability practices into their businesses and investors looking to integrate ESG and impact into investment portfolios. To learn more about how Keslio can assist your organization on its sustainability journey, please don't hesitate to get in touch with us.
