quotes How sustainable finance is redefining the financial landscape

06 February 2024
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Updated 06 February 2024

How sustainable finance is redefining the financial landscape

Sustainable finance emerged in the late 20th century in response to growing concerns over climate change and ecological degradation. The 1992 Earth Summit marked a turning point, urging financial institutions to embrace greener options such as green bonds and loans. This financial approach integrates environmental, social and governance factors to reshape the finance landscape, prioritizing positive impact, long-term sustainability and financial returns. The momentum behind sustainable finance is driven by evolving stakeholder expectations, resource scarcity and climate concerns.

Public and private green finance serve different roles. Public green finance stimulates private investment by leveraging subsidies and guarantees, unlocking $554 billion in private climate finance in 2022. It funds research, de-risks innovative technologies, and fosters a level playing field for sustainable projects through fiscal and monetary policy. Meanwhile, private green finance provides essential scale and innovation, contributing to the $35.3 trillion in global sustainable investment assets in 2023. Its role includes developing and scaling green technologies, enhancing market efficiency and directing capital to impactful projects. Combining the tools of both public and private green finance forges a powerful synergy, bridging the financing gap and accelerating the transition to a sustainable future.

Sustainable finance disrupts by altering the capital flow, directing resources to projects like renewable energy and clean technologies. An 88 percent adoption of ESG factors by global asset owners, up from 30 percent in 2018, signals a profound shift in value definition. In a Morgan Stanley survey, 72 percent of investors deemed ESG integration “critically important” for long-term returns. This emphasis on sustainability reshapes capital flows, with $323.4 billion invested in global ESG assets in 2023, highlighting the redirection of capital toward greener projects.

The financial sector’s sustainable journey is rapidly evolving. Initially, green loans enabled borrowers to fund environmentally positive projects, followed by the introduction of green bonds for substantial environmental projects. Banks, as economic engines, now integrate ESG factors in financing and investment decisions, reshaping economic priorities. The rise in financial institutions offering sustainable finance services is evident, with the total value of green loans and bonds reaching $417.8 billion in 2022. This growth fosters the development of innovative financing solutions, reflected in the global increase in green lending, showcasing the continuous expansion of sustainable finance.

Key players in sustainable finance have the opportunity to collaborate, utilizing their resources and capital to foster positive financial outcomes.

Sovereign wealth funds, managing more than $8 trillion globally, play a significant role in sustainable finance. These funds, with diverse purposes like economic stabilization and funding social or economic objectives, actively prioritize sustainability for long-term economic benefits. Investments in renewable energy, clean technologies and sustainable forestry projects demonstrate their commitment, influencing portfolio companies to adopt ESG practices. Recognizing the value and risk mitigation of sustainable investing aligns with the overall approach of sovereign wealth funds. Investment funds, incorporating ESG criteria, use thematic ETFs and dedicated impact funds to concentrate on specific themes, responding to investor demands. Since 2020, sustainable investment assets under management in non-US markets have increased by 20 percent.

Sustainable financing is transforming the financial landscape, with ESG factors becoming influential determinants of value. Green bonds directed more than $1 trillion to climate-friendly projects in 2023, projected to reach $2 trillion in 2024. Sustainability-linked loans, reaching almost $300 billion in 2022, adjust interest rates based on borrower ESG performance. Studies show that 70 percent of ESG-integrated portfolios outperform their non-ESG counterparts over five years, reshaping risk profiles and driving innovation. Green financing and investment not only contribute to environmental benefits by mitigating resource depletion and climate change, but also promote economic growth in new sectors. Additionally, sustainable finance enhances the social sector, improving livelihoods through investments in education and health.

Sustainable finance is poised for significant expansion in the next decade, with advancements in data transparency and impact measurement through blockchain and AI technologies. The global surge in demand for sustainable investments has spurred product development and innovation. It represents a fundamental shift in the financial framework, not just a trend. Key players in sustainable finance have the opportunity to collaborate, utilizing their resources and capital to foster positive financial outcomes. This promising scheme has the potential to drive substantial changes in the financial system and environment, facilitating the transition to a sustainable and inclusive economy.

Majed Nezar Al-Qatari is a sustainability leader, ecological engineer and UN Youth Ambassador with experience in advancing ESG and sustainability goals in corporate businesses, nonprofit organizations and financial institutions.