The European Commission describes sustainable finance as “the process of taking environmental, social, and governance (ESG) considerations into account when making investment decisions in the financial sector, leading to more long-term investments in sustainable economic activities and projects.”
Discussion around transitioning to sustainable finance has become a popular one following the approval of the European Union’s (EU) Green Deal in 2020, aimed at transforming the EU’s economy to become climate-neutral by 2050.
According to GlobalData’s ‘Net Zero Strategies in Financial Services’ report, nearly every leading banking and payments company has a long-term net zero goal. Sustainable finance has a key role in delivering the policy objectives under the Green Deal by channelling private investment into the transition to a resilient, fair, net-zero economy.
Strategic business opportunities in transitioning to sustainable finance
Often, the transition to sustainable finance and the implementation of green initiatives are perceived as risky and costly. The UK government estimates that to deliver on the UK’s net zero ambitions, through the late 2020s and 2030s, an additional £50-60bn ($63-76bn) capital investment will be needed each year. Nonetheless, there are huge, overlooked business opportunities to be realized from this transition in the long term.
Firstly, there is a growing market demand for sustainable financial products, such as green bonds and sustainability-linked bonds, and so the growth potential for these products is significant. Sustainable finance also creates new investment opportunities in emerging green industries and technological innovations. This can drive innovation and the creation of a new job market. Taking into consideration climate and ESG factors when making core business decisions further allows businesses to reduce and mitigate risk exposure against ESG-related risks like fraud avoidance, price checking, etc.
Additionally, from a revenue perspective, sustainable finance can benefit businesses by reducing operational costs through more efficient resource allocation and automated asset and ESG reporting. A Morgan Stanley research paper in 2019 titled ‘Sustainable Reality’ showed that there was no financial trade-off in the returns of sustainable funds compared to traditional funds and that they demonstrated lower downside risks. This invalidates the common misconception that sustainable investments yield lower returns.
The role of innovative technologies
With the rise of greenwashing practices, the regulatory crackdown on organizations exaggerating their environmental credentials for marketing purposes has intensified. The current regulatory frameworks, like the Sustainable Finance Disclosure Regulation (SFDR) in the EU and the Sustainable Disclosure Regulation (SDR) in the UK, place restrictions on the use of the terms ‘green’ and ‘sustainable’, and businesses must comply with mandatory ESG disclosure and reporting requirements to prove this.
This means that they must ensure their data is readily available and reliable. Technologies like artificial intelligence (AI), machine learning (ML), blockchain, and the Internet of Things provide the capabilities to effectively address the challenges of emissions reporting and ESG-related regulatory disclosures. Companies have a lot of unstructured data which AI and ML can help to convert into structured digital forms, which is necessary for accurate reporting.
Compliance with regulations will present long-term benefits to businesses as greater transparency and strengthened governance help build stakeholder trust and enhance brand reputation.
