More and more enterprises are rapidly adopting sustainable finance, with a demonstrated 10% growth in global markets reported in 2023. In a study by Deloitte, 90% of respondents indicated that sustainable finance is already central to almost everything they do, or it is becoming integral to much of what they do.
The purpose of this guide is to bring some clarity to the complexities of sustainable finance, so stakeholders can more readily set aligned priorities and effectively bring sustainable finance to their organizations.
What Is Sustainable Finance?
Sustainable finance supports economic growth by focusing on sustainable projects and practices using a variety of financial products like loans and investments. This practice encourages companies to attract investments based on their sustainability credentials, while also applying similar criteria when deploying their capital. This ensures that their business operations contribute positively to society and the environment.
Business Benefits of Sustainable Finance
Several advantages to sustainable finance go beyond producing dividends. Here are a few of the outcomes that contribute to a company’s long-term sustainability and competitiveness.
Reduced cost of capital
Sustainable investments often attract a broader base of investors, including socially responsible investment funds and individuals looking for ethical investment opportunities. This increased demand for a company’s securities can lead to a lower cost of capital, as investors may be willing to accept slightly lower returns in exchange for contributing to positive social and environmental outcomes.
Companies focused on sustainability are also often seen as lower risk, as they proactively manage environmental, social, and governance issues that could potentially lead to financial liabilities or damage to their reputation. Lower perceived risk can result in lower costs for financing.
Decreased operational costs
Sustainable investments often lead to more efficient operations, particularly in terms of energy use, water consumption, and waste management. These improvements can significantly reduce operational costs over time.
Another way companies reduce operational costs is through investing in a sustainable supply chain. This can lead to more stable and resilient supplier relationships, reducing the risks and costs associated with supply chain disruptions.
Enhanced brand value
Demonstrating a commitment to sustainability can strengthen a company’s brand, leading to increased customer loyalty. Customers are increasingly favoring brands that align with their values – as long as brands demonstrate that value authentically.
This improved brand image can also help attract high-quality employees. Companies known for their sustainability efforts are more attractive to top talent, particularly among younger generations who prioritize working for employers with strong environmental, social, and governance (ESG) credentials.
Regulatory compliance
Sustainable investing ensures a company meets or exceeds regulatory standards, avoiding fines and sanctions related to environmental and labor rights violations. In addition, many governments offer tax incentives, grants, or subsidies for projects that contribute to sustainability goals, such as renewable energy installations or energy efficiency improvements.
Vehicles for Corporate Sustainable Finance
These vehicles for corporate sustainable finance are designed to support environmental and social objectives while aligning closely with a company’s financial goals. From sustainability-linked debt financing to sustainable investing, each option offers a unique pathway for businesses to contribute positively to global sustainability efforts while pursuing economic growth.
Green bonds
Corporations can issue green bonds to raise funds for new and existing projects with environmental benefits. These bonds are dedicated to financing or refinancing projects related to renewable energy, energy efficiency, sustainable waste management, clean transportation, and water conservation. For example, a company could issue green bonds to finance the construction of solar power plants or to upgrade facilities to reduce carbon emissions.
Social bonds
These bonds direct investor capital toward initiatives designed to improve social and economic outcomes, combining financial returns with tangible social impact. Projects financed by social bonds range from improving healthcare and education access to supporting sustainable agricultural practices. As part of the sustainable finance market, social bonds attract investors keen on contributing to positive social change alongside earning a return on their investment.
Sustainability-linked loans
The interest rate for these loans is tied to the borrower’s achievement of sustainability targets. A corporation might secure a sustainability-linked loan with terms that offer lower interest rates if it meets specific ESG criteria, such as reducing greenhouse gas emissions or improving energy efficiency in its operations.
Sustainability-linked bonds
Similar to green bonds, but with a broader focus, sustainability-linked bonds are designed to finance or refinance projects that have a positive impact on the issuer’s sustainability performance. The return on these bonds is often linked to the issuer’s achievement of ambitious, predefined sustainability targets.
Negative screening
This is the process of excluding certain sectors, companies, or practices from a portfolio based on specific ESG criteria. For example, investors might avoid companies involved in fossil fuels, tobacco, or arms manufacturing due to their negative environmental or social impacts.
Positive screening
For this, investors actively select companies or sectors for investment based on positive ESG performance relative to industry peers. This may look like prioritizing companies with strong sustainability practices, renewable energy projects, or exemplary labor relations.
ESG integration
This is the integration of ESG factors into traditional financial analysis and investment decision-making. Investors may analyze a company’s ESG practices alongside financial metrics to identify risks and opportunities not apparent through financial analysis alone.
Thematic investing
This is the practice of focusing investments on specific ESG themes or issues, such as climate change, sustainable agriculture, or clean energy.
Impact investing
This strategy involves investing to generate positive, measurable social and environmental impact alongside a financial return. Examples include directing capital towards affordable housing, healthcare, education, and other projects with clear social benefits.
Resources and Tools for Sustainable Finance
A wealth of resources and tools are available to guide companies along their sustainable finance journey. These resources can help your business measure ESG performance, identify improvement areas, and communicate progress to stakeholders.
Here are some key platforms and resources to get you started:
Sustainalytics
A global leader in ESG and corporate governance research and ratings, Sustainalytics offers comprehensive insights that help investors and companies integrate ESG factors into their investment strategies and operational decisions. Its services include industry reports, company specific ESG risk assessments, and screening tools to help identify and mitigate potential ESG risks.
MSCI
Known for its ESG research, MSCI provides critical decision support tools and services for the global investment community. With a focus on delivering in-depth research, ratings, and analysis of the environmental, social, and governance-related business practices of thousands of companies worldwide, MSCI helps investors build and manage better portfolios. Its tools enable businesses to understand their ESG performance relative to peers and to identify areas for improvement.
ESG data platforms
An ESG data platform is a specialized digital solution designed to collect, analyze, and report on ESG metrics of companies, investments, and projects. These platforms serve as critical tools for investors, corporations, and other stakeholders interested in the sustainability and ethical impact of their investments or operational practices.
Implement Sustainable Finance in Your Business
Integrating sustainable finance into your business operations can be a transformative process. It aligns financial success with environmental stewardship and social responsibility. To get started down this path, it’s vital to examine what sustainable finance means within the context of your business.
Antea Group can help. We use a business-first approach to surface how sustainable finance aligns with your business goals. This helps you identify opportunities where environmental stewardship and social responsibility can drive financial success.
Let Antea Group’s Sustainability Consulting for Corporate Responsibility team help you discover your path to sustainable finance.