Sustainable finance: what exactly does it mean and how is it helping to slow climate change?
Essentially, sustainable finance is a combination of sustainable development and finance. Sustainable development, according to the United Nations’ (UN) World Commission on Environment and Development, is “development that meets the needs of the present without compromising the ability of future generations to meet their own needs.”
So sustainable finance is the act of providing money to help the world reduce environmental degradation, helping fund the goals set out in the UN’s Paris Agreement on climate change. Sustainable finance is generally done by funding eco-friendly projects and allowing investors to be more discerning in which companies they invest their money.
Most university students don’t have the time or money to think about investments. But for the sake of knowledge and considering some options for the future (when you have a salary that allows you to invest), here are some interesting new investing trends for a greener planet.
At its core, a green bond is money raised to fund a green project. These green projects must have a positive climate or environmental impact (e.g., solar panels, wind turbines).
Though this type of funding is growing in popularity, real-world examples are still few in number. One prominent example in Canada is the green bond Scotiabank issued in July 2019. With the money raised by Scotiabank, they promised to use this money only to fund green projects including “renewable energy, clean transportation and green buildings,” according to their website.
On top of funding projects that will help reduce climate change, a lower interest rate (and thus cheaper financing) is one of the benefits of getting green bonds, as shown by the green bond the city of Toronto issued in December 2020.
For personal finance, such as retirement savings, ESG (environmental, social and governance) investment is one way people can put their money towards climate and environmental benefits. It involves adding environmental, social and governance decisions to the regular investment decisions you make.
An example of this may be to exclude oil companies or gun manufacturers from an investment portfolio. It is also possible to invest by putting money into an ESG index fund, such as XESG. According to investment management company BlackRock’s website, XESG “seek[s] similar risk and return to the broad Canadian equity market while achieving a more sustainable outcome.” Including ESG in investment decisions helps to send a message to corporations that climate change and the environment are of serious concern to individual investors.
As the current market for green investment products grows, there will be further financial innovation to help causes and companies that aim to help the environment and climate. One such product the industry is starting to look at is green deposits.
A green deposit is a way for people to place their money at a bank, like a regular deposit, with the bank’s promise to only use the funds for green projects and companies. For example, the bank may lend the money in the form of a green loan. This type of product could further incentivise companies to become more environmentally conscious. If more money were deposited in the form of green deposits, it could reduce the amount of money available to companies deemed not environmentally friendly, and thus increase the interest on their loans.
While there has been progress, sustainable finance is still only a small part of the global financial machine. This sector’s growth needs to be even quicker to reach the goals set out in the Paris Agreement.
It is well known the financial industry does not always have society’s best interests at heart. As with everything in sustainable development, there is still further work to be done by the government, corporations and individuals to meet the Paris goals for an environmentally conscious future. If you have the money either now or in the future, these green investment options may be a useful step to consider in helping create a more sustainable future.