What about you? Do you do green finance?

27/02/2020

You may have noticed a term –sustainable finance–  that keeps cropping up whenever topical financial issues are discussed in the media or on social networks. But sustainable finance is no passing fad. It’s far more than that.

True, sustainable finance cannot be easily defined in just a few words. But it generally refers to investment that takes into account social, governance and environmental considerations, perhaps not exclusively, but certainly as prominent or even priority factors.

So how has the world of finance come to discuss environmental risks?

By its very nature, climate change associated with global warming is a worldwide concern. It has prompted initiatives across a wide range of fields, although until recently it had been viewed as somewhat beyond the realm of the financial system. All that changed in 2015 with ratification of the Paris Agreement, which identified the financial sector as a key means of channelling finance towards development of a sustainable economic model.

The EU has set out an action plan aimed at connecting the financial system with sustainable development. The plan covers all market operators, including central banks and supervisory authorities. Specifically, the latter are required to, first, ensure that financial institutions take into consideration risks associated with climate change; and, second, establish the right conditions to steer capital flows into the transition towards a sustainable economy. 

Several courses of action have been identified to help make this happen:

• Establishing a common language for sustainable finance, rendering it easy to identify whether a given economic activity is sustainable or not.
• Working to ensure that major investment decisions are not determined exclusively by financial considerations, such as risk, return and liquidity. They must also take into account sustainability factors (environmental, social and governance), including greenhouse gas emissions, the depletion of natural resources and working conditions.
• The disclosure of information to investors, consumers and economic agents on the environmental impact of company activities.

Combating climate change requires a concerted effort from all stakeholders: governments, public institutions, financial institutions and every single one of us. We are all stakeholders when it comes to planet Earth. All of us need to do our bit.