How does sustainable finance affect the world?

Discuss the concept of sustainable finance and its impact on the global economy.

The push to live more sustainably is changing how we live. But what does this mean for the way we invest our savings and pensions? Welcome to the world of finance that helps the environment.

In recent years, environmental, social, and governance (ESG) factors have come to play a big role in many investment decisions. Simply put, this means that you should invest your money in ways that will make the world a better place.

What is long-term finance?

Sustainable investing includes a lot of different things, like putting money into green energy projects and putting money into companies that show social values like social inclusion or good governance by, for example, having more women on their boards.

Sustainable finance is a key part of getting the world to net zero by putting private money into carbon-neutral projects, says the European Union. Their Green Deal Investment Plan aims to raise $1.14 trillion to help pay for making Europe net zero in climate change emissions by 2050.

The International Financial Reporting Standards Foundation just set up the International Sustainability Standards Board to come up with new rules to verify sustainability claims. This is to make sure that sustainable investments do what they say they will do.

Sustainable finance provides better returns.

Sustainable businesses not only help the environment and make society more fair and inclusive, but there is more and more evidence that they also give investors higher returns.

A study done for the asset manager Fidelity looked at the performance of ESG investments around the world from 1970 to 2014. It found that half of them did better than the market. Only 11% did worse than expected.

BlackRock, the biggest asset management company in the world, did some research and found that during the peak of the COVID-19 pandemic in 2020, more than eight out of ten sustainable investment funds did better than share portfolios that didn't take ESG factors into account.

According to research by the financial website Morningstar, companies with high ESG ratings have seen their share prices rise faster and pay their shareholders more in dividends over the past five years.

This is important because most investments in the stock market are made by financial institutions like pension funds. In the United States, organisations that take care of other people's money hold 80% of the listed equity in the top companies.

Individuals can choose to get a lower rate of return to help save the environment, but institutional investors and trustees of pension funds can't do that. They have a fiduciary duty to act in the best financial interests of investors.

But because the returns on sustainable assets are going up, trustees no longer have to choose between profit and sustainability. The Transformational Investment report from the World Economic Forum gives the example of New Zealand's state pension fund. Its trustees said that climate change made it harder for them to pay pensions, so they switched to a sustainable finance strategy. Since its start in 2003, the fund has done better than similar investments by an average of 1.24% a year, which adds up to $7.24 billion (NZD 10.65 billion).

But why do investments that are good for ESG perform better than other investments?

How did they do better?

One is that customers' views are changing. Two-thirds of US consumers of all ages prefer to buy from companies that share their values, according to a study. This number goes up to 83% for people between the ages of 18 and 34, who are called "millennials."

A global survey found that people are four to six times more likely to buy from a brand whose mission they agree with. But if a company does something they don't agree with, three-quarters said they stopped buying from that brand and told others to do the same.

Industries that use a lot of carbon, like coal, oil, and gas, are also finding it harder and more expensive to get money because the biggest lenders won't do business with them.

Research by McKinsey shows that sustainable companies are more likely to get contracts, save money by using fewer resources, have less regulation, keep their best employees, and not lose money on old processes that use a lot of carbon.

Reuters said that in 2021, companies around the world will have invested a record $859 billion in sustainable projects. Of this amount, $481.8 billion came from green bonds that raised money for specific environmental projects.

And sustainable finance is only going to get bigger. According to an analysis by Bloomberg, the total value of ESG investments is on track to be more than $53 trillion by 2025. This is more than a third of all investments around the world.