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Part 1: Sustainable Financing, Green Financing, and Responsible Investing - What are they and how do we adopt them?
As we should all be aware, human activities have significant impacts on the environment and the ecosystem as a whole. Hence, the term green financing, which is an element of sustainable finance and responsible investments, came about to help economists and finance professionals take a more wholesome approach when managing finances.
Over the past few decades, the finance function within an organisation has transformed significantly- taking on various new strategic roles. However, the importance of sustainability has constantly been overlooked thus resulting in the recent emergence of new terminologies, strategies, and initiatives to push this agenda forward. The Climate Change report 2022 released by Intergovernmental Panel on Climate Change, IPPC, highlights the importance of adopting measures to prevent the irreversible effects of climate change. As such, professionals globally have been moving towards a more sustainable way of operating.
Figure 1: The figure taken from Climate Change 2022 shows how cumulative societal choices and actions can lead to different outcomes from a climate change perspective.
Now that we understand why green finance should be at the forefront of any business organisation, here are a few approaches that can and should be adopted by Malaysia and the rest of the world as we move into improving overall sustainability enhancement.
The first mindset shift that must take place is that organisations need to be able to integrate business objectives and align them with their sustainability goals. It should be clear that business objectives and sustainability goals go hand in hand as one cannot exist without the other. Instead of adopting principles that aid and abet greenwashing, businesses need to operate with integrity alongside adopting a mindset that believes in sustainable financing/investing.
Following that, businesses need to find a sweet spot that allows them to appreciate the benefits of adopting sustainable financing habits while ensuring that resources are utilised effectively. This may mean different things for different service providers however, studies have shown over the past few years that companies adopting more sustainable finance practices have seen a steadier growth in share price and profit margins. This should indicate that businesses who are able to integrate elements of green finance into their portfolios and overall agenda are able to generate positive gains at the end of the day.
Finally, as we are on our journey to adopt a better approach to green financing, the significance of ESG and what that means for us as a society needs to be highlighted. We will look into this aspect of sustainable finance in more depth as we get into the second article of this series and how it plays a role in FinTech space.
To sum this portion up, we need to be clear that a sustainable financial ecosystem needs to be able to value assets and commodities in a way that can generate actual long-term wealth not only for one group of people but for our society as a whole.
References:
Chen, J., Siddik, A. B., Zheng, G. W., Masukujjaman, M., & Bekhzod, S. (2022). The Effect of Green Banking Practices on Banks’ Environmental Performance and Green Financing: An Empirical Study. Energies, 15(4), 1292.
Zhang, M., Lian, Y., Zhao, H., & Xia-Bauer, C. (2020). Unlocking green financing for building energy retrofit: A survey in the western China. Energy Strategy Reviews, 30, 100520.
Chartered Banker Institute
Climate Change 2022: Impacts, Adaptation, and Vulnerability https://www.ipcc.ch/report/ar6/wg2/
Written By:
Shamita Linganathan