By Nicole K. Phinopoulou
Sustainability is becoming an increasingly important consideration for financiers investors and stakeholders as a whole, as they look to align their organisations and investments with their values and address the risks and opportunities presented by climate change and other Environmental, Social, and Governance (ESG) factors.
In the scope of Sustainable Investments, many investors now see sustainability as part of the way to manage risk and enhance returns over the long term.
Investors in all asset classes, including stocks, bonds, and real estate, are increasingly showing a preference for green financing as concerns about the environment and climate change continue to grow. This is also being driven by increasing regulatory and policy support for sustainable investing, as well as growing consumer demand for environmentally friendly products and services.
As a result, projects that can demonstrate a positive impact on ESG factors are more likely to attract investment and favourable financing. This includes projects that promote renewable energy, energy efficiency, sustainable transportation, and other environmentally friendly initiatives. Such projects not only help to mitigate the effects of climate change, but they also have the potential to create jobs and stimulate economic growth. Additionally, such projects can also improve public health by reducing air pollution and improving access to clean energy.
It’s important to note that there is a process of certifying if a project is considered as “green”, in long term to avoid accusation on “greenwashing”. For example, a project should be aligned, at least taking proven consideration, of the internationally (United Nations, World Bank and European-Union-EU) recognized “green” finance standards, such as the Green Bond Principles (GBP), together with the Social Bond Principles (SBP), the Sustainability Bond Guidelines (SBG) and the Sustainability-Linked Bond, collectively the principles (SLBP). The Principles are a collection of voluntary frameworks with the stated mission and vision of promoting the role that global debt capital markets can play in financing progress towards environmental and social sustainability. It is a start if correctly be applied, to ensure that the funds are being used for environmentally beneficial projects. Green financing is a tool that can be used to achieve the United Nations’ Sustainable Development Goals (SDGs) by supporting sustainable development projects that address multiple SDGs at once, including:
- SDG 7 (Affordable and Clean Energy): Investing in renewable energy projects and energy efficiency measures can help to increase access to affordable and clean energy.
- SDG 9 (Industry, Innovation and Infrastructure): Investing in sustainable transportation infrastructure can help to promote economic growth and innovation.
- SDG 11 (Sustainable Cities and Communities): Investing in sustainable infrastructure can help to create more livable and resilient cities, improving the lives of urban residents.
- SDG 13 (Climate Action): Investing in green infrastructure is critical to reducing greenhouse gas emissions and mitigating the effects of climate change.
Credit margin and ESG ratings
Linking credit margin with the performance of certain recognized ESG ratings can be an effective way to incentivize companies and organizations to adopt sustainable practices.
By linking credit margin with ESG ratings, companies and organizations that have strong ESG performance evidently may be approved to qualify for lower interest rates on loans and other forms of debt financing, making it more affordable for them to invest in sustainable projects and initiatives. A financial incentive is created for companies and organizations to improve their ESG performance in order to access and claim more favorable financing terms and bond products.
This type of “green pricing” can help to drive the growth of sustainable finance and encourage more companies and organizations to adopt sustainable practices. Nevertheless, in the equation, industry experts should be engaged. It should never be forgotten that the process of linking credit margin with the performance of certain ESG ratings is complex and requires a detailed assessment of the company or organization’s ESG performance. The assessment as usually done, includes the assessment of an organization or company on its performance in various ESG categories such as environmental impact, labor practices, and corporate governance.
Sustainable financing doesn’t just end when the relevant capital/resources are made available. On the contrary, financiers need to continuously assess the relevant projects. Properly managing sustainability risks is essential for every involved stakeholder to protect their reputation, assets, and long-term financial performance. The procedure requires continuous monitoring and improvement to stay up to date with the latest risks and opportunities, and to adapt to changing circumstances.