Sustainable finance is the practice of taking into account the environmental, social and governance (ESG) considerations when making investment in the financial sector, leading to long-term investments into sustainable economic activities and projects.
Environmental aspects would consist of climate change mitigation and adaptation as well as preservation of biodiversity, pollution prevention and circular economy. Social consideration would encompass issues of inequality, inclusiveness, labor relations, investment in human capital and communities as well as human rights issues. The Governance aspect would comprise of public and private institutions including employee remuneration, management structure, employee relations etc.
ESG bonds form an important part of the concept of sustainable finance. In the FY-2020-21 the Indian Inc has raised around $4.94 billion through ESG bonds which is the largest fund raise compared to previous years. Companies like Mahindra and Mahindra, ITC limited, future retail, Infosys, Mindtree, tata steel and tata capital are a part of top ESG companies in India.
Major Benefits of company investing in sustainable finance practices are:-
- Increase in stock liquidity- the firms which are actively investing in ESG and green bonds are able to grow at 10 times greater growth rate when compared to those who are not.
- Unlock competitive values- companies which recognize the changing socio-economic conditions and environmental conditions are better able to identify strategic opportunities and meet competitive challenges. The best example here is Starbucks which was struggling initially to expand its market. But once it started promoting environmental sustainability, its market share grew 10 times.
- Attracts investors who are stickier- the investor who invest via sustainable finance options are value-based investors and are more focused on what would happen in next decade rather than next quarter and such investors would stick longer with the company
- Attract and retain best talent- the companies following sustainable finance practices attract loyal and passionate employees who would in turn drive the intangible good and ultimately increase the profitability of the company.