In 2015, the Paris Agreement was adopted by over 190 nations in the quest to cover climate change mitigation, adaptation, and finance. According to the Agreement, parties must ensure that "finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development". That same year, the United Nations also adopted the 2030 Agenda with Sustainable Development Goals to protect the planet. Among these goals is Sustainable Finance.
According to Harvard University, “Sustainable finance is defined as investment decisions that take into account the environmental, social and governance (ESG) factors of an economic activity or project. Environmental factors include mitigation of the climate crisis or the use of sustainable resources. Social factors include human and animal rights, as well as consumer protection, and diverse hiring practices. Governance factors refer to the management, employee relations, and compensation practices of both public and private organisations.” In short, Sustainable finance doesn’t just involve protecting the environment. It is a broader term that involves the well-being of people and the efforts of governments.
“The need for creating a sustainable future has never been more urgent and every industry needs to get on board to ensure this,” says investment banker, Praful Mehta Shah. “Finance is one among these. Industries and investment firms today are on the hunt for professionals with expertise in ESG, especially across Asia. Governments, private sector firms, and financial institutions must come together to aid this cause.
“Every business in the world is somehow dependent on the earth and its biodiversity, directly or indirectly. Yet, most of us fail to take this into account while creating our business practices. Investors and consumers are one step ahead, and have now started demanding accountability from corporations and companies. They aren’t just looking at the profit or product; they also want companies to align with their personal value systems – whether it is employing people across the gender spectrum or reducing waste in their production processes. So when you choose to invest your capital, ESG practices ensure that you do this successfully.”
Commentary from the London School Of Economics stated that India’s solar and wind energy sectors employed 1,64,000 workers in 2022, which is a 47 per cent increase from the previous year. It also projected that by 2030, these sectors could employ around 1 million workers. India also hosted the G20 T20 this year, with the slogan ‘One Earth, One Family, One Future’. This resulted in several investments in the country earmarked for sustainable finance opportunities, such as hydrogen, energy storage, and renewables.
Agriculture, with an emphasis on green and nature-friendly methods, is another area that has seen traction. This year, India’s 1,000 biggest corporates will also have to issue and disclose a BSSR or Business Responsibility and Sustainability Report (BRSR), which enumerates their efforts towards environmental and social measures taken. Everyone is familiar with green bonds, issued to fund environmentally-friendly projects. SEBI, which is the country’s securities regulator, has also released new frameworks for blue (ocean) and yellow (solar) bonds.
“ESG criteria firstly include a low carbon footprint and a positive impact on the environment,” says corporate lawyer, Harini Chandran. “In addition, sustainability-linked loans from financial institutions offer lower rates of interest to companies that meet certain targets, such as reducing greenhouse gas emissions or increasing renewable energy. These could directly or indirectly tackle issues such as climate change, pollution, biodiversity loss, soil erosion, deforestation, waste disposal, water scarcity, and energy efficiency.
“The second criterion is the consideration of people involved in the production and consumption of products or services. So right from strong labour rights, employee engagement and fair wage, and diversity and gender equality, to safety and satisfaction for consumers, and privacy and protection of data, all important factors are to be considered. Lastly, governance is important because it sets certain systems in place to run a company, such as whistleblower schemes, the absence of corruption, and audits and accountability. There are no strict guidelines in place currently, but companies have been looking at global trends and standards to take a leaf out of their book and implement those practices here.”
In 2019, India was a Founding Member of the International Platform on Sustainable Finance (IPSF), which was initiated by the European Union. This platform enables policymakers and investors to have a dialogue and identify sustainable investment opportunities globally, and increase the capital invested in these. It also allows for the sharing of best practices and identifying barriers to sustainable finance at the micro and macro levels – especially since there are no universal indicators in place to measure sustainable finance.
Companies that are interested in ensuring that they don’t get left behind in the bid to balance economic growth with ESG criteria, should also invest in training their financial staff and putting these practices into play. Women and those across the gender spectrum should be given equal opportunities across the board of job roles. Communities that have traditionally lacked representation to contribute and speak up, should also be fostered into the fold. These transitions are never easy to implement, but organisations need to be willing to tackle them. The impact of these decisions isn’t immediately evident, but when they are a part of the value proposition to investors and consumers, businesses see goodwill and long-term benefits that are far-reaching and future ready.
As Warren Buffet rightly said, “Someone’s sitting in the shade today because someone planted a tree a long time ago.”