Sustainable finance can be defined as the integration of environmental,

social and governance factors into traditional financial planning and

investment decisions. Financial services and markets have an

important role to play in the transition to a more sustainable future.

The pressure is also increasing on business to be more purposeful and

responsible. Green and social finance has become an

increasingly competitive sector globally as the fight against climate

change steps up. Sustainable finance is also understood as finance to

support economic growth while reducing pressures on the

environment and taking into account social and governance aspects.

Many firms are proactively upgrading technology and are either

developing the skills required for integrating ESG in the business

decision-making. Firms offer global clients further ESG product

expertise, regulatory guidance and investor perspectives will be key a

differentiator, opening the door to broader strategic dialogue. Smart

technologies have the capability to take ESG to the next level by giving

investors the right tools to assess the performance and sustainability

of investment companies more accurately. It can deliver financial

returns in the short and long term while generating positive value for

society and operating within environmental constraints. While some

investors use ESG as a tool for risk management, some others use it to
improve their position on sustainable finance in order to align with

societal and impact issues. Deutsche Bank AG has set up a sustainable

finance team within its capital markets department in response to the

growing focus on environmental, social and governance issues among

its clients. Also, on a firm level, sustainable finance may refer to

viability, stability, or security of a business. From the inner

management, a senior manager normally uses an internal source of

financing, such as retained earnings, and then debt, and then equity.

In other words, additional profit is regularly transferred into retained

earnings that positively influences the solvency and liquidity of the

company. Measuring the risk of bankruptcy is crucial to determine

the level of sustainable finance of a firm. Hence, it is highly probable

that companies with higher profit increase solvency, and, in fact,

financial sustainability at the same time. We should set up an

appropriate financial strategy to provide an adequate level of

sustainable finance, with the consideration of a current business

environment. In short, sustainable finance is increasingly attracting

funds, owing to its capacity to outperform conventional alternatives,

with greater long-term resilience to boot. Various financial

innovations have consequently arisen, calling for specific calibration

efforts in terms of framing, regulations and operating methods. This

emerging investment universe must indeed be framed and gear

financing and investments tools towards sustainability goals. So, all

proposed methods would be a valuable practical tool for senior

managers and other business stakeholders through supporting the

financial decision-making process and sustainable finance.

By committing to deliver long-term value for their shareholders,

society and the environment, banks can make a real difference while

benefiting from an enormous opportunity: the International Finance

Corporation estimates there are USD23 trillion of climate-related

sustainable finance opportunities in emerging markets alone in the

years to 2030. Banks can blacklist industries that contribute

to climate change such as coal-fired power, agro-industries involved

in deforestation, or sectors where there are human rights violations,

for example. Banks have an important role to play in financing a green

transition while also being vulnerable to the risks resulting from

climate change and the regulatory efforts it takes to comply with new

EU regulations. And they can support microfinance, renewable power,

blended finance and other sustainable financing that promotes

sustainability. For example, Russell Investments has developed a

methodology that it asserts can differentiate between companies who

score highly on ESG issues that are financially material to their

business, from those who score highly on issues that are not financially
material to their business36; in doing so it is able to enhance portfolio

construction and investment performance. Financial institutions can

also have an impact on sustainability is by putting in action a full and

transparent disclosure on how sustainable their activities are. The

European Commission is pushing an agenda that will guide banks and

other institutions toward more thorough transparency when it comes

to disclosing their sustainability policies. Sustainable banking starts

with technology and data. Through the recently published

regulations, which were mentioned in the previous article, the

disclosure of ESG data is advancing. By utilizing this data, banks could

steer their clients to make more informed, sustainable decisions. By

the same token, banks could also set a good example for society in

terms of operation and offerings. The usage of platformization and AI

could offer unlimited opportunities. Integrating third-party solutions

into offerings can make customer decision making much easier and

might result in upselling. Banks can for instance help their clients to

deal with sustainable home upgrades by using third-party solutions in

order to calculate the most financially attractive option. Another

example is Greenly, a start-up in partnership with Sia Partners that

can help companies and customers understand and manage their CO2

footprint. Banks could integrate AI logic like Greenly into their general

banking and budgeting applications which can help clients make more
conscious decisions. Notwithstanding, a deeper understanding of the

CO2 footprint should be a concern for the bank’s own operations as

well. In this way, banks can align the content of their disclosures with

the sustainable interests of long-term investors. They might even shift

the focus of investors and shareholders towards forward-looking

assumptions, methodologies, opportunities, and strategies by openly

reporting on sustainability and climate-related factors. If this trend

were to continue, banks with inadequate governance would expose

themselves to legal and divestment risks. Banks that have adequate

and comprehensive climate governance practices in place are able to

mitigate climate-related risks and even gain a competitive

advantage. In a way, successfully aligning with a strategy that is

aimed at reducing carbon emissions can become an indicator of a

company’s governance. Banks could use their communication channels

to signal their adequacy and governance to a variety of stakeholders.

All in all, these findings showcase the necessity for boards to pursue

sustainability and climate management in order to make appropriate

strategic decisions.

Several developments have contributed to growth of sustainable

finance, distinct from social impact and traditional financial

investments. First, societal demands by non-investors: the transition

from the shareholder to stakeholder model has challenged the notion

that the firm only serves shareholders, as the needs of other

stakeholders have encouraged the growth of corporate social

responsibility in business and even government entities. This has

invited reporting on issues that relate to good practices and standards

that do not relate to short-term financial returns but are thought to

contribute to long-term value, such as by strengthening reputation,

brand loyalty, and talent retention. Second, greater demand by social

impact investors for data related to sustainable fiance, related to good

practices. Third, the demand by ESG investors through responsible

investing to take a more sustainable perspective, which can both

benefit from risk management elements and also better align with

societal values. Also, it is being incorporated into other portfolio

products, such as ETFs. A survey by Bank of America illustrates that

growth in sustainable fiance smart beta strategies has been faster than

that of many other types of strategies. Moreover, at the current pace,

some players expect ESG sustainable investing through funds and ETFs

to grow to several trillion within several years. For example, in 2020,

Japan’s Financial Services Agency has revised its stewardship code of

conduct, including with respect to sustainable finance. It redefines

“stewardship responsibilities” and explicitly instructs institutional

investors to consider medium- to long-term sustainability, including

ESG factors, according to their investment management strategies in

the course of their constructive engagement with companies in which

they invest. The revisions call on institutional investors to engage in

dialogue with investment companies and clearly state how they will

incorporate ESG considerations into their investment strategies. To

pursue this type of sustainable growth, companies will need to take

into account emissions, resource use, waste management and

biodiversity. Capital markets, particularly the bond market, will play

a key role in financing this transition.

Over the last few years, bankers, insurers, and investors have begun to

realise that climate change is much more than an environmental issue, and

that it has deep implications for all sectors of the economy. Climate change

is a measurable global reality and along with other developing countries,

where the impact is more pronounced due to the perceived lack of financial

resilience. Extreme weather events are affecting supply chains in all sectors.

The current Covid-19 crisis has made it clear that no-one is insulated from

disasters. They can wipe out years of financial gains on investment in a

matter of days, and they can have effects on the wider economic system

that can last for years. The impacts of extreme weather events caused by

climate change or of biodiversity loss could be even more devastating. These

environmental megatrends require an accelerated and scaled-up response

across the finance sector. Climate change is also an issue of global concern;

more and more prominent investors, businesses and institutions are calling

for the incorporation of climate-related financial disclosures. Climate

change is our most critical systemic challenge. And we need new tools to

build investment strategies that reflect climate risk. Combating climate

change requires action from the financial sector as well. Progressive financial

institutions can position themselves as leaders in the climate finance

evolution. Furthermore, as climate actions and investments will further

accelerate, financial institutions have room to innovate and change.

Globally, climate change is recognised as a real and potentially destabilising

threat to economies and the well-being of people, particularly the most

vulnerable. South Africa is especially vulnerable to its impacts. South Africa

is experiencing significant effects of climate change particularly as a result of

increased temperatures and water variability.

The observed rate of warming has been 2°C per century or even higher –

more than twice the global rate of temperature increase for the western

parts and the northeast. There is evidence that extreme weather events in

South Africa are increasing, with heat wave conditions found to be more

likely, dry spell durations lengthening slightly and rainfall intensity

increasing. Climate zones across the country are already shifting, ecosystems
and landscapes are being degraded, veld fires are becoming more frequent,

and overused natural terrestrial. Long-term economic, environmental and

social risks are linked. Environmental disasters such as floods or droughts or

the destruction of built and ecological3 infrastructure inevitably cause

economic, social and health stresses – particularly for those who are not

insured or under insured and have no savings or financial resilience.

Economic transition poses additional threats to jobs and communities if the

opportunities for greening the economy are not actively pursued. While Asia

faces considerable risks and vulnerabilities due to climate change, the

continent also possesses the skills, capacity and investment to build, finance

and develop a safer and cleaner future. At the UN Asia-Pacific Climate Week

meeting in September 2019, participants agreed the Asia-Pacific region

could lead the global transformation towards a low-carbon and resilient

economy. If this is to be successful, Asia will look to financial centres like Hong

Kong to scale up green services across capital markets, banking, investment,

fintech and insurance. China’s green bond market accounting for US$8.13

billion of this. Hong Kong played a significant role in this regionwide trend.

In May 2019, the Hong Kong government raised US$1 billion from the sale

of its inaugural green bond. It was the first bond to be issued under the city’s

HK$100 billion (US$12.8 billion) green bond programme, one of the largest

government-led green bond issuance programmes in the world. Proceeds

from green bonds are used to improve the environment, combat climate

change and transition to a low-carbon economy.

Climate change is a multifaceted challenge, requiring more resilient societies

that can adapt to increased drought and water shortages, more

unpredictable weather patterns, food and water insecurity, changes in

disease trends, and physical threats to infrastructure. improving ecosystem

integrity and resultant water security is a critical component of climate

change adaptation in the face of the warmer temperatures. Increasing

awareness of the dire economic and financial consequences of climate

change are drawing attention to the link between firms’ management of

climate risks and financial materiality. This is particularly the case as

physical risks from climate change are expected to grow, as well as the risks

from stranded assets to financial sector balance sheets. A growing body of

research on the risks from climate change highlight channels by which they

can affect economies, business, and financial sectors. These include the

impact of physical risks from climate change related to storms, floods, fires,

and negative spill over effects, such as to supply chains or financial markets.

There is a growing expectation that climate-related factors will have an

increasing influence over financial materiality, particularly in industries that

are more exposed to stranded assets from declining demand for fossil fuels,
and those exposed to the effects of physical risks. But climate change creates

new and additional risks for all banks, not yet fully covered by the

performance standards or the Equator Principles and not yet reaching into

the commercial and retail portfolios, and therefore warrants significant

new focus. Climate change affects the banking sector directly, through their

own operations and indirectly through their lending, mortgage, investment

and trading books. Moreover, banks can use the pandemic to enhance their

comprehension of the vulnerability of their balance sheet to climate risks.

That comprehension might lead them to improve their alignment with the

Paris Climate Agreement regarding their investment and lending policies.

Besides, banks play another important role in a potential green recovery;

they provide financial support to companies and individuals and, as such,

might be able to help their customers develop more sustainable business

models while recovering from the pandemic.

All in all, a green recovery and economic progress can work together. Green

technologies are maturing and low-carbon energy is starting to compete

with fossil fuel-based energy prices. Recent evidence suggests that green

projects might have higher short-term returns compared to conventional

projects. Finally, the costs of inaction or late action on climate change far

outweigh the investment in climate change mitigation today. Climate

change is a direct existential threat that is nearing the point of no return,

warned United Nations SecretaryGeneral António Guterres in 2018. The

average global temperature has risen by about 1.1°C since the preindustrial

era and the ocean has warmed by half a degree. Increasing temperatures,

rising sea levels and more severe and unpredictable weather patterns are

triggering food security, water resources and human health concerns.

African and Asian countries are particularly vulnerable to climate change. In

Asia, the Global Climate Risk Index identifies South and Southeast Asia as

especially exposed, due to a combination of developing economies,

geographic location, densely populated low-lying areas, and insufficient

resilient infrastructure. Green and sustainable finance focuses on

environmental and sustainable aspects, such as tackling climate change and

scaling up investments that provide environmental benefits. This investment

is urgent—to limit global warming, a massive reallocation of capital is

required. The ADB estimates US$1.7 trillion will be needed each year until

2030 in Asia on infrastructure that maintains growth, tackles poverty and

responds to climate change. A key part of this transition involves shifting

from the traditional financial model of creating value for shareholders, to a

model that takes heed of non-financial factors, such as environmental, social

criteria and good governance (ESG). While there has been some debate

about how ESG investing affects returns, an analysis of over 2,000

academic studies carried out by the asset management firm DWS and the

University of Hamburg showed ESG had an overwhelmingly positive impact

on corporate financial performance, with only one in 10 studies finding a

negative link.

A considerable challenge for banks is the need to swop hard currency

funding to local currency, which creates additional risks and inefficiencies

when considering these funding decisions. Practices, products and

methodologies vary across the banking sector and not all locally registered

banks subscribe to all the voluntary principles. This does therefore mean that

there is, as yet, no national benchmark for performance on social and

environmental risk assessment or management practice. Regulators are

therefore unable to draw conclusions on exposure to climate change and

other ESG risks from published information – which in the case of some

banks focuses only on operational or in-house facilities and in the case of

others extends partially into major transactions funded, such as those

project or bridging finance deals that fall within the Equator Principles. No

system of assessing performance maturity exists as there is no requirement

for banks to account for or disclose their implementation of the BASA

principles. Internationally there is growing pressure on the financial sector as

a whole and banks in particular to recognise their role in enabling financial

flows to address global challenges.

Both the awareness of risk and the desire for impact is leading to a demand

for social and environmental data that can be used to inform financial

decisions, as well as report on impact. Artificial intelligence will also have an

important role to play, but the pressure will be on for financial institutions

to ensure and demonstrate that AI is deployed in a way that will drive

improved or fairer outcomes for society and the environment. Where

financial institutions use AI simply for algorithmic trading or for biased

selection of customers for credit or insurance, it’s likely that their reputation

will suffer. Although access to finance is not an end in itself, it can be an

enabler of opportunity and a determinant of resilience for the most

vulnerable people in the world. The growth in digital finance, if accompanied

by other appropriate forms of support, to create jobs, increase incomes, and

provide access to energy and other infrastructure, could kick-start a

virtuous circle of increased growth in the poorest countries. Covid-19 has

highlighted the existing gap between those who can access education,

consumer goods, markets, workplaces, healthcare, and finance through

digital means and those who cannot. Digital inequality, both within nations

and between them, needs to be addressed.

From my perspective, our society is undergoing profound changes and

sustainable finance has become increasingly popular in recent years and

none more so than in the face of the Covid-19 pandemic which goes to show

how essential it is to guide financial flows towards achieving the sustainable

finance. In the face of this, companies have only one key word: innovation.

Innovation is not only the key to economic success, it is also the solution for

a sustainable world. In the financial market, many innovative opportunities

have emerged such as green bonds, fintech and many others. While

sustainable finance has traditionally focused on the performance of

companies, green bonds moved the spotlight to the performance of assets

with positive environmental impact and economic value. With green bonds

picking up pace, both government and business entities have started to

explore opportunities, and diversify their bond portfolios by incorporating

social and sustainability factors. Sustainability bonds and green bonds raise

funds for specific social and environmental uses, and are a valuable part of

the sustainable finance portfolio. Social impact bonds and development

impact bonds can ensure that governments and other donors encourage

private sector investment into activities with a high social return. Forms of

blended finance are also on the rise, where the public and private sectors

invest together with a suitable combination of financial risk and social or

environmental return. Portfolio construction by pension funds will

increasingly include an allocation to impact investing. This will help to

diversify the current portfolio while also providing a way of supporting

activities that are likely to deliver a better society and environment for

pensioners to retire into in the future.

Sustainable finance offers opportunities to mobilise alternative sources of

funding. Noting that these instruments are evolving and the market is

continually expanding. The instruments include bonds and fixed-income

instruments, impact-focused investments, taxes and tax incentives and

increasingly ways of blending public and private finance, which includes the

blending of sovereign and international funds, such as those of the Green

Climate Fund, risk guarantees and other means of crowding in finance to

fund transformation to a lower carbon, more resilient and sustainable

economy. Public funds are insufficient in financing climate related initiatives

and projects, and funding can be accessed from international Climate Funds

which are funds established to provide funds to finance climate-related

investments, programs and projects. Climate Funds are established by

multilateral institutions, such as the UNFCCC, form part of financial

windows under multilateral development banks such as the World Bank or

bilateral agencies. To enhance the consistency and increase the speed of this

process, AI could be used progressively. AI could play a vital role in sourcing

ESG factors such as granular climate risk data analysis or energy certificates.
The ability to reduce risks and increase efficiency is an attractive proposition

for financial institutions.

Reference:
OECD. (2020). Developing sustainable finance definitions and
taxonomies. Paris: OECD Publishing, Green Finance and Investment.

Yen, M. F., Shiu, Y. M., & Wang, C. F. (2019). Socially responsible

investment returns and news: Evidence from Asia. Corporate Social
Responsibility and Environmental Management, 26(6), 1565–1578.