This article sets out a high-level definition of Sustainable Finance, provides a backdrop to why there is such momentum behind the concept, and why it is becoming more mainstream. It also outlines the significant risks that are facing the sector, and the education and awareness that IoB is providing to support the sector as it navigates this terrain.
What is Sustainable Finance?
Sustainable Finance aims to integrate Environmental, Social and Governance (ESG) criteria into financial services, while increasing financial actors’ awareness of the critical role the sector plays in enabling us to deliver on the ambitious targets set in the Paris Agreement and the UN’s Sustainable Development Goals. More broadly, when we speak about sustainability in a business context, we’re talking about the critical need to have a sustainable business model. Unless a firm considers the materially relevant societal and climate issues that impact on the business, long term sustainability will be a challenge. The challenges will emerge in numerous ways from anything from reputational risk, to criticism from customers based on issues in the supply chain. The long-term sustainability sweet spot is found at the intersection of the Environmental, Social, and Governance (ESG) pillars and ESG is about the impact of these major environmental and societal challenges on a company and how the company responds to it.
Why is Sustainable Finance such a hot topic?
For decades, tensions have been mounting between economic growth and sustainable development, and in 2015 two significant events happened. The UN Sustainable Developmental Goals (SDGs) came into effect as the core global sustainability goals which built on the Millennium Development Goal.
Millennium Development Goals achievements;
Since 1990, the number of people living in extreme poverty has declined by more than half.
The proportion of undernourished people in the developing regions has fallen by almost half.
The primary school enrolment rate in the developing regions has reached 91 percent, and many more girls are now in school compared to 15 years ago.
Remarkable gains have also been made in the fight against HIV/AIDS, malaria and tuberculosis.
The under-five mortality rate has declined by more than half, and maternal mortality is down 45 percent worldwide.
The target of halving the proportion of people who lack access to improved sources of water was also met.
The Sustainable Development Goals ‘are the blueprint to achieve a better and more sustainable future for all’, and set the following ambitious vision fo
Good Health and Well-Being
Clean Water and Sanitation
Affordable and Clean Energy
Decent Work and Economic Growth
Industry, Innovation and Infrastructure
Sustainable Cities and Communities
Responsible Consumption and Production
Life below water
Life on Land
Peace, Justice and Strong Institutions
Critically, the SDG’s call out that all actors must play their part. Not only governments, not only citizens, but private enterprise too.
The Paris Agreement was also signed in 2015. It was an unprecedented global consensus on how to tackle climate change. Which set to limit greenhouse gas emissions to net zero and to endeavor to limit temperature increases to 1.5 degrees. A key success factor for achieving those ambitious targets is finance, and the Paris Agreement crystalises the need to mobilise private sector finance, and to steer the sector towards greener investment.
Impact on the sector
The impact of ESG factors on the financial services is significant. IoB’s new programme ‘The Professional Certificate in Responsible and Sustainable Finance’ outlines what is facing the sector, and offers frameworks to navigate the terrain. We have already mentioned the sector’s role in funding sustainable investment. The points below offer a very brief, and high level summation of what are nuanced topics, covered in greater detail in the programme.
From a banking perspective, there is significant risk to manage. The challenge for banking risk managers can be shown in a paper by the Central Bank of the Netherlands - De Nederlandsche Bank (DNB) “For example, a debtor’s financial position may deteriorate due to geological or environmental changes that impact its operations (physical risk). Increasing government regulation and standardization or a shift in consumer preferences may affect a business’s market value or creditworthiness (transition risk). Not least, negative media exposure related to environmental and social issues may cause reputation loss or even result in legal claims (reputation risk).”
From an investment perspective while the UN Principles of Responsible Investment (UNPRI) have been in place since 2006, there are still considerations listed below:
Reporting – Improving the quality and quantity of climate-related disclosures;
Return – firms and investors need to be supported so that they can identify the opportunities in the transition to net zero;
The questions faced by investors and their advisors in relation to how ESG Factors influence investment performance and, increasingly, how their investment will impact on the Environment and Society.
There is a growing call from corporate and private consumers and clients for greater ESG incorporation. The School Strike for Climate shows a significant swelling of support for action, particularly from the younger generation.
How is IoB supporting the sector?
Following our online sustainability series earlier this year (the interaction of banking regulations and sustainable finance; climate proofing the financial services sector; Demystifying Sustainable Finance; and an introduction to Environmental, Social and Governance (ESG) Investing), we were pleased to be involved in season 1 of the new podcast series developed by ESG Ireland – an organisation which is ‘focused specifically on closing the knowledge gap around ESG and responsible investing’. The new podcast – aptly called “The ESG Factor” and available on all major platforms – ‘features leaders from across the responsible investment industry covering themes such as indices, impact investing, active management, and stewardship’. Listen now: The ESG Factor.
We are delighted to announce our new, one module, Professional Certificate in Responsible and Sustainable Finance. Sustainable Finance is an area that requires decisive leadership, flexibility, and responsiveness from the financial services sector, and society as a collective. This programme is for all financial services professionals who wish to understand more about the evolving nature of Environmental, Social, and Governance (ESG) factors within financial services.
It seeks to give an introduction to, and an understanding of themes such as: response to climate change; the catalyst for sustainable finance and EU regulatory initiatives. The programme also examines non-financial disclosures, climate and sustainability reporting including climate related risks, opportunities and financial impacts. The expansion of green, social, and sustainable bonds is discussed, and the programme concludes by discussing how to embed a culture of sustainability within an organisation, and an assessment of the future of the ESG agenda.
About the author:
Eimear McBride specialises in the design and delivery of world class, professionally relevant, career defining digital, data and sustainable education and training programmes. She is the Director of Digital and Innovation in the Institute of Banking, working with industry to understand current and future skills needs and developing exciting education propositions that enable individuals and organisations to truly achieve their ambitions. She holds a BBS and an MSc in Education from DCU, and is currently working towards a Doctorate in Education in Queen’s University.