Individual investors and companies consider several factors before putting their money into an investment opportunity. A few decades ago, they would analyse profit and performance-related factors to ensure better investments. Recently however, trends such as Sustainable Development Goals (SDGs), green finance and sustainable finance have emerged and redefined what constitutes the perfect investment portfolio. Investors now prefer sustainable investment opportunities that consider environmental, social and governance (ESG) factors. Sustainable finance investment banking can benefit both society and the investor.
Understanding the concept of sustainable finance
With sustainable finance, investors consider ESG factors before investing funds. The goal is to invest in sustainable assets, companies and projects to ensure long-term investment and profits. The investment banking sector is now being redefined by this concept, with asset managers offering ESG services. In many jurisdictions, corporate entities must ensure their operations have less of an environmental impact than before. Similarly, many jurisdictions have laws relating to employee welfare. This has led to regulators, governments, asset managers and investors actively considering ESG factors.
Investors are moving towards green finance to sustain their investments. Efforts to mitigate climate change are gaining traction, and corporates with large carbon footprints and that do not prioritise effects on society and employee welfare are at risk, jeopardising investors’ funds. Sustainable finance investment banking focuses on eliminating such ESG risks.
In 2015, the UN launched SDGs and mandates for investors and companies around the globe. The aim is to build a sustainable future. Before investing, therefore, banks and individuals need to ensure the entity will generate sustainable profit. If the investment opportunity can provide long-term gains, it would be sustainable. We see below how the investment banking sector has changed due to the emegence of sustainable finance.
Use of ESG ratings
Sustainable finance is backed by ESG factors, with investment banks considering ESG scores based on their impact on the environment and society to determine the sustainability of businesses. ESG ratings will likely become a benchmark in the investment banking sector in the coming years.
Rise of ESG research
Investors conduct in-depth research – from market analysis to profit forecasting. ESG research services are now gaining popularity, with investors wanting to know a target company’s environmental and governance policies when they conduct due diligence. ESG research activities include the following:
- Climate change analysis
- SDG analysis
- Identifying sustainable initiatives
- Identifying green bonds
- ESG compliance analysis
- ESG scoring/rating
Reduced resource consumption
Any company’s operations could have an impact on the environment. Even an IT company could have a carbon footprint. Organisations are, therefore, looking to minimise resource utilisation, for example, by adopting automation.