Sustainable finance: Why finance graduates need to understand this growing area
The majority of finance professionals are now aware that environmental, social, and governance (ESG) factors are employed as a framework for assessing and managing businesses that goes beyond their purely shareholder-focused approach to management. ESG refers to a much wider variety of elements connected to the sustainable development of an economy and society as a whole.
Traditionally, investors have only concerned themselves with maximizing the monetary returns on their investments. However, by including ESG in a company strategy, it is possible to boost revenues, reduce costs, and establish your brand as a leader in the eyes of an increasingly environmentally conscious world.
Bloomberg estimates that by 2025, global ESG assets could surpass USD 53 trillion, accounting for more than a third of the estimated USD 140.5 trillion in total assets under management globally. By year's end, it projects that ESG assets will total USD 37.8 trillion.
It is increasingly clear that ESG is here to stay and is destined to become a pillar of the finance industry; graduates should have – at the very least – a basic understanding of the area and what it means for industry itself.
What is ESG investing?
What is ESG investing?
Green? Social? Sustainable?
It is important to be able to understand the difference between green, social, and sustainability bonds:
- Green bonds: Also known as climate bonds, green bonds are one of the financing options available to private firms and public entities to support climate and environmental investments. Green bonds link to ESG by virtue of their stated commitment to fund only sustainable projects. The money raised by green bonds is specifically designated for financing certain, ongoing green projects. The issuer's complete balance sheet serves as the guarantee for green bonds.
- Social bonds: Here, profits are specifically designated to support new or ongoing projects that have a positive social impact.
- Sustainability bonds: These bonds combine social and environmental concerns.
The rise of impact investing
The popularity of impact investing, whereby a number of wealthy investors are seeking ethical, philanthropic strategies to increase their return, is on the rise.
From USD 5.2 billion in 2012, global borrowing through the issuance of green bonds and loans, as well as equity investment through initial public offerings for green projects, increased to USD 540.6 billion in 2021.
This impact investing strategy involves making investments in businesses that receive high marks from independent, third-party research organizations and firms on their environmental and social responsibility indices.
The numbers behind ESG
- The climate/green bonds market reached an accumulated issuance of USD 1 trillion in 2020.
- The first green bond was issued in 2007 by the European Investment Bank under the label Climate Awareness Bond. Sustainable finance bond issuance surpassed USD 1 trillion for the first time during full year 2021, an increase of 45 percent compared with full year 2020 and an all-time record.
- Over the course of 2021, assets under management in ESG funds rose by 17 percent to USD 7,018 billion, according to data from Lipper. This compares with growth of 12.7 percent in the overall funds market. Overall, flows into ESG funds in 2021 reached USD 814 billion.
- The COVID-19 pandemic spiked huge interest in ESG investing and highlighted social and global inequality. Due to the extensive pandemic-related health and economic effects, ESG has expanded into a “Main Street” issue with significant reputational risk for companies, including financial services.
Working in sustainable finance: key facts and stats you should know
The future of sustainable finance
The future of sustainable finance looks positive.
Over the past few years, many ESG trends have cropped up in a variety of industries. The rising regulations that are now baked into all corporate processes are a significant development that has fuelled this area of the industry. These rules are in place to ensure that corporations are both more accountable for, and mindful of, the actions they undertake.
Another key trend is the well-known action of ‘responding to climate change’. Although historically, the market has not placed a high priority on environmental issues, the enhanced attention given to environmental initiatives by powerful nations like the EU, the US, and the UK has altered how stakeholders will react to climate change issues in years to come.
Due to these factors, ESG funds are predicted to soar over the next decade or so.
In the corporate sector, ESG is the newest trending term. Although it has been in the works for some time, it has now become a mainstream agenda in the post-pandemic world.
As you consider career options going forward, be sure to assess sustainable finance for a rewarding career as you look to tackle one of the world’s most important issues.