The drive to sustainable finance investment banking has drastically transformed the way people handle money these days. It has significantly impacted how people invest their pensions and savings now. ESG (Environmental, Social and Governance) considerations have become dominant in most individual and institutional investors’ decisions in the last few years. Simply put, that means investing money in something that makes the world a better place to live.
Understanding the Meaning of Sustainable Finance
Sustainable finance investment banking covers a wide range of activities, including investments in companies demonstrating social values like social inclusion, green energy projects, and good governance, such as having more women on the boards. Sustainable finance plays a key role in the global transition to carbon-neutral climate change emissions by channeling investments into net zero projects. Setting up the International Sustainability Standards Board under the International Financial Reporting Standards Foundation is a way to ensure sustainable investments deliver their promises. It has introduced new regulations for validating sustainability claims.
Better Returns with Sustainable Finance
Apart from helping the earth and making society more inclusive and fairer, evidence proves that sustainable companies actually deliver higher investment returns. A wide range of sustainable investments worldwide has outperformed the market with negligible negative performance. Companies adopting sustainable practices have proved better picks in the stock market as well.
Asset management companies found better performance from sustainable investment funds even during the peak of the Covid-19 pandemic. Moreover, investment funds constructed on ESG principles bring the best returns for investors and the planet. Apart from paying higher returns to shareholders, businesses with high ESG ratings enjoy significant hikes in their share prices. It is an important matter because financial institutions make most investments in the stock market.
While individual investors are ready to earn a lower return rate for the safety of their planet, investment banks, and institutional investors do not enjoy that luxury. They are bound to abide by fiduciary duties that act in the investors’ best financial interests. However, increasing returns on ESG assets mean financial institutions no longer need to sacrifice profit for sustainability. Many trustees chose to switch to ESG-compliant financial strategy as climate change increased the risk involved in fund pensions.
Reasons for the Outperformance of ESG Investments
One crucial factor for the increasing outperformance of ESG investments is the changing consumer attitudes. Customers of all ages prefer buying from companies sharing the same values, especially among millennials aged 18 to 34. They are likely to purchase from a company demonstrating the corporate purpose they agree with. However, if a brand does something they do not endorse, many might stop buying from it and encourage others to do the same.
Carbon-intensive companies like oil, gas, and coal find it more expensive and challenging to raise funds as leading investment banks refuse to do business with them. On the contrary, ESG-compliant companies are likely to win more contracts, have fewer regulations, and save money by utilizing fewer resources. They successfully retain the best people and avoid financial loss on traditional carbon-intensive processes. Global companies have received record ESG investments over the last few years, raising money for specific sustainable projects.
Furthermore, the level of sustainable finance investment banking is only set to increase. According to a Bloomberg analysis, the total ESG investment value is expected to exceed $53 trillion by 2025, which accounts for more than 70% of all investments worldwide.
The Transforming Face of Investment Banking
The global investment banking and finance industry is moving towards conscious capitalism, in which investors allocate their capital more responsibly. They use their finance to address critical issues that the world is facing at present, like climate change, financial inclusion, and inequality. After embracing a wider set of stakeholders, the finance industry has moved from preferring shareholders to suppliers, local communities, customers, employees, competitors, and the environment.
Leading firms are crucial in encouraging this transformation by not allocating their capital to harmful activities. Moreover, they create products and channel money toward tackling these issues, positively impacting key stakeholders, communities, and employees. Overall, sustainable finance investment banking has generated better returns, leading to rapid growth in the industry over the last few years.