Sustainable finance is the set of financial regulations, standards, norms, and products that pursue an environmental objective. It is about including environmental, social, and governance (ESG) considerations in investment decisions. Sustainable finance allows the financial system to connect with the economy and its populations by financing its agents while maintaining environmental sustainability. Sustainable finance is an overarching term referring to the investment process accounting for and promoting environmental and social factors.
The terminology is essential to understand the different concepts around sustainable finance and the differences. The United Nations Environment Programme (UNEP) defines three concepts that are different but often used as synonyms, namely, climate, green, and sustainable finance. Climate finance is a subset of environmental finance, mainly referring to funds that address climate change adaptation and mitigation. Green finance has a broader scope because it also covers other environmental issues such as biodiversity protection. Lastly, sustainable finance includes ESG factors in its scope, covering all financing activities that contribute to sustainable development.
Sustainable finance is important because it plays a key role in delivering on the objectives of the European Green Deal, which aims to boost the green transition. It does this by channelling private investment into the transition to a climate-neutral, climate-resilient, resource-efficient, and fair economy, as a complement to public money. Sustainable finance is helping transform both the economy and society with more responsible development and investment in the transition towards sustainable production and services around the world.
In conclusion, sustainable finance is about ethical decision-making in business and investment, pivoting on ESG standards that customers, workers, and investors demand of companies. It is an essential tool to finance the transition to a more sustainable future, and it is becoming increasingly important in the financial sector.
