Long considered a fringe or niche discipline, sustainable finance has finally established a strong foothold in the world of investing. A range of market forces, accelerated by the Covid-19 pandemic, combined with increasingly discerning retail and institutional investors, has resulted in the rapid growth of the sustainable finance industry, which until recently was considered to be in its relative infancy.
A new breed of socially and environmentally aware investors have encouraged banks, large investment companies, and by extension corporations, to re-examine their frameworks around Environmental, Social and Corporate Governance (ESG) standards in order to be viewed as responsible corporate citizens and viable brands.
But what exactly is sustainable financing? Put simply, sustainable financing or investing is the practice of financing or investing in companies or projects that have a positive environmental or social impact. These may include companies initiating projects in renewable energy, social initiatives or new, low-carbon technologies. It offers a prudent and ethical code of conduct while investing in or financing projects and corporations.
As our collective conscience increasingly gravitates towards sustainable and ethical practices, ESG, also referred to as impact or sustainable investing, is primed to become key to long-term value creation and returns on assets for investors.
A recent rise in valuations of ESG-compliant corporations is testament to the growing focus of investors on entities that are viewed as upholding higher ethical standards.
For example, a recent report by the International Energy Agency and Imperial College Business School found portfolios of listed renewable energy companies outperformed traditional hydrocarbon stocks over the past decade.
A study conducted by the Ministry of Economy, Majid Al Futtaim Holding, and Abu Dhabi Global Market (ADGM) shows that ESG factors are being significantly scrutinised by major corporations around the world.
The study found that 75 per cent of retail and institutional investors applied ESG principles to at least a quarter of their portfolios in 2019, a considerable increase from 48 per cent in 2017. Globally, banks have been funding a higher number of sustainability-linked projects – rising to $71.3 billion in the first three quarters of 2019.
Other research from HSBC shows that climate-aligned and ESG-compliant public companies have outperformed global benchmarks over the long term.
Channelling ESG returns into macroeconomic growth has also been a concerted effort, one that international financial centres have been seen championing. The likes of Hong Kong, Singapore and Abu Dhabi, widely regarded as preferred destinations for international investment, are scaling their regulatory frameworks and introducing sustainability-focused initiatives and offerings that advocate for the increased integration of ESG practices in the public and private sector. A prime example of these efforts is found in the formation of the UN Financial Centres for Sustainability (FC4S), a 30-member network of international financial centres that work alongside one another to achieve the objectives of the Paris Agreement and the United Nations’ Sustainable Development Goals.
Regionally, the UAE is focused on instilling a knowledge-based economy and is making a concerted push to promote ESG as an investment strategy and as best practice for companies here, even as it remains a largely hydrocarbon-driven economy.
ADGM, the international financial centre located in the capital of the UAE, has championed ESG practices over several years, with an aim of developing a vibrant ecosystem and thriving sustainable financial hub that supports capital formation, including raising, deployment, creation and issuance of products to achieve positive ESG objectives.
Next week, ADGM will host the third annual Abu Dhabi Sustainable Finance Forum (ADSFF), which brings together some of the brightest minds in the field – including investors, regulators, international agencies and global financial institutions – to discuss sustainable finance and improving ESG frameworks. During the first ADSFF in 2019, ADGM implemented a series of measures to advance its Sustainable Finance Agenda, including the launch of the Abu Dhabi Sustainable Finance Declaration, which commenced with 25 signatories and was expanded to include a further 11 signatories in 2020. ADSFF's theme for this year is Financing Sustainable Recovery and Future Resilience.
The government and regulator-driven initiatives to promote sustainable finance that have been witnessed around the world are indicators that serve to demonstrate the criticality of public strategies and corporate goals of sustainable finance and ESG compliance.
As G20 countries begin to take leadership roles in promoting sustainable finance by standardising the industry through robust uniform frameworks and supporting developing countries with investments and national roadmaps for sustainable finance, it is expected that sustainable finance will be an important objective of corporations across the globe.
Sustainable finance has truly come of age and corporates must apply robust ESG in planning their future vision and strategy. This includes integrating environmental and social considerations into decision making, reflecting a deeper understanding of the risks and how to manage them, as well as recognising the opportunities to create value for all stakeholders.
Emmanuel Givanakis is deputy chief executive of ADGM Financial Services Regulatory Authority