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The activities that fall within the scope of sustainable finance are wide-ranging and include various investment strategies, financial products, and services that aim to create positive impact.
One example of sustainable finance is impact investing, which is a type of investment that seeks to generate measurable social or environmental impact alongside financial returns. Impact investing can take many forms, including investments in renewable energy, affordable housing, or microfinance.
Another example of sustainable finance is green bonds, which are debt instruments used to finance environmentally friendly projects, such as renewable energy infrastructure or sustainable transportation. These bonds are issued by corporations, sovereign states, municipalities, and development banks, and provide investors with an opportunity to finance environmentally beneficial projects while earning a return on their investment.
Sustainable insurance is another type of sustainable finance, which involves incorporating ESG considerations into insurance products and services. For example, sustainable insurance can provide coverage for climate-related risks, such as natural disasters, and it can also incentivize policyholders to adopt environmentally friendly practices.
These are just a few examples of the types of activities that fall within the scope of sustainable finance. The goal of all sustainable finance activities is to direct capital towards positive impact and create lasting change in environmental and social issues.
Sustainable investing encompasses a range of approaches and levels of ambition. ESG investing is a primary strategy that aims to consider environmental, social, and governance factors in investment decisions, while avoiding or reducing ESG risks and seeking measurable impact. The following are some of the main ESG investment strategies, from the least to the most ambitious:
The corporate social responsibility (CSR) of businesses refers to verifying how companies and businesses use their proceeds, while sustainable finance concerns the verification of how organizations earn their revenues.
A frequent misunderstanding concerning the ESG approach comes from companies being analysed in relation to their CSR performance, i.e. how they spend their profits, instead of analysing them in relation to their business activity and production process, i.e. how they earn profits. This entails a risk of greenwashing – making an unsubstantiated claim to deceive consumers into believing that a company’s products are environmentally friendly or have a greater positive environmental impact than they actually do.
Aligning financial flows with sustainable development will help scale up the financial flows that are required to strengthen the global call to action regarding the threat of climate change. Tackling climate change cannot only be done by providing financial assistance from developed to developing countries, but a more comprehensive transformation of finance has to be achieved, aligned with the global need to bring down our greenhouse gas emissions.
The goal here is, not only, to mobilise more green finance, for example for renewable energies, but it is also essential to shift finance away from brown investments, such as fossil fuels. This, however, requires a transition over time. Indeed, some of the most impactful investments are those made in companies and industries that are in the process of shifting to a less carbon-intensive mode.
If you who want to improve or neutralize the environmental footprint of your finances you can take some of the following steps:
Assess your current portfolio: Take a closer look at the environmental impact of current investments and, notably with your advisers, look for ways to minimize negative impacts and maximize positive impacts.
Invest in sustainable funds: Choose to invest in funds that focus on sustainable and environmentally friendly companies, or in green bonds that finance environmentally responsible projects. There are useful European categorisations and labels (e.g. LuxFLAG) that can help shape investors’ understanding of what the products do in terms of ESG.
Stay informed: Keep up-to-date about the latest developments in sustainable finance and green investments, and be willing to adjust investments as new information becomes available
Contact your: Bank, insurance company and pension fundand request information on how your money is currently invested and potentially change the investment strategy to be better aligned with the sustainability preferences.
Indeed, an individual who desires to invest some of their money, will, under new MiFID rules since the summer of 2022 be asked about their sustainability preferences, which will then be taken into account in the investment strategy.
About the blog:
There is an urgent need for rapid transition to global sustainability. Business and industry have enormous social and environmental impacts. "Why does it matter?" is a bi-monthly blog that aims to elucidate this important topic through the eyes of our experts.
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