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Sustainable Financing: What is it and Why is it Essential?

Sustainable Financing

Building a more sustainable future by preserving natural resources and protecting our ecosystem is a pressing need. It’s all hands to the pumps as most industries need to play an active role in it. Among them, the financial sector exercises a huge power in raising awareness of various issues of sustainability and funding businesses that follow sustainable practices or engage in research and development of renewable sources of energy.

More and more large institutional investors are including environmental, social, and governance (ESG) metrics today into their criteria for stewardship, which aims for responsible capital allocation. Sustainable financing by financial institutions is based on the policies and standards that consider sustainable ESG practices and risks.

For instance, DBS sets forth principles through Group Core Credit Risk Policy for carrying out credit risk management activities. Similarly, through its Group Responsible Financing Standard, it addresses the ESG challenges by financing and facilitating investment and trade flows responsibly. 

What is sustainable financing?

Sustainable financing is the process of making investment decisions in a project or economic activity considering the environmental, social, and governance (ESG) factors. Regulators, asset managers, and institutional investors work towards sustainable projects globally. 

Among the ESG factors, the environmental aspects include climate change, pollution, carbon emissions, deforestation, biodiversity, water scarcity, energy efficiency, and waste management. The social factors are all about customer satisfaction, gender and diversity, community relations, data protection, human rights, employee engagement, and labor standards. The governance factors include board composition, employee relations, executive compensation, corruption, bribery, political contributions, and lobbying.

You don’t have any standardized approach to the evaluation of various ESG metrics. Of course, investors can address ESG considerations using data sources and a range of analytical approaches.

What makes sustainable financing important?

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We need to do our bit to ensure that we live better in a safe world without causing any harm to the environment and planet. Sustainable finance principles should underpin our thinking process and efforts. Sustainable financing is gaining more popularity today with banks, investors, and institutional investment funds working towards promoting an ESG-compliant agenda. Why is sustainable financing important?

With sustainable finance, you can give more emphasis to ESG criteria. Thanks to the environmental awareness movement, some of the ESG factors are today increasingly considered the bare minimum for a company if it has to be regarded as a viable investment. For instance, companies need to reveal their carbon emissions through the Carbon Disclosure Progress for the investors to prefer them. 

Further, greater reporting requirements complying with the tighter COP26 commitments will lead to severe reputational hits with investors and customers to businesses not conforming to ESG criteria. Most institutional investors want companies to have a positive environmental impact.

Banks’ approach to sustainable financing

Most banks are committed to responsible financing today. For instance, the Association of Banks in Singapore has moved a step ahead by issuing industry guidelines for easy implementation of sustainable financing. Some banks like DBS have devised a sustainability risk management strategy incorporating ESG risk assessment into the credit assessment and approval procedure for their clients. The ESG risk is analysed at every stage like evaluation, approval, documentation, and monitoring.

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