Hugues Bouthinon-Dumas, Professor of Law at ESSEC Business School, provides a masterclass series of articles over the coming weeks on sustainable finance, how it fits into the notion of sustainable development and how the law can be used to promote it. The first of the series looks at the what and why of sustainable finance.
What does the notion of “sustainable finance” cover?
There is no unanimous opinion on what the notion of sustainable finance exactly covers, though the expression obviously refers to “sustainable development”. We can say that sustainable finance is finance that has a concern for sustainable development – in other words, a concern for long term conciliation between economic, social and environmental interests.
In reality, we can observe that the interests of players in the financial field for extra-financial concerns vary in accordance with both the topic and the players involved. We can nevertheless consider that the heart of the matter lies in the challenges faced by climate change and the energy transition linked to it. Moreover, sustainable finance can be concerned by other topics such as social inequalities, the protection or endorsement of minorities, gender equality, the fight against modern slavery, good governance practices and notably the fight against corruption, human rights, the quality of customer relations, etc. The list of all the subjects impacted by sustainable finance still remains to be completely drawn up.
As such, sustainable finance is much like a school of thought and a tendency based on older notions such as Sustainable Development, CSR or ESG (Environment-Social-Governance) criteria applied to company audits.
Why the players in the financial field today take into account social and environmental stakes
The motivation is two-fold – which in fact explains why there is a certain ambiguity attached to the very idea of sustainable finance.
Sustainable finance first of all consists in taking into account social and climate risks in financial decisions and calculations, without necessarily questioning financial logic.
But sustainable finance can also be conceived in a wider, more radical perspective, indeed revolutionary, regarding the transformation of the economic system towards sustainable development and by using the means of action proper to the field of finance. For example, by providing the financial resources required for the energy and ecological transformation or by modifying corporate behaviours so that companies are aware of, and take into consideration, their impact on society and the environment.
How big is the change in direction triggered by sustainable finance?
It’s still much too soon to say if sustainable finance is just a fad, or even a rather hypocritical slogan used by financiers, or the exact opposite – the demonstration of a complete change of paradigm that we can characterise in different ways. We can, for example, consider that the social and environmental costs linked to economic activity must, from now on, be systematically internalized. Another way to see things is trying to substitute short-term finance into finance that is concerned by its long-term development. This radical transformation in finance is increasingly on people’s lips, but is far from being established practice.
What is sure, however, is that sustainable finance is a movement that impacts every segment in the field of finance: banks, providers of credit, insurance companies, pension funds, investment funds – including private equity – listed companies, and primary and secondary financial markets as well as all the players orbiting around these: regulators, auditors, rating agencies, financial analysts, and so on.
Geographically, we can observe the rise in sustainable finance initiatives in Europe, Canada, and the United States, as well as in Asia – for example in Singapore, where the country is attempting to position itself as a major hub in this field.
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