Sustainable investments have grown to account for more than $12 trillion of the $46 trillion in total assets under professional management in the U.S., increasing 38% in just two years. More than ever, investors are evaluating entrepreneurs’ knack for sustainable growth beyond metrics like financial returns. With an emphasis on catering to environmental and social concerns, this is how entrepreneurs can understand and obtain sustainable financing in today’s market.
What Is Sustainable Financing?
Sustainable financing is a form of financial investment that integrates environmental, societal, and governance issues into business decisions that benefit the companies who receive financing, their clients, and society at large. Inspired in part by global initiatives, including UN Sustainable Development Goals, sustainable financing aims to enhance commitments on climate and sustainability objectives by promoting more long-term investments in sustainable economic activities.
To obtain sustainable financing, a company must, as a whole, contribute to protecting and restoring the environment, improve economic competitiveness, and drive social well-being. By channeling investment funds into a sustainable business, financial institutions enable economic growth while reducing pressures on global ecosystems. Investments are typically judged on environmental, social, and governance criteria commonly referred to as ESG criteria.
Corporate sustainability considerations under ESG criteria include:
● Environmental — The company promotes climate change mitigation, pollution prevention, or the preservation of biodiversity.
● Social — The company actively strives for inclusiveness and equality, fights for human rights issues, or invests in human capital and communities.
● Governance — The company boasts an established management structure, fair compensation, and transparency in intradepartmental communications.
How Do You Obtain Sustainable Financing?
If the above ESG criteria seem fitting for your corporate sustainability model, you and your business may be a contender for a sustainable investment. Several methods of obtaining sustainable financing include bank financing, capital investors, and green bonds. Here is what to know about each.
1. Bank Financing
As the most prominent business lending institutions, traditional banks were some of the first corporations to become involved with sustainable financing related to government sustainability initiatives. For instance, the HSBC investment banking company alone is dedicating between $750 billion and $1 trillion to help more than 1.5 million customers “make a lasting sustainable transition.” Likewise, the company has pledged to become a net-zero carbon business by 2030 or sooner, falling in line with the EU’s international commitments on climate and sustainability objectives.
Under the “Business Plan for the Planet,” HSBC will partner with companies to achieve their sustainability goals. Ranging from renewable energy to a streamlined supply chain, HSBC will supply financial and intellectual capital to support sustainable growth.
2. Capital Investors
After a 2015 Morgan Stanley report found that 72% of companies with a social impact purpose showed higher profitability and lower volatility, an influx of private investments began to account for ESG criteria.
According to Jeff Bartel, chairman and managing director of Hamptons Group, a privately held alternative investment and strategic advisory firm, sustainability and environmental stewardship have become standard benchmarks for those seeking investments.
Whether you are seeking a sustainable investment from investment firms, angel investors, or venture capitalists, pay close mind to the social responsibility your company is driving. Aside from financial measures, such as the profitability and longevity of your company, Jeff Bartel recommends honing in on your social impact purpose to demonstrate value.
3. Green Bonds
Last but not least, green bonds are funding opportunities specifically designed for “green projects” that are both sustainable and socially responsible. Examples of “green projects” include renewable energy, clean transportation, and responsible waste management. Public or private institutions issue green bonds. The receiving company is expected to periodically update the institution about how the funds are used and the environmental benefits obtained.
With this caveat in mind, Jeffrey Bartel warns entrepreneurs against seeking green bonds if their company or project does not entirely align with the issuer’s criteria. You will be routinely assessed, so don’t exaggerate the “greenness” of your project.
How Does Sustainable Financing Impact Social And Environmental Causes?
Through sustainable financing, institutions promote both social and economic development continuously. With each investment, institutions can support economic growth and the global ecosystem — or in turn, they can essentially blacklist industries that single-handedly contribute to climate change, such as agro-industries involved in deforestation.
If you are an entrepreneur whose business can benefit the environment and society at large, discover if the support of sustainable financing is right for you.
