What are “sustainable finance” and “ESG”? (2024)

FAQs

What are “sustainable finance” and “ESG”? ›

Sustainable finance is all about ethical decision-making in business and investment. It pivots on environmental, social and good governance (ESG) standards (especially in asset management and corporate strategy) that customers, workers and investors demand of companies.

Sustainable finance is about financing both what is already environment-friendly today (green finance) and what is transitioning to environment-friendly performance levels over time (transition finance).

ESG – short for Environmental, Social and Governance – is a set of standards measuring a business's impact on society, the environment, and how transparent and accountable it is.

ESG means using Environmental, Social and Governance factors to assess the sustainability of companies and countries. These three factors are seen as best embodying the three major challenges facing corporations and wider society, now encompassing climate change, human rights and adherence to laws.

Another important difference is that green finance is primarily focused on environmental and climate-related risks. ESG, however, takes a more holistic approach and considers social and governance factors as well. It is worth noting that there is some overlap between the two concepts.

Sustainable finance is all about ethical decision-making in business and investment. It pivots on environmental, social and good governance (ESG) standards (especially in asset management and corporate strategy) that customers, workers and investors demand of companies.

Pillar 1: Definition: Use of proceeds. Pillar 2: Selection: Process for project evaluation. Pillar 3: Traceability: Management of proceeds. Pillar 4: Transparency: Monitoring and reporting.

While sustainability and ESG are closely related concepts, they have distinct focuses and governance implications. Sustainability takes a broader, holistic view, encompassing environmental, social, and economic dimensions, while ESG provides a structured framework for evaluating specific performance criteria.

What is the ESG of a company? ESG stands for Environmental, Social, and Governance. It is a framework used to evaluate a company's sustainability and ethical impact. Below is a simple guide to ESG.

ESG stands for environmental, social and governance. These are called pillars in ESG frameworks and represent the 3 main topic areas that companies are expected to report in.

What is replacing ESG? ›

'ESG' originated as a way to demonstrate compliance however it was often then used interchangeably, and use of the term was replaced with 'sustainability'. But it's making a resurgence – 'ESG' is back.

What Does ESG Mean for a Business? Adopting ESG principles means corporate strategy focuses on environment, social, and governance. This means taking measures to lower pollution, and CO₂ output, and reduce waste. It also means having a diverse and inclusive workforce, at the entry level and the board of directors.

One of the biggest criticisms of ESG is that it perpetuates what it was partly designed to stop – greenwashing.

Types of ESG debt financing

There are two main types of ESG debt finance, Green Loans or Green Bonds, and Sustainability Linked Loans or Sustainability Linked Bonds. There are also Social Impact Bonds, Sustainable Bond and Transition Bonds.

Sustainable finance is an overarching term referring to the investment process accounting for and promoting environmental and social factors, as illustrated in the image above. While covering a broad swath of activities, we will focus on a subset of sustainable development: environmental or green finance.

When occurring, ESG risks will have or may have negative impacts on assets, the financial and earnings situation, or the reputation of a bank. ESG risks include environmental risk, social risk and governance risk and the resulting impact on banks' P&L and liquidity.

Financial sustainability is the capacity of a firm to earn revenue or get a return on an investment that covers all expenses and makes a profit. It assesses whether a project is viable for investment and whether investing resources in it will generate a sufficient return for investors.

It aims to align financial decision-making with the broader goals of sustainable development, such as reducing greenhouse gas emissions, promoting social equality, and conserving natural resources.

Sustainable finance is an overarching term referring to the investment process accounting for and promoting environmental and social factors, as illustrated in the image above. While covering a broad swath of activities, we will focus on a subset of sustainable development: environmental or green finance.