The importance of sustainability


Author: Alice Cavarzan

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Date of Publication: 17/08/2022


Sustainable financial products means that each company must consider the environmental, social, and economic impacts. These traits may affect their financial investment. Sustainability is not just a matter of conscience. The risks of not integrating sustainability assessments are not only reputational but also budgetary. In the long term, environmental, social and governance issues (ESG), will have real and quantifiable financial impacts. Some examples of these issues could be climate change or effectiveness of the board. Consumers today are more aware. They are looking for information about companies and their social and environmental commitment.


rebased total net assets (TNA) of euro area equity funds

For this reason, it becomes essential for companies to consider the well-being of society and the environment. All this led to a significant increase in the number and volume of sustainable financial products. Also, with the help of the European Union that is gradually imposing a framework for sustainable finance pushing markets and investors to make their own strategies. Consequently, their way of doing business increasingly integrated with sustainability issues.


A risk that comes with the development of sustainable capital markets is greenwashing. One of the key risks for green capital markets is this. Infect, greenwashing could negatively affect the growth of green finance. It’s because lots of companies claim to be sustainable, but very few of them really are. They may focus their advertising campaigns on sustainability issues. In this way they will take advantage of the fact that customers are more sensitive to these issues nowadays. But without taking concrete action to protect the environment and people and especially without concretely changing their corporate vision. This is because embarking on a true path of sustainability is very expensive and challenging. On the other hand, the image of being a sustainable company now appears indispensable to increase the value of the brand. In this way the company aims to achieve a positioning focused on environmental sustainability. In the end, it achieves an improvement in image and turnover. The thing is that it does so, without corresponding to a substantially different way of operating. So, it is able to reduce their environmental impact.


One of the challenges to developing sustainable capital markets is that the transition will require high levels of financing. Therefore the role played by the financial system in channeling these funds is so important in this process. Standardization and transparency are also needed. This is because they ensure that markets can efficiently allocate funds to activities identified as sustainable.

outstanding amount and assets under management (AUM) of euro area sustainable financial instruments

When we talk about sustainability, also the financial structure matters. The optimal capital structure if we aim at decarbonizing the economy is the stock market instead of credit market. Like the article from the European Central Bank says: “for a given level of economic development, financial development, and environmental protection, economies generate fewer carbon emissions per capita if they receive relatively more of their funding from stock markets than from credit markets” . The main reasons are two:


  1. stock markets are better than banks at reallocating investment towards the greener sector.

  2. stock markets are associated with more green patenting in traditionally carbon-intensive industries.

Regarding financial market regulation, if a country wants to decarbonize its economy, it should not only promote green finance initiatives such as green bonds. It should also consider stimulating the development of equity markets. Countries could introduce green credit guidelines to encourage banks to improve their environmental performance. They would also lend more to firms that are part of the low-carbon economy. So, it's fundamental to introduce sustainability-related information for two reasons. First, to avoid greenwashing and second to preserve the integrity of the growing market of sustainable financial products. They should also introduce a reform in the context of the European Commission’s Capital Markets Union and legal initiatives. A characteristic example is the EU Sustainable Finance Regulation. There are also bond instruments whose purpose is to finance projects with different impacts :


● ecological impact (Green Bond)

● a social impact (Social Bond)

● sustainable impact (Sustainable Bond).


Investing according to ESG criteria is not only useful to our company, but it is economically and financially advantageous. The European Commission must be active with the regulation of the financial market. It’s necessary to combat the selfishness of companies that are interested only in profit regardless of the harmful effects they cause to the environment.

 

Reference List:


Finance and decarbonization: why equity markets do it better (europa.eu)


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