“Sustainability” has expanded far beyond a buzzword reminding consumers to recycle plastic and paper. It’s a wide-ranging concept that’s also a top-of-mind concern in C-suites across the globe.
That’s because the concept of sustainability consists of “three pillars: economic, environmental and social — also known informally as profits, planet and people,” according to Investopedia. The focus of the concept is “on meeting the needs of the present without compromising the ability of future generations to meet their needs.”
Screening criteria have been established to look at companies’ sustainability behaviors so potential investors can have confidence in a company’s future performance.
How Companies Are Evaluated for Sustainability
Three criteria — referred to as ESG — outline a company’s commitment to sustainability:
- Environmental, which considers a company’s earth-friendliness in terms of such activities as managing the company’s carbon footprint
- Social looks at how the business manages its relationships with communities, customers, investors, suppliers and employees
- Governance examines aspects such as company leadership, executive pay, internal controls, audits, and shareholder rights
A company’s sustainability commitments may share some similarities with its corporate social responsibility (CSR) strategy, which Investopedia defines as “a self-regulating business model that helps a company be socially accountable — to itself, its stakeholders, and the public. By practicing corporate social responsibility, also called corporate citizenship, companies can be conscious of the kind of impact they are having on all aspects of society, including economic, social, and environmental.”
“The primary difference,” according to The Balance, is that “CSR is an internal function, while ESG is an external one.”
Companies measure their internal CSR programs to determine how their actions improve their impact on society.
The success of a company’s ESG commitment is evaluated to inform external audiences, including stakeholders such as current and potential stockholders, who will use the outcomes to guide decisions about their socially responsible investing (SRI).
What Is Socially Responsible Investing (SRI)?
Investopedia defines SRI as “the practice of investing money in companies and funds that have positive social impacts.”
Strong evidence indicates SRI is growing, based on US SIF Foundation’s Report on U.S. Sustainable and Impact Investing Trends.
Total U.S.-based assets under management in sustainable investments increased 42%, from $12 trillion at the beginning of 2018 to $17.1 trillion at the start of 2020, the report said. This represented 33% or 1 of every 3 dollars of total U.S. assets under professional management in early 2020.
What Is Green Finance?
The World Economic Forum (WEF) defines green finance as “any structured financial activity that’s been created to ensure a better environmental outcome.”
WEF identifies these types of initiatives as typical green financing opportunities:
- Renewable energy and energy efficiency
- Pollution prevention and control
- Biodiversity conservation
- Circular economy initiatives
- Sustainable use of natural resources and land
WEF notes that the green finance concept includes funding sources such as commercial loans, bonds and venture capital to encourage environmentally friendly projects that minimize the impact on climate and resources in ways conventional development practices can’t match.
What Impact Does Green Finance Produce?
Green finance — the funding of sustainable, renewable and climate-conscious assets — makes possible positive environmental and social outcomes such initiatives can deliver. For instance, consider some of the many benefits of a green building construction, provided by the Green Built Alliance.
What Are the Benefits of Green Buildings?
- Preserved and improved ecosystems and biodiversity
- Healthier water and air quality
- Reduced waste streams
- Restored and conserved natural resources
- Lowered costs of operations
- Improved productivity of occupants
- Increased profits and asset value
- Optimized economic life-cycle performance
- Improved occupant comfort and health
- Enhanced indoor air quality
- Minimized impact on local utilities
- Higher overall quality of life
How to Learn More
The financial topics you have read about in this article are becoming more important as the world deals with climate change and other environmental issues.
If you are interested in considering a career in finance to help support green initiatives, there are several online programs. In as few as 16 months, you can earn an MBA to empower your involvement with this critical global issue.
Learn more about UHV’s Global MBA with a concentration in Finance online program.
Environmental, Social, and Governance (ESG) Criteria
Corporate Social Responsibility (CSR)
Socially Responsible Investment (SRI)
The Balance: What Is Corporate Social Responsibility?
The Forum for Sustainable and Responsible Investment: US SIF Trends Report
Business Wire: The US SIF Foundation’s Biennial “Trends Report” Finds That Sustainable Investing Assets Reach $17.1 Trillion
World Economic Forum: What Is Green Finance and Why Is It Important?
TCO Certified: The Circular Economy — an Opportunity for More Sustainable IT Products
BBVA: Green Loans, a Tool to Finance Sustainable Development
Green VC: Green and Social Venture Capital