Is green finance needed more than ever before?

By Puja Sharma

Globally, a market for sustainable finance is emerging, fueled primarily by green finance and green bonds. It aims to take environmental, social, and governance (ESG) factors into account when making long-term investment decisions. Negative (exclusionary) and positive investment strategies are used in sustainable finance (integrated), according to the report by EY.

The pandemic, as well as rising sustainability concerns, have highlighted the importance of developing a financially inclusive and sustainable market. The growing concern for society has prompted investors, both individual and institutional, to consider ESG factors when making investment decisions.

The former seeks to do “no harm” by divesting from companies that pose negative social and environmental risks, whereas the latter seeks to create additional social and environmental impact through investments that are aligned with Sustainable Development Goals (SDG).

A market for sustainable finance is emerging globally, driven primarily by green finance and green bonds. Its goal is to consider environmental, social, and governance (ESG) factors when making long-term investment decisions. In sustainable finance, both negative (exclusionary) and positive investment strategies are used (integrated).

The former seeks to do “no harm” by divesting from companies that pose negative social and environmental risks, whereas the latter seeks to create additional social and environmental impact through investments aligned with SDGs (SDG). The pandemic, as well as growing concerns about sustainability, have highlighted the importance of creating a financially inclusive and sustainable market.

The growing concern for society has led individual and institutional investors to consider ESG factors when making investment decisions.

The impact of the pandemic has made it evident that financial inclusion is not enough to protect people against the black swan events that can wipe away progress made over several years in a year or two. A few studies have examined the correlation between financial inclusion and financial health, and the results have not been encouraging.

A study by the U.S.-focused Financial Health Network conducted in 2020 shows that only 33% of Americans are financially healthy despite near-universal financial inclusions. Similarly, while financial inclusion in Kenya increased from 75% to 83% between 2016 and 2019, the percentage of adults deemed financially healthy declined from 39% to 22% in the same period. Gallup’s study indicated the lack of a clear relationship between account ownership and financial security in low- and middle-income countries. This makes for a strong case to work beyond financial inclusion and focus on improving people’s financial health or well-being, especially the Low and Moderate Income (LMI) people. Financial health or well-being is defined as where a person has these 4 dimensions.

The financial system makes it easier to make trade-off decisions between economic, social, and environmental goals therefore it assists in strategic decision-making between the sustainable goals11. Furthermore, the Development of financial institutions helps promote economic growth, and social development, and reduces poverty around the world. The various roles played by financial systems in sustainable finance area:

1. Produce information about potential investments in advance and allocate capital.
2. After allocating funds, monitor investments and exercise corporate governance.
3. Facilitates risk management, diversification, and trading.
4. Mobilises and consolidates the savings.
5. Facilitates the transfer of goods and services