In a time when sustainability is considered a natural pillar for businesses to include in their commercial offerings, the finance sector is exerting many efforts to be in line with that notion today. Sustainable finance in its most basic form is a concept that encompasses any and all financial activities that contribute towards achieving social, environmental and economic sustainability for a better world. These activities fall under the broad range of environmental, social, and corporate governance (ESG).
By the start of the 20th century, negative impacts of sustainable finance were debunked and the world accepted the need for environmentally responsible investment, where partnerships were established worldwide between FIs, governments and NGOs to increase awareness on environmental concerns like global warming, climate change and more. Fast-forward to the present and the notion of sustainable finance and ESG has become a crucial aspect of global finance.
Today, sustainable finance takes on many shapes and forms and these are the general areas that involve efforts to creating sustainable finance practices:
Socially Responsible Investing (SRI)
Also referred to as ‘green’, ‘ethical’ or ‘impact’ investing, SRI includes any activities that integrate the aforementioned ESG concerns into any and all financial processes in a systematic and impactful way. It entails the financial entities’ endorsement and practical application of activities that validate eco-friendliness, human rights, green initiatives and socio-economically challenged groups. By association, SRI also negates and rejects businesses that are seen as socially and environmentally unsustainable such as fast food and the likes.
As implied in its name, green financing pertains to any finance-related business that prioritize and promote tackling environmental concerns through their offering & general activities. One of the most obvious worldwide initiatives in recent times is the issuance of green bonds from different companies that are focused on reducing carbon footprints, as well as any FI that reduces or eliminates the need for using printed paper and other environmentally harmful materials.
A subcategory of responsible investment and similar to community investing, social financing involves organizing financial resources to create funds for investment projects that need it, such as SMEs, housing projects and educational initiatives for international communities. This aims to grant access to credit and other resources to underserved and/or unbanked individuals or communities that have been previously denied access by traditional FIs and banks.
Businesses that primarily aim to achieve specific social, environmental and sustainable goals fall under that category, where they include microfinancing projects that serve underprivileged individuals or communities, NGOs that are looking to make a difference and any investment initiatives that promote goodwill and eco-friendliness.
To bring the current situation of sustainable finance to light, the United Nations released a list of sustainable development goals (SDGs) back in 2015 where the Deputy Secretary-General highlighted a few alarming facts, such as that poverty rates are falling too slowly and global hunger is rising for the third year in a row. Additionally, the current financing gap was declared at $2.5 trillion per year, a fact that entails the need for private companies to fund 80-90% of sustainable finance programs as the public sector is not sufficient to both tackle these issues and make a significant impact on our environment.
So where does FinTech fit in Sustainable Finance?
FinTech and the general idea of digital finance represents a crucial framework for promoting green finance, financial inclusion and enabling the equitable distribution of information, resulting in better decisions and risk management without compromising on the UN’s SDGs and worldwide sustainability goals. New and existing technologies are proving to be the key enabler that reduces costs while guaranteeing a greener approach to financial sustainability initiatives. The sheer speed, efficiency and reliability of FinTech solutions create a robust infrastructure that allow for the disposal of environmentally harmful procedures and operations, reducing carbon footprints, electricity consumption and physical processes that have a negative impact on our planet.
There are several examples of countries that are either experimenting or implementing sustainable finance solutions through national initiative or even trying out different FinTech solutions to make a greater eco-friendly impact. It also urges the need of some technologies like blockchain and smart contract to ensure sustainability and social standards in trade finance and digital on-boarding through e-KYC.
With many businesses in the world today not paying attention to their carbon footprints and general impact on the environment, there are several others that are taking initiative and enforcing policies that yield favorable outcomes for our planet, and they manage to do so without compromising on their company mission or objectives. FinTech is a definite enabler of eco-friendliness at this point, and its future promises an even more beneficial impact on the environment as it develops and grows into a sustainable system that makes the world a better place for all of us.
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