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What is sustainable finance?

October 28, 2022
2 hands holding a green small plant

And now, you're ready to put your money where your mouth is by embracing sustainable finance.

You're not the only one who feels this way. Research shows that sustainability has become an increasingly important factor in people's buying decisions in 17 countries.

The question is, how can you start to embrace ethical investment amid today's climate change concerns? And what are the benefits of ESG (Environmental, Social, and Governance) investing long term?

Here's a rundown of everything you need to know about investing responsibly in 2023 and beyond.

Let's jump in!

Sustainable finance: what is it?

Sustainable finance involves making financial investment decisions that are environmentally friendly. For instance, you choose to put your money toward sustainable organizations. You can also invest in green projects and activities.

The ultimate goal of sustainable finance is to drive economic growth as well as support your own financial well-being. However, you want to do this while decreasing environmental pressures.

What are the ESG goals?

With sustainable finance, the investing decisions you make should be based on ESG considerations. ESG stands for "environmental, social, and governance." Let's take a look at what today's ESG goals are and how ethical investing aligns with them.

Environmental considerations

Look for companies that promote policies focused on conserving natural resources. Their policies should also treat animals ethically.

The best companies are focused on properly dealing with pollution and reducing waste, too.

Ideally, your chosen companies should publish sustainability or carbon reports. These reports will help you to determine exactly where they stand when it comes to lowering the emissions of greenhouse gases.

For instance, the companies' reports should explain how they are limiting harmful chemicals and pollutants. The reports may also highlight how they are using sources of renewable energy to operate in a cleaner way.

All in all, the companies you give your money to should be seeking to decrease their carbon footprint.

Social considerations

As you research green companies, look at your target companies' stakeholder relationships as well.

For instance, do these companies hold their suppliers to their own eco-friendly standards? Also, do they donate some of their profits to their local communities? Or, do they encourage their workers to do volunteer work?

The workplaces of the companies you invest in should also focus on the employees' safety and health.

In addition, pay attention to a target company's supply chain. Does it avoid questionable overseas labor?

The company, for instance, should steer clear of manufacturers that use child labor. Also, avoid those that don't take workplace safety seriously.

The top companies to invest in also pay fair wages. 

Finally, search for companies that additionally promote corporate ethics, inclusion, diversity, and social justice. Companies that speak up against sexual, gender, and racial discrimination may be the best options for ethical investing.

Governance considerations

Another way of caring for the environment is to invest in companies that use transparent and accurate accounting methods. The best companies also pursue diversity and integrity when selecting their leadership. And they hold themselves accountable to their shareholders.

As an ESG investor, ask if your target company avoids conflict of interest among senior executives. The same should be true for their board members.

All in all, the company should not allow prospective employees to pay company leaders to gain preferential treatment, for example. 

A sign that a company has the best governance is that they stagger their board elections. In addition, the company's CEO should not be serving as the board chair.

Importance of sustainability amid today's climate change risks

Sustainable finance is helping today's consumers and companies alike to create a climate-resilient and climate-nutrient economy. Private investment in green companies is also helping the economy to become fairer and more resource-efficient.

Given the value of ethical investing, the European Union (EU) is currently striving to build a monetary system that will support sustainable growth long term. For example, the Paris climate agreement emphasizes aligning finances with efforts to be low-carbon.

Specifically, the EU wants to decrease the emissions of greenhouse gases by 55% compared with 1990's emissions rate by the year 2030.

The EU also wants to achieve carbon neutrality by 2050. This means it wants to reach net-zero emissions of greenhouse gases in just under three decades.

How exactly can the EU make this happen? By re-orienting financial investments toward more sustainable businesses and technologies. The EU also aims to finance sustainable growth long term.

ESG investing benefits

One of the top reasons to become an ESG investor is that this can protect your wallet in the event of an ethics blowup in the economy.

For instance, let's say a company suffers from bad public relations due to an oil spill. The spill may have occurred due to unethical or risky operations. If you invested in this company, your investments may tank along with the firm's reputation.

By investing in ESG-minded businesses, you can avoid this situation. However, the ESG companies you invest in must be real change agents. Their ESG goals must be actionable, measurable, and realistic.

How we can help with investing responsibly

Given the current threat of climate change, sustainability needs to be a top priority. This will help true economic progress to happen. You can easily ramp up your ESG investing efforts by choosing eco-friendly companies to invest in.

At bunq, we are a leading sustainable finance company. We can help you to embrace ethical investment by investing only in green companies.

Sign up and enjoy a free 30 day trial. Explore green banking, right on your phone.

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