SUSTAINABLE finance involves a long-term integrated approach for using financial resources to optimise a company's social, environmental and financial mission. It is the provision of financial resources to inclusively promote economic growth and enhance ecology and human well-being in the long term. Sustainable finance is essential since it promotes responsible businesses, leading to a sustainable economy.
The growth of sustainable finance is driven by both companies and investors. Companies are increasingly seeking to enhance their performance and reputation from investments that improve energy efficiency, minimise material usage and reduce waste, eventually adding value for their shareholders. On the other hand, investors are shifting their attention towards environmental and social concerns, and finding it more attractive to own companies that champion sustainable finance.
Many investors understand that their financial returns can be affected by climate change, ecosystem collapse and biodiversity degradation. For example, extreme weather can affect the productivity of agricultural and forestry sectors.
Although there is no clear evidence that responsible investing yields better returns than traditional investing, many investors and analysts are now evaluating companies and other assets based on their environmental, social and corporate governance (ESG) performance. They view that key ESG developments can improve a company's performance over the long term.
A 2010 study by Ocean Tomo, a merchant bank that specialises in intellectual property, seems to support this view. The study found that intangible assets, including research & development, brand, reputation, and management of environmental and social externalities, accounted for 81 per cent of the total stock-market value of publicly traded companies in the S&P 500 index.
Responsible investing has augmented a wide range of products and assets classes in the financial market. By the start of 2012, there were 333 US mutual funds identified by the US SIF Foundation that considered ESG criteria, with assets under management of US$641 billion. This compares to 250 funds with assets of US$316 billion in 2010.
Alternative investment funds, including social venture capital, double or triple bottom line (People, Planet and Profit) private equity funds, and property funds, have surged 249 per cent from 2010 to 2012. Even assets held by community investing institutions such as community development banks, credit unions and loan funds have also grown by 47 per cent during the same period.
Businesses are now more aware of integrating the triple bottom line in their strategies. However, efficient funding from financial institutions is still needed to induce investments in sustainability projects that will improve energy efficiency and reduce input materials, waste and pollution.
For the last few years, the number of financial institutions subscribing to common principles and framework of responsible investment such as Principles for Responsible Investment (PRI) and Equator Principles has been growing. These principles encourage financial institutions to adopt ESG considerations into their practice.
While Singapore is well developed in many aspects, sustainable finance is still an emerging area here. In August this year, the World Wide Fund for Nature launched a guide to promote EGS in Singapore's financial sector. The initiative provides guidance to financial advisers and lenders on how to adopt sustainable practices and embed EGS issues into their operations.
The assessment and reporting of sustainability efforts and performance is also important. To disclose such information, companies can follow several international sustainability reporting standards such as the Global Reporting Initiative (GRI), the United Nations Global Compact, the International Organization for Standardization, and AccountAbility's AA1000 Series. A few European countries such as Denmark, Sweden and the United Kingdom are about to implement a new mandatory requirement on corporate non-financial reporting on issues such as human rights, diversity in board of directors and environmental matters.
In Singapore, Singapore Exchange released guidelines for sustainability reporting in June 2011 to encourage all listed companies to provide sustainability-related information to their stakeholders. Recently, Singapore Compact for Corporate Social Responsibility and National University of Singapore launched a study on sustainability communication by mainboard-listed companies. They found that as at Dec 31, 2013, 160 out of 537 companies communicated their sustainable business practices to their stakeholders, compared to 79 companies in 2011 and 64 in 2009. Out of the 160 companies, 19 used the GRI framework to produce their report.
Financial markets and financial institutions are key players in the economy. Financial institutions raise capital, manage risk and provide financing to government, businesses and individuals through financial markets. We need a financial system that is efficient and robust enough to lead the country as a sustainable economy.
Stock exchanges must play an important role in enhancing ESG awareness, promoting corporate sustainability reporting and improving the transparency, consistency and comparability of corporate disclosure on sustainability performance.
To bring attention to these issues, in 2009 the UN Global Compact, PRI and the United Nations Environment Programme Finance Initiative together launched Sustainable Stock Exchanges. This is an initiative aimed to enhance collaboration among stock exchanges, investors, regulators and companies in providing high quality corporate performance and transparency on sustainability related matters, including the promotion of responsible investment. Up to now, 16 exchanges have joined the initiative.
Successful implementation requires committed leadership, clear policies, appropriate incentives, and good governance. While financial institutions may voluntarily adopt standards and principles for sustainable finance, SMEs still need support from the government in the form of incentives and funding for their sustainability projects.
It is important to note that the key for a country to achieve sustainable finance is to build a close collaboration among all stakeholders which include business, government, individuals and society.