Financial concepts can be complex, and if you layer sustainability on top it can all quickly become a little daunting.
Let’s run through a few concepts and ideas that you might hear referred to when exploring sustainable finance.
Let’s start with ESG
In the context of sustainable products, you may have heard the acronym ESG, which stands for Environmental, Social, and Governance factors. ESG is an approach to investing that takes into account the environmental, social, and governance performance of companies, in addition to traditional financial factors.
Environmental factors include mitigation of the climate crisis or use of sustainable resources. Social factors include human and animal rights, as well as consumer protection and diverse hiring practices. Governance factors refer to the management, employee relations, and compensation practices of both public and private organizations.
By considering these ESG factors, investors can assess the sustainability and social responsibility of the companies they invest in, and make investment decisions that align with their values. For example, an investor might choose to invest in a company that prioritizes sustainable practices or has a strong track record of social responsibility.
A related concept to be aware of, is the phrase ‘impact investing’ or ESG investing. Impact investing is about investing in companies or projects that have a positive social or environmental impact, while still generating financial returns.
Adaptation finance is another important concept. This refers to financial support for projects and initiatives that help communities adapt to the impacts of climate change, such as rising sea levels or increased natural disasters.
‘Microfinance’ is a banking service provided to individuals or groups who otherwise would have no other access to financial services. Microfinance allows people to take on reasonable small business loans safely, in a manner that is consistent with ethical lending practices. Microfinance is particularly powerful in developing countries – for example a loan to a female led business in India can help to alleviate child poverty.
Green financial products
The concept of ‘green financial products’ is another useful idea to be aware of when it comes to personal banking. These products are designed to support sustainable initiatives, such as renewable energy projects, or to support a more environmental way of living, and can include things like green bonds, green loans, and green mortgages. Your bank might have a dedicated offering for these types of products.
Ultimately, these concepts and approaches to sustainable finance are about using our financial resources to create positive outcomes, both for ourselves and for the world around us.
By familiarising ourselves with these concepts, we can make informed decisions about how to use our money to support a more sustainable future.