There is no binding definition for Sustainable Finance, which translates to “sustainable finance” or “sustainable financing” in German. It is not even clear when this term first appeared in linguistic usage. What is certain is that the English pair of terms was established in the finance industry from the mid-2010s.
In general, sustainable finance is understood to mean all activities of a financial services provider that are carried out in a sustainable manner. Three sustainability criteria apply, which are abbreviated as “ESG” in English: “E” stands for “Environment”, “S” for “Social” and “G” for “Governance”. The first criterion relates to environmental protection, the second to compliance with certain standards for conducive social coexistence, and the third involves comprehensively sustainable corporate governance.
The discourse around Sustainable Finance was set in motion by the United Nations (UN), the World Economic Forum (WEF), the World Bank and other global players. Since the Paris Climate Agreement of 2015, concrete steps have been taken worldwide to establish sustainable finance as quickly as possible within the framework of the 2030 Agenda and in line with the climate targets set. China and the EU, especially with France and Germany in the vanguard, immediately set about implementation. Numerous regulations for financial market participants have already been adopted and implemented, with many more to follow soon.
The principle of sustainable financing is clear: sustainability is rewarded, but those who violate it have to bear the consequences by deinvesting. According to WEF data, around one-third of global investments are already made within the framework of ESG criteria. The trend is still rising. Due to the increasing regulation of the financial services sector in the sense of promoting Sustainable Finance and the immensely high investment requirements for the economic transformation towards the so-called “Net-Zero-Society” until the year 2050, this share is bound to increase even more.
As an investor, however, you should bear in mind that this development is not due to free market forces, but has been set in motion by governmental and supranational intervention on the part of various players in a planned economy, so to speak.
In addition, the geopolitical situation in the Western hemisphere in particular is causing considerable problems for a number of economies due to the war in Ukraine, the economic sanctions against Russia and the ongoing energy crisis. It is therefore all the more important for every good investor to carry out thorough due diligence with sufficient foresight with regard to the sustainability of certain projects in order not to experience a nasty surprise.
