WHAT IS SUSTAINABLE FINANCE?

in

“At Goldman Sachs, sustainable finance is a core competency – a better way of serving our clients, driving innovation, and advancing sustainable economic growth.” KYUNG-AH PARK (Head of Environmental Markets & Innovation, Sustainable Finance Group, Goldman Sachs) 

Sustainable Finance Definition

Sustainable finance encompasses the integration of environmental, social, and governance (ESG) considerations into financial services and investment decisions. This practice not only aims to promote long-term environmental stewardship and social equity but also seeks to offer substantial economic growth through investments in sustainable economic activities and projects. As of 2020, global ESG assets are on track to exceed $53 trillion by 2025, representing more than a third of the $140.5 trillion in projected total global assets under management​.

Historical Background

Evolution of Sustainable Finance

  • Early Beginnings in the 1960s: This era marked the initiation of the modern environmental movement, with events like Earth Day and the publication of Rachel Carson’s “Silent Spring” highlighting the impacts of pollution and the indiscriminate use of pesticides.
  • Incorporation of ESG Factors: By the late 1990s and early 2000s, ESG factors were increasingly integrated into mainstream financial analysis, reflecting a shift towards recognizing the financial materiality of non-financial factors.
  • Influence of Public Awareness and Regulatory Pressure: Public demand and tighter regulations have driven the growth of sustainable finance, as environmental disasters and climate change push for more corporate responsibility and transparency.

Moreover, in 1992, the Earth Summit in Rio de Janeiro established the United Nations Environment Programme Finance Initiative (UNEP FI), recognizing the crucial role of private finance in sustainable development. Thirty years later, UNEP FI’s members are pioneers in the finance world, driving transformations toward a system that supports sustainable development.

Key milestones

  • The Equator Principles (2003): These principles have been adopted by over 90 financial institutions worldwide, influencing over $700 billion in loans and offering a systemic approach to environmental and social risk management.
  • The Paris Agreement (2015): It has catalyzed financial innovations such as climate risk insurance and climate-aligned bonds, pushing financial institutions to align their portfolios with low-emission, climate-resilient pathways.
  • Development of Green Bonds (first issued in 2007): Green bonds have grown exponentially in popularity, with issuance reaching $257.7 billion in 2019 alone, underlining their role in mobilizing capital for sustainable development projects.

Sustainable Finance Surge

On Vietnamese Grounds

For Vietnam, the progress includes the State Bank of Vietnam’s approval of a program on green bank development and an action plan aligned with the nation’s sustainable development goals for 2030. By 2025, Vietnam aims to have an environmental and social (E&S) management system in all financial institutions and integrate E&S risk assessments into their credit risk assessments. This commitment is demonstrated by a 2019 survey revealing that 76% of banks had a sustainable finance strategy in place, with several banks already implementing E&S systems to meet regulatory requirements.

Southeast Asia Framework

In the broader context of Southeast Asia, efforts to shift towards sustainable financial systems are being supported by initiatives such as the ASEAN-5 economies’ transition to low-carbon and climate-resilient economies. This includes a significant push towards climate change mitigation and adaptation, emphasizing the critical role of the financial sector in supporting these goals​.

References