Sustainable finance comes of age

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17 January 2021, by ADGM's Staff Editor

Long considered a fringe or niche discipline, sustainable finance has finally found a strong foothold in the world of investing. A range of market forces, accelerated by the COVID-19 pandemic, combined with increasingly discerning retail and institutional investors has resulted in the rapid growth of the sustainable finance industry, which until recently was considered to be in its relative infancy. A new breed of socially and environmentally aware investors have encouraged banks, large investment companies, and by extension corporations, to re-examine their frameworks around environmental, social and corporate governance (ESG) standards in order to be viewed as responsible corporate citizens and viable brands.

But what exactly is sustainable financing? Put simply, sustainable financing or investing is the practice of financing or investing in companies or projects that have a positive environmental or social impact. These may include companies initiating projects in renewable energy, social initiatives, and new low carbon technologies. It offers a prudent and ethical code of conduct while investing in or financing projects and corporations.

As our collective conscience increasingly gravitates towards sustainable and ethical practices, ESG, also referred to as impact or sustainable investing or financing, is primed to become the key to long-term value creation and returns on assets for investors.

A recent rise in valuations of ESG compliant corporations is testament to the growing focus of investors on entities that are viewed as upholding higher ethical standards. For example, a recent report by the International Energy Agency and Imperial College Business School has highlighted a disparity between returns on renewable energy and traditional hydrocarbon stocks over the past decade. Moreover, during the COVID-19 pandemic, renewable energy has significantly outperformed fossil fuel stocks. A study conducted by the Ministry of Economy, Majid Al Futtaim Holding, and Abu Dhabi Global Market (ADGM) shows that ESG factors are being significantly scrutinised by major corporations around the world. The study found that 75 percent of retail and institutional investors applied ESG principles to at least a quarter of their portfolios in 2019, a considerable increase from 48 percent in 2017. Banks have globally been funding a higher number of sustainability linked projects – rising to $71.3 billion in the first three quarters of 2019.

Other research from HSBC highlights that climate-aligned and ESG-compliant public companies have outperformed global benchmarks over the long term. This trend is not just on a global level.

Channelling ESG returns into macroeconomic growth has also been a concerted effort, one that international financial centres have been seen championing. The likes of Hong Kong, Singapore and Abu Dhabi, widely regarded as preferred destinations for international investment, are scaling their regulatory frameworks and introducing sustainability-focused initiatives and offerings that advocate for the increased integration of ESG practices the public and private sector. A prime example of these efforts is found in the formation of the Financial Centres for Sustainability (FC4S), a 30-member network of international financial centres that work alongside one another to achieve the objectives of the Paris Agreement and the United Nations’ Sustainable Development Goals.

Regionally, the UAE is focused on inculcating a knowledge-based economy and is making a concerted push to promote ESG as an investment strategy and as best practice for companies here, even as it remains a largely hydrocarbon-driven economy.

ADGM has championed ESG practices with an aim of developing a vibrant ecosystem and thriving sustainable financial hub that supports capital formation, raising and deployment and creation and issuance of products to achieve positive ESG objectives.

In its capacity as the regional financial hub, ADGM has announced its third annual Abu Dhabi Sustainable Finance Forum (ADSFF), which brings together some of the brightest minds in the world, investors, regulators, international agencies, and global financial institutions to discuss sustainable financing and improving ESG frameworks. During ADSFF 2019, ADGM implemented a series of measures to advance its Sustainable Finance Agenda, including the launch of the Abu Dhabi Sustainable Finance Declaration, which commenced with 25 signatories and was expanded to include a further 11 signatories in 2020. The 3rd edition of ADSFF takes place 20 January 2021 under the theme ‘Financing Sustainable Recovery and Future Resilience.’

The government and regulator driven initiatives to promote sustainable finance that have been witnessed around the world are indicators that serve to demonstrate the criticality to public strategies and corporate goals of sustainable finance and ESG compliance. As G20 countries begin to take leadership roles in promoting sustainable finance by standardising the industry through robust frameworks and supporting developing countries with investments and national roadmaps for sustainable finance, as recommended in a recent paper by G20 Insights, it is expected that sustainable finance will be an important objective of corporations across the globe. Sustainable finance has truly come of age and corporates must apply robust ESG frameworks, and truly enact their ESG values, in order to achieve growth, longevity and brand equity.

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