Sustainable finance and its role in the future of business

4 min read

If you’re studying or working in the world of business, you’ve probably heard talk of the term “sustainable finance.” But what is it and how important will it be in the future?

In today’s post, we hear all about this crucial new topic from Professor Susana Martínez.

Professor Martínez earned a BBA from Northeastern University and ICADE, as well as an MBA in CSR and Sustainability. At IE University, she teaches Finance and Financial Accounting in various programs and is currently pursuing her PhD in the field of Sustainable Finance. She’s also a mentor for women in finance, helping future female business leaders launch their careers in traditionally male-dominated fields.

Read on to discover all the main concepts of sustainable finance, as well as the impact that sustainable methodologies and investments are having on financial markets around the world.

A new frontier

Sustainable finance is “gaining enormous momentum.” Just like digitalization and artificial intelligence have forever changed the business landscape, now sustainability is one of the critical trends that successful organizations must incorporate into their everyday actions.

The world today is defined by VUCA: volatility, uncertainty, complexity and ambiguity. These concepts are clearly visible in industries like tech, but they’re also key for finance. Sustainability is one of many critical changes. So, what does sustainable finance really mean?

Professor Martínez defines sustainable finance as taking sustainability into account as an additional aspect of our decision-making process when we evaluate risk and return. In the end, “sustainable finance is still finance.” High returns is still the goal. It’s simply broadening our perspective about what information we need to use in order to make decisions.

Is there only one approach to sustainable finance?

Not at all.

This concept has evolved over time. It was originally related to religion and ethics, but now it’s more aligned with social responsibility. Many people call it ESG investing (Environmental, Social, Governance).

The European Union and United Nations have clear guidelines surrounding ESG investing, although it’s not exactly the same thing as sustainable finance. Right now, ESG accounts for only a small component (about 3%) of the European Union’s total investments.

Sustainable finance includes ESG, but ESG focuses on the risk side only. Sustainable finance also investigates opportunities, such as thematic investments (green finance, carbon neutral, gender equality, impact investments), circular economies, efficient use of resources and much more.

Philanthropy can be a part of ESG, but it falls mostly outside the sustainable financial model. Many companies still engage in ESG philanthropy in order to increase their impact, but in order to be considered sustainable finance, they must aim for some amount of return.

Risks and opportunities

The environmental side of ESG investing and sustainable finance refers to things like greenhouse gas emissions, water use, etc. These are difficult KPIs to measure, as a company has to interpret not only their own emissions or consumptions, but also that of their suppliers and consumers in order to understand the overall impact of their actions.

For social issues, we need to understand the stakeholders of the company. How do we treat clients, locals, shareholders, and employees?

Professor Martínez asked the attendees to guess which issue has historically been the most important to investors. The responses were mixed, but companies in the past tended to focus on governance. Today, the environment is often a “more important driver in stock performance.”

That’s why sustainable finance is a perfect field to launch your career.

Why consider sustainable finance?

It’s simple: demand is high, and it’s a future-proof career path.

Younger generations especially are driving increased demand for sustainable investments. Business schools are offering more classes in these areas, companies are hiring more people with experience in sustainability, and customers pay more for products and companies with sustainable credentials.

Many organizations and institutions are especially keen to attract more women to the field, since finance is a traditionally male-dominated field. Here at IE University, we offer a variety of scholarships for women, including the Women in Finance Scholarship, so there’s never been a better time for female professionals to enter the finance industry.

What’s next?

There are some issues to be aware of in this field, and a big one is “greenwashing.”  How do you identify and address seemingly “green” initiatives from companies that in reality have other motives? There have been more government-level audits in recent years, but in the end, consumers and aspiring professionals are responsible for separating meaningful actions from mere marketing tactics.

Additionally, it’s sometimes difficult to identify the source of financial growth in high-ranked ESG companies. For example, during the COVID-19 pandemic, we witnessed increased growth in high-ranked ESG companies despite overall market difficulties. But is this due to their ESG initiatives, or the fact that they are mostly tech companies, which get high environmental scores by their nature since they are not reliant on manufacturing and other high-consumption practices?

These are just some of the questions that you will need to tackle if you decide to take on the challenge of a career in sustainable finance. It’s the perfect time to learn about sustainable finance if you aim to have a positive impact on the world, as well as consolidate returns for yourself or your business.