What is sustainable finance? Sustainable finance incorporates environmental, social and governance considerations into investment decisions. In the long term, this leads to more investment in sustainable projects and activities. It plays a key role in achieving the goals of the European Green Deal, which aims to accelerate the green transition. This means moving towards a green economy through sustainable technologies, industries and transport.
Why is sustainable finance relevant?
Increasing regulatory and financing pressures are putting sustainability at the forefront of the investment world. Climate regulation has driven a financial revolution. In the US, enhanced SEC climate disclosure requirements expected in April 2023 will encourage organizations to formally adopt sustainability principles. In the EU, new CSRD standards supported by the Green New Deal enforce strict climate rules and targets. Globally, the 2015 Paris Agreement underscored the many countries ready to commit to a greener, cleaner future.
The investment required to support a carbon-free world is enormous. The UN estimates that the global investment required to achieve the UN Sustainable Development Goals is between $5T and $7T per year1. The capital required is far greater than the capital provided for sustainable development2. Given this looming financing gap, coupled with national decisions to achieve climate goals and mitigate climate risks, sustainable finance provides a compelling and timely solution.
What are the different types of sustainable finance products?
Sustainable finance comes in many forms and forms. While there are a wide range of financing options, the dominant financial instruments are in the form of debt and equity, detailed below:
I. Green equity: equity shares/stocks invested in companies and/or funds that promote positive environmental impact.
a. Green companies: investment in shares of companies that promote positive environmental goals, such as renewable energy or electric vehicle companies.
b. Green funds (exchange-traded funds and/or mutual funds): investment in funds indexed or selected for companies with a positive environmental footprint, such as funds that only hold peer companies that excel in carbon reduction.
II. Green debt: debt instruments aimed at projects and/or companies that combat climate change and environmental degradation.
a. Bonds: credit issued in the public market to finance projects aimed at positive environmental change.
Green and sustainable bonds: bonds invested in projects with environmental objectives, such as bonds aimed at energy building renovations.
Sustainability-backed bonds: bonds invested in projects whose funding is based on the achievement of certain sustainability-related goals within a certain time frame, such as bonds directed at renewable energy infrastructure to meet energy consumption reduction goals.
b. Loans: credit issued in the private market that is intended for positive environmental change.
Green and sustainable loans: loans invested to stimulate the development of environmentally friendly services and products, such as energy-efficient home improvement loans.
Sustainability-backed loans: loans invested in projects whose funding is based on the achievement of certain sustainability-related goals by a certain time frame, such as energy-efficient home improvement loans with covenants based on meeting energy reduction goals.
Development and outlook for the sustainable finance market
The global sustainable finance market is growing rapidly. Global lending through green bonds and loans, as well as equity financing through initial public offerings targeting green projects, ballooned to $540.6 billion in 2021, a 100-fold increase since 20124. Overall, sustainable assets under management soared from $30.7 trillion in 2018 to $35.3 trillion in 20205. There is no sign of slowing down. Sustainable assets could surpass $41 trillion in 2022 and $50 trillion in 2025, representing a third of the total projected assets under management globally6. As the market continues to grow and develop, financial institutions and investors alike need guidance to best position themselves for success.
Sustainable Finance in Indonesia
The term sustainable finance in Indonesia along with its roadmap was launched by OJK together with the Indonesian Ministry of Environment and Forestry since 2014. This roadmap was launched with the hope that it can be an instrument to leverage and solve environmental problems and also increase the competitiveness of financial services companies in Indonesia.
Meanwhile, the main challenge in implementing sustainable finance in Indonesia is convincing business actors and the community that efforts to generate profits will be better and more sustainable if they consider natural resources and social impacts. This principle is commonly known as profit, people, planet or 3P.
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