Essay Sample on Sustainable Finance: Investing for Profits & Sustainable Development

Sustainable finance entails any financial service incorporating governance, environmental, and social criteria into the investment or business decisions to realize sustainable profits of both employees and the community at large. A sustainable financial center results in sustainable development and encourages growth in terms of social, environmental, and economic aspects (Carvalho, Ferreira, Sobreiro, Kimura & Barboza, 2016). Besides, sustainable commercial center enhances and ensures economic competitiveness, prosperity, and efficiency both in the present and in the future while restoring and protecting ecological systems, and improving social well-being and cultural diversity. Practices that are involved in sustainable finance include active ownership, microfinance, impact investing, green bonds, sustainable funds, credits for sustainable schemes, and development of sustainable structures in a more sustainable manner (Carvalho et al., 2016). The primary purpose of this essay is discussing the importance of sustainable finance and how it helps in allocating resources to individual and societal requirements, explaining the main functions of financial structures and their application to financial sustainability. The paper will also focus on evaluating why traditional financial approaches and theories are not effective in the current economic system and the challenges of integrating sustainability into finance.

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Sustainable finance plays a critical role in shaping the world we live in. The integration of sustainability measures into the finance sector is significant in addressing future challenges. This includes the creation of financial market models that establish incentives for large scale transformation in investments and a more economical future capital allocation (Busch, Bauer & Orlitzky, 2016). Besides, sustainable finance has contributed to addressing some of the most pressing climatic and environmental issues through allocating large amounts of capital to the sustainability of low carbon sectors. For instance, sustainable finance has made it possible for International Energy Agency to allocate some funds towards low carbon energy technologies and integrating renewable and energy efficiency approaches that are required to maintain the global temperature rise to below 20C and avoid the adverse impacts of global warming (Busch et al., 2016). Sustainable finance helps in allocating resources to individuals and societal needs through allocating investments and finances to the projects and corporations that are sustainable, thus accelerating the shift towards a low-carbon circular economy. Besides, sustainable finance helps in allocating resources through assisting in making strategic decisions that ensure the achievement of sustainable goals (Weber, 2014).

Some of the primary functions of effective financial systems are; Inducement to save- investors require substantial stores to maintain their savings. The financial systems facilitate savings by issuing a significant financial asset as stocks of value, supported by services of intermediaries and financial markets of various categories. For wealth holders, all this provides sufficient choice of collections with attractive incorporation of yield, safety, and income (Weber, Diaz & Schwegler, 2014). With financial innovations and advancement in financial technology, the scope of portfolio selection has also upgraded. Inducement to save applies to sustainability by transforming the behavior of human society into saving and innovative habits and by incorporating effective techniques for sustainability. For instance, it helps in enhancing business processes and operations to become productive to reduce the wastes and cost dramatically (Cheng, Ioannou & Serafeim, 2014).

Mobilization of savings- financial stocks separate the act of saving to the actual investment. Savings may be in small or large quantities, short term or long term, and are usually done by many individual firms and households. All these investments are required to be collected and mobilized before deficit clients utilize them (Weber et al., 2014). A financial model is an effective mechanism for mobilizing savings. This happens automatically in a financially stable economy when the public stocks its savings in terms of money. Mobilization of savings applying applies to sustainability through issuing financial assets provided by financial institutions such as insurance companies, banks, amongst others. When the public acquires these securities, it makes its surpluses directly accessible to deficit investors (Cheng et al., 2014).

Allocation of funds- another primary function of a financial system is to organize an efficient, smooth, and socially reasonable allocation of credit. With the current economic transformation, modern financial institutions are playing a critical role in providing credit. Such direct lending to the public has been made feasible by the agencies of marketable financial savings and stock markets such as equities and corporate bonds. These agencies apply to sustainability since they act as an economic link between the ultimate borrower and ultimate lender (Weber & Feltmate, 2016).

The future of finance is transforming. With low fees and high-interest rates and success for digital technology, online banks are effectively contending with traditional mortar-and-brick banks making the big banks, for instance, Bank of America and Well Fargo, to go mobile. Traditional financial models and approaches are not always appropriate in the current transition of the world's economic system since they are simplifying their organizational system to minimize overhead costs and are concentrating on their significant competencies rather than struggling to excel in everything (Cheng et al., 2014). With the rise of online banking companies and financial technology, there is little distrust that the banking sector will conform with the changing times. Traditional banking models are also infamous for their lower or no interest rates on savings accounts, compared with the current online banking (Weber, 2014). For instance, the previous survey by GoBankingRates indicates that the best saving accounts are evident in online banks. Examples of online banking companies identified to be among the top five with the highest interest rates include CIT, iGo banking, Barclays, Ally Bank, and My Savings Direct (Weber, 2014).

There are several challenges in integrating finance into sustainability. Some of the key challenges include incorporating the current trends changing the global economy. The world in which we are living today is rapidly transforming in terms of connectivity and globalization, evolving growth of market and dynamism, changes in society and technology could all influence the economy, environment, and community (Weber & Feltmate, 2016). Short-termism, a corporate behavior that is deeply entrenched, is also a significant challenge of realizing a sustainable financial system. Investors should develop strategies that can address short term practices that impede the sustainability of financial systems. Another challenge facing the integration of finance to sustainability is failing to observe the long-term investment value drivers such as governance, social, and environmental issues (Weber & Feltmate, 2016). Even after the growing evidence displaying the financial materiality of ecological, social, and governance (ESG) problems to portfolio value, the finance and investment mentors guiding on how substantial dollars are invested are not considering ESG issues in savings and investment issues (Cheng et al., 2014).

Investors, for instance, the European Commission's High-level Group (HLEG) has established several recommendations to enhance the financial structures contributing to inclusive and sustainable growth. Alternative suggestions include expounding the roles of the investor for embracing the sustainability activities and improving disclosure rules making sustainability threats fully transparent (Carvalho et al., 2016). The Generation Foundation and United Nations Environmental Protection Agency have made a series of roadmaps meant for specific countries that guide regulators, national policymakers, and other shareholders on ensuring that institutional investors are aware that their fiduciary duties need them to observe material ESG problems in their decision making and investment processes (Carvalho et al., 2016).

Conclusively, Sustainable finance is any financial service that involves governance, environmental, and social aspects into the investment or business decisions to realize sustainable profits of both employees and society at large. Financial systems are mainly concerned with encouraging the stakeholders to save, mobilization of savings, and, last but not least, allocation of funds in terms of credits to the borrowers. There are various challenges regarding the integration of finance into sustainability, including incorporating the current trends changing the global economy, Short-termism, and failing to observe the long-term investment value drivers such as governance, social, and environmental issues. Investors can develop some strategies that enhance the financial structures contributing to inclusive and sustainable growth, including expounding the roles of the investor for embracing the sustainability activities and improving disclosure rules making sustainability risks fully transparent.

References

Busch, T., Bauer, R., & Orlitzky, M. (2016). Sustainable development and financial markets: Old paths and new avenues. Business & Society, 55(3), 303-329. Retrieved from https://journals.sagepub.com/doi/abs/10.1177/0007650315570701

Cheng, B., Ioannou, I., & Serafeim, G. (2014). Corporate social responsibility and access to finance. Strategic management journal, 35(1), 1-23. Retrieved from https://onlinelibrary.wiley.com/doi/abs/10.1002/smj.2131

de Carvalho Ferreira, M. C. R., Sobreiro, V. A., Kimura, H., & de Moraes Barboza, F. L. (2016). A systematic review of literature about finance and sustainability. Journal of Sustainable Finance & Investment, 6(2), 112-147. Retrieved from https://ideas.repec.org/a/taf/jsustf/v6y2016i2p112-147.html

Weber, O. (2014). The financial sector's impact on sustainable development. Retrieved from https://www.tandfonline.com/doi/full/10.1080/20430795.2014.887345

Weber, O., & Feltmate, B. (2016). Sustainable banking: Managing the social and environmental impact of financial institutions. University of Toronto Press. Retrieved from https://books.google.com/books?hl=en&lr=&id=_HmMCwAAQBAJ&oi=fnd&pg=PP1&dq=related:7xExn_Smc8UJ:scholar.google.com/&ots=oBkO8LWdP-&sig=DpyKErfzIS9vXPLYhEU0Q9fbpfM

Weber, O., Diaz, M., & Schwegler, R. (2014). Corporate social responsibility of the financial sector-strengths, weaknesses and the impact on sustainable development. Sustainable Development, 22(5), 321-335. Retrieved from https://onlinelibrary.wiley.com/doi/abs/10.1002/sd.1543