Investment financial activities and products have been criticized for their negative impact on the environment and society. In recent years, there has been a growing awareness of the need to reform investment financial activities and products to push for sustainable development. This has led to the emergence of green financial products and the adoption of the Sustainable Development Goals (SDGs) approach on financial products.
Why SDGs are Not Contrary to Profits:
The idea that sustainable development and profits are incompatible is a common misconception. In fact, businesses that prioritize sustainable development are more likely to be successful in the long run. Companies that adopt sustainable practices are more likely to attract and retain customers, employees, and investors who prioritize sustainability. In addition, sustainable practices can lead to cost savings and efficiency gains, which can increase profitability. Therefore, adopting the SDGs approach on financial products can be a profitable business strategy.
The Natura Case: Natura is a Brazilian cosmetics company that has adopted a sustainable business model based on the principles of the circular economy. The company has developed a range of sustainable products made from natural and organic ingredients, and has implemented sustainable production and supply chain practices. Natura’s commitment to sustainability has helped to improve the company’s reputation and brand value, and has helped it to attract and retain customers who prioritize sustainability. In addition, Natura’s focus on the circular economy has helped to reduce its costs and increase its efficiency.
Negative Impact of Investment Financial Activities and Products:
Investment financial activities and products have been blamed for financing activities that harm the environment and society. For example, the fossil fuel industry has been accused of causing climate change, and the arms industry has been accused of contributing to violence and conflict. Investment financial products such as derivatives have also been blamed for contributing to the 2008 financial crisis.
Necessity of Reforming Investment Financial Activities and Products:
Reforming investment financial activities and products is necessary to align them with sustainable development goals. The goals cover a wide range of issues such as poverty, hunger, health, education, gender equality, clean water and sanitation, renewable energy, responsible consumption, and climate action.
The necessity of reforming financial products to align with the SDGs can be demonstrated through mathematical facts. According to the United Nations, achieving the SDGs will require an estimated $5-7 trillion of annual investment between now and 2030 (UN, 2019). However, current levels of investment are not sufficient to achieve these goals. The gap between the funding needed and the funding available is estimated to be around $2.5 trillion per year (UN, 2019).
To bridge this gap, financial products and investment activities must be reformed to prioritize sustainable development. One approach is to develop green financial products, such as green bonds, which are specifically designed to finance sustainable projects (Mertens et al., 2018). Green bonds have grown rapidly in recent years, with issuance totaling $269.5 billion in 2020, a 9% increase from the previous year (Climate Bonds Initiative, 2021). By investing in green bonds, investors can support sustainable projects and contribute to the achievement of the SDGs.
Another approach is to integrate SDG criteria into investment decision-making processes. This can be done through the development of SDG-aligned investment products, such as impact funds, which are designed to achieve specific SDG targets (Von Schnurbein et al., 2018). By investing in impact funds, investors can align their financial goals with the SDGs and support sustainable development.
The benefits of investing in sustainable financial products are not just limited to supporting the achievement of the SDGs. Studies have shown that sustainable investments can generate competitive financial returns. For example, a report by the Global Impact Investing Network found that the median net internal rate of return for private impact funds was 8.9%, compared to 8.1% for conventional funds (GIIN, 2019).
In conclusion, the necessity of reforming financial products to align with the SDGs is clear. The gap between the funding needed and the funding available to achieve the SDGs is substantial, and sustainable financial products can help to bridge this gap. In addition, investing in sustainable financial products can generate competitive financial returns, demonstrating that prioritizing sustainable development is not contrary to profits.
What are Green Financial Products?:
Green financial products are investment products that finance projects with environmental benefits. These products have been growing in popularity in recent years. Examples of green financial products include green bonds, green loans, and green insurance. According to the Climate Bonds Initiative, the global green bond market reached a record $269.5 billion in 2020, up from $165.5 billion in 2019.
Sustainable Development Goals Approach on Financial Products:
The Sustainable Development Goals approach on financial products involves incorporating the SDGs into investment decision-making processes. This approach requires investors to assess the impact of their investments on the SDGs and to adjust their investment strategies accordingly. A study by the Principles for Responsible Investment found that companies that align their strategies with the SDGs tend to outperform their peers in terms of financial performance and risk management.
Possible Solutions to Reform Investment Financial Activities and Products:
- Regulation and Standards: The regulatory environment can be strengthened to ensure that investment financial activities and products align with sustainable development goals. Governments and regulators can introduce standards for environmental, social, and governance (ESG) criteria in investment decisions. The European Union’s Sustainable Finance Disclosure Regulation and the UK’s Green Finance Strategy are examples of regulatory frameworks that promote sustainable finance.
- Investor Engagement: Investors can engage with companies to promote sustainable practices and influence their investment decisions. Shareholder activism can be used to influence corporate behavior and drive change towards sustainable practices. Investors can also use their proxy voting rights to influence corporate decision-making and hold companies accountable.
- Impact Investing: Impact investing is an investment strategy that aims to generate social and environmental impact alongside financial returns. It involves investing in companies or projects that have a positive impact on society or the environment. Impact investing can drive investment towards sustainable development goals and incentivize companies to adopt sustainable practices.
- Education and Awareness: Education and awareness-raising campaigns can promote the importance of sustainable finance and the benefits of green financial products. Financial institutions can develop educational programs to train investors and financial advisors on sustainable finance. Public awareness campaigns can also be used to encourage individuals and institutions to adopt sustainable finance practices.
- Independent expert supervision of activities: Supervision of activities in line with the SDGs can be a powerful solution for making companies and governments more conscious and active in the work for sustainable development. Independent experts can provide objective and impartial analysis of the impact of activities on the SDGs, and can help to identify areas where improvements can be made. The presence of independent expert supervision can also create a competitive advantage for companies that prioritize sustainable development.
The need to reform investment financial activities and products to promote sustainable development is critical in the face of environmental and social challenges. The adoption of green financial products and the implementation of the SDGs approach on financial products can be a profitable business strategy that aligns with sustainable development goals. To achieve this, regulatory frameworks, investor engagement, impact investing, and education and awareness-raising campaigns can be used to incentivize sustainable finance practices.
- Eccles, R. G., & Serafeim, G. (2013). The Performance Frontier: Innovating for a Sustainable Strategy. Harvard Business Review. https://hbr.org/2013/05/the-performance-frontier-innovating-for-a-sustainable-strategy
- European Commission. (2021). Sustainable finance. https://ec.europa.eu/info/publications/sustainable-finance_en
- Principles for Responsible Investment. (2019). Investing in the Sustainable Development Goals: The SDG investment case. https://www.unpri.org/download?ac=7182
- United Nations. (2015). Transforming our world: The 2030 Agenda for Sustainable Development. https://sustainabledevelopment.un.org/post2015/transformingourworld