In this scientific article conceptual basis of the sustainable financing is reviewed.
Key words: sustainable development, finance sector, responsible investments.
The definition of sustainable development appeared as «Development that meets the needs of the present without compromising the ability of future generations to meet their own needs» . This definition brings an idea of an intergenerational equilibrium as a key for sustainable development. The essence of sustainable development is that the development of the present generation should not conflict with the interests of future generations.
The concept of sustainable development served as the ideological basis for the adoption in 2015 of the Agenda for Sustainable Development. In the agenda, the UN summit developed 17 sustainable development goals. The leaders of 193 countries agreed with a document with these goals. The term for goals is the period 2015–2030. They replaced the Millennium Development Goals (MDGs), which were set for the previous 15 years. 17 Sustainable Development Goals are comprised of more than 170 targets on various fronts ranging from ending poverty and hunger to achieving gender equality and taking urgent action on climate change .
The Sustainable Development Goals are criticized for being unrealistic and vague. Indeed, by now it's impossible to evaluate the financial resources needed or assess the progress. Sustainable development is more a direction of movement than an achievable aim.
The financial system plays a key role in driving economic growth towards sustainability values based on the promotion of greater environmental responsibility, climate resilience, low-carbon technology, human rights, gender equality, social inclusion and sustainable economic growth, among others. The financial system is the result of a long-term evolution linked to global economic growth and based on macroeconomic choices as well as certain legal, technological and government rules. Sustainable finance includes investments in environmental protection, sustainable use of agricultural resources and biotechnology-based producers. The financial sector can facilitate the transition by agreeing to lend to, invest in and ensure businesses that manage their natural risks and impacts. Sustainable business financing has strong financial as well as wider social benefits, so sustainable finance continues to gain momentum.
The need to create corporate sustainability transparency is obvious. Examples are the oil spill in the Gulf of Mexico in 2010, Volkswagen's underestimation of CO2 emissions from cars in 2015. They result in huge financial losses for companies and investors.
Sustainable finance empowers environmental, social and governance (ESG) factors in decision-making about investments in climate change mitigation, inequality elimination, greenhouse gas emission reduction, and energy efficiency and social inclusion. Given their nature, these ESG benchmarks reflect sustainable development objectives, contributing to long-term competitiveness and sustainable growth, promoting low-impact industries based on resource conservation, reuse, recycling and renewable energy, and respecting the needs of future generations. Whereas investors and lenders used to focus mainly on the financial performance and reputation of companies, the focus has shifted to environmental, corporate culture, employee relations and transparent company management — ESG factors. Social and Corporate Governance refers to a company's three main sustainability and social performance factors. This index informs investors about a company's strategy, the working conditions of its employees and how the company takes care of the environment.
Rating agencies are already confirming that in some cases ESG risks have an impact on a company's creditworthiness assessment. For example, studies by key international rating agencies Moody's, Fitch and S&P show that more and more banks are recognising the importance of ESG risks and integrating them into their credit analysis process. The financial and industrial sectors' turn to ESG principles has been facilitated by the strengthening of the environmental agenda and the adoption of the Paris Agreement in 2015, which will require companies to regulate their carbon footprint starting in 2020.
According to PwC, 985 institutional investors from 37 countries eliminated $6.24 trillion worth of high-risk ESG assets from their portfolios in 2018. The agency notes that responsible investment capital increased by a third every two years from 2014 to 2018, and by 2019 about half of all assets managed in Europe were classified as responsible investment assets. Demand for ESG ratings remains only among large exporting companies that are based in the West and receive green and syndicated ESG loans from foreign banks. In Russia, the prevalence of such ratings is low due to the lack of regulatory requirements .
As part of the trend towards responsible development, in 2006 the United Nations initiated the Principles for Responsible Investment (PRI) to formalise the accounting for non-financial indicators. PRIs present a set of principles to minimise the risks of long-term investments by incorporating ESG factors into investment strategies. Major institutional investors, with financial support from the United Nations Environment Programme (UNEP), have developed six core principles for responsible investing and created the PRI Association for Responsible Investment.
Principle 1: We will incorporate ESG issues into investment analysis and decision-making processes.
Principle 2: We will be active owners and incorporate ESG issues into our ownership policies and practices.
Principle 3: We will seek appropriate disclosure on ESG issues by the entities in which we invest.
Principle 4: We will promote acceptance and implementation of the Principles within the investment industry.
Principle 5: We will work together to enhance our effectiveness in implementing the Principles.
Principle 6: We will each report on our activities and progress towards implementing the Principles .
Major financial players such as Blackrock, Goldman Sachs and JPMorgan have joined PRI and use the principles to manage their assets. Finance companies both in Russia and globally are following the general trend. Otherwise, they do not meet the criteria for doing business and soon run the risk of losing a large proportion of agents. This will affect the liquidity of their securities and they will find it difficult to raise capital on the market, which will likely result in higher funding costs. In today's world, a company's image and reputation are as important as its products or services. Key stakeholders care about whether an organisation shares their values and whether the business is responsible, honest and open. Reputation represents the perception of a company by its stakeholders and is one of its most important assets, and an effective reputation is essential for creating competitive advantage and sustainable development.
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