As far as buzzwords go, is there anything more prominent than sustainability? But for a while now, we have seen how sustainability has taken over various sectors. Although slow off the gates, the financial sector has also significantly raised its adoption profile for this sector, aiming, for example, at advancing sustainability and reducing climate risk for the worldwide financial system.
Sustainable finance incorporates environmental, social, and governance (ESG) factors into financial decision-making processes. It aims to strike a balance between financial returns and positive impacts on society and the environment, promoting long-term stability and sustainability in financial markets.
A report by Bloomberg Intelligence indicates that global ESG assets could exceed $50 trillion by 2025. Moreover, the current scenario predicts that global warming will continue to be an alarming threat unless there are significant and long-lasting reductions in greenhouse gas emissions. This highlights the pressing need to ensure that finance aligns with the goals of the Paris Agreement and sustainability in general.
Read: ADGM exclusive: Sustainable finance key to net-zero aims
Impact of sustainable finance
The financial world is undergoing a pivotal change as sustainability and equity concerns remain top priority. The financial industry will have a significant role in achieving a sustainable future through investments in green technologies and clean energy to facilitate the shift to a low-carbon economy. This can be achieved by backing businesses that embrace sustainability, and inclusion and follow ethical business standards. Moreover, investors also benefit from increased transparency and accountability when financing companies, particularly those that prioritize sustainable finance or factor in ESG considerations in their investment decisions.
Companies are transitioning from having a dialogue about sustainability efforts to taking concrete actions that meet changing stakeholder demands. There is also the need to create value by promoting and incorporating sustainability. Deloitte’s Sustainability Action Report 2022 indicates that 99 percent of public companies expect to invest in ESG reporting and tech by 2023. Although there has been increased acceptance of ESG within the investment industry, the diverse methods used by investment management firms, regulators, and investors indicate that its full potential is yet to be achieved. This can be realized if investment managers routinely take ESG metrics into account in all their investment decisions.
Opportunities in the sector and the evolving role of finance professionals
According to PWC’s analysis of the opportunities for green finance in GCC countries, the region has the potential to generate a significant impact by 2030, unlocking up to $2 trillion in cumulative GDP. This will significantly contribute to creating over 1 million jobs and attracting foreign direct investment (FDI) in the region.
The UAE has been supporting the development of sustainable finance by taking a collaborative approach. For instance, the Abu Dhabi Sustainable Finance Forum (ADSFF) is a collaborative and goal-driven initiative led by the financial sector in the UAE. It is aimed at promoting sustainable finance and investing in projects and initiatives that support the country’s national climate goals and contribute to a brighter, more sustainable future. During the fifth edition of the ADSFF this year, key private market investors, government leaders, regulators, innovators, and financial institutions discussed areas of collaboration to increase the flow of capital toward sustainable investments and transition finance ahead of COP28.
The recent increase in demand for ESG investments by investors indicates that investment managers should take prompt action to fully capitalize on this opportunity. Through collaborations, research, and advocacy, finance professionals can aim to help integrate environmental considerations into mainstream finance and lending. The growing availability of tailored ESG products and platforms offers them the opportunity to enhance their value proposition to clients.
The present-day world is characterized by volatility, complexity, and ambiguity. These attributes are evident in industries such as technology, but they also play a crucial role in finance. Sustainability is one of the many crucial transformations in this environment. Hence, the government along with industry stakeholders and academia must encourage educational opportunities for greater environmental protection and sustainability.
It is noteworthy that aspiring finance professionals are driving increased demand for sustainable investments. Incorporating these topics in mandatory courses at universities would equip students to become business leaders and investors who are more inclined to channel capital toward addressing crucial social and environmental challenges. This, in turn, would assist in making sustainable finance a widespread practice.
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