Green finance: ESG & sustainable investment criteria

THE ESG investing: green light for sustainable bonds

In an aera where environmental, social, and societal issues are becoming increasingly prominent, financial institutions, governments, and businesses are more and more inclined to embrace the shift towards energy transition through sustainable financing. This is reflected in a set of practices and financial instruments aimed at supporting projects that have a positive impact on society and the environment.


ESG, Sustainable Investment Criteria

ESG investing has garnered significant capital inflows in recent years as investors seek to align their portfolios with ethical values.

An increasing number of companies are committed to adhering to ESG criteria and are integrating them into their investment decisions related to green technologies. Key criteria in terms of green financing revolve around three dimensions:

  • ENVIRONMENT - Analysis of a company's impact on the environment:

Management of natural resources, carbon footprint, recycling and waste recovery policy, commitment to renewable energies, prevention of biodiversity, etc.

  • SOCIAL - Evaluation of the human aspects of the company:

Management of human relations, working conditions, diversity, parity, pay equity, inclusiveness, internal and external commitments (customers, partners and suppliers), etc.

  • GOVERNANCE - Evaluation of the quality of management of a company:

Financial transparency, structure of the Board of Directors, executive remuneration, anti-corruption mechanisms, etc. It should be noted that, in any ESG strategy, we find everything or part of the strong elements of global awareness established by the UN via the universal framework of the 17 Sustainable Development Goals (SDGs).

What types of impact financing?

In support of ecological transition, ESG bonds revolve around three types of extra-financial bonds:

  • Green Bonds

Created in 2007 by the European Investment Bank (EIB) and the World Bank, Green Bonds, or GB, truly gained momentum in 2013 when companies and other entities gained access to their issuance.

Over the past 10 years, the Green Bonds market has experienced significant growth. Despite challenges in the overall bond market in 2022, the momentum of Green Bonds (GB) picked up again in early 2023.

These Green Bonds are dedicated to financing projects entirely related to the environment, such as: renewable energies (solar, wind, hydraulic energy), energy efficiency, reduction of carbon emissions, sustainable management of natural resources, prevention and control of pollution, …

  • Social Bonds

Commonly known as "social impact bonds," these bonds focus on financing projects that have a positive social impact on society. We can cite projects such as: education, accessibility to housing, job creation for disadvantaged populations, etc.

  • Sustainability Linked Bonds

Sustainability Linked Bonds (SLB) are financial instruments that encompass both "green" and "social" aspects. The difference lies in the fact that they are structured around overall ESG performance objectives for the issuing company. This typically strongly incentivizes the company to meet ESG requirements.

ESG, value proposition for investors

Today, financial actors increasingly incorporate ESG criteria into their analysis and decision-making processes because a company's performance is no longer solely judged by its financial results, but also by its environmental and social impact. Companies that adopt sustainable practices are more likely to be seen as attractive investments, while those that do not meet these criteria are prone to facing growing pressure from investors.

Studies also suggest that companies aware of the positive impact of implementing responsible practices in their business models tend to display superior long-term financial performance. Those that have opted for an ESG strategy have shown more resilience and are better equipped to face economic crises. During periods of uncertainty, focusing on responsible practices provides a certain stability.

However, abuses occur, and some intentions may lose sight of their primary goal: contributing to a more responsible world. Combating greenwashing has become a challenge to address, and in this context, a tightening of regulations is eagerly anticipated.

ESG and treasurers: where are we in concrete terms?

To promote the integrity, transparency, and credibility of the green bond market, the Green Bond Principles (GBP) were established in 2014 by the International Capital Market Association (ICMA). These principles are voluntary, and their adoption depends on the issuer.

Today, practices related to green bond issuances are being further standardized. To create a rigorous regulatory framework, the European Commission is in the process of implementing a European standard for green bonds, the European Green Bond Standard (EU-GBS – infographic from the Council of the European Union). This new unified framework for green bonds, a global first, will enhance transparency and credibility in bond issuances in the European market.

Additionally, under the impetus of the European Securities and Markets Authority (ESMA), a European rating agency named EASRA is expected to be established in 2024. This new approach aims to clarify the rating principle by assigning an ESG rating through a methodology different from traditional rating agencies.

The challenge for the treasurer will be to ensure compliance of his new practices in the context of investment management within the company.

It is in this sense that management software must adapt to these new standards. At 3V Finance, we are evolving our titanTreasury risk management solution mainly based on the new needs of our clients, developments we consider useful to facilitate the lives of treasurers and CFOs, and regulatory changes that punctuate our market.

To support our clients, a dedicated team at 3V Finance monitors the latest news and works closely with auditors and partners to define the best adaptations that will facilitate management with new regulatory requirements.

Want to learn more ? Contact our experts.

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