It’s true, finance can be a tool for sustainability of both people and planet. We clue you in on what you need to know about sustainable and social finance.
What is sustainable and social finance?
Sustainable and social finance is a broad category that brings two things together: financial and social returns. Market tools are used to both deliver a monetary return on investments and contribute to helping solve some of the world’s social and environmental problems.
Sustainable and social finance also includes using technology to distribute funds and aid to those in need, and even re-thinking how to reform the entire global financial system to be more supportive of sustainable development goals (SDGs). Thus, the types of financial services included are broad.
Actors can include entities ranging from governments, the UN and NGOs, to banks and your normal, everyday citizen.
Why does it matter?
The world today is facing serious environmental and human issues, and a range of actors feel the need to think and act differently when it comes to the role of finance in terms of sustainability and social responsibility. For example, on the individual level, 85% of millennials in the U.S. say they have already taken part in, or are interested in, impact investing—investing in companies, organisations, or funds to gain financial as well as social and environmental returns.
Moreover, climate change is an undeniable part of our existence, and the world’s population is set to reach almost 10 billion by 2050, further pushing already strained resources. If more financing isn’t dedicated to these problems, they will worsen. Even for investors, failing to pay attention to social and environmental problems affects their investments. The Bank of New York Mellon writes:
Ignoring risks presented by the shifting global landscape has implications for investors’ long-term returns. Natural resource constraints, global health threats, social instability, and demographic changes are already presenting business leaders with challenges, and are shaping decisions that will affect future business success and investment performance.
Besides investment, people are turning to a range of financial solutions to tackle social problems (such as financial inclusion services and sharing platforms).
The market for social finance is USD 22 trillion, according to Bank of New York Mellon research.
Types of financial services
Sustainable and social finance is a wide-ranging category that includes many types of financing and investments:
- social enterprise lending (RSF, Social Enterprise Finance Australia)
- impact investing (ABN AMRO Social Impact, Acumen)
- social impact bond, also known as “Pay for Success Financing” (Social Finance, Oranje Fonds)
- green finance (Climate Mundial, Rabobank Green and Sustainability Bond Framework)
- microfinance/microfunds (Kiva, Oikocredit)
- community investing (Local Enterprise Assistance Fund, Asian Development Bank)
- Islamic financing (As-Salama, Maybank Islamic)
It also includes other financial services that have a social benefit:
- platforms to donate to charities (Whydonate)
- payment solutions for social clubs (ClubCollect, Jars)
- platforms to teach society about managing finances (Otly, Advice Games)
- solutions for financial inclusion, such as mobile money services (M-PESA, Madura Microfinance)
- peer-to-peer insurance (Friendsurance, Dynamis)
Measuring social contribution at the corporate level
Financial service providers aren’t the only companies who engage with sustainable and social finance. Many companies also seek ways to engage in sustainable and social finance. A popular way to measure performance in this area is to use Environmental, Social, and Governance (ESG) criteria.
ESG has become a key part of mainstream investing over the last two decades, bucking the previous notions that social responsibility negatively affected returns on investments. This has been due to growing concerns about climate change, research on the profitability of responsible investing, and institutions noticing an increased need for responsible investment products. ESG criteria are used by corporations and financial institutions to judge whether their investments are responsible.
Environmental criteria deal with how an organisation treats environmental issues (such as waste, pollution, and climate change), in what ways a potential investment will affect the environment, and how these issues affect a company’s income.
Social criteria include how inclusive and diverse an organisation is, human rights concerns, animal welfare (where applicable), and consumer protection.
Governance criteria are based on how a company is run. These include, for example, executive compensation, how a company is structured, accounting transparency, and board, shareholder and stakeholder relations.
Financial inclusion is also an important part of sustainable and social finance. Many of the services listed above, such as microfinance and mobile money, are developed through partnerships between companies, governments, and NGOs with the specific purpose of delivering financial services to the world’s poor.
Often these services are based on standard technologies that are repurposed for social applications. For example, microfinance can have purely commercial goals, but it is also used to drive growth in developing countries. Thus, what makes for “sustainable and social finance” can have very little to do with the service or technology being used, or even the services offered. Rather, it is far more about the using a technology and a mode of service delivery to benefit society and the environment.
Recent research reports
- Conditions for Scaling Investment in Social Finance (BSR)
- Evidence on the Performance of Impact Investments (Global Impact Investing Network)
- Eyes on the Horizon: The Impact Investor Survey (Global Impact Investing Network and J.P. Morgan)
- From the Margin to the Mainstream: Assessment of the Impact Investment Sector and Opportunities to Engage Mainstream Investors (World Economic Forum)
- Roadmap for a Sustainable Financial System (UN Environment and World Bank Group)
- Sustainable Finance Survey (HSBC)
- Sustainable Finance Report (Deutsche Bank)
By Elliot Lyons and Erin Taylor, researchers at Holland FinTech
This article is part of a series on sustainable and social finance. Keep an eye out for upcoming articles on trends, financial inclusion, and services in the area.