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This article is for educational purposes and does not constitute legal, employment, or tax advice. For specific advice applicable to your business, please contact a professional.
Increasingly employees, investors, and customers alike are looking to businesses to set an example when it comes to sustainability. The 2020 KPMG Survey of Sustainability Reporting found that 80% of companies worldwide now report on sustainability. In addition to this, a majority of worldwide companies have targets in place to reduce their carbon emissions and 40% acknowledge the financial risks of climate change in their reporting. Not only is this a priority for investors, younger generations of employees and customers are increasingly invested in engaging with businesses that demonstrate sustainable operations.
Gen Z is seeking a sustainable future
According to a 2020 First Insight report, 73% of Gen Z consumers are willing to pay more for sustainable products. Not only do Gen Z consumers want to spend their money supporting sustainable companies, they want to work at environmentally friendly companies as well. In a recent study by Simon-Kucher & Partners, 85% of people globally indicated their purchase behavior shifted toward being more sustainable in the last five years. Over a third of those surveyed say they are willing to pay a 25% premium on average for more sustainable products and services.
Customers aren’t the only ones driving businesses toward sustainability — prospective employees are as well. Nearly half of those surveyed by Deloitte in 2021 say they have made — and continue to make — choices about where they work based on their personal ethics.
What is sustainable finance?
Sustainable finance, also known as green finance, refers to investment decisions that consider environmental, social, and governance (ESG) factors in their activities or projects. This term is the broader term that includes anything businesses are doing to improve their corporate social responsibility performance. These initiatives are often aligned with the 17 United Nations Sustainable Development Goals:
- No poverty
- No hunger
- Good health and well-being
- Quality education
- Gender equality
- Clean water and sanitation
- Affordable and clean energy
- Decent work and economic growth
- Industry, innovation, and infrastructure
- Reduced inequalities
- Sustainable cities and communities
- Responsible consumption and production
- Climate action
- Life below water
- Life on land
- Peace, justice, and strong institutions
- Partnerships for the goals
By taking into account these factors when making investment decisions, sustainability is woven into the fabric of what will then contribute back to the economy. Sustainable finance is intended to create social and environmental impact as well as a financial return.
What does environmental, social, and governance (ESG) mean?
Environmental, social, and governance, more commonly known as ESG, is a class of investing known as sustainable investing. Sustainable finance takes into account the categories of ESG when making investment decisions. These categories can be used as a frame of reference for areas where your small business could be sustainable and in turn used by potential future investors to your business.
| Environmental: conservation of the natural world | Social: consideration of people and relationships | Governance: standards for running a company |
|---|---|---|
| Climate change, carbon emissions | Customer satisfaction | Board composition |
| Air and water pollution | Data protection and privacy | Adit committee structure |
| Biodiversity | Gender and diversity | Bribery and corruption |
| Deforestation | Employee engagement | Executive compensation |
| Energy efficiency | Community relations | Lobbying |
| Waste management | Human rights | Political contribution |
| Water scarcity | Labor standards | Whistleblower schemes |
Source: CFA Institute
Investing in environmental, social, and governance areas for your business can also help your business. Businesses focused on these sectors can bring in like-minded competitors, increase efficiency, and attract prospective employees. A 2020 study by McKinsey cited investments in ESG as a way businesses could reduce costs and operating profits by as much as 60%. On top of this, the same study suggests that a business with a demonstrated positive environmental impact might not only attract and better retain prospective employees, it may also motivate them to be more productive. The returns could potentially be as valuable to your business as the investment in sustainability could be to the broader economy.
