In our heads we all know how the financial sector works. You convince someone of your credit worthiness and they give you a loan. You repay that loan over time, with interest added to every repayment. Those with the money to lend get wealthier, while those who borrow remain in a cycle of mediocrity.
It’s a cynical view, but if we are honest it is a view most of us hold on some level. We hear stories of banks coining it during the good times, of loan sharks charging exorbitant rates for those with no other options. And we believe, like Shakespeare, that every Shylock demands his pound of flesh.
But historically there have been many models of business finance, and there is no reason a new model can’t emerge, a more sustainable and ‘green’ model.
Many centuries ago churches railed against usury (charging interest), so businessmen in medieval times had to find ways around it. Wealthy Jewish people had no prohibition on interest, so they became Europe’s bankers, and our present system gradually evolved.
But alternatives were possible. The Muslim world, like the medieval Christian world, doesn’t approve of interest. So their model is different. Instead of getting a mortgage to buy a house, the bank buys the house and sells it to you. They have not loaned you the money; they have sold you the property. And you pay them in installments. Your repayments will include a fixed amount which is the bank’s profit for brokering the real estate deal.
The end result is the same; you get the finance you need and the financial institution makes money. But the feel is very different. And it works perfectly in many parts of the world. It is a concrete lesson that things can be done in a different way, whether you are looking for finance, or looking to invest your profits.
What is sustainable finance?
Let’s get ready for the jargon. According to Cambridge University, sustainable finance is the process of taking environmental, social and governance considerations into account when making investment decisions in the financial sector, leading to more long-term investments in sustainable economic activities and projects.
Put simply, you should look at the ethical qualities of your business investments. Few of us would willingly invest our savings in an armaments company, or a company that ran sweat-shops to produce their goods. But it goes a lot further than this. An investor interested in sustainability would look to invest in sectors that mitigate the climate crisis, or for companies that use sustainable resources. Companies that are already part of the circular economy. Those are the environmental factors.
Social factors might include human and animal rights, as well as consumer protection, a diverse hiring policy, and a progressive approach to human resources. Governance factors refer to the management, employee relations, and the compensation practices of both public and private organizations.
Taking these factors into account you might steer away from investing in Volkswagen because of their lying over complying with emissions guidelines. And you would avoid Bitcoin because of the massive energy costs of producing the cryptocurrency. You might avoid footwear and clothing companies which have links to Asian sweatshops.
Steering your money away from the bad and towards the more sustainable provides a boost for those companies which place environment, people and governance to the fore. And where money moves, society follows.
Sustainable Finance Ireland
The Irish government has already identified sustainable finance as one of it’s priorities. In it’s document Ireland for Finance 2025: the new strategy for the further development of the international financial services sector in Ireland to 2025, it notes that sustainable finance represents: “a significant opportunity for Ireland to be in the vanguard of this growing area.”
Financial services are an area this country has a strong tradition in. If we move with the times we can maintain that strong tradition and grow it. Ireland issued its first sovereign green bond in 2018, and the ESB issued the first Irish corporate green bond last June.
So far it’s the tip of the iceberg. Green bonds currently only represent 1% of the E45 trillion global bond market. What that means is that there is massive potential for growth.
Examples of sustainable finance
Non sustainable investments scream at us – we see headlines about the amount of electricity consumed in a Bitcoin mine, or see motor executives in court. But there are plenty of sustainable financial investments to choose from.
Looking no further than Munster, there are globally focused companies such as Amarenco, DP Energy, Solar 21, and Brookfield Renewables. These companies are investing in renewable energy solutions such as wind farms and solar energy.
Let’s look at Amarenco as an example. Their world headquarters is in Cork. Their mission statement is: “We recognize that climate change can’t be curbed with one single solution. But we believe making solar photovoltaic ubiquitous is key in achieving a sustainable life on our beautiful but fragile planet. This is why we conceive, develop, finance, deliver and manage baseload solar photovoltaic infrastructures which fit seamlessly everywhere and yield the most stable, long term returns.”
They have completed over 2,000 projects, and have many more in the works. They employ 145 across Europe, and have invested half a billion in the past four years.
There’s a sustainable financial investment for anyone, and it is one of many out there.
As KPMG noted in a recent report, sustainable investment assets stood at $30 trillion in 2018, but will need to triple to $90 trillion by 2030 to tackle global warming. If we choose to invest in the Irish companies offering sustainable assets, we are helping push this global agenda.