Stripped down, ‘finance’ looks at financial returns when making decisions about lending and investing. Where ‘sustainable finance’ differs is that it also looks at environmental, social, and governance (ESG) aspects. It assists enterprises and programs that promote excellent business practices, people’s health, and taking care of the environment for a long time.

Sustainable funding is very important in the world of business finance. Traditionally, trade financing helps products flow across borders; sustainable trade finance makes sure that these deals are in line with sustainability goals, such as getting goods from ethical suppliers, employing low-emission transportation, and making sure that environmental criteria are met. For instance, banks could give special rates on letters of credit that are tied to certified sustainable goods or services.

There are three foundational ideas that make up sustainable financing:

1. ESG integration: This involves looking at a company’s social responsibility (i.e., how it treats its employees), environmental effect (i.e., how much carbon it puts into the air), and governance processes (i.e., how diverse and open its board is). More and more, banks and investors utilise ESG indicators to look at how sustainable and risky their portfolios are.
   
2. Green bonds:  These are fixed-income investments made just to collect money for environmental projects including renewable energy, climate adaptation, and sustainable infrastructure. Green bonds have become quite popular as investors look for ways to encourage growth that is good for the environment.
   
3. Transition finance: Not all businesses are presently environmentally friendly, but transition finance grants money to businesses in high-emission industries (like steel or shipping) that seek to minimise their environmental impact over time. This strategy makes it easier to accomplish sustainability goals and makes the overall sector less carbon-intensive.

Sustainable bond issuance by sector. Source: UNCTAD, OECD, IFC

Each of the involved entities comes together carrying various roles:

• Companies establish goals for being environmentally friendly, seek to make their supply chains more efficient, and look for money that aligns with their social and environmental ideals.

• Banks and other financial institutions generate long-term loans and other forms of finance that meet green standards, such as ESG-linked loans and trade credit products.
  
• Regulatory frameworks, tax rebates, and standard-setting tools like the EU Taxonom are used by governments and regulators to promote sustainable behavior.

Sustainable bond issuance by instrument type (2024). Source: Natixis, S&P Global, World Bank, ICE, ABN AMRO

Stripping right back to basics, while the word ‘sustainable’ is used in this industry largely in reference to ESG, its actual definition is ‘able to be maintained at a certain level’ or ‘able to be upheld or defended’. In light of this, sustainable finance doesn’t entail giving up on generating money. It relies on the principle that assisting people and the environment will be beneficial to the economy in the long run. It lowers systemic risks while encouraging creativity across different areas, such as global trade.

Sustainable loan issuance by instrument type (2024). Source: Natixis, BBVA