Sustainable Finance & Responsible Investment
Welcome to Sustainable Finance and Responsible Investment (SF&RI) Insight section, the place to find out more about our views and hot topics related to this fast growing global legal area of interest which covers a number of expertise areas.
Sustainable finance touches many different aspects of society and gives market participants a choice to act in a responsible way and to support positive change in their day-to-day business. Sustainability is a priority focus area for governments and commercial businesses across the world and Europe has already made a promising start on becoming a global leader. Sustainable finance has also now become a regulatory imperative - no longer considered a matter reserved just for investors and asset managers, institutions across the broader financial landscape are increasingly coming under pressure from regulators and other stakeholders to take action to address sustainability in how they do business.
What does Sustainable Finance & Responsible Investment actually mean?
Although there is no hard and fast definition, broadly speaking SF&RI can be divided into two categories: impact banking & investing and lending & investing pursuant to environmental, social and governance (ESG) criteria.
- ESG lending/investing is the more prevalent in the context of commercial finance, it involves conventional lending/investment “with a conscience”. Whilst still aimed at creating wealth and providing returns it consciously avoids investments that do not comply with ESG criteria and that can expose the lender/investor to factors such as pollution and poor governance.
- Impact banking/investing, on the other hand, tends to sit within the Corporate Social Responsibility (CSR) area at the moment, the primary aim of this being to decrease poverty and having a direct and verifiable impact on the lives of the poor. We say that this sits in the CSR camp at the moment because various policy groups are advocating for the development of financial products with risk-adjusted market returns that would increase the attractiveness of this type of investment to institutional investors such as pension funds and insurance companies (who have the fiduciary responsibility to make market returns and who hold the world’s largest pools of capital).
Sustainable finance looks at how investing, lending and financing interacts with ESG issues. Traditionally, the focus of sustainable finance has been on how to make a profit while investing with a ‘green’ conscience, however it seems that there is a move towards “smart” green investments that can lead to profit and benefits for ESG issues.
What are ESG factors?
ESG issues can cover:
- Environmental: Greenhouse gas (GHG) emissions, biodiversity loss, pollution and contamination, carbon regulation exposure, renewable energy;
- Social: Labour practices, community displacement, human rights, health and safety, financial inclusion; and
- Governance: Corruption and bribery, reputation, management effectiveness.
At CMS, we aim to put our clients’ world at the heart of what we do. For this reason, we have a team of lawyers from across the firm from a range of different expertise areas who are actively engaging with the issues and opportunities that SF&RI poses. Our aim is to help our clients to navigate this rapidly evolving legal and commercial landscape whilst also providing the interested with more information about this growing area via this Insight section.