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Basically a financial market is a machine that takes money from investors and distributes it to entrepreneurs that need money for their businesses. Those businesses promise a return to the investors.
Depending on the business an investment comes with a certain risk. The risk and return profile of a business usually helps investors to choose where to invest.
Sustainable finance takes a look beyond the simple numbers of risk and return:
It looks at the impact of the investment. Does the investment have a negative effect on environmental, social or governance aspects?
In sustainable finance these impact-related issues do matter for the investment decision and they might even matter for the risk profile. Some investors might prefer a more sustainable investment over another project with a smaller risk and return profile. Others may only consider sustainable projects in general. Considering the fact that a bad long-term sustainability can actually change the risk and return profile sustainable finance adds a whole new perspective to investments.
Now, which investments exactly can be called “sustainable” is a difficult matter. In this context, the topic currently becomes tremendously important for many companies and financial institutions.
The EU is working on a standard – or taxonomy – determining what can be classified as a sustainable investment.
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