Ethical Finance

Monday, June 21, 2021, by Dr. Mariya Yesseleva-Pionka, PhD

Climate changes have initiated many transitions and shifts across government and industry sectors to reduce the negative impact on the environment worldwide. With every new and existing business comes great responsibility for making climate-friendly decisions. To align with the United Nations Environment Programme Finance Initiative, new and existing businesses in the financial services sector must foster better conditions for forming ethical finance behaviour. The starting point is to embed achievable sustainability targets into the business models and strategic plans and introduce quantifiable approaches for measuring the impact of financing on the environment. The transparency and accountability of sustainable behaviour are of paramount importance for all businesses. 

 

Over the past years, government and private companies are issuing various debt instruments to finance environmentally friendly projects. The beginning of the Sovereign Green Bonds’ era took place in 2016 when Poland issued the inaugural Green Sovereign Bond to reduce the reliance on coal and transition to the lower-carbon targets. France became the second country in the world that issued the sovereign green bond in 2017, with many other governments following the suit. China’s first batch of Green (carbon neutral) Bonds was issued in February 2021 with the aim to reduce carbon emissions.

 

The Blue Bond market was created in 2018 when Seychelles, with assistance from the World Bank, launched USD15 million blue bonds to develop the economy while preserving the marine areas. Blue bonds represent new financial instruments for funding marine projects aimed at ocean conservation. 

 

The Transition Bonds have also been growing in popularity and were originally introduced for industry sectors labelled as heavy polluters to start the transitioning process from brown to green status. Whereas Nature Bonds have a broader purpose and aimed at making sovereign debt connected with biodiversity and carbon neutrality to achieve net-zero emissions. With the World Bank’s assistance, Pakistan is planning to offer this year the very first Nature-performance Bond as part of the climate mitigating strategy and assist with recovering from the global pandemic.

 

The demand for climate-friendly and socially responsible investments is on the rise. The Social Bonds were created to assist vulnerable groups of society in improving their lives. The first Social Impact Bond (SIB) was introduced in the United Kingdom in 2010 to reduce recidivism. It was evident that after just a few years, there was an increase in the SIBs with the US, Australia, Canada and South Korea following an example and introducing the path for other governments to follow. Also, the introduction of the very first Wildlife Bonds by the World Bank this year is marking the beginning of funding projects aimed at protecting endangered species, such as rhinos in Africa. 

 

With the myriad emerging sustainable investment options, it is essential to understand the underlying projects, sustainability targets, risks and return. COVID-19 has contributed to a further increase in sustainability-link bond investments, allowing companies to establish business-wide targets and spend proceeds from funding on pre-determined projects. Companies promise to lower their carbon emissions and, if they do not meet these targets, they will have to compensate investors above promised return. At this stage, there are numerous terms in the financial markets worldwide that describe green investment options. Given the diversity of financial markets worldwide, it is essential to introduce taxonomy when classifying green projects. 

Author

Dr Mariya Yesseleva-Pionka is Global Certificates Manager at ICSB, a Higher Degree by Research Supervisor at Excelsia College and Adjunct Academic at the University of Technology  Sydney, Australia. Dr Yesseleva-Pionka held teaching and senior academic management positions in Central Asia (Kazakhstan) and Australia. She specialised in general investments, personal and corporate superannuation investments while working for Westpac Banking Corporation and BT Financial Group in Australia. She was invited to join The Housing Connection, a not-for-profit organisation in Sydney, Australia as Treasurer and Board Member from November 2019. Her research interests include entrepreneurial finance, traditional and alternative ways to finance small and medium enterprises (SMEs), corporate finance, policies for the small business sector, innovation and SMEs, FinTechs and Blockchain. Dr Yesseleva-Pionka is the Associate Editor for the Journal of the International Council for Small Business (JICSB).