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Impact of Green Finance and Sustainability on Investment

Introduction

With the encroaching impacts of climate change caused majorly by industrial green house gases, a wide range of industries and businesses are looking to go green so as to minimize their carbon footprint and contribute towards environmental conservation. One of the ways companies are looking to contribute towards the efforts of environmental conservation is through green finance and sustainability. Tang (2021) asserts that the sustainable financing strategy where investment decisions are made with close considerations to the financial returns as well as environmental, social and governance factors also referred to as green finance offers a framework for continued productivity and profitability of companies alongside significant positive strides towards minimizing the effects of green house gases. However while green investment offers reprieve for companies and organizations what impact does it have on investors and investment companies such as the UK Capital Markets? This study looks to critically evaluate the impact of green finance and sustainability strategies on the investment decisions within the UK capital markets.

Background of study

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The detrimental impact of industrial gases and waste has led to a revolution towards environmental sustainability with organizations and companies across almost all industries putting in an effort to minimize their carbon footprint (United Nations Industrial Development Organization UNIDO, 2011). Neste (2020) highlights that some of the ways industries have been involved in this revolution include, cutting down on their use of non renewable energy, encouraging recycling and reusing of resources, investing in green development and currently engaging in green finance and sustainability. While green finance affords companies and organizations the opportunity to concurrently pursue their business objectives and environmental sustainability, the new strategy comes with significant risks that have yet to be tested within the business environment and that are directly transferred to the investors and investment companies within a given economy.

In the UK for instance, the economy is in great need of a fast tracked transition towards sustainable development pathways, an endeavor that requires a magnanimous shift in investments types, decisions and strategies (Bank of England, 2018). The large corporate organizations as well as the small sector firms need to move away from greenhouse gases, fossil fuels and combustion of natural resources towards more energy efficient resources, industries, technologies and capabilities. All of this key changes require significant investment and as such the role of the financial sector becomes significantly imperative in this “green transformation” (Global Impact Investing Network, 2017).However in light of the increased risks and advancements into uncharted territory, investment in green finance and sustainability presents significant challenges which are likely to impact decision making of investors and investment companies including the UK Capital market.

Problem statement

Investment into green financing presents organizations and companies within different industries significant opportunities to contribute towards environmental conservation and minimize the global carbon footprint. According to Carbon and more (2019) in addition to companies looking to positively impact the environment; consumers prefer people friendly organizations who significantly engage in environmental protection. Multiple studies including White, Hardisty and Habib (2019) and Martins (2021) further confirm that the current consumer prefers companies that engage in environmental conservation activities and produce sustainable products and packaging. This makes investment in sustainability significant in the contemporary market and another key reason and determinant of potential success indicating why companies should invest in green finance. However, the investors investing in such strategies are practically covering all the risks by investing into new ideas whose potential and viability are yet unknown. This presents a crucial aspect for consideration by investors, investment companies and capital markets when it comes to investing in green finance and sustainability ideas, begging the question what impact the increased adoption of green finance and sustainability in the UK has on investment decision making within the UK Capital Market.

Aims and Objectives

Considering that the investment and capital market will be responsible for financing the new green finance and sustainability projects and strategies, how will the risk and benefits brought about by these strategies impact investment decision making. This research aims to investigate what impact green finance and sustainability strategies will have on investment decision making within the UK capital markets.

Research Objectives

To adequately achieve the aim of the study, the research process will look to answer three key strategic objectives. These objectives include

To critically evaluate the concept of green finance and sustainability within the contemporary industrial market

To find out the potential benefits and risks associated with adopting green finance and sustainability strategies

To determine the impact of adopting green finance and sustainability strategies by the UK industries on the UK capital markets

Research Questions

What is green finance and sustainability and why is it important in the contemporary industrial marketplace?

What are the potential benefits and risks associated with adopting green finance and sustainability strategies?

What impact would extensive adoption of green finance and sustainability strategies in the UK have on the UK capital markets?

Rationale

While adopting green development and production strategies has been proven to significantly impact the reduction of the global carbon footprint and enhance the conservation of the environment, most companies and organizations are still unable to adopt some of the key green strategies due to a lack of adequate financing. This has significantly slowed down the process of industrial transformation into sustainability and necessitated the need for green finance for sustainability. However this concept is fairly new and investors are still skeptic about which green projects to invest in and how to invest in them including the potential risks and benefits to be expected from such investment opportunities. This study is as such significant for such companies and investors within the capital market as it looks to identify the general potential benefits and risks associated with green finance and sustainability. In addition it looks to identify any potential impact that a strategy to investment on such projects by companies may have on the UK capital markets investment decision making. This makes the study a significant resource when it comes to evaluating the feasibility and viability of a green finance and sustainability projects or strategy.

Literature Review

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The literature review will be structured in three parts exploiting literature on the broad themes of the concept of green finance and sustainability, structure of the UK Capital Markets and the investment decisions based on green finance and sustainability.

Green Financing and Sustainability

Volz (2018) defines green financing as the investment in industrial activity that focus on the promotion of sustainable financial sector regulations, development of productive financial activity within industries as well as the introduction of innovative financing concepts to increase the flow of funds into green investments. Green financing aims to increase the flow of finances from private, public and nonprofit sectors into sustainable development projects with environmental conservation and positive social influence as key priorities. Based on the United Nations Environment Program (2021) a key part of this is to better manage environmental and social risks, take up opportunities that bring both a decent rate of return and environmental benefit and deliver greater accountability all of which require increased capital investment that can be provided for by investment and capital markets.

Structure of the UK Capital Markets

The UK capital markets play an integral role in the functioning of the economy and in fuelling economic recovery to absorb unprecedented shocks. It offers diversified services to the corporate entities such as complementary bank lending that expands the availability of finance and resources throughout the economy (Coady, et.al., 2015). Based on the Bank of England (2018) up to 90% of the UK corporate have accessed the UK capital markets to raise financial resources to invest in business and manage business risks. In addition small and medium-sized firms also move towards these markets when accessing financial resources. Close to 14,000 SME firms have used the capital market resources with close to 900 smaller firms listed on the stock market (Bank of England, 2018).

Investment decisions making

The vulnerability in climate change and the huge need to reduce carbon emissions requires significant investments in green technology that is resilient to bear climate changes (United Nations Environment Programme, 2018). Green finance enables business to tackle strategic problems of pollution and climate change thus preparing the company for long-term sound profitability and deep-rooted customer interests. All these factors along with any significant risks are considered by capital market investors when considering investment choices.

Research Methodology

The proposed research will adopt a mix of quantitative and qualitative analysis. The qualitative analysis will adopt the use of semi-structured interviews and questionnaires to understand the spectrum of the sustainable development goals that a company wishes to invest in. Various high level managers and leaders will be identified from the companies selected for the proposed research. The quantitative aspect on the other hand will be adopted to conduct a correlation analysis between the return on equity generated from the stocks identified and the investments made in the sustainable development goals. A trend analysis will be captured between these two variables of interest to better understand the role of green finance and what its impact to investment groups can be.

References

  • Bank of England, 2018. Financial Stability in Focus: The corporate sector and UK financial stability. [online] Bankofengland.co.uk. Available at: [Accessed 23 November 2021].
  • Carbon and More, 2019. Do consumers prefer eco-friendly companies? Yes they really do. [online] Carbon and More. Available at: [Accessed 23 November 2021].
  • Coady, D., I. Parry, L. Sears and B. Shang (2015): “How Large Are Global Energy Subsidies?” IMF Working Paper No. 15/105. Washington, DC: International Monetary Fund..https://www.imf.org/external/pubs/ft/wp/2015/wp15105.pdf
  • Global Impact Investing Network. Achieving the Sustainable Development Goals: The Role of Impact Investing. September 2017;https://thegiin.org/assets/GIIN_Impact%20InvestingSDGs_Finalprofiles_webfile.pdf
  • Martins, A., 2021. Most Consumers Want Sustainable Products and Packaging. [online] Businessnewsdaily.com. Available at: [Accessed 23 November 2021].
  • Neste, 2020. 9 breakthroughs in sustainability that the world needs to focus on next. [online] Neste. Available at:
  • United Nations Environment Programme. 2018, Making Waves: Aligning the Financial System with Sustainable Development. April 2018; available at http://unepinquiry.org/wp-content/uploads/2018/04/Making_Waves.pdf [Accessed 23 November 2021].
  • United Nations Environment Programme, 2021. Green Financing. [online] UNEP - UN Environment Programme. Available at: [Accessed 23 November 2021].
  • United Nations Industrial Development Program, 2011. The new industrial revolution making it sustainable. [online] Unido.org. Available at: [Accessed 23 November 2021].
  • Volz, U., 2018. FOSTERING GREEN FINANCE FOR SUSTAINABLE DEVELOPMENT IN ASIA. [online] Adb.org. Available at: [Accessed 23 November 2021].
  • White, K., Hardisty, D. and Habib, R., 2019. The Elusive Green Consumer. [online] Harvard Business Review. Available at: [Accessed 23 November 2021].

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