Increasing pressure to improve sustainability: How and why financial institutions should get involved

Sustainability has become a buzzword over recent years. Initially, sustainability was closely associated with environmental preservation, but the term is now so broad and ambiguous that it usually means something different depending on who you ask. This article takes a deep dive into the meaning of sustainability and the roles financial institutions can play in this crucial global effort.

‍What is sustainability?

In 1987, the United Nations Brundtland Commission defined sustainability as “meeting the needs of the present without compromising the ability of future generations to meet their own needs.” This basically boils down to preserving societal values, well-being, and resources for current and future generations.

In essence, sustainability is a broad term with four key areas of focus: human, social, economic, and environmental conservation. These are also known as the four pillars of sustainability.

1. Human sustainability – Refers to the sustainment and improvement of the human component within society. This is achieved through human welfare initiatives such as providing healthcare services, food, shelter, and education.
2. Social sustainability – Aims to preserve the society's social values, such as culture, identity, and globalization. Social sustainability means cultivating cohesion among various communities, embracing diversity, and providing equal opportunities to all.
3. Economic sustainability – Means maintaining a specific level of economic productivity within a region or country indefinitely. Gross domestic product (GDP) is a good example of how countries measure their economic sustainability. GDP is a monetary valuation of all the finished goods and services a country produces within a given period (usually a fiscal year). Economic sustainability hinges on fair and efficient use of resources to boost profitability, standards of living, and overall financial growth.
4. Environmental sustainability – This is the facet of sustainability most people are familiar with. Its main goal is to meet human demands while conserving the planet's natural resources. Presently, there’s a sharp focus on environmental sustainability following numerous worrying ecological problems such as climate change, global warming, pollution, energy crises, and food shortages.

In 2015, the UN member states agreed on 17 Sustainable Development Goals (SDG) as part of the UN’s 2030 Sustainable Development Agenda. All 17 goals revolve around the four pillars we’ve just mentioned.

But it's not just national governments tasked with achieving these goals. Everyone, from large corporations and small businesses to individuals, has a crucial part to play when it comes to sustainability. We need all hands on deck if we're going to address the world's pressing sustainability issues, such as food insecurity, economic hardship, environmental degradation, and social/cultural injustices.

Financial institutions on sustainability

The world needs sustainable banking and financing. Banks, fintech companies, and commercial lenders are in a prime position to promote sustainability in all sense of the word. Money makes the world go round, which means it can also be used as a tool to bring positive change on a global scale. For instance, those in the money business can help bridge the $2.5 trillion annual financing gap in meeting the UN's SDG.

Instead of focusing solely on profits, financial institutions can prioritize human, social, economic, and environmental sustainability when making investment and lending decisions. It’s a selfless resolution that’s quickly catching on as more and more companies embrace sustainable financing.

Here are some notable organizations at the forefront of sustainability-driven financing:

• Aspiration Bank – 100% committed to clean money; it does not invest in or fund ventures such as fossil fuel exploration that negatively impact the planet. The bank also directs a portion of its profit toward reforestation and carbon-neutral initiatives, in which any Aspiration Bank account holder can opt to participate.
• Putnam Investments – Provides financial services that facilitate sustainable investments in agriculture, environmental health, and the public's well-being.
• Treecard – This is a credit/debit card whose main mission is reforestation. Every $50 spent on each card plants one tree, and up to 80% of the company's profits go to reforestation programs all over the globe. Treecard has partnered with Ecosia, a non-profit search engine that uses its ad revenue to fund community-based reforestation initiatives.
• Doconomy – Provides tools for individuals and enterprises to gauge and adjust the sustainability impact of their financial/investment choices. Doconomy’s array of impact calculators enlighten individuals and corporations on their carbon footprint and suggest solutions to drive positive change. The company has partnered with various global leaders, including Mastercard and the UNFCCC, with the aim of promoting green banking.
• Trine – A P2P business lending platform that funds solar energy projects. It connects businesses with clean energy investors, many of whom are world-class solar panel manufacturers, distributors, and installers.
• Raise Green – A fintech company helping businesses raise funds for clean energy and climate tech projects. IBM is one of Raise Green’s biggest partners in its solar installation programs.

Let’s look at five impactful ways that financial institutions can get involved in sustainability:

Empowering more green initiatives through clean funding

Prioritizing businesses or projects that positively impact society and the planet is probably the easiest way financial institutions can contribute toward sustainability. As we've seen, there are many commercial institutions and fintech companies dedicated to supporting green initiatives such as solar panel installations, low-emission utilities and manufacturing, and environmental rehabilitation efforts.

Speaking of supporting green initiatives and investments, the Equator Principles are an essential framework guiding financial organizations to do just that. These principles help lenders identify and manage environmental and social risks when financing various projects or enterprises. Since it was established by the International Finance Corporation (IFC) in 2003, 136 financial organizations in 38 countries have officially adopted this framework.

Focusing on equitable funding that balances the social-economic scales

Unfortunately, there’s still a lot of social/cultural bias when it comes to financing. According to the 2021 Small Business Credit Survey, minority-owned businesses are more likely to report financial challenges and less likely to get approved for funding than their White-owned counterparts. However, minority-owned enterprises make up a considerable portion of the U.S. SMB industry. So, denying them funding puts a heavy drag on not only socially discriminated communities but the national economy at large.

We can’t truly achieve economic and social sustainability without equitable funding. Fortunately, many banks, alternative lenders, and financial welfare unions (including the Small Business Administration) are keen on providing select financial solutions exclusively to businesses owned by minorities such as people of color, women, people with disabilities, and those in LGBTQ+ communities.

Guiding investors and business owners toward sustainable choices

Besides prioritizing green businesses and projects in funding approval, financial institutions can also guide borrowers and investors in making sustainability-conscious business decisions. This could be through advisory services that demonstrate the benefits of investing in sustainability initiatives while suggesting the most lucrative or effective strategies to do so.

According to the World Economic Forum, 90% of corporate executives believe sustainability is important, yet only 60% of organizations have implemented sustainability strategies. So, many business leaders only need one final nudge to roll out a sustainability action plan. Financial institutions can make this push during funding, which is the most critical stage in any venture.

Revitalizing marginalized economic sectors

Commercial organizations and even small online lenders have the power to redistribute funds in ways that empower neglected economic sectors. Some businesses are considered too risky to finance because they operate in highly volatile markets or unproven industries. For example, ventures in the energy, commodity, hospitality, and technology sectors can have difficulty securing the funds they need to grow. But despite being "inherently risky," these businesses are crucial to the county's economic health, stability, and progress.

Financial service providers can solve this imbalance by redefining the lending risk and supporting businesses otherwise deemed “uncreditworthy” simply due to their niche or industry.

Driving change from within

Another way financial institutions can foster sustainability is to lead by example. Nowadays, sustainability is a strong selling point in any business. Given the mounting pressure for more considerate and inclusive business practices, customers are more than willing to interact and be associated with forward-thinking brands. A recent study shows that sustainability is becoming increasingly important to consumers. More than a third of consumers will even pay more for products and services from brands affiliated with sustainability.

It's about time players in the financial sector restructured their business policies and missions to incorporate at least one aspect of sustainability.

Join the sustainability movement with Loanspark

Make your contribution toward sustainability by becoming a co-branded partner with Loanspark. Leverage our cutting-edge digital resources and financial expertise to develop and design a B2B lending solution that addresses one or more sustainability elements. Whether your interest is social equity, environmental conservation, human welfare, or economic stability, you can choose which businesses you want to fund in order to align your interests and offerings with the SDG objectives. 

Loanspark’s BLaaS eliminates entry barriers into the financial market, making it easier for you to strengthen economic communities across the country by providing much-needed funding. 

Partnering with Loanspark is a low-cost, fast, and convenient way for B2B companies, financial brokers, accounting firms, marketing visionaries, and banks to launch new funding products. It takes us as little as 14 days to bring a new offering to market.

Call us at 1-877-81-SPARK to discuss how you can start helping the business communities around you through easy funding.