Investors are getting more interested in businesses seeking to limit negative environmental impact and introduce sustainable innovation to the market. According to experts, soon, the market will face a sustainability transformation, powered by investors’ sentiments, new legal requirements, and banks’ pursuit to direct financing to sustainable business activities.

According to Remy Salters, CFO at Swedbank Lithuania, sustainability is becoming a significant part of business development, which will increase the attractiveness of the business to consumers and partners and set lending conditions and create investment opportunities.

For a long time, sustainable business used to be associated with social responsibility and environmental initiatives rather than the main business activities. Now, sustainability is an integral part of business throughout the whole supply chain, manufacturing, business development strategies, risk and compliance issues, product and service innovation.

Investors understand that the risks of investing in unsustainable initiatives are higher. Businesses that don’t have a clear sustainability strategy and goals will likely face more competition and lower chances of landing financing. In the long run, unsustainable business activities might face compliance and reputability issues, as well as asset depreciation and lack of demand in the market.

Capital market interest in green investments is growing; however, another problem limits investors - a lack of sustainable and eco-friendly projects in the market. “Investors often express the need to invest in sustainable and eco-friendly projects, but currently, the market has a higher demand than there’s a supply,” explained Remy Salters.

The European Union is also working on advancing sustainable business initiatives and relocating investments to climate-neutral activities that contribute to the European Green Deal development. Regulators and new regulations become an integral part of sustainable business development to ensure that the investments reach such projects.

New criteria to evaluate sustainability

According to Remy Salters, although the EU is pushing green business investments, the Union still struggles to define sustainable activities. Here comes a so-called greenwashing risk, when companies manipulate the outcome using sustainable messages and indicators to trick investors and regulators into gaining market advantage.

“The EU seeks to solve sustainable business activity issues using a taxonomy. The goal of this solution is to define what makes a business activity sustainable. This initiative will help companies understand the requirements for sustainable business development, and for investors and financial institutions to know the criteria for business activity assessment based on its impact on the environment,” commented the Swedbank representative.

Currently, the criteria are set for 70 projects that aim to reduce climate effects and 68 activities that help adjust to the climate crisis aftereffects. Further classification systems will expand in the near future.

Transparency and risk assessment

The EU taxonomy will remain a foundation of sustainable financing. It will help create eco-friendly product labeling, set green bonds and investment standards. It will be followed by new requirements for companies to measure environmental impact and sustainability indications. Conditions will be applied to stock market quoted organizations, banks, insurance companies, and other public interest businesses.

New requirements for financial market participants emerge, increasing transparency, and encouraging sustainable business financing. Market participants will be required to be overt about their investments and strategies to meet new requirements, meaning investors will be more likely to work with sustainable businesses.

Mr. Salters explained that new bank requirements for assessing lending risks are also being developed next to these regulations. “European Central Bank will pay more attention to risks related to climate change. In the future, banks will be required to assess client risks based on climate and environmental impact more rigorously, as well as monitor them in their portfolio,” told Remy Salters.

Sustainable business and project development will determine the company’s reputation and allow better financing opportunities.

Banks have been applying sustainability assessment mainly in the case of a large transaction, but soon there will be more of such activities. New requirements will allow gauging individual investment effects on the environment. “For a couple of years now, we’ve been assessing sustainability before granting large transactions. However, we want to go further and understand the impact better, for instance, to count CO2 emission throughout the whole portfolio. Based on the results, we hope to help companies step closer to the sustainable business model,” explained Remy Salters.

There are changes in the investment field, as well. Swedbank pension funds already relocated 500 million euro investments to companies that have integrated sustainable development goals. 250 million euro pension funds are directed to the Baltic market. “When we make the investment decision, we talk with the companies to understand how their projects will help reduce the environmental impact and limit the effects of their activity in the long run,” shared Mr. Salters.

Requirements to become opportunities

New requirements in the EU will become a solid argument, changing market rules, and driving changes. Although business model transformation will require more time and investment from companies, Mr. Salters is sure it will also open the door for opportunities.

“To achieve long-term EU goals, sustainable investments are crucial. These objectives are ambitious: reduce greenhouse gas emission by 50-55% by 2030 and reach neutral CO2 emission by 2050. To increase investments in private and public sustainable business, we aim to relocate funds to sustainable activities.” Remy Salters shared future plans.

The EU economy aid plan and the budget for 2021-2027 are set to contribute 1.8 trillion euros to help the member states survive the COVID-19 crisis and accelerate sustainable European development. Around 30% of the funds will be relocated to the activities solving climate change problems. CFO at Swedbank Lithuania believes that these plans will open more opportunities for investments in sustainable business.

“There are plenty of opportunities, therefore the business should already start the transition to sustainability. And they should begin by evaluating themselves: what impact does my business make and how can we reduce it,” explained Mr. Salters.

Original article made by Verslo Žinios.