Enables better financial analysis, and ultimately creates more efficient capital markets.
Global sustainable assets grew to a record $35.3 trillion in 2020, with a substantial proportion invested corporate equity or debt.
It can demonstrate that companies are accountable to the local communities, that they understand and prioritize their concerns and handle their grievances. It can be used to initiate an on-going dialogue with local communities, build trust and secure their social license to operate.
This is particularly important in extractive industries and infrastructure.
The three most popular investments strategies were the following:
All three investment strategies require a thorough understanding of companies’ strategies, governance, and performance on sustainability issues. Institutional investors rely on publicly disclosed, easily accessible, and highly reliable ESG data to properly implement these strategies.
The IFC toolkit helps fill the global demand for sustainable assets by guiding companies in the preparation comprehensive and integrated financial and sustainability reports.
Sustainability-linked finance is fastest growing market in sustainable finance, gaining traction with corporate issuers and investors looking to broaden the scope of sustainable finance and reward companies’ sustainability performance and outcomes.
It includes a range of corporate debt instruments—bond, loans, and credit—that are linked structurally to the issuer’s performance on predetermined sustainability goals and targets, allowing general-purpose uses of proceeds and supporting an integrated management and governance of sustainability.
Sustainability-linked corporate finance is based on companies’ ability to integrate sustainability in strategy, governance, and performance.
Emerging models for sustainability-linked finance focus on:
The IFC Framework prepares companies for the issuance of sustainability-linked finance by promoting a comprehensive and integrated approach to:
Academic studies have consistently found a strong link between ESG and financial performance. Companies with effective management and disclosure of sustainability issues tend to have lower costs of capital, higher valuations, and better returns for shareholders.
When integrated with financial reporting, ESG information can provide investors with a broader view of strategy and performance and give confidence in the long-term viability of the business model.
Some non-financial information, such as climate change mitigation, employee turnover, or product quality, may even be thought of as pre-financial or leading indicators.
ESG performance also provide insights into the quality of a company’s management, and its ability to:
Increasingly, investors translate sustainability performance into financial performance by identifying and tracking sustainability issues that have a material impacts on the operational and financial performance of the company.
Extra financial analysis helps identify channels for how sustainability impacts financial performance, focusing on impacts on the main elements of company valuation, including revenue growth, profitability, assets and liabilities, and risk and cost of capital.
Sustainability factors are increasingly included in credit rating agencies’ assessment and, therefore, can directly impact a company’s risk profile and cost of capital.
Reaching the UN SDGs in emerging markets requires a $4 trillion annual investment—far beyond the means of governments and development agencies.
Capital markets can play a key role to channel private investments toward priority development needs, including:
Enhanced corporate disclosure (including ESG) contributes to more liquid and efficient markets. It enables investors to make decisions based on material information and reduces information asymmetry for less informed investors.
In emerging markets, integrated financial and non-financial disclosure also helps mitigate inherent risks around weaker public institutions and governance, heightened social and environmental risks, and companies with controlling shareholders.
In developing countries, insufficient flow of private capital often limits economic and social development. In part, this is due to a heightened perception of risk in these countries, compounded by a lack of information and transparency.
