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The Role of Finance in the Pursuit of Sustainability

Financial services partners can help boost the progress of efforts to address the climate crisis

As climate change has moved from a distant abstraction to a present-day crisis, sustainability has been pushed to the top of the agenda for investors, consumers, policymakers, and business executives, creating new demand for a whole range of “green” financial services.

Executives increasingly recognize that making the right investments now on initiatives that can generate clean energy, reduce greenhouse gas emissions, and mitigate exposure to natural disasters, among other efforts, will be essential for the long-term health of their enterprises—and for society as a whole.

“It’s incredibly important to address climate change and build services around it, whether they’re renewable energy loans, green bonds, or sustainable debt funds,” says Dr. Tobi Petrocelli, director of Environmental and Sustainability Management at MUFG. “There are so many different products and services that are addressing a low-carbon economy.”

We have a conviction that environmental and social sustainability are essential to achieving sustainable growth.

— Dr. Tobi Petrocelli, Director of Environmental and Sustainability Management, MUFG Americas

The push for sustainability
Natural disasters such as wildfires and hurricanes, many exacerbated by a warming planet, are causing ever-increasing financial losses. Long-term forecasts, moreover, call for increasing devastation as the Earth continues to heat.

“Now you see the symptoms of climate change really affecting people,” Petrocelli says.

These losses have served as a tipping point for investors, who increasingly favor companies and securities linked to sustainability. Research has found that companies with stronger ESG practices typically have higher valuations.1 On the fixed-income side, the market for green bonds—debt securities that fund environmental projects—passed $1 trillion in total value in September 2020.2 And relative to conventional securities, investors are willing to pay a meaningful premium for “green” bonds.2

Why the link between sustainability and stronger investment performance? One likely explanation is investors believe companies upholding higher ESG standards are better equipped to manage a range of risks, from litigation to regulatory action to brand damage.

“ESG is about creating a more informed decision-making process,” Petrocelli says. “When you look at sustainability from a risk lens, it changes the entire aperture.”

Another draw for investors: Consumers favor brands that demonstrate a commitment to sustainability.

Nearly 70% of customers in the United States and Canada think it’s important for a brand to be sustainable or eco-friendly. What’s more, consumers of all ages and incomes pay substantial premiums for products aligned with their personal beliefs, with 7 in 10 purpose-driven shoppers paying an average of 35% more for “sustainable” purchases.3

The confluence of these trends gives corporate decision-makers a rare opportunity to invest toward a broad range of goals. Investing in sustainability has the potential to satisfy consumers, investors, employees, regulators, and policymakers, while at the same time mitigating risk and potentially capturing early-mover advantages in new markets—all while helping make the world a better place.

The result is an explosion of growth and innovation in initiatives geared toward sustainability. Financial institutions will play a critical role in empowering these enterprises.

Serving the needs of a fast-changing market
The fight against climate change touches virtually every facet of the economy, Petrocelli says. Promoting sustainability involves financing for renewable energy, energy efficiency, green affordable housing, mass transit systems, environmentally optimized agricultural operations, and public water infrastructure, among other areas. It also involves a variety of financing vehicles, from sustainability-linked loans and the underwriting and distribution of green bonds to renewable energy project finance.

“The financial sector can help,” Petrocelli says. “We can provide research and financing for energy efficiency. We can finance renewables, and we can innovate to help customers and clients to switch to low-carbon-intensity fuels and gases. We can provide green mortgages, green loans, and even sustainability-linked loans tied to key performance indicators.”

Underwriting these kinds of projects requires financial institutions with the resources to operate at large scale, experience in sustainable lending, and a sophisticated understanding of the opportunities, risks, and fast-changing dynamics. MUFG, one of the world’s leading lenders to sustainable projects, for example, has been a member of the ESG-focused Equator Principles since 2005 and a participant in the Principles for Responsible Banking.

MUFG has made a $330 billion4 commitment to finance projects aimed at building a more sustainable world, and introduced a Green Deposits program in the United States that will fund sustainability projects. And, in response to investor demand, MUFG’s investor services business launched an ESG transparency reporting solution for asset managers.

“MUFG considers the pursuit of sustainability to be one of its most important management issues,” Petrocelli says. “We work across oceans to achieve a low-carbon economy, providing financing to address a range of efforts, from sustainable loans to large utilities to funding water infrastructure in cities. We have a conviction that environmental and social sustainability are essential to achieving sustainable growth.”

 

This article was written by WSJ Custom Content Studio for MUFG.
The Wall Street Journal News Department was not involved in the creation of this content.

1. ESG Is All the Rage. Big Investors Can’t Agree on Why, Wall Street Journal, 3/4/21
2. Why Going Green Saves Borrowers Money, Wall Street Journal, 12/17/20
3. Two-Thirds of North Americans Prefer Eco-Friendly Brands, Study Finds, Barron’s, 1/1/20
4. Exchange rate of 1 USD=¥ 105 (JPY)