Banks and other financial intermediaries transfer money from subjects who have accumulated savings (like households) to subjects in financial deficit, who need to invest or spend more than their available resources (like companies or public administrations). 

When deciding how to invest money, savers and banks have a crucial role in directing capitals towards subjects and activities that generate a positive impact on the society and on the environment.

Thus we can say that the management of the savings has concrete consequences on the reality that surrounds us which could be both positive and negative depending on the type of investment we make.

«Sustainable finance» refers to finance that takes environmental factors into account in investment decision-making, directing capital towards longer-term sustainable activities and projects. Finance is defined as sustainable based on the ESG parameters, i.e. according to environmental (Environment), social (social) and corporate governance (Governance) factors.

ESGs are assessed with scores by specialized agencies (ESG ratings) that express a summary evaluation on the level of environmental, social and corporate governance sustainability of issuers (companies, states, supranational organizations), securities and/or collective investment instruments.

For "financial products targeting sustainable investments", traders must disclose how they achieve sustainable investment objectives. This information must be made available on the website, in the pre-contractual information and in the periodic reporting, as set out by the  SFDR (Sustainable Finance Disclosure Regulation) of the EU.

The complexity and lack of transparency of the methodologies used to calculate ESG scores and the different weights attributed to ESG  factors by different agencies limit the reliability and comparability of ESG scores, leaving the door open to greenwashing practices.

Greenwashing is a communication or marketing strategy of companies, institutions or organizations that present as eco-sustainable activities and products that in fact are not. With greenwashing, companies deceptively try to increase their sales by exploiting the growing sensitivity of consumers on environmental sustainability.

In the most frequent cases of greenwashing, the communication has the following characteristics:

• there is no accurate information or data to support the statement;
• the information and data are declared as certified while they are not recognized by authoritative bodies;
• single characteristics of what is communicated are emphasized;
• the information is so general as to create confusion among consumers;
• false or counterfeit labels may be used;
• Untrue environmental claims are reported. 

Key takeaway

So if you decide to buy a product or make an investment because of the sustainability characteristics that are claimed, you should also carefully inform ourselves  through sources other than those who propose the product!

Sustainable finance….

In sustainable finance, the maximization of profit and the value of shares and dividends remain predominant, trying not to harm the environment too much.

… or ethical finance

The approach of ethical finance is antithetical: the realization of economic profits is pursued, but it is functional to the objective of maximizing the benefits for people, communities and the planet

The risks of a fragmentary approach are mainly borne by the bank's customers, the environment and society. In fact, customers risk being misled thinking of making fully green and fair investments, the environment derives a limited benefit from the investment and society sees its rights to health and a just future threatened.

Despite this, the fragmented approach of sustainable finance persists because it benefits economic operators.