Sustainable finance and ESG: new reality or utopian dream?
Changing trends in the international business environment encourage more and more investors to rethink their priorities and to integrate sustainability factors more intensively when making investment decisions. The direction of looking not only at financial returns but also at the impact of environmental, social and governance factors (ESG) is becoming stronger in Lithuania. The requirement to distribute capital for public benefit as efficiently as possible is increasingly applied to investment projects that request funding from both the national budget and the EU Structural Investment Funds. What, then, is the future for companies that do not care for environmental protection, sustainability and sustainable development in general, and which factors may even determine access to public funding in the future?
“In financing traditional activities, investors mainly focus on financial returns. However, sustainable finance is related to a much wider range of returns. A lot of attention is paid to environmental, social and governance factors; thus, the funding of sustainable businesses means the opportunity not only to help others but also to contribute to something greater, i.e. to make work more meaningful. Sustainable financing is also promoted by the objectives set in the Programme of the Government, namely, to achieve investment in support of climate policy objectives, digital transformation, development of energy efficiency, sustainable transport, and promotion of research and innovation. In other words, the financing of future business will become the foundation of its sustainable growth”, says Kęstutis Motiejūnas, Chief Executive Officer of INVEGA.
More and more companies and investors are aware that ESG factors contribute to a better world, help reduce damage to the environment and society and create long-term sustainable opportunities. Companies may also be pushed towards sustainability by increasingly demanding customers or markets which, without these principles, close down.
According to Kęstutis Motiejūnas, the concept of environmental, social and governance criteria has gained great importance in recent years, while the three-letter abbreviation ESG has become an increasingly important standard in financial markets. It is not surprising, therefore, that the number of companies considering to include ESG factors in their operating principles is also growing.
“More and more companies and investors are aware that ESG factors contribute to a better world, help reduce damage to the environment and society and create long-term sustainable opportunities. Companies may also be pushed towards sustainability by increasingly demanding customers or markets which, without these principles, close down,” Mr. Motiejūnas adds.
Environmental, social and governance factors should be important elements that are sought by businesses and are aimed at creating long-term success. Over time, ignoring ESG factors may not only threaten the supply chain of businesses but also undermine their goodwill and financial performance.
Funding market in the future
As the implementation of sustainable financing principles gains momentum in the EU, Lithuania, having adjusted the country’s investment portfolios, capital market and investment policy, can become a leader in transforming the business segment into a sustainable, innovative technology-oriented and climate friendly sector. It is not surprising, therefore, that the implementation of the measures to promote sustainable financing is also gaining momentum in the financial instruments offered by INVEGA.
“Both INVEGA and the financial intermediaries implementing our instruments are already paying attention to how companies manage their environmental impact or, for example, how businesses will operate in order to move towards a low-carbon economy,” says Kęstutis Motiejūnas. “Business governance practices that also promote transparency, business ethics and respect for the interests of various stakeholders of the company are one of the key moments in determining whether a business will receive a venture capital investment. It is equally important for us and companies to respond to the social interest that is measured by the company’s relationship with the community whose environment is affected by the company’s activities”.
Business governance practices that also promote transparency, business ethics and respect for the interests of various stakeholders of the company are one of the key moments in determining whether a business will receive a venture capital investment.
Quarantine has brought lasting change, and it is clear that the struggle for business development will be won by those companies which will be determined to accept the new reality. Demographic indicators are also of great importance here.
“The millennium generation, which is currently the fastest growing economic engine and already accounts for one quarter of society, gives priority to activities that are not only in line with their values, but also provide an opportunity to contribute to major changes in their country and even globally. Therefore, business should pay attention to the fact that this generation is already investing and will invest in measures based on sustainability values in the future”, notes the CEO of Invega.
Technological development is no less important and deserves attention. It is already very clear that the factors that may determine future access to public funding will be based on promoting innovation, investing in sustainable technologies, greening and digitising the economy. Private sector investment in projects contributing to the implementation of the European Green Deal is also encouraged by the Taxonomy Regulation and related legislation adopted by the European Parliament. This Regulation will help create the world’s first-ever “green list”, a classification system for environmentally sustainable economic activities. It will create a common language that investors can use when investing in projects that have a substantial positive impact on the climate and the environment. It will enable investment to be channelled into more sustainable technologies and companies, thereby contributing to the EU’s objective of neutralising the impact on the climate by 2050. It is no exception that INVEGA plans to offer a wider range of more targeted investments in digitisation of businesses, as well as green innovation-enhancing and sustainable economic activities because this is the future not only of Europe, but also of the whole world.
Sustainability creates new markets
Public investment is increasingly directed towards green initiatives, but it is important that private investors would also contribute to this. INVEGA’s financial instruments already meet the needs of sustainable business by providing financing in the areas where the free market does not operate effectively enough and expand and will further expand the supply of business financing sources in the future. At present, it is the financial instruments that help invest the funds received many times and to reuse the State’s monetary resources to finance the business.
“Financial intermediaries with whom we cooperate or will do so in the future will play a crucial role in offering businesses competitive financial solutions that promote sustainable activities. We hope that our partners – financial intermediaries – will take into account environmental and social problems when granting loans or investing, and we will direct them towards this purpose so that together we could not only reduce the lack of financing for businesses, but also go towards the same ultimate goal – to ensure long-term investment and contribute to the creation of welfare", says Kęstutis Motiejūnas.
Companies that apply ESG practices tend to have better corporate governance and a long-term sustainability advantage. The integration of ESG factors in the shaping of future public funds investment policy is not only beneficial to society but also helps effectively manage risks and create new opportunities.
UAB Investicijų ir Verslo Garantijos (INVEGA) is a national development agency established by the Government of the Republic of Lithuania to help Lithuanian businesses get the necessary financing. The mission of this Agency is to promote the growth and competitiveness of Lithuanian businesses: guarantees issued by INVEGA help resolve the problem of insufficient or unattractive collateral to financial institutions; preferential loans, subsidies and risk capital instruments managed and provided directly by INVEGA to businesses facilitate access to finance.