International and Indian Trends and Challenges in Responsible Finance

Executive Summary

Global sustainable development challenges such as climate change or poverty cannot be addressed without Responsible Finance – finance that integrates social, environmental and governance concerns into the lending and investment decision making of financial institutions. Responsible financial systems can contribute to the goal of sustainable economic development through promoting business innovation and strengthening economic, environmental and social responsible behavior of businesses. Businesses need access to capital, credit or equity to expand and grow their businesses. By setting the right incentives through non financial lending and investment criteria, the financial sector acts as a ‘multiplier’ of responsible business practices and sustainable economic development. Consequently, Responsible Finance cannot be decoupled from the responsible business agenda as ultimately Responsible Finance is a means to the end of responsible business.

This study sets out a series of major Responsible Finance trends and identifies a number of key challenges and barriers for its further integration. The study is aimed at those interested in learning about the status quo, trends and drivers influencing business practices through lending and investment decisions in the financial sector internationally and in India. It is has been financed by the German Ministry of Economic Cooperation and Development (BMZ) through the Sector Project Financial Systems Development and bilateral technical cooperation in the field of  Private Sector Development in India, implemented by GIZ.

It defines Responsible Finance as a broad umbrella term for a bouquet of strategies employed by financial institutions involving the integration of environmental, social and governance (ESG) criteria and metrics into financial lending and investment decision making. The three categories of Responsible Finance considered in this study are: Sustainable/Responsible Lending, Sustainable/Responsible Investment, and Impact Investing.

  • Sustainable/Responsible Lending: Refers to the practices of retail lenders and corporate financiers’ (investment banks) to apply environmental, and/or social criteria in their lending decision making, the latter specifically in their project financing decisions.
  • Sustainable/Responsible Investment: Refers to the incorporation of environmental, social and governance (ESG criteria) into investment decision making by investors.
  • Impact investment: Refers to an investment approach by a new breed of venture capitalists and angel investors at the start up or early stage of a business’s development. In providing early stage financing impact investors aim to maximize social and environmental impacts alongside financial returns with their investments.

The trends, challenges and recommendations in this study are based on extensive stakeholder engagement and desk based research. Over 35 interviews with international and India based stakeholders from the sector were conducted in December 2011 and January 2012; in addition, the study builds on two multi-stakeholder consultation events with representatives over 240 investor and banking stakeholders undertaken by GIZ earlier in 2011 in Mumbai, India.

The report concludes with recommendations for GIZ’s future engagement on this agenda.

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