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Sustainable Development

Updated on January 31, 2024
Article byShrestha Ghosal
Reviewed byDheeraj Vaidya, CFA, FRM

Sustainable Development Definition

 Sustainable development integrates environmental, social, and governance (ESG) factors into financial decision-making to promote long-term economic growth. It aims to align investment strategies with sustainability goals. This approach recognizes that financial activities profoundly impact society and the environment, contributing to a more resilient and equitable future for all stakeholders.

Sustainable Development

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This development comprises various practices, including responsible investing, green bonds, and ethical banking. These practices assist in channeling capital towards the projects and companies that prioritize sustainability. Through sustainable activities, investors and financial institutions help minimize environmental and social risks while tapping into the opportunities arising from a sustainable global economy.

Key Takeaways

  • Sustainable development is the addition of environmental, social, and governance (ESG) criteria into financial activities. It seeks to integrate investment strategies with sustainability objectives.
  • This development addresses the negative consequences of economic growth on the environment. As a result, it promotes business practices that focus on economic development without depleting the environment and its resources.
  • It helps direct funds toward organizations and projects that prioritize sustainability in financial decisions and business operations. The development seeks to minimize environmental and social risks while creating a resilient and equitable landscape for all stakeholders.

Sustainable Development Explained

Sustainable development is a shift from the traditional economic growth and investment approach. It focuses on addressing the pressing global challenges, like climate change, social inequality, and environmental degradation, while promoting economic prosperity. This development includes the principles of environmental, social, and governance (ESG) criteria in financial decision-making. It identifies that the planet’s health and society’s well-being are impacted by economic development.

This development encourages investments that prioritize the preservation and restoration of the environment. It includes financing renewable energy projects, supporting initiatives to reduce greenhouse gas emissions, and investing in sustainable agriculture and forestry practices. This development seeks to fund environmentally responsible projects that help reduce the adverse environmental impacts of economic activities.

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Features

The features of sustainable development are as follows:

  • Profits: This underlines the economic aspect of this development. It involves making sound financial investments and decisions that generate returns for investors and businesses. However, it also focuses on sustainable and responsible profit generation. It means considering investments’ financial stability and growth potential while factoring in the long-term risks associated with environmental and social issues. This feature aims to create economic value that sustains over time, benefiting the investors and the society.
  • Planet: This feature highlights the importance of environmental sustainability. It encourages making financial choices that consider the impact of investments on nature. This includes supporting environmentally friendly projects and businesses that reduce carbon emissions, conserve resources, protect ecosystems, and promote sustainable land use. It aims to decrease climate change, protect biodiversity, and ensure the responsible use of natural resources.
  • People: It addresses the importance of social and ethical considerations in finance. This feature involves directing financial resources toward initiatives and enterprises prioritizing social inclusivity, fair labor practices, human rights, and community development. Investments in education, healthcare, affordable housing, and initiatives promoting social equity are some people-centered sustainable finances. This feature seeks to improve the quality of life for individuals and communities, reduce social inequalities, and enable social unity.

Examples

Let us study the following examples to understand this development:

Example #1

Suppose Credit Sources is a local bank that wants to apply sustainability in its operations. They offered special loans to homeowners who wanted to install rooftop solar panels. The solar panels generate clean, renewable energy, reducing the homeowners’ electricity bills and carbon footprint. The bank earned interest on the loans, ensuring a return on their investment. The homeowners saved money on energy bills, making it a financially attractive option. As a result, this approach helped align profits with environmental and social benefits.

Example #2

The deadline for meeting the United Nations Sustainable Development Goals has been set for 2030. The middle-income countries have seven years to fulfill their target. They are searching for the $2.5 trillion required annually to invest in infrastructure, connectivity, health, and decarbonization. This shortcoming demanded further reforms to the international financial architecture to find new resources. The recent Summit for a New Global Financing Pact in Paris produced a plan for increasing the financing at these institutions.

Benefits

Some benefits of sustainable development are:

  • This development considers the environmental, social, and governance (ESG) factors. It aims for more resilient investments less susceptible to unforeseen risks, like ecological disasters or reputational damage.
  • Incorporating this development criteria helps identify and minimize potential risks, like regulatory fines, supply chain disruptions, or climate-related liabilities. It aids in protecting the financial health of investors and businesses.
  • Sustainability directs capital toward projects and businesses, prioritizing environmental protection, social well-being, and ethical governance. It leads to positive contributions to society and the planet.
  • It encourages innovation in sustainable technologies and practices. It drives economic growth in emerging industries like renewable energy, green infrastructure, and socially responsible businesses.
  • One of the crucial benefits of sustainable development is that many investors are increasingly interested in sustainability-aligned investments. Thus, companies with these development goals can attract a broader investor base and lower their cost of capital.
  • The development can enhance a company’s reputation, making it more appealing to consumers, employees, and stakeholders. It can result in increased brand loyalty and market share.

Challenges

The challenges of sustainable development are:

  • A lack of globally accepted standards and definitions for this development makes it difficult to compare and assess investments consistently.
  • Access to high-quality, consistent, and comprehensive sustainability data is limited. As a result, it is challenging for investors and financial institutions to accurately measure the sustainability of investments.
  • Some businesses may exaggerate or misrepresent their commitment to sustainability, making it difficult for investors to distinguish genuinely sustainable investments from greenwashed ones.
  • Financial markets often prioritize short-term gains over long-term sustainability. This approach discourages investments with more extended payback periods but significant sustainable impacts.
  • Varying regulations and standards across countries and regions create compliance challenges for financial institutions operating in multiple jurisdictions.
  • One of the significant challenges of sustainable development is that the transition to a more sustainable economy may result in the obsoletion of assets. It may impact the value of certain investments and cause financial instability.

Sustainable Development vs Sustainability vs Economic Development

Let us look at the differences between them on different parameters:

1. Sustainable Development

  • This concept encompasses economic, social, and environmental dimensions. It aims to balance these aspects, recognizing their interdependence and the importance of long-term well-being.
  • It emphasizes meeting the needs of the present generation without compromising the ability of future generations to meet their own needs. This forward-looking approach ensures that resources and ecosystems are preserved for the benefit of future populations.
  • This development seeks to achieve economic growth that is socially equitable and environmentally responsible. It considers the well-being of people, the planet, and profits in policy and decision-making.

2. Sustainability

  • Sustainability is the capacity of a system to endure and thrive over time. It is not limited to environmental considerations but encompasses various aspects of longevity and well-being.
  • It can encompass environmental sustainability, economic sustainability, and social sustainability. Sustainability implies building resilience in systems to withstand economic, ecological, and social external shocks.
  • In environmental sustainability, the focus is on responsible resource management, pollution reduction, and biodiversity preservation. Economic sustainability relates to judicious financial practices and avoiding economic instability. Social sustainability is about equity and societal well-being.

3. Economic Development

  • Economic development focuses explicitly on increasing the wealth, income, and economic opportunities within a region or country. It is primarily concerned with boosting the overall financial well-being of a population.
  • It involves strategies to create jobs, increase productivity, and generate economic growth. Economic development policies seek to enhance the standard of living for citizens.
  • Economic development can be of various forms, including industrialization, infrastructure development, and innovation.

Frequently Asked Questions (FAQs)

1. Who gave the concept of sustainable development?

This concept was introduced in the 1987 report of the World Commission on Environment and Development, also known as the Brundtland Commission. This commission was chaired by the former Norwegian Prime Minister Gro Harlem Brundtland. The Brundtland Report, named “Our Common Future,” highlighted the environmental, social, and economic issues by emphasizing the importance of responsible resource management and equitable development practices.

2. How does sustainable development impact our society?

This development profoundly impacts society as it promotes equitable and responsible growth. It boosts social inclusivity by improving access to education, healthcare, and employment opportunities. This development helps reduce poverty and inequalities, enhancing overall well-being. Moreover, it aims to reduce the risks of climate change and protect the ecosystems, ensuring a healthier planet. Additionally, it provides a higher quality of life for current and future generations by addressing crucial issues like clean energy, clean water, and sustainable agriculture.

3. What impact does inequality have on sustainable development?

Inequality has a negative impact on this development. It hinders social unity and economic stability, increasing social unrest and conflicts. Unequal access to resources, education, and healthcare disrupts development and productivity while limiting the society’s overall growth potential. Furthermore, when marginalized groups are excluded from the decision-making processes, sustainable policies may not sufficiently address their needs and concerns, which increases disparities.

This article has been a guide to Sustainable Development & its definition. We explain its features, examples, benefits, and comparison with sustainability. You may also find some useful articles here –

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