Sustainable Finance

by

Matthew Archer

• LAST REVIEWED: 31 July 2019
• LAST MODIFIED: 31 July 2019
• DOI: 10.1093/obo/9780199363445-0117

Introduction

Sustainable finance refers to the integration of environmental, social, and governance (or ESG) considerations in processes of financial decision-making. It includes a number of strategies and financial instruments, such as green bonds, screening, impact investing, socially responsible investing, and so on. Over the past few decades, sustainable finance has evolved from a strategy employed by ethical investors (such as religious institutions) to screen “bad” companies (arms, alcohol, and tobacco manufacturers; casinos; etc.) from their portfolios to an increasingly central part of banks’ and other financial institutions’ risk management strategies. Over the next few years, scholars and practitioners expect sustainable finance to evolve even further, becoming a strategy for investors to actively pursue new opportunities that traditional financial analyses fail to reveal or accurately value. In that sense, sustainable finance has evolved alongside corporate sustainability, shifting from a values-based focus on social responsibility to a more explicitly financial focus on long-term, strategic growth. For the purposes of this essay, sustainable finance refers to a number of trends, including impact investing, socially responsible investing, financing for sustainable development, and so on. Early analyses of sustainable finance were focused on establishing correlation between the integration of social and environmental concerns in investment decisions and the performance of those investments. More recent analyses have started trying to understand the causal relationships between impacts and investments, and between social-environmental performance and financial performance. The role of financial institutions like mutual funds and insurance companies in mitigating climate change and promoting sustainable development has become an important topic for practitioners and policymakers, as well as for academics interested in sustainable development, corporate sustainability, and a range of other issues. However, sustainable finance has remained more or less marginal within mainstream academic finance, owing in part to the idea that it does not offer anything theoretically new to study. And yet, as a number of scholars have shown, sustainable finance offers a novel lens through which to study emergent forms of risk and their interaction with each other, as well as more classic theoretical problems such as governance, performativity, and valuation. Because this is an emerging and rapidly evolving field, many of the works cited are relatively recent. A growing contingent of critical scholars, especially in economic geography and political ecology, has also formed around the notion of natural capital and the valorization/financialization of nature it engenders.

General Overviews

There are a number of edited volumes and some books that attempt to chart the emerging landscape of sustainable finance. Lehner 2016 offers a comprehensive overview of social and sustainable finance, while Paranque and Pérez 2016 provides a more critical take. Jeucken 2010 and Krosinsky and Purdom 2016 focus more on the practitioner perspective while remaining engaged with academic debates. Stewart, et al. 2009 was an early treatment of the relationship between finance and sustainable development.

• Jeucken, Marcel. 2010. Sustainable finance and banking: The financial sector and the future of the planet. Boca Raton, FL: Routledge.

  Accessible text written by a prominent practitioner with a lot of experience in responsible investing with both pension funds and private banks. The book presents a discussion of sustainability from the perspective of multiple kinds of organizations, as well as a number of case studies.

• Krosinsky, Cary, and Sophie Purdom, eds. 2016. Sustainable investing: Revolutions in theory and practice. London: Taylor & Francis.

  A concise introduction to current trends in sustainable investing, with short, mostly jargon-free essays by academics, practitioners, and a few undergraduate students on topics ranging from climate-smart landscapes to infrastructure to emissions reductions to investment strategies.

• Lehner, Othmar M. 2016. Routledge handbook of social and sustainable finance. London: Routledge.

  An indispensable volume that charts the landscape of sustainable finance from multiple disciplinary and theoretical perspectives, and a necessary resource for researchers.

• Paranque, Bernard, and Roland Pérez, eds. 2016. Finance reconsidered: New perspectives for a responsible and sustainable finance. Bingley, UK: Emerald Group.

  A theoretically focused collection of essays by leading (critical) scholars of socially responsible investing and sustainable finance. It deals especially with academic finance and its (in)ability to critically assess sustainability and responsibility. The volume attempts to reimagine finance as a “commons.”

• Stewart, Richard B., Benedict Kingsbury, and Bryce Rudyk, eds. 2009. Climate finance: Regulatory and funding strategies for climate change and global development. New York: New York Univ. Press.

  A collection of essays with a focus on the role of financial institutions (and the regulation of those institutions) in sustainable development. This was an early treatment of the subject by leading scholars.