Cheat sheet: What is Sustainable finance?

21 February 2016


The EU paid more attention to sustainability concerns in its financial policymaking after the UN Sustainable Development Goals were agreed in 2015. In 2017, as part of its Mid-term Review of the Capital Markets Union, the European Commission wrote that “a deep re-engineering of the financial system is necessary for investments to become more sustainable and for the system to promote truly sustainable development from an economic, social and environmental perspective”.

Read Finance Watch’s comments on the Mid-term Review here.

The Commission’s first substantial initiative was to convene a High Level Expert Group on Sustainable Finance, which worked for just over a year and published its Final Report in January 2018, paving the way for a subsequent Action Plan on Sustainable Finance. Read Finance Watch’s comments on the HLEG’s Final Report here.

Beyond the Commission’s agenda, Finance Watch’s work on sustainable finance includes producing the Global Green Finance Index (GGFI) in partnership with Z/Yen, and publishing a blueprint for sustainable finance that can be developed in future to include a study of natural capital, among other things.

Some of the key issues include:

  • Carbon pricing and other economic regulation

Sustainable finance is only one side of the equation. Finance needs projects to fund, and this requires suitable economic regulation to encourage sustainable infrastructure and other projects. A first priority is to establish prices for carbon and other negative externalities at tipping-point levels, where for instance energy efficiency retrofits of buildings can become profitable.

  • Financial stability

Further regulation is needed to make the financial system itself more sustainable and resilient, which can also reduce the cost of capital for sustainable activities in the real economy. Measures that feed green bubbles should be avoided, and measures to help financial institutions deal with losses from funding high carbon activities should be encouraged.

  • Types of financial institution

Increasing the flow of finance for sustainable activities calls for a wide range of different financial institutions, including specialist green lenders and infrastructure funds, and a greater number of public banks, mission-oriented stakeholder banks, peer-to-peer lenders, and other types of institution. This will require a deep transformation of the business models of the large financial institutions that currently dominate the market.

For more key issues in this area, see Finance Watch’s blueprint for sustainable finance.


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