ABSTRACT

Sustainable finance requires that funding and lending decisions are associated with the sustainable use of the proceeds. In particular, sustainable finance refers to emerging financial activities, instruments, and institutions that seek to ensure sustainable development, such as impact management projects, sustainable investment funds, green equities, blue bonds, or carbon markets. These initiatives have become common practice and are rapidly growing in recent years (Global Sustainable Investment Alliance, 2021; World Bank, 2022), in parallel with the development of sustainability standards for non-financial reporting, regulatory requirements, and rating and ranking systems to evaluate and benchmark sustainable practices. The paradigm shift from mainstream finance to sustainable finance, which changes the role of finance in the economy, is ongoing (Schoenmaker & Scharamade, 2019). Traditional finance is known for profit maximization, which overlooks negative externalities such as the depletion of natural resources and social capital erosion. In contrast, sustainable finance offers the internalization of externalities integrating extra-financial concerns. 1 Unlike economics (refers to science) and economy (refers to economic activities in general), sustainable finance refers to both sustainable finance science and sustainable finance activities or financial practice oriented to sustainable development (i.e., “finance for sustainability”). Sustainable development encompasses concerns of different natures, i.e., environmental, social, economic, and governance, addressed by various sub-segments in sustainable finance. As Figure I.1 shows, carbon finance, climate finance, green finance, and social finance are sub-segments of sustainable finance (UNEP, 2016). However, neither of them alone encapsulates the overall notion of sustainable finance.