Sustainability in Finance

Sustainability in Finance

Sustainable development is about capital allocation.

European Community Environmental Law: The Evolution of a Regional Regime of International Environmental Protection recognised the importance of financial institutions by stating that “financial institutions which assume the risk of companies and plants can exercise considerable influence – in some cases control – over investment and management decisions which could be brought into play for the benefit of the environment”. Despite this, little work has been done by the Commission on the role of the financial institutions in achieving sustainable development.

An even more fundamental relationship is indicated by an alternative definition of

sustainable development: This makes it clear that sustainable development is about capital allocation and thus should be at the core of financial markets activity.

Policies are likely to be most effective if they aim to complement and work with existing financial activity.

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On a more practical level, financial institutions interact with the environment in a number of ways:

  • Investors – supplying the investment needed to achieve sustainable development.
  • Innovators – developing new financial products to encourage sustainable development – e.g. in energy efficiency.
  • Valuers – pricing risks and estimating returns, for companies, projects and others.
  • Powerful Stakeholders – as shareholders and lenders they can exercise considerable influence over the management of companies.
  • Polluters – while not “dirty” industries, financial institutions do consume considerable resources.
  • Victims of environmental change – e.g. from climate change.

Financial markets present an opportunity for environmental policy, particularly useful in view of the need for a wider range of policy instruments. In view of the indirect nature of many of the interactions above, policies are likely to be most effective if they aim to complement and work with existing financial activity. To that end, a transactional model of the financial markets is used, to indicate how it is possible to influence financial transactions. It illustrates the key roles of information and analysis.

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