A Framework for Sustainable Finance

Abstract

This paper develops a new framework for sustainable finance. Financial institutions have started to avoid unsustainable companies from a risk perspective, which we label as Sustainable Finance 1.0. In Sustainable Finance 2.0, financial institutions look for companies that balance the financial, social and environmental goals. The frontrunners are investing in and lending to sustainable companies that create long-term value for the wider community (Sustainable Finance 3.0). The new framework allows us to develop an indicator to assess how deep sustainable finance is. While general reports suggest a large increase in sustainable investing and banking, our empirical findings suggest that the financial system is just above, but still quite close to, Sustainable Finance 1.0.

Keywords: sustainable development, environmental, social and governance (ESG) risks, sustainable finance, corporate governance, short-termism

JEL Classification: G11, G21, H23, H41, Q01