Sustainable Finance - A Conceptual Outline

Abstract

The concept of sustainable development affects every part of economic life. The pro-vision of liquidity and capital should contribute to a habitable ecological and social environment. This paper surveys the role of finance in the concept of sustainability. It starts with a discussion of finance and ethics, as sustainability, in principle, is an ethical concept. In the following sections, the focus is on socially responsible investments (SRIs) as the most prominent representatives of sustainable finance. Various techniques to construct such investment products and their different types are explained. We demonstrate the labor division between and the tasks of the different agents in the network of SRI. Special reference is made to empirical results concerning the performance of an asset allocation process restricted by sustainability criteria. As SRI intends to promote a firm’s contributions to social, environmental and governance issues, the question that is discussed is if and how investors can enforce such a real impact. Sustainable finance goes beyond financial investment contracts. With socially responsible property investments, research on an asset class is presented, which represents real investments with sustainability criteria. Sustainable finance with a strong focus on very direct impacts on the borrower side and partial links to philanthropy is discussed by introducing microfinance. The paper ends with a look at the valuation of a firm conducted under ecological and social criteria and with a brief discussion on carbon finance.

Keywords: sustainable development, socially responsible investments, corporate social responsibility, ethics, financial markets

JEL Classification: G20, G30, L21, M14, Z13