Financial Innovations for Sustainable Finance: An Exploratory Research

Abstract

Open climate and green finance issues concern the lack of a comprehensive taxonomy of green and brown assets and the uncertainty over the substantial advantage in investing in green projects (e.g., greenium). Barriers to environmental-related investments boil-down to the lack of a stable climate policy framework coupled with the lack of knowledge about climate change effects, suitable financial instruments, liquidity in the market, and climate-related disclosure. Among this developing framework, financial actors have conceived innovative instruments to overcome some of those barriers in line with the peculiarities of sustainability-oriented investments. Via collecting relevant instances, this work investigates the possible role financial innovations can play in the transition towards sustainability. In some cases, existing structures were adjusted to include environmental-oriented projects extending de-facto their use-of-proceeds (e.g., green securitization, green covered bonds). Some other instruments have been developed, including non-financial dimensions within their pricing models (e.g., weather derivatives). Considering the peculiarities of sustainability-oriented investments, new financial products were designed to merge existing ones (i.e., PRS). New technologies (i.e., blockchain) have improved existing business models favoring alternative ways of financing (i.e., microfinance, crowdfunding) with the pivotal role of public-private initiatives (i.e., Blended Finance, PACE). As the potentialities of financial innovations have been at the core of recent societal turmoil (e.g., 2008 financial crisis), a more cohesive institutional framework could lead to more comprehensive analyses of the effects (positive or negative) they might have on this transition.

Keywords: financial innovations, sustainable finance, climate-related risk, sustainability transition

JEL Classification: G23, O31, Q21