Working Paper: CEPR ID: DP12603
Authors: Dirk Schoenmaker
Abstract: To guide the transformation towards a sustainable and inclusive economy, the United Nations has developed the Sustainable Development Goals (SDGs). Sustainable development is an integrated concept with three aspects: economic, social and environmental. This paper starts by reviewing the environmental and social challenges that society is facing.Why should finance contribute to sustainable development? The main task of the financial system is to allocate capital to its most productive use. Financial institutions have started to avoid unsustainable companies from a risk perspective, which we label as Sustainable Finance 1.0 and 2.0 in our new framework. The frontrunners are now increasingly investing in sustainable companies and projects to create long-term value for the wider community (Sustainable Finance 3.0).
Keywords: sustainable development; environmental; social and governance (ESG) risks; sustainable finance; corporate governance; short-termism
JEL Codes: G11; G21; H23; H41; Q01
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Financial decisions (G11) | Sustainable outcomes (Q01) |
| Avoiding investments in unsustainable companies (F64) | Reduced risk of adverse societal impacts (F69) |
| Evolution of sustainable finance (O16) | Enhanced social and environmental outcomes (O35) |
| Companies focusing on material ESG issues (L74) | Outperform financially (G29) |
| Financial institutions adopting sustainable practices (G21) | Improved financial and social/environmental impacts (O16) |