Sustainable finance is taking centre stage to make a positive impact on the environment and our society – while making economic sense.

By Jérôme Lacombe

Over the past decade, a new type of finance has become mainstream to fund the transition to a decarbonised global economy.

Voters, regulators and scientists are putting pressure on the financial sector to step up to the formidable challenge of climate change.

Unprecedented amounts of capital are required to slow down global warming. The sustainable financial sector is starting to fill the funding gap. Through specialised equity funds, bonds and loans it fosters the allocation of capital to green and social projects.

The young generation and the whole of society are asking finance to do better than just profit seeking.

The finance industry becomes more sustainable

Sustainable finance integrates environmental, social and governance (ESG) criteria into individual investment decisions.

Arguably, modern sustainable finance took off in 2008. That year, the World Bank issued the first green bond and raised US$440 million to finance climate protection projects.

This transaction is a landmark. It connects institutional investors’ money to environmental or social projects.

The young generation and the whole of society are asking finance to do better than just profit seeking

The instrument is structured like a traditional bond. However, the proceeds are used to finance – or refinance – sustainable projects. Independent experts determine eligible projects and check fund allocation over time.

The green bond raises awareness of climate change and the way investors, policy makers and scientists work together.

The total green bond market has grown exponentially to US$800 billion at the end of 2019 (see chart below). Issuers now include sovereign funds, banks, utilities, local authorities and other large corporates.

Market value by year

Market value
Total market value in $Bn per year (Source: bonddata.org)

New types of bonds have been launched in the wake of green bonds: blue bonds, social bonds, transition bonds and even pandemic bonds, which are now massively used to fight the Covid-19 virus. Each bond serves a specific purpose: the prevention of sea level rise, the creation of social housing or the funding of medical relief in emerging countries, for example.

Today, we face one of the worst global health crises in a hundred years. The epidemic outbreak of the Covid-19 virus is causing the loss of human lives and dramatic economic and social challenges. Central banks are injecting billions into the global economy. We will surely need the private sector to contribute too.

Voters support political parties that propose concrete actions to fight climate change and improve society

It will not be the first time. Already in 2017, the launch of the first pandemic bond raised $320 million from private investors to help developing nations face Ebola and other infectious diseases. This time, the crisis may lead to the issuance of eurobonds.

Key stakeholders are fostering a rapid change

The political pressure for change increases. Voters support political parties that propose concrete actions to fight climate change and improve society.

In 2019, "green" political parties surged in the EU parliamentary elections in France, Germany, the UK and Ireland. They are becoming mainstream political forces.

We see also market supervisors play their part. In December 2017, eight national banks came together to form the Network for Greening the Financial System (NGFS).

The organisation published its first comprehensive report, A call for action, in 2019. The report proposes recommendations to finance the transition to a green and low-carbon economy. Since then, the NGFS has grown to 42 members and 8 observers, representing 5 continents.

Insurance companies and pension funds now recognise that sustainable financial investments also make economic sense

The tracking of historical performance and economic research help the cause of sustainable finance. When analysing historical performance, experts conclude that a better impact on society does not automatically lead to lower financial return; on the contrary. Insurance companies and pension funds now recognise that sustainable financial investments do also make economic sense. Hence, they are now shifting massive amounts of capital to specialised ESG funds.


In its August 2019 report Sustainable reality, Morgan Stanley concludes: “We found that sustainable funds provided returns in line with comparable traditional funds while reducing downside risk (...). Incorporating environmental, social, and governance (ESG) criteria into investment portfolios may help to limit market risk.


Shareholder engagement is an efficient way to lead change too. Large institutional investors (for example BlackRock) use their financial strength and their vote to influence the strategic decisions of large corporates.

The Climate Action 100+ investors who oversee $32 trillion in assets foster more transparency on companies’ ESG strategies and climate transition risks. In May 2019, the New York State’s pension fund and the Church of England endowment fund voted against all the directors of Exxon, a leading US oil-and-gas company, at the company’s annual meeting to protest “against inadequate response to climate change”.

Banks are launching sustainable lending products. ING, a leading Dutch bank, structured the first sustainability improvement loan in 2019.

The borrower of this loan agrees to meet certain environmental goals. If she meets them, the loan margin will decrease. If she fails, the cost of debt will go up.

This way, the bank rewards a positive impact on society and incentivises its clients to reach their objective fast.

Finally, the younger generations will no doubt foster change through their pro-environment messages on social media or in the streets.

Climate change protest

Nearly nine in ten millennials (86%) are interested in sustainable investing according to a Morgan Stanley report published in 2017. The largest intergenerational wealth transfer in history will take place in the near future.

According to the report, an estimated amount of $30 trillion are set to change hands. It will give Generation Xers and millennials a powerful tool to re-allocate funds to more socially or environmentally conscious companies.

Nearly nine in ten millennials are interested in sustainable investing

Some hurdles still to overcome

So-called "greenwashing" could blur messages.

How do you detect structural changes, amid a sea of commercial announcements and articles? Stakeholders often rush into the sustainable finance market for a bit of publicity and green brand building.

Is sustainable finance really creating new pools of available capital?

In 2018, Steve Waygood, Chief Responsible Investment Officer of leading UK insurer Aviva, noted that green bonds are not always mobilising fresh capital.


"I believe green bonds are also a distraction to some extent. We need to bear in mind that they are refinancing mechanisms almost all the time, so the infrastructure already exists (…). People look at the £100 billion green bond market and assume that £100 billion has gone into green infrastructure that year. It is not the case."


The bond market is sophisticated and expensive. Issuers need to engage advisors and disclose financial information to regulators, rating agencies, and investors.

Finally, measuring sustainable and green performance is extremely difficult and there is still no international benchmark or standard.

A sustainability rating needs to integrate extra-financial criteria, which are subjective and not easily measurable.

Sustainable finance is in desperate need of a common language between investors, issuers, project promoters and policy makers.

To overcome this hurdle, the European Commission published, on 9 March 2020, its “taxonomy” report. This document proposes a consistent framework and helps investors identify activities which contribute to environmental objectives – starting with climate change mitigation or adaptation.

Although it is probably not perfect, the taxonomy will guide issuers in accessing green financing.

Sustainable finance timeline
Source: ESMA

Keeping the momentum

Will sustainable finance resist the upcoming economic recession and the shift of political focus to national business policies and rising unemployment?

The jury is out:

  • Since the start of the Covid-19 crisis, foreign investors pulled $83 billion from emerging markets, the largest capital outflow ever recorded, reported the Institute of International Finance, a trade group, on 2 April 2020.
  • Decision makers will urgently need to restart the global economy. They may focus on traditional and carbon-intensive industries first, such as the building sector – responsible alone for 40% of the world’s CO2 emission.

However, urgent economic measures need to be compatible with past commitments to reduce carbon emissions. Developed economies have already announced their objective to cut their carbon dioxide emissions to zero by 2050 and will need to keep their word.

Any rescue plan needs to come with strong environmental commitments.

Whatever the outcome, the urgency to reallocate capital to fight climate change and societal challenges remains.

Sustainable finance will have a role to play.

All written content is licensed under a Creative Commons Attribution 4.0 International license.