Introduction

Sustainable finance represents a shift away from the narrow shareholder model in traditional finance to the broader stakeholder approach. The essay aims to provide an overview of the sustainable finance challenges and to develop new guidelines for sustainable finance.

Sustainability challenges

The essay identifies three broad sustainability challenges:

• Environmental challenges such as climate change
• Social foundations relating to human dignity
• Sustainable development that contributes to economic, social, and environmental development.

The essay highlights the inadequacy of traditional finance in solving these issues.

Sustainable finance framework

The essay proposes a new framework that is based on the interplay of financial, social, and environmental returns. The role of the financial system is highlighted and the essay identifies three stages of sustainable finance. The stages move from profit maximisation to internalisation of externalities and then to contributing to sustainable development while observing financial viability.

Obstacles to sustainable finance

The author identifies two major obstacles to sustainable finance: short-termism and insufficient private efforts. Short-termism is defined as the tendency of investors to focus on immediate financial returns at the expense of long-term economic, environmental, and social value creation. The essay suggests that the best way to overcome such obstacles is through guidelines for governing sustainable finance.

Coalition for sustainable finance

The author highlights the need for investors to collaborate with other stakeholders, including governments and civil society, to further facilitate sustainable finance. The essay identifies key players necessary for such transformative changes, which include corporations, institutions, households, and different interest groups.

Guidelines for sustainable finance

The essay outlines guidelines to govern sustainable finance, providing a framework to help companies move from the shareholder to the stakeholder model. Other suggestions to counter short-termism include developing long-term stakeholder models such as loyalty shares, altering the pay structure for executives, and offering incentives for long-term investors. The essay emphasises the importance of designing these measures in an incentive-compatible manner. Governance and regulatory frameworks also need to be created to support the transition to sustainable finance.

Conclusion

The essay concludes by highlighting the potential of sustainable finance to move from finance as a goal (profit maximisation) to finance as a means of achieving broader social and environmental goals. The broader stakeholder approach is key for the transformation of finance from a short-term risk management activity to a long-term value-creating function, aimed at contributing to the common good.