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Essay / Lecture

Investing for the common good: a sustainable finance framework

Traditional finance focuses solely on financial return and risk. By contrast, sustainable finance considers financial, social and environmental returns in combination. This essay provides a new framework for sustainable finance highlighting the move from the narrow shareholder model to the broader stakeholder model, aimed at long-term value creation for the wider community. Major obstacles to sustainable finance are short-termism and insufficient private efforts. To overcome these obstacles, this essay develops guidelines for governing sustainable finance.

By: Date: July 11, 2017 Topic: Energy & Climate

The issue of sustainable development has multiple aspects, all of which need to be considered if sustainability is to be guaranteed. On the environmental front, climate change and depletion of natural resources are two factors that are threatening the earth’s ability to regenerate. On the economic front, development that does not pay sufficient attention to income inequality and provision of basic needs to all is a process in danger of imploding. This essay explores the role that finance can play to ensure that investment protects the environment and promotes economic systems that are internally sustainable.

Dirk Schoenmaker argues that seeing the role of finance as one of allocating funding to productive investments in a narrow sense is no longer appropriate. What constitutes ‘productive’ cannot be independent of a project’s environmental and socio-economic impact because there are often trade-offs between short-term profits and long-term impact. What might appear to be a profitable project over a given time period could have negative impacts that might only become apparent in the longer term. This essay discusses these trade-offs in the context of the conflicting objectives of shareholders and other stakeholders: the motivation of the former to generate profits might at times jeopardise the long-term interests of the latter. This essay shows how that is a consequence of short-termism and a failure to act with the collective interest in mind. But if sustainability is paramount, as it should be, then the shareholders’ and stakeholders’ motives need to be better aligned.

This essay provides a framework for moving in this direction and offers guidelines to counter short-termism, with an emphasis on incentive-compatible measures for all. Moving from traditional to sustainable finance means having to counter attitudes that are embedded in the ways our economic systems are organised. Shifting away from them requires both new ways of operating but, importantly, new underlying principles that put sustainability centre stage to guide our thinking. It is important that we put this process in motion, and the earlier the better.

Maria Demertzis, Deputy Director of Bruegel
Brussels, July 2017

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External Publication

Diversification and the world trading system

Diversification is important because it is associated with economic growth and reduced volatility.

By: Uri Dadush, Niclas Poitiers, Abdelaaziz Ait Ali, Mohammed Al Doghan, Muhammad Bhatti, Carlos Braga and Anabel González Topic: Global Economics & Governance Date: September 16, 2020
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Blog Post

Climate finance: an agenda for EU coordination with emerging markets

Addressing the challenge of financing the low-carbon transition will require substantial investment in the European Union and in emerging and developing economies. Sustainable finance frameworks have proliferated in advanced and emerging markets but fragmentation of financial flows due to different classification systems and standards for green financial instruments is a real risk. Ensuring consistency should be a core agenda for the new International Platform on Sustainable Finance.

By: Alexander Lehmann and Mark Plant Topic: Energy & Climate, Global Economics & Governance Date: September 9, 2020
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Past Event

Past Event

Bruegel Annual Meetings 2020 - Day 3

Third day of Bruegel Annual Meetings.

Topic: Energy & Climate, European Macroeconomics & Governance, Finance & Financial Regulation, Global Economics & Governance, Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: September 3, 2020
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Opinion

China Has an Unfair Advantage in the EU Market. What Can Be Done to Level the Playing Field?

This article has originally been published in Brink News. The dominance of Chinese state-owned enterprises in China’s domestic market is giving them unfair advantages in the European Union single market as well. The EU Commission recently released a series of recommendations for leveling the playing field regarding foreign subsidies. Unfortunately, while useful, these ideas are unlikely to […]

By: Alicia García-Herrero and Guntram B. Wolff Topic: Global Economics & Governance Date: July 28, 2020
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Opinion

Can households in the European Union make ends meet?

Half the households surveyed by Eurostat see themselves as unable to find the resources they would need to cope with an unexpected expense within a month, estimated by experts at €375 in the case of Greece.

By: Maria Demertzis, Marta Domínguez-Jiménez and Annamaria Lusardi Topic: Finance & Financial Regulation Date: July 24, 2020
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Blog Post

COVID-19: The self-employed are hardest hit and least supported

Self-employed workers are hardest-hit by COVID-19 lockdowns. Yet they often receive less government support than salaried employees. Is the disparity justified?

By: Julia Anderson Topic: European Macroeconomics & Governance Date: April 8, 2020
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Blog Post

How COVID-19 is laying bare inequality

COVID-19 is laying bare socio-economic inequalities and could exacerbate them in the near future. The virus is a risk factor particularly for those at the lower end of the income distribution, who are vulnerable to the interaction of the shock with income, socio-economic and urban inequalities.

By: Enrico Bergamini Topic: Global Economics & Governance Date: March 31, 2020
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Past Event

Past Event

On gains, losses, and trade-offs: the case of Border Carbon Adjustment

How will the border carbon adjustment be implemented and what will be the implications?

Speakers: Gabriel Felbermayr, André Sapir and Georg Zachmann Topic: Energy & Climate Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: March 5, 2020
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Past Event

Past Event

The quality and quantity of work in the age of AI

At this event, the panelists will discuss the implications of Artificial Intelligence on the labour market and the future of work in general.

Speakers: Robert Atkinson, Anna Byhovskaya, Maria Demertzis, Carl Frey and Daniel Samaan Topic: Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: February 5, 2020
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Blog Post

Climate risks to European banks: a new era of stress tests

Several European central banks have begun assessing the impact of adverse climate scenarios on banks’ capital. Comparable work at EU or euro area level has evolved more slowly. Supervisors need build up a distinct and more complex type of analysis, and should engage with banks now.

By: Alexander Lehmann Topic: Energy & Climate, Finance & Financial Regulation Date: February 4, 2020
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Opinion

European capital markets union, by rule and by choice

While the euro is now a leading global currency and the European Central Bank has become a comprehensive banking supervisor, Europe’s markets have been treading water.

By: Rebecca Christie Topic: Finance & Financial Regulation Date: January 23, 2020
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Blog Post

European green finance is expanding, a discount on bank capital would discredit it

If EU banks are to mobilise a greater share of loans for sustainable projects they will need a reliable policy framework, clear internal performance targets and the relevant skills. A discount on bank capital underlying such assets is neither justified nor likely effective. A comprehensive review of how climate risks are reflected in prudential regulation is nevertheless in order

By: Alexander Lehmann Topic: Energy & Climate Date: January 15, 2020
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