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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: Banking and capital markets

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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Policy Contribution

How can the European Union adapt to climate change?

A stronger adaptation governance framework would benefit adaptation efforts.

By: Klaas Lenaerts, Simone Tagliapietra and Guntram B. Wolff Topic: Green economy Date: June 28, 2022
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Upcoming Event

Jul
6
12:30

Shifting taxes in order to achieve green goals

How could shifting the tax burden from labour to pollution and resources help the EU reach its climate goals?

Speakers: Heather Grabbe, Femke Groothuis, Carola Maggiulli, Niclas Poitiers and Kinga Tchorzewska Topic: Green economy, Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels
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Upcoming Event

Jul
5
12:30

Green public investment after COVID-19

How can the public sector meet the climate funding needs of the EU?

Speakers: Zsolt Darvas and Elena Flores Topic: Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels
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Past Event

Past Event

BRI 2.0: How has the pandemic influenced China’s landmark Belt and Road Initiative?

China's Belt and Road Initiative is undergoing a transformation after two years of pandemic. How is it changing and what are the consequences for Europe.

Speakers: Alessia Amighini, Eyck Freymann, Alicia García-Herrero and Zhang Xiaotong Topic: Global economy and trade Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: June 23, 2022
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External Publication

The Global Quest for Green Growth: An Economic Policy Perspective

A review on green growth and degrowth arguments.

By: Klaas Lenaerts, Simone Tagliapietra and Guntram B. Wolff Topic: Global economy and trade, Green economy Date: May 5, 2022
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Blog Post

Owning up to sustainability risks: the EU should champion international standards

To keep European Union capital markets open and integrated, new international standards should be reflected in future European law and accounting practice to provide further incentives for a reallocation of capital, reflecting in particular climate risks.

By: Alexander Lehmann Topic: Banking and capital markets, Green economy Date: April 26, 2022
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Working Paper

The low productivity of European firms: how can policies enhance the allocation of resources?

A summary of the most important policy lessons from research undertaken in the MICROPROD project work package 4, related to the allocation of the factors of production, with a special focus on the weak dynamism of European small and medium-sized enterprises (SMEs).

By: Grégory Claeys, Marie Le Mouel and Giovanni Sgaravatti Topic: Macroeconomic policy Date: April 25, 2022
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Blog Post

Climate migration: what do we really know?

While uncertain, studies suggest that climate change will cause significant internal and international migration over the next century.

By: Klaas Lenaerts and Simone Tagliapietra Topic: Global economy and trade Date: April 25, 2022
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Working Paper

Knowledge flows and global value chains

Trade and industrial policy can support productivity growth through global value chains by providing the right legal environment that supports the formation of longterm business relationships.

By: Marta Bisztray and Niclas Poitiers Topic: Global economy and trade Date: April 13, 2022
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Blog Post

Is the private sector retreating in China? Not among its largest companies

Though private ownership does not free companies from the pervasive influence of the Communist Party, China’s private and state sectors are not equivalent; China’s largest firms are growing faster than their state-owned counterparts.

By: Tianlei Huang and Nicolas Véron Topic: Global economy and trade Date: April 5, 2022
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Working Paper

The private sector advances in China: The evolving ownership structures of the largest companies in the Xi Jinping era

This paper documents recent structural changes in China’s corporate landscape, based on company level data, providing a complementary perspective to that of official Chinese statistics.

By: Tianlei Huang and Nicolas Véron Topic: Global economy and trade Date: April 5, 2022
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Parliamentary Testimony

House of Lords

UK energy supply and investment

Testimony before the Economic Affairs Committee at the House of Lords, UK Parliament.

By: Simone Tagliapietra Topic: House of Lords Date: March 23, 2022
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