How sustainable finance creates impact: transmission mechanisms to the real economy

Journal article

Abstract:: When and how does sustainable finance tangibly contribute to creating a better world? In this paper, we outline mechanisms through which impact on sustainability outcomes is transmitted from financial systems to the real economy. We argue that, to have a positive impact on sustainability outcomes, financial institutions must make a clear contribution to: (i) reducing (increasing) the cost of capital for firms’ (un)sustainable activities; (ii) increasing (reducing) their access to liquidity; and (iii) encouraging or enabling sustainable corporate practices. We assess the potential for impact in each category across several asset classes. We analyse how financial institutions can integrate the development of “impact budgets” into strategic asset allocation. Finally, we consider ways in which future research could consider the implications for impact-oriented portfolio construction in more detail and develop empirical methods for further testing and quantifying the impact of the different transmission mechanisms we discuss.

Files:: Caldecott_et_al_2024_How_sustainable_finance.pdf

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Language:: English
Keywords:: sustainable finance

greenwashing

impact investing

transmission mechanisms
Pubs id:: 1990419
Local pid:: pubs:1990419
Deposit date:: 2024-04-16

Copyright holder:: Caldecott et al.
Rights statement:: © The Author(s) 2024. This article is licensed under a Creative Commons Attribution 4.0 International License, which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons licence, and indicate if changes were made. The images or other third party material in this article are included in the article’s Creative Commons licence, unless indicated otherwise in a credit line to the material. If material is not included in the article’s Creative Commons licence and your intended use is not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission directly from the copyright holder. To view a copy of this licence, visit http://creativecommons.org/ licenses/by/4.0/.

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