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What is sustainable finance?

Enhancing knowledge about sustainable finance is the aim of the Erasmus Platform for Sustainable Value Creation – together with the financial sector. Dieuwertje Bosma, ethicist and project manager of the platform, takes a philosophical look at finance. In this blog she explains the basics of sustainable finance.



Finance has long been a silo, with a focus solely on financial measures. This has changed over the past few years: the financial sector is increasingly involved in sustainability because the idea that businesses exist to exclusively maximise shareholder value needs rethinking. The concept that results from this is sustainable finance; it means simply finance that takes into account long-term Environmental (E), Social (S) and Governance (G) factors. Or finance that also takes into account the UN’s Sustainable Development Goals. But there is more to the story.

Why sustainability?

The answer to this starts with the challenges the world faces. We all face immediate environmental challenges that threaten the planet’s liveability: climate change, land degradation, loss of biodiversity, and so on. At the same time, societies also face obstacles: poverty, hunger, lack of healthcare and more. If we want to meet the needs of current and future generations without depleting the planet, or depriving people and societies, then we need a sustainable transition – our systems urgently need a sociological and technical overhaul that propels them towards more sustainable modes of production and consumption. Luckily, an increasing number of people and companies are realising this.

Why should finance care about sustainability?

Should finance consider anything other than profitability and efficient allocation of resources? The answer depends how you consider efficient allocation of resources. Old beliefs stemming from the linear economy hold that resources are efficiently allocated if costs are minimalised and profits are maximised. According to this thinking, growth is always good. Everything else, such as planetary resources and effects on societies, are considered ‘externalities’. The market alone is efficient in setting prices. We don’t think this is wholly true anymore.

Investors can have a positive influence

Sustainability is all about a new interpretation of what it means to allocate resources efficiently; it’s allocation of resources with respect for the environment and for society. Finance is the beating heart of our economy, so it can play a leading role in stimulating or even accelerating the transition towards a sustainable future, by investing in sustainable companies and projects. Furthermore, investors can also positively influence the companies in which they invest that are not yet 100 per cent sustainable – but have the potential to transition to a more sustainable state.

Short-termism

Although the concept of sustainable finance has taken root, the most difficult hurdles are still ahead. One of them is short-termism.

Economic activity has a long term effect on the environment and on society – this is true for risks as well as benefits. Investing in carbon-intensive companies might be very profitable in the short term but we also know that carbon-intensive industries have severe negative effects – and associated costs – that affect the long term of the environment. The challenge is to incorporate those long-term costs up front.

And we all know that it’s complicated to adequately incorporate long-term risks and opportunities into today’s actions, even on a personal level.

So who needs the new knowledge?

So we need the financial sector to shift towards a long-term orientation that creates value for the common good as well as for investors; it’s no longer good enough just to maximise shareholder profits. Scientific research has an important role to play here. The better we understand the true risks – and opportunities – of future scenarios, the better financial institutions will be equipped to make decisions that work for sustainability.

This is why the Erasmus Platform for Sustainable Value Creation was created. When we work with the financial industry, we can help accelerate new knowledge about sustainable finance. Are you interested to find out more about what we do? Please visit our website or contact us!

More information

If you enjoyed reading this, try another in our series of blog posts about sustainable finance from the Erasmus Platform for Sustainable Value Creation at Rotterdam School of Management, Erasmus University (RSM). It is intended to act as an introduction to the Platform’s work; to promote and foster knowledge on sustainable finance.

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Platform for Sustainable Value Creation blog