Principles of Sustainable Finance

Erasmus University Rotterdam opened a course about how the finance world is intertwined with the sustainability world. After 8 weeks of learning, I found that the sustainability world is actively supporting long-term financial viability for an economic project where it is usually seen in the other way around.

Finance's role in sustainability is important

Our economic models were developed in the resource abundance age, when a lot of natural resources and limited carbon emissions. There were no environmental concerns factored into these economic models; only labor and capital. The same thing happened with financial theory that does not account value to natural resources beyond their near term cash flows. Unfortunately, these models are still widely used and I believe that we are now in a transition to a low carbon and more circular economy to overcome environmental challenges.

The role of the financial system in sustainability is addressing the issue of how it can facilitate decision-making on the trade-offs between economic, social, and environmental goals. As it is currently conducted, the financial system has functions as breakdown below, based on Levine (2005).

1. Produce information ex ante about possible investments and allocate capital;
2. Monitor investments and exert corporate governance after providing finance;
3. Facilitate the trading, diversification, and management of risk;