Dirty Banking: Probing the Gap in Sustainable Finance

Abstract

In 2016, the Global Sustainable Investment Alliance estimated the market for sustainable investments to have reached 22.89 trillion USD of assets under management. While financial institutions have embraced the idea of sustainable finance as a business opportunity, they have arguably done little, but to piggy-back on investors’ demand. Today, it is not unusual for a single firm to retail fossil free investment funds and concomitantly offer commercial loans towards fracking, coal, and Arctic drilling. This paradox is underpinned by a major gap in the way sustainability has permeated primary and secondary markets which, we argue, calls for a serious rethinking of the sustainability transition in finance. This article proposes two contributions in this direction. First, we develop an original conceptualisation of finance as a socio-technical system to discuss the dynamics that both hinder and promote a transition from mainstream to sustainable finance. Second, we propose to study how investment banks integrate sustainability in their underwriting services. To do so, we filter through close to half a million of debt and equity underwriting deals (2005–2017) using the Government Pension Fund Global of Norway’s list of 153 excluded companies. Our results suggest that investment banks do not shy away from underwriting companies that have been flagged for major environmental, social, and governance misconduct, neither do they restrain from underwriting companies providing contentious products, such as tobacco, coal, and nuclear weapons. Moving forward, we suggest ways to address this problem and call for further research on the responsibility and agency of finance and advanced business services firms in sustainability transitions.

Does Technological Innovation Drive Corporate Sustainability? Empirical Evidence for the European Financial Industry in Catching-Up and Central and Eastern Europe Countries

“…As regards sustainability and financial performance in the financial industry, on the other hand, literature is scarce and it has similarly produced inconclusive results (e.g., [8]), with both positive [29] and negative outcomes [30], in line with the blurred evidence on other industries pointed out above (e.g., [28,31]). For instance, Esteban-Sanchez et al [9] find a partially positive relationship from the employees and community dimensions but not from the governance one in the period of the financial crisis; specifically, they find that during the crisis the banks with better relations with the community could be valued positively by investors, which, in turn, increases corporate financial performance.…”

“…The answer is yes: innovation is the leverage that permits not only the creation of new value and innovative performance but is also directly and positively related to improved sustainability dimensions and other sustainability-oriented measures, such as CSR. In the particular case of the financial industry (e.g., [29,38]), the relationship between innovation and sustainability is said to be positive, albeit to the best of our knowledge there are only two studies, so further research is required. As stated by Forcadell et al [1], innovation can improve corporate sustainability on many fronts, such as new digital requirements, customer demand and also financial performance.…”

How to Design More Sustainable Financial Systems: The Roles of Environmental, Social, and Governance Factors in the Decision-Making Process

“…Many factors, especially non-financial factors (i.e., ESG), are responsible in the present day for the transformation of the conventional finance paradigm to a sustainable one. Urban and Wójcik proposed a revisited multilevel-perspective (MLP) concept based on Geels to explain the sustainable finance transition [55] (Figure 1). We extended this proposal by including "social exclusion" and "negative externalities" into the sociotechnical landscape, and pointing out the role of greening financial markets, the greening economy, and CSR at the niche innovations level.…”

Relating Financial Systems to Sustainability Transitions: Challenges, Demands and Dimensions

“…Finance is a subset of economic studies, which defines the role of finance in the economy as facilitating the exchange and transfer of funds from households with excess funds to those in need of funds 3 A recent paper by Urban et al, 2019 applies the sustainability transitions terminology of 'socio-technical system' and framework of the Multi-Level Perspective (MLP) to the reforms in the financial system. For the treatment in this paper, I have chosen not to adopt this definition due to the emergent nature of the research.…”

“…A key point of this literature is that banks create new money (out of the deposits of savers) through lending, rather than just recycling deposits of savers into loans (Werner, 2014). The orthodox theories study how finance fulfils its role in the economy based on the assumptions that markets are efficient, and investors behave rationally and include the Efficient Market Hypothesis and Capital Asset Pricing Model theories, which assign variables on the basis of financial risks (Spratt, 2009;Sun et al, 2011;Urban et al, 2019).…”