Why should sustainable finance be given priority? Lessons from pollution and biodiversity degradation

Abstract

The concept of sustainable finance is a relatively new concept that is increasingly accepted by the financial industry since the Berne Declaration came together to promote sustainable finance in the commercial sector. Although sustainable finance is very apt and timely, many issues need to be addressed if this concept is to be meaningful and it is to achieve its desired objectives. Some of the issues that need to be clarified and addressed include (1) defining the kind of sustainability that is envisaged (2) examining issues relating to the use of high discount rates and its compatibility with the goals of sustainability (3) the case of excessive pollution due to adverse selection, moral hazard and lobbying and (4) specialisation and path dependent systems that are detrimental to future production. This paper discusses these issues, providing examples from pollution and biodiversity degradation. The paper also shows why economic growth without considering pollution impacts and path dependent systems is detrimental to future production which violates the concept of sustainable finance. This discussion demonstrates why the concept of sustainable finance is timely and why it is necessary to take into account the potential issues that need to be addressed. The challenges that lie ahead are many, and the sooner they are addressed, the more credible and potent sustainable finance will be.Sustainable finance, economic growth, pollution, biodiversity degradation, path dependent systems