Social Europe

politics, economy and employment & labour

  • Themes
    • European digital sphere
    • Recovery and resilience
  • Publications
    • Books
    • Dossiers
    • Occasional Papers
    • Research Essays
    • Brexit Paper Series
  • Podcast
  • Videos
  • Newsletter

Can sustainable finance really help solve the climate crisis?

Basil Oberholzer 10th December 2019

It is wrong to believe the financial sector will contribute to ecological transformation. Economic and environmental policies remain key.

sustainable finance
Basil Oberholzer

The financial sector should take responsibility and contribute to the decarbonisation of the global economy. This is increasingly how think tanks, bankers, economists and policy-makers advocate for ‘sustainable finance’. It is even a pillar of the Paris agreement. While sustainable finance is most often advanced with regard to climate change, the same notion is applicable to biodiversity and, for that matter, weapons, child labour and drugs.

Sustainable finance rests on the idea that money needs to be used for good. Astonishing amounts of private wealth are invested in the wrong assets or remain idle. At the same time, billions of dollars are needed to achieve the Sustainable Development Goals (SDGs) or to translate the Paris agreement into reality. Hence, banks and investors should invest this money in sustainable projects, while divesting from unsustainable ones.

Without money, the argument goes, the green transformation remains a dream. But thanks to sustainable finance, the required quantities of renewable energy, technological innovations and infrastructure projects can be realised. At the same time, production of fossil fuels can be reduced by withdrawing capital, depriving the companies of finance or, at least, raising their borrowing costs.

The good news, it is said, is that sustainability has a ‘business case’. Investment in assets such as fossil fuels entails high risks best avoided (for example, the carbon bubble argument) and returns on sustainable assets are at least equal to those on conventional investments. Doing good with money goes along with good returns.

Our job is keeping you informed!


Subscribe to our free newsletter and stay up to date with the latest Social Europe content.


We will never send you spam and you can unsubscribe anytime.

Thank you!

Please check your inbox and click on the link in the confirmation email to complete your newsletter subscription.

.

Fundamental flaws

There are however fundamental flaws in this optimistic view. First, it relies on a monetarist conception of money. Money is assumed to be a limited quantity, controlled by the central bank, which inserts it into the economy, where it can be exchanged for goods, services and financial assets. This means we need to convince rich people and everyone who owns money to invest it sustainably.

In fact, however, money is ‘endogenous’: it comes into existence when a bank grants a loan to a borrower. Loan issuance entails the simultaneous creation of a bank deposit. Loans are on the asset side of the bank’s balance sheet while deposits are on the liability side. Since credit provision by banks is not limited, money is not limited either. Hence, any investment project can basically be financed without being restricted by the scarcity of money.

Under capitalism, profitability is the driver of investment. This principle implies that any investment finds the capital it needs as long as it is profitable. Once the profitability condition is fulfilled, the banking system provides the required amount of money via the opening of credit lines. It is therefore no surprise that sustainable assets generate the same returns as conventional ones. For, if this were not the case, those sustainable investments would simply not occur.

Real economy

Investment can be income-neutral or income-creating. The former applies, for example, to a portfolio manager who buys and sells financial assets—nothing changes in the real economy, because the assets already existed. Divesting from conventional assets to purchase sustainable ones thus does not have any impact. Likewise, it is not really useful to move a savings deposit from one bank to another, expecting that the latter would use it for sustainable projects—the investment has already taken place, as otherwise the deposit would not exist.

One may argue that divesting from certain unsustainable assets will make their prices fall. But selling an asset does not affect its cash flow and, as long as profitability is given, there will be a buyer.


We need your support


Social Europe is an independent publisher and we believe in freely available content. For this model to be sustainable, however, we depend on the solidarity of our readers. Become a Social Europe member for less than 5 Euro per month and help us produce more articles, podcasts and videos. Thank you very much for your support!

Become a Social Europe Member

Income-creating investment means the production of new assets (goods and services). In contrast to the simple trading of assets, it is ‘real’ because it requires the issuance of a new loan and thereby creates a new income. Again, the condition for this is the profitability of the investment project. This explains why the share of sustainable investment has not increased beyond single-digit rates: too many environmental problems are not profitable as business cases, even though they are of existential importance from society’s point of view.

On the other hand, hoping that ‘bad sectors’ such as the oil industry will run out of capital when investors divest is in vain. As long as oil production is a profitable business it will find finance sources, because money and credit are not limited.

Renewable-energy production

Take the example of renewable-energy production, which is growing at high rates. This has been made possible by Germany’s pioneering role in research and industrial policy, as well as China’s promotion of large-scale production, lowering costs.

The sustainable-finance community celebrates the increase in sustainable assets because investment in renewable energy has increased. Yet the essential causal impact has come from policy—because, via research, subsidies and taxes, it has given renewable energy a business case. Subsequent observation of more sustainable assets in banks’ and investors’ portfolios is not a surprise but a tautological necessity. Likewise, if we achieve the SDGs in the future, such that our economy will be green, the balance sheets will inevitably be green as well.

At a smaller scale, sustainable finance may have a certain impact. For example, shareholder engagement in companies might be a possible avenue—though it is questionable whether shareholders are also willing to make business better when it reduces returns. Another approach may be that better information makes sustainability risks more transparent, such that companies make more effort to mitigate them.

It would be much more effective, however, not just to make those risks transparent but to make them real. It is up to policy to foster stricter laws and promote better technologies, to turn fossil fuels from a business case to a losing deal.

Policies key

Finance is not limited. But it only flows to investments considered profitable. It will continue to finance production of fossil fuels, weapons and other ‘bads’ for as long as that is so. It will never finance projects for biodiversity and rainforest protection, because this does not bring returns.

Through prohibition, taxes, subsidies and public investment, economic and environmental policies are key to making sustainable assets profitable and bad assets unprofitable—100 percent sustainable assets then will be the simple consequence. It is wrong to wait for banks and financial markets to solve the biggest problem of our time.

Basil Oberholzer

Basil Oberholzer works as an environmental economist and is author of Monetary Policy and Crude Oil: Prices, Production and Consumption. He received his PhD at the University of Fribourg, Switzerland.

Home ・ Economy ・ Can sustainable finance really help solve the climate crisis?

Most Popular Posts

schools,Sweden,Swedish,voucher,choice Sweden’s schools: Milton Friedman’s wet dreamLisa Pelling
world order,Russia,China,Europe,United States,US The coming world orderMarc Saxer
south working,remote work ‘South working’: the future of remote workAntonio Aloisi and Luisa Corazza
Russia,Putin,assets,oligarchs Seizing the assets of Russian oligarchsBranko Milanovic
Russians,support,war,Ukraine Why do Russians support the war against Ukraine?Svetlana Erpyleva

Most Recent Posts

defence,europe,spending Ukraine and Europe’s defence spendingValerio Alfonso Bruno and Adriano Cozzolino
North Atlantic Treaty Organization,NATO,Ukraine The Ukraine war and NATO’s renewed credibilityPaul Rogers
transnational list,European constituency,European elections,European public sphere A European constituency for a European public sphereDomènec Ruiz Devesa
hydrogen,gas,LNG,REPowerEU EU hydrogen targets—a neo-colonial resource grabPascoe Sabido and Chloé Mikolajczak
Big Tech,Big Oil,Big Pharma,agribusiness,wealth,capital,Oxfam,report,inequality,companies Control the vampire companiesJayati Ghosh

Other Social Europe Publications

The transatlantic relationship
Women and the coronavirus crisis
RE No. 12: Why No Economic Democracy in Sweden?
US election 2020
Corporate taxation in a globalised era

Foundation for European Progressive Studies Advertisement

EU Care Atlas: a new interactive data map showing how care deficits affect the gender earnings gap in the EU

Browse through the EU Care Atlas, a new interactive data map to help uncover what the statistics are often hiding: how care deficits directly feed into the gender earnings gap.

While attention is often focused on the gender pay gap (13%), the EU Care Atlas brings to light the more worrisome and complex picture of women’s economic inequalities. The pay gap is just one of three main elements that explain the overall earnings gap, which is estimated at 36.7%. The EU Care Atlas illustrates the urgent need to look beyond the pay gap and understand the interplay between the overall earnings gap and care imbalances.


BROWSE THROUGH THE MAP

Hans Böckler Stiftung Advertisement

Towards a new Minimum Wage Policy in Germany and Europe: WSI minimum wage report 2022

The past year has seen a much higher political profile for the issue of minimum wages, not only in Germany, which has seen fresh initiatives to tackle low pay, but also in those many other countries in Europe that have embarked on substantial and sustained increases in statutory minimum wages. One key benchmark in determining what should count as an adequate minimum wage is the threshold of 60 per cent of the median wage, a ratio that has also played a role in the European Commission's proposals for an EU-level policy on minimum wages. This year's WSI Minimum Wage Report highlights the feasibility of achieving minimum wages that meet this criterion, given the political will. And with an increase to 12 euro per hour planned for autumn 2022, Germany might now find itself promoted from laggard to minimum-wage trailblazer.


FREE DOWNLOAD

ETUI advertisement

Bilan social / Social policy in the EU: state of play 2021 and perspectives

The new edition of the Bilan social 2021, co-produced by the European Social Observatory (OSE) and the European Trade Union Institute (ETUI), reveals that while EU social policy-making took a blow in 2020, 2021 was guided by the re-emerging social aspirations of the European Commission and the launch of several important initiatives. Against the background of Covid-19, climate change and the debate on the future of Europe, the French presidency of the Council of the EU and the von der Leyen commission must now be closely scrutinised by EU citizens and social stakeholders.


AVAILABLE HERE

Eurofound advertisement

Living and working in Europe 2021

The Covid-19 pandemic continued to be a defining force in 2021, and Eurofound continued its work of examining and recording the many and diverse impacts across the EU. Living and working in Europe 2021 provides a snapshot of the changes to employment, work and living conditions in Europe. It also summarises the agency’s findings on issues such as gender equality in employment, wealth inequality and labour shortages. These will have a significant bearing on recovery from the pandemic, resilience in the face of the war in Ukraine and a successful transition to a green and digital future.


AVAILABLE HERE

About Social Europe

Our Mission

Article Submission

Membership

Advertisements

Legal Disclosure

Privacy Policy

Copyright

Social Europe ISSN 2628-7641

Social Europe Archives

Search Social Europe

Themes Archive

Politics Archive

Economy Archive

Society Archive

Ecology Archive

Follow us on social media

Follow us on Facebook

Follow us on Twitter

Follow us on LinkedIn

Follow us on YouTube