1.1 Introduction
The modern worldâs economic system has led to a global environmental crisis (e.g. IPCC 2018). As this view is slowly starting to be embraced by businesses and financial institutions, financial markets are evolving to provide new forms of funding to actors that wish to face this crisis. Even if always bearing in mind its risk-return priorities, part of the financial market is nowadays joining public actors, non-governmental organisations (NGOs) and civil society in the efforts to face the global environmental challenge. The funding of these efforts is what can be broadly referred to as green finance .1
As the portion of the financial markets that focuses on solving the environmental crisis grows larger and more diverse, it carries with it the notion that capital can be used to solve extra-financial issues in addition to providing funding and generating profits. Evidently, this notion is not new,2 and some might even say it has existed since the first barter-like methods of exchange. In comparison, both capitalism and modern finance are relatively young, the former becoming the encompassing global economic system only in the late twentieth century and the latter roughly considered to be born in the 1950s with the first seminal works on modern financial theory (e.g. Markowitz 1952). Nevertheless, the concept that natural resources are limited and that some by-products of mass production processes (e.g. polluting gases or waste) are highly detrimental to both humankind and its natural environment was not central in the public debate until recent years. Capitalism and modern finance could indeed be considered as an effective system and an efficient means to trigger the economic potential of nations irrespective of their impact on the environment. As a matter of fact, the twentieth century also corresponds to a period of great economic growth and of exceptional improvement in human conditions in those countries that started their industrialisation processes. Global warming and the consequent increasing incidence of climate-related extreme weather events (such as droughts, floods and storms)3 have then worked as a wake-up call on the limits of any economic model that does not foresee the preservation of the environment as one of its pillars. In this respect, green finance represents the global financial communityâs first structured attempt to join financial performances and positive environmental impact, and can be seen as one of the concrete signs of the economic systemâs adaptation to the global environmental challenge.
In such a context, this chapter provides an overview of the main developments in green finance from its origins to the present. In this respect, the main roots of the role of ethics in finance are first recalled. Then, the major international events contributing to raise the attention to the need to preserve the environment are treated, in particular as concerns the Paris Agreement and the adoption of the Sustainable Development Goals (SDG). Hence, a discussion is provided on the role of green finance today within the sustainable finance landscape, including an outline on the main families of existing financial products and services and their evolution over time. Finally, the key challenges still ahead for green finance in order to be considered a stable component of the modern financial landscape are mentioned.
1.2 Ethics and Sustainability in Finance
Signs of humankindâs concern with the notion of ethical use of money can already be found in religious texts. The usurer, that is, a lender compensated through (unjustified) interests on the money lent, was, for example, already mentioned in the Vedas, a body of writings from ancient India considered as the oldest scriptures of Hinduism, drafted between 1700 and 1100 BC. The notion of usury is then present in the religious texts of Buddhism, Judaism, Christianity and Islam.4 Many movements developed over time on similar basis,5 and some argue that the attitude towards the use of money as influenced by religious beliefs (and hence ethics) can be interpreted as the early form of what can be considered today as sustainable finance .6
However, the relationship between money and ethics had a strong acceleration only in modern times and eventually became not restricted to the boundaries of religious communities. Instances of this change can be found in the follow-up of social protests that occurred in the United States in the 1950s and 1960s, through both the civil rights movement and the increasing opposition to the involvement in the Vietnam War. For example, movements that opposed the use of agent orange (a highly toxic gas developed to destroy forests and which frightened indigenous populations during the Vietnam War) led to the creation of the Pax World Balanced Fund in 1971, a fund that was explicitly thought for investors that wished to avoid direct investments in any firm that participated in the production of this gas. As a matter of fact, the Pax World Balanced Fund can be considered one of the first examples of socially responsible funds. In this respect, it was closely followed by the creation of the Dreyfus Third Century Fund in 1972, which actively looked to invest in best-performing firms in terms of the enhancement of quality of life in the United States. As these investment strategies grew in popularity and appeal, initiatives in which finance was used as a tool to enforce social justice proliferated. One of the most compelling examples of large-scale initiatives was the drafting of the Sullivan principles7 in 1977, a code of conduct for businesses that factually contributed to the movement that determined the end of apartheid in South Africa.
During the last decades of the twentieth century, the socially responsible investing movement grew further (e.g. Renneboog et al. 2008), benefitting from three main developments, which finally created the basis for an increasingly severe assessment by investors as concerns social and environmental matters. The first referred to the multiplying warnings by scientists and researchers regarding the dangers of climate change. The second concerned the increasing acceptance of the view that poor corporate governance can be detrimental to both markets and the firmâs impact on the society and the environment. The third consisted in the widening of the debate on the relationship between institutional investorsâ fiduciary duty and sustainability issues. As a result, those that can today be referred to as socially responsible investors started at that time to consider the deterioration of the environment as a specific cause for concern and to increasingly apprise conscientious firms in terms of environmental management. In particular following the Three Mile Island and then the Chernobyl nuclear power plant accidents, occurring in 1979 and 1986, respectively, and the Exxon Valdez shipwreck in 1989 (spilling of about 41,000 cubic metres of crude oil near the coasts of Alaska), global awareness regarding the possible consequences of bad business practices on the environment reached an unprecedented peak. In this regard, 1989 was ...