Essential Concepts of Sustainable Finance 103231687X, 9781032316871

Table of contents :
Cover
Half Title
Series Page
Title Page
Copyright Page
Table of Contents
Acknowledgements
Sustainable Finance: A Multidimensional and Multi-actor Framework
Visual Codes of Sustainable Finance Concepts
A
2030 Agenda for Sustainable Development
Active Engagement
Active Ownership
Active Voting
Anthropogenic Climate Change
Anthropogenic Emission
B
Baseline and Credit Mechanism
Best-in-Class Screening
Best-in-Universe Screening
Biocapacity
Biodiversity
Biodiversity Finance
Biodiversity Intactness Index (BII)
Biodiversity Loss
Biosphere Integrity
Blended Finance
Blue Bonds
Blue Economy
Blue Finance
Brown Economy
Brown Taxonomy
Brundtland Report
Business Sustainability
Business-as-Usual
C
Cap and Trade System
Carbon Allowance
Carbon Bubble
Carbon Credit
Carbon Dioxide (CO[sub(2)])
Carbon (Dioxide) Capture
Carbon (Dioxide) Capture and Storage (CCS)
Carbon (Dioxide) Capture & Utilization (CCU)
Carbon Dioxide Equivalent ( CO2e)
Carbon Emission
Carbon Emission Permit
Carbon Finance
Carbon Footprint
Carbon Leakage
Carbon Markets
Carbon Neutrality
Carbon Offsetting
Carbon Price
Carbon Removal / Carbon Dioxide Removal (CDR)
Carbon Sequestration
Carbon Sink
Carbon Taxation
Chief Sustainability Officer
Circular Economy
Climate
Climate Change
Climate Change Adaptation
Climate Change Mitigation
Climate Crisis
Climate Disclosure Standards Board (CDSB)
Climate Finance
Climate Neutrality
Climate Stress Test / Testing
Climate-related Risk (CrR)
Common Good Value
Community Investing
Conference of the Parties (COP)
Corporate Citizenship
Corporate Engagement
Corporate Governance
Corporate Social Responsibility
Corporate Sustainability
D
Decarbonization
Development Finance
Diversity, Equity, and Inclusion
Double Materiality
Doughnut Economics
Dynamic Materiality
E
Earth Overshoot Day
Earth System
Ecological Footprint
Ecosystem Services
Emission Allowance
Emission Trading
Emissions Trading System
Enlightened Shareholder Value (ESV)
Environmental Capital
Environmental Economics
Environmental Externalities
Environmental Factors (E of ESG)
Environmental Finance
Environmental Footprint
Environmental Kuznets Curve
Environmental Risk
Environmental Taxonomy
Environmental, Social, and Governance Factors/ ESG Factors/ ESG Criteria
Equator Principles
ESG Analysis
ESG Engagement
ESG Fund
ESG Incorporation
ESG Integration
ESG Investing/ Investment
ESG Rating
ESG Reporting
ESG Risks
ESG Voting
Ethical Investment / Ethical Investing
EU Taxonomy for Sustainability
Exclusionary Investing
Exclusionary Screening
Externalities
F
Finance-as-Usual
Financial Inclusion
Financial Materiality
Fossil Fuel
G
Global Reporting Initiative
Global Warming
Global Warming Potential (GWP)
Governance Factors (G of ESG)
Green Asset Ratio (GAR)
Green Assets
Green Bond Principles
Green Bonds
Green Company
Green Economy
Green Equities
Green Finance
Green Fintech Taxonomy (Green Fintech Classification)
Green Growth
Green Investment
Green Lease, Green Leasing
Green Loan
Green Loan Principles
Green Mortgage
Green Premium
Green Project
Green Taxonomy
Green Water
Greenhouse Effect
Greenhouse Gas Emission (GHG Emission)
Greenhouse Gas Neutrality
Greenhouse Gas Protocol (GHG Protocol)
Greenhouse Gases (GHGs)
Greenium
Greenwashing, Greenwash
I
Impact Finance
Impact Investing
Impact Lending
Impact Loan
Impact Materiality
Impact Measurement and Management
Inclusionary Investing
Inside-out Perspective
Integrated Report
Integrated Reporting
Integrated Thinking
Integrated Value
Integrated Value Creation (IVC)
Intergovernmental Panel on Climate Change
Internalization
International Integrated Reporting Council (IIRC)
International Sustainability Standards Board (ISSB)
K
Katowice Climate Package
Keeling Curve
Kyoto Protocol
L
Land Degradation
Land Degradation Neutrality
Land-system Change
Land-use Change
Life Cycle Assessment
Linear Consumption
Linear Production
Linear Economy
Long-term Value Creation (LTVC)
M
Materiality
Microcredit
Microfinance
Microinsurance
Microloan
Millennium Development Goals
Montreal Protocol
N
Nationally Determined Contributions
Natural Capital
Natural Resource
Negative Emission
Negative Externalities
Negative Screening
Net Zero Economy
Net Zero Emission
Non-Financial Information
Non-Financial Reporting
Norms-based Screening
O
OECD Guidelines for Multinational Enterprises
Outside-in Perspective
P
Paris Agreement
Parts per Million (ppm)
Physical Risk
Pieconomics
Pigouvian Tax
Planetary Boundaries
Planetary Boundaries Framework
Porter Hypothesis
Positive Externalities
Positive Screening
Principles for Responsible Banking
Principles for Responsible Investment (PRI)
Principles for Sustainable Insurance (PSI)
R
Race to Zero
Renewable Energy
Responsible Consumption
Responsible Investment
S
SASB Standards
Scope 1 GHG Emissions
Scope 2 GHG Emissions
Scope 3 GHG Emissions
Shareholder Action
Shareholder Activism
Shareholder Primacy
Shareholder Value
Short-Termism
Sin Company
Sin Stock
Social Bank
Social Bonds
Social Externalities
Social Factors (S of ESG)
Social Finance
Social Taxonomy
Socially Responsible Investment (SRI)
Stakeholder Capitalism
Stewardship
Stranded Asset
Sustainability
Sustainability Accounting Standards Board (SASB)
Sustainability Disclosure
Sustainability Index
Sustainability Linked Loans
Sustainability-Linked Loan Principles
Sustainability Rankings
Sustainability Rating Providers
Sustainability Ratings
Sustainability Reporting
Sustainability Risks
Sustainability Science
Sustainability Score
Sustainability Taxonomy
Sustainability Transformation
Sustainability Transition
Sustainability-themed Investing
Sustainable Business Model
Sustainable Development
Sustainable Development Goals (SDGs)
Sustainable Digital Finance
Sustainable Finance
Sustainable Finance Forms
Sustainable Finance Literacy
Sustainable Finance Stages
Sustainable Finance Taxonomy
Sustainable Finance Technology (SuFTech)
Sustainable Insurance
Sustainable Investing, Sustainable Investment, Sustainability Investment (SI)
Sustainable Investment Fund
Sustainable Investment Strategies
Sustainable Lending
T
Taxonomy
Thematic Investing
Tradable Emission Permit
Tradable Emission Right
Transition Finance
Transition Management
Transition Risk
Triple Bottom Line
Twin Transformation
U
United Nations Framework Convention on Climate Change (UNFCCC)
United Nations Global Compact
United Nations Guiding Principles for Business and Human Rights
V
Value Reporting Foundation
Values- based Banking
Appendix – List of International Organizations in Sustainable Finance
Notes on Contributors

Citation preview

“­Finance is crucial to sustainable development since transitioning toward a clean and just economy requires massive funding. Besides, increasing investors’ appetite for ESG assets underlies the ­fast-​­growing sustainable investment market. These trends underlie a proliferation of sustainability standards, ratings, scores, regulations, frameworks, and associations. This book provides a useful guide for n ­ on-​­ESG experts so that they understand the role of finance in achieving sustainable development.” Professor Doctor Timo Busch, Chair of Management and Sustainability, University of Hamburg “­A valuable dimension of this book is its capacity to connect financial terms with ­non-​­financial ones. This book clarifies the sustainable finance notions to individual and institutional investors, financiers, managers, and the general public so that they can make informed decisions: business organizations need to embrace increasing sustainability standards, which requires a fundamental knowledge of sustainability; investors will benefit from clarifying adjacent concepts in sustainable investing, and students can improve their learning curve on the e­ ver-​­growing sustainable finance arena. The value of this book is unquestionable as it facilitates understanding the building blocks of sustainable finance in the business world for years to come. Transformation starts with learning; learning begins with understanding fundamental concepts and this book is an excellent kickstart.” Carlos Serrano, Climate Finance Advisory Services Lead, LAC Financial Sector, International Finance Corporation (­IFC, World Bank Group)

Essential Concepts of Sustainable Finance This book compiles and explains technical terms in sustainable finance in an ­easy-­​­­to-​­navigate ­A-​­Z format. The interdisciplinary nature of sustainable finance means that those researching and working in the field often have to turn to a variety of different sources to look up various n ­ on-​­financial terms. Recognizing this issue, Ibrahim Sancak and Elisa Aracil have curated a comprehensive list of the key terms most commonly used in the field. Each entry maps out an important concept or idea and illustrates how it relates more broadly across this growing discipline, such as the changes and innovations required by the financial sector to meet the United Nation’s Sustainable Development Goals. Overall, Essential Concepts of Sustainable Finance will enable readers to communicate more effectively about finance within the context of sustainability. With related terms and further reading included alongside the entries, this innovative and accessible volume will be of great interest to students, scholars, and practitioners alike. Elisa Aracil is a professor of business and economics and a researcher at Instituto de Investigación Tecnológica in Universidad Pontificia Comillas Madrid (­Spain). She has worked in investment banking for more than ten years. Her research focuses on sustainable banks, innovation and digital transformation, corporate social responsibility, financial inclusion, and the role of finance in mitigating societal grand challenges. She has published her work in scientific journals such as the Journal of Business Research, the Journal of Cleaner Production, Finance Research Letters, Business Strategy and the Environment, Corporate Social Responsibility and Environmental Management, Business Ethics: A European Review, Business Strategy and Development, Sustainability, and the International Journal of Emerging Markets. She participates in various research projects at the national and international levels, funded by the European Commission, and is the Director of the CaixaBank Chair of Sustainable Economy. Ibrahim Sancak is both an academic and a finance professional with more than 20 years of financial ­industry-​­related experience. He served as the founding director of the Market Oversight and Enforcement Division at the Capital Markets Board of Turkey. Dr. Sancak joined the ­ZWIRN-​­Research Center of the Ostfalia University of Applied Sciences (­Germany) as a professor of finance in February 2019. Since then, he has been actively conducting scientific research in sustainable finance and digital finance. In 2020, he took part in delivering a sustainability management guide for Bankenfachverband, a key financial industry association in Germany. He teaches the “­Economic Thinking and Sustainable Finance” course of the Sustainability & Risk Management (­MSc) program at the university. He also teaches at various European universities, including the University of Roma Tre in Italy. He holds a bachelor’s degree in business administration and a master of business administration from Ankara University (­Turkey), a master of science in finance from the George Washington University (­the US), and a PhD in banking from Marmara University (­Turkey). Professor Sancak also holds three certificates from the US Securities and Exchange Commission (­SEC) on market regulation and supervision.

­A-​­Z Guides for Environment and Sustainability

This series provides accessible, easy-to-navigate overviews of a range of different topics related to environment and sustainability. Following an A-Z format, each book contains entries which map out an important concept or term and illustrates how it connects more broadly to other ideas and disciplines. With related terms and further reading included alongside the entries, these innovative volumes will be of great interest to students and scholars learning, teaching and researching in this field. Essential Concepts of Sustainable Finance An ­A-​­Z Guide Edited by Elisa Aracil and Ibrahim Sancak

Essential Concepts of Sustainable Finance An ­A-​­Z Guide

Edited by Elisa Aracil and Ibrahim Sancak

Cover image: © Getty Images First published 2024 by Routledge 4 Park Square, Milton Park, Abingdon, Oxon OX14 4RN and by Routledge 605 Third Avenue, New York, NY 10158 Routledge is an imprint of the Taylor & Francis Group, an informa business © 2024 selection and editorial matter, Elisa Aracil and Ibrahim Sancak; individual chapters, the contributors The right of Elisa Aracil and Ibrahim Sancak to be identified as the authors of the editorial material, and of the authors for their individual chapters, has been asserted in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. British Library ­Cataloguing-­​­­in-​­Publication Data A catalogue record for this book is available from the British Library ISBN: ­978-­​­­1-­​­­032-­​­­31686-​­4 (­hbk) ISBN: ­978-­​­­1-­​­­032-­​­­31687-​­1 (­pbk) ISBN: ­978-­​­­1-­​­­0 03-­​­­31089-​­1 (­ebk) DOI: 10.4324/­9781003310891 Typeset in Bembo by codeMantra

Contents

Acknowledgementsxvi Sustainable Finance: A Multidimensional and ­­Multi-​­​­​­actor Framework

1

Visual Codes of Sustainable Finance Concepts

7

A8 2030 Agenda for Sustainable Development 8 Active Engagement 9 Active Ownership 9 Active Voting 10 Anthropogenic Climate Change 10 Anthropogenic Emission 10 B11 Baseline and Credit Mechanism 11 Best-in-Class Screening 12 Best-in-Universe Screening 12 Biocapacity 13 Biodiversity 13 Biodiversity Finance 15 Biodiversity Intactness Index (BII) 15 Biodiversity Loss 15 Biosphere Integrity 15 Blended Finance 16 Blue Bonds 16 Blue Economy 17 Blue Finance 19 Brown Economy 19

viii Contents

Brown Taxonomy 19 Brundtland Report 19 Business Sustainability 21 Business-as-Usual 21 C22 Cap and Trade System 22 Carbon Allowance 24 Carbon Bubble 24 Carbon Credit 24 Carbon Dioxide (­CO2) 24 Carbon (­Dioxide) Capture 25 Carbon (­Dioxide) Capture and Storage (­CCS) 26 Carbon (­Dioxide) Capture & Utilization (­CCU) 28 Carbon Dioxide Equivalent (­CO2e) 29 Carbon Emission 29 Carbon Emission Permit 29 Carbon Finance 30 Carbon Footprint 30 Carbon Leakage 30 Carbon Markets 30 Carbon Neutrality 32 Carbon Offsetting 32 Carbon Price 33 Carbon Removal / Carbon Dioxide Removal (­CDR) 34 Carbon Sequestration 34 Carbon Sink 35 Carbon Taxation 35 Chief Sustainability Officer 35 Circular Economy 37 Climate 39 Climate Change 39 Climate Change Adaptation 41 Climate Change Mitigation 41 Climate Crisis 42 Climate Disclosure Standards Board (CDSB) 42 Climate Finance 42 Climate Neutrality 44 Climate Stress Test / Testing 45 Climate-related Risk (CrR) 46

Contents  ix

Common Good Value Community Investing Conference of the Parties (COP) Corporate Citizenship Corporate Engagement Corporate Governance Corporate Social Responsibility Corporate Sustainability

47 48 48 48 50 50 51 53

D55 Decarbonization 55 Development Finance 56 Diversity, Equity, and Inclusion 58 Double Materiality 59 Doughnut Economics 60 Dynamic Materiality 62 E64 Earth Overshoot Day 64 Earth System 64 Ecological Footprint 64 Ecosystem Services 66 Emission Allowance 66 Emission Trading 67 Emissions Trading System 67 Enlightened Shareholder Value (ESV) 67 Environmental Capital 67 Environmental Economics 68 Environmental Externalities 69 Environmental Factors (E of ESG) 69 Environmental Finance 69 Environmental Footprint 70 Environmental Kuznets Curve 71 Environmental Risk 73 Environmental Taxonomy 74 Environmental, Social, and Governance Factors/­ESG Factors/­ESG Criteria 75 Equator Principles 77 ESG Analysis 78 ESG Engagement 79 ESG Fund 80

x Contents

ESG Incorporation 81 ESG Integration 81 ESG Investing/­Investment 81 ESG Rating 82 ESG Reporting 83 ESG Risks 83 ESG Voting 84 Ethical Investment / Ethical Investing 84 EU Taxonomy for Sustainability 85 Exclusionary Investing 86 Exclusionary Screening 88 Externalities 88 F90 ­Finance-­​­­as-​­Usual 90 Financial Inclusion 90 Financial Materiality 91 Fossil Fuel 92 G93 Global Reporting Initiative 93 Global Warming 94 Global Warming Potential (GWP) 98 Governance Factors (­G of ESG) 98 Green Asset Ratio (GAR) 99 Green Assets 99 Green Bond Principles 101 Green Bonds 102 Green Company 102 Green Economy 103 Green Equities 104 Green Finance 106 Green Fintech Taxonomy (Green Fintech Classification) 107 Green Growth 109 Green Investment 109 Green Lease, Green Leasing 111 Green Loan 111 Green Loan Principles 112 Green Mortgage 113 Green Premium 113 Green Project 116

Contents  xi

Green Taxonomy 116 Green Water 116 Greenhouse Effect 117 Greenhouse Gas Emission (GHG Emission) 117 Greenhouse Gas Neutrality 117 Greenhouse Gas Protocol (GHG Protocol) 117 Greenhouse Gases (GHGs) 118 Greenium 120 Greenwashing, Greenwash 120 I123 Impact Finance 123 Impact Investing 123 Impact Lending 124 Impact Loan 125 Impact Materiality 125 Impact Measurement and Management 125 Inclusionary Investing 127 ­Inside-​­out Perspective 128 Integrated Report 128 Integrated Reporting 128 Integrated Thinking 130 Integrated Value 131 Integrated Value Creation (IVC) 133 Intergovernmental Panel on Climate Change 133 Internalization 134 International Integrated Reporting Council (­IIRC) 134 International Sustainability Standards Board (­ISSB) 135 K137 Katowice Climate Package 137 Keeling Curve 137 Kyoto Protocol 139 L141 Land Degradation 141 Land Degradation Neutrality 142 ­L and-​­system Change 143 ­L and-​­use Change 143 Life Cycle Assessment 143 Linear Consumption 145

xii Contents

Linear Production Linear Economy Long-​­term Value Creation (­LTVC)

145 146 147

M148 Materiality 148 Microcredit 149 Microfinance 149 Microinsurance 151 Microloan 151 Millennium Development Goals 151 Montreal Protocol 152 N154 Nationally Determined Contributions 154 Natural Capital 155 Natural Resource 157 Negative Emission 157 Negative Externalities 157 Negative Screening 158 Net Zero Economy 158 Net Zero Emission 158 Non-Financial Information 158 ­Non-​­Financial Reporting 159 Norms-​­based Screening 159 O160 OECD Guidelines for Multinational Enterprises 160 ­Outside-​­in Perspective 161 P162 Paris Agreement 162 Parts per Million (­ppm) 164 Physical Risk 164 Pieconomics 166 Pigouvian Tax 167 Planetary Boundaries 168 Planetary Boundaries Framework 168 Porter Hypothesis 173 Positive Externalities 175 Positive Screening 175

Contents  xiii

Principles for Responsible Banking Principles for Responsible Investment (­PRI) Principles for Sustainable Insurance (­PSI)

175 177 178

R180 Race to Zero 180 Renewable Energy 180 Responsible Consumption 182 Responsible Investment 183 S185 SASB Standards 185 Scope 1 GHG Emissions 186 Scope 2 GHG Emissions 189 Scope 3 GHG Emissions 189 Shareholder Action 190 Shareholder Activism 190 Shareholder Primacy 190 Shareholder Value 190 ­Short-​­Termism 192 Sin Company 193 Sin Stock 194 Social Bank 195 Social Bonds 196 Social Externalities 197 Social Factors (­S of ESG) 198 Social Finance 199 Social Taxonomy 200 Socially Responsible Investment (­SRI) 201 Stakeholder Capitalism 202 Stewardship 202 Stranded Asset 203 Sustainability 204 Sustainability Accounting Standards Board (­SASB) 206 Sustainability Disclosure 206 Sustainability Index 208 Sustainability Linked Loans 209 Sustainability-Linked Loan Principles 210 Sustainability Rankings 211 Sustainability Rating Providers 212 Sustainability Ratings 213

xiv Contents

Sustainability Reporting Sustainability Risks Sustainability Science Sustainability Score Sustainability Taxonomy Sustainability Transformation Sustainability Transition Sustainability-themed Investing Sustainable Business Model Sustainable Development Sustainable Development Goals (­SDGs) Sustainable Digital Finance Sustainable Finance Sustainable Finance Forms Sustainable Finance Literacy Sustainable Finance Stages Sustainable Finance Taxonomy Sustainable Finance Technology (­SuFTech) Sustainable Insurance Sustainable Investing, Sustainable Investment, Sustainability Investment (­SI) Sustainable Investment Fund Sustainable Investment Strategies Sustainable Lending

215 216 218 219 220 222 224 224 224 226 227 230 232 232 234 234 236 236 237 238 239 239 244

T245 Taxonomy 245 Thematic Investing 245 Tradable Emission Permit 245 Tradable Emission Right 245 Transition Finance 246 Transition Management 246 Transition Risk 246 Triple Bottom Line 247 Twin Transformation 248 U249 United Nations Framework Convention on Climate Change (­UNFCCC) 249 United Nations Global Compact 250

Contents  xv

United Nations Guiding Principles for Business and Human Rights

252

V254 Value Reporting Foundation 254 ­Values-​­based Banking 255 Appendix – List of International Organizations in Sustainable Finance Notes on Contributors

257 261

Acknowledgements

We thank Annabelle Harris, Jyotsna Gurung, Caroline Church, and Routledge Editorial Board members for their unprecedented support and guidance in initiating, organizing, and submitting this project. Elisa Aracil receives funding from Project ­PID2021–­​­­124641NB-​­I00 of the Ministry of Science and Innovation (­Spain).

Sustainable Finance A Multidimensional and ­ ­Multi-​­​­​­actor Framework Elisa Aracil and Ibrahim Sancak

Sustainable finance requires that funding and lending decisions are associated with the sustainable use of the proceeds. In particular, sustainable finance refers to emerging financial activities, instruments, and institutions that seek to ensure sustainable development, such as impact management projects, sustainable investment funds, green equities, blue bonds, or carbon markets. These initiatives have become common practice and are rapidly growing in recent years (­­Global Sustainable Investment Alliance, 2021; World Bank, 2022), in parallel with the development of sustainability standards for ­­non-​­​­​ ­f inancial reporting, regulatory requirements, and rating and ranking systems to evaluate and benchmark sustainable practices. The paradigm shift from mainstream finance to sustainable finance, which changes the role of finance in the economy, is ongoing (­­Schoenmaker & Scharamade, 2019). Traditional finance is known for profit maximization, which overlooks negative externalities such as the depletion of natural resources and social capital erosion. In contrast, sustainable finance offers the internalization of externalities integrating ­­extra-​­​­​­f inancial concerns.1 Unlike economics (­­refers to science) and economy (­­refers to economic activities in general), sustainable finance refers to both sustainable finance science and sustainable finance activities or financial practice oriented to sustainable development (­­i.e., “­­finance for sustainability”). Sustainable development encompasses concerns of different natures, i.e., environmental, social, economic, and governance, addressed by various ­­sub-​­​­​­segments in sustainable finance. As Figure I.1 shows, carbon finance, climate finance, green finance, and social finance are ­­sub-​­​­​­segments of sustainable finance (­­UNEP, 2016). However, neither of them alone encapsulates the overall notion of sustainable finance. Sociotechnical transitions, such as the transition to sustainable finance, tend to destabilize existing societal context and prompt confusion regarding its boundaries, sometimes blurred with the prevailing paradigm (­­Loorbach et  al., 2017). A clear and precise definition of the sustainable finance notion and its constituents, as well as a framework that allows its analysis from multiple perspectives and dimensions, can shed light on the perimeters of sustainable finance and contribute to its development. Moreover, a clear definition can help organizations design and evaluate their sustainable initiatives DOI: 10.4324/9781003310891-1

2  Sustainable Finance: A Multidimensional and Multi-actor Framework

Figure I.1  H  ow Sustainable Finance Responds to Different Pillars in Sustainable Development Source: Adapted from UNEP (­­2016)

to achieve funding, guide financial institutions and investors’ decisions on capital allocation, and incentivize sustainability commitment across industries and actors. There are some endeavors to define sustainable finance, but there is still no established and widely accepted definition. We propose a framework that delineates the sustainable finance scientific domain. In addition, we conceptualize sustainable finance through an in-​­​­​­ ­­ depth description of its constituents, which are covered throughout this book with around 300 related concepts. Finally, we suggest a definition of sustainable finance emanating from our framework. Our framework to analyze the sustainable finance notion draws on the functionalist, transitional, and critical approaches, each suggesting complementary views to explore the perimeters of sustainable finance. The functionalist perspective departs from the intermediary role of finance in the economy (­­Bencivenga  & Smith, 1991). Financial institutions mobilize funds and allocate them through lending and intermediated investing in different economic activities (­­Freixas & Rochet, 2008). Thus, the function of finance in an economy is to connect savers with economic agents in seek of capital for specific ventures. Achieving sustainable development requires massive funding. The UN’s Conferences in Rio+20 (­­2012) and Addis Ababa (­­2015) highlight the funding gap to achieve sustainable development, which governments alone cannot bridge. Thereby, financial institutions are crucial in ensuring funding for sustainable transformation (­­Aracil et al., 2021).

Sustainable Finance: A Multidimensional and Multi-actor Framework  3

The functional view of sustainable finance refers to the role of finance in providing the required funds to foster sustainable development. This perspective assumes that finance can convey a sustainable future, that is, technical possibilities to fund sustainable development requirements. For doing so, sustainable financial products have emerged, such as sustainable responsible investment funds, green equities, or green bonds, whose proceeds are channeled towards sustainable projects. Moreover, the financial valuation methods have also evolved from focusing on earnings to scenarios that include financial and non-​­​­​­ ­­ financial risks and returns. Thus, the functionalist perspective relies on providing and intermediating specific sustainable financial assets and financial practices, such as green loan arrangements or carbon credits. The transitional perspective complements the functional one by engaging different actors and establishing the means and tools to ensure the transition from mainstream finance to sustainable finance. Trust is core in finance (­­Rajan & Zingales, 2003) since financial transactions involve assuming uncertainty and risk over future events. Sustainability transition as a long-​­​­​­ ­­ term process of transformative change (­­Avelino  & Wittmayer, 2016) intensifies the need to build trust between borrowers and lenders. The potential polymorphic understanding of sustainability, its conceptual confusion, and a lack of a clear regulatory system can exacerbate distrust between the economic agents involved. Distrust can be overcome by an enabling institutional setting (­­Guiso et  al., 2004) with clear operational standards. Therefore, a context that explicitly sets the “­­rules of the game” is paramount to allow finance to effectively convey its function of channeling proceeds to sustainable ventures. Hence, the transitional approach in sustainable finance regards the dynamic institutional conditions that facilitate financial exchanges and allow sustainable transitions to evolve as part of a broader transition to a sustainable economy (­­Grin et al., 2010). In this regard, regulatory labeling and classification efforts, such as the European Union’s Sustainability Taxonomy, and financial and fiscal incentives toward sustainability transition are crucial. A critical realist perspective challenges the reliability of the sustainable finance umbrella term and the underlying sustainable nature of investments, contested due to green and sustainable washing risks (­­Schmuck et  al., 2018) and impression management or managerial capture (­­Boiral & Henri, 2017). These may include overlooking the “­­do good principle” and focusing on “­­do no harm” or strategically stating misleading, unspecific, ­­non-​­​­​­measurable, ­­non-​­​­​­comparable, or ­­self-​­​­​­proclaimed sustainable claims to build a reputation for sustainability. Against this background, structured, standardized, rigorous reporting systems and comparing ­­non-​­​­​­f inancial information are crucial to identifying sustainable ventures. In other words, a successful transition embeds “­­changing the investment culture and behavior of all market participants” (­­­­H igh-​­​­​ ­Level Expert Group on Sustainable Finance, 2017: 2). This perspective implies incremental changes regarding frameworks, standards, market indexes, and ratings that mitigate greenwashing fears and strengthen the credibility of the sustainable finance regime.

4  Sustainable Finance: A Multidimensional and Multi-actor Framework

In summary, our framework conceptualizes sustainable finance from functional, transitional, and critical perspectives. It highlights the main areas for development, such as the need to strengthen sustainable financial assets or material outcomes (­­as in the functional perspective) within a clear and precise contextual setting (­­per the transitional perspective) that fosters credibility and trustworthiness (­­following the critical realist lens). The three dimensions evolve in parallel and are interconnected through the power of relationships between the actors involved. Sustainable finance is embedded in a complex social ecosystem conformed by a wide range of actors such as financial institutions, regulators, investors, firms, and ­­third-​­​­​­party agencies, inter alia. It aims at generating “­­common good value” and social prosperity (­­Schoenmaker & Schramade, 2019). Thus, sustainable finance is a ­­multi-​­​­​­actor notion where actions from multiple stakeholders providing transparent disclosure, comparable information, adequate ratings, and standards are needed to effectively allow funding proceeds to reach sustainable ends and benefit the wider community. Our sustainable finance framework allows to delineate the sustainable finance notion as follows: Sustainable finance channels financial f lows and proceeds to economic activities that meet present needs without compromising the ability of future generations to meet their own needs by fostering a ­­resource-​­​­​ ­efficient, ­­low-​­​­​­carbon, inclusive, and resilient economy. Thus, sustainable finance integrates economic (­­­­resource-​­​­​­efficient), environmental (­­­­low-​­​­​­carbon), social (­­inclusive), and governance (­­resilient) concerns in a ­­multi-​­​­​ ­stakeholder ecosystem to achieve sustainable development under the Brundtland Report (­­1987) definition of sustainable development.2 From a practitioner’s perspective, sustainable finance presents itself as a multidimensional notion whose constituents are grouped into different dimensions, capstones, or themes. That is, sustainable finance, viewed as a system, is composed of the following interrelated dimensions: financial assets, financial markets, business sustainability, planet, norms, and frameworks. Each of these dimensions can be associated with the perspectives adopted in our framework (­­Figure I.2). The functionalist perspective is concerned with financial assets, markets, and actors engaged in sustainable finance, such as organizations or business sustainability. The transitional perspective relies on norms and the exogenous effects on the planet, and finally, the critical perspective focuses on frameworks (­­for example, voluntary standards) for the advancement of sustainable finance. To allow an ­­in-​­​­​­depth understanding of each of the sustainable finance constituents and, at the same time, facilitate a comprehensive view of all of them as parts of the sustainable finance notion, this book presents the essential concepts in sustainable finance grouped according to the six dimensions: financial assets, financial markets, business sustainability, norms, planet, and frameworks.

Sustainable Finance: A Multidimensional and Multi-actor Framework  5

Figure I.2  A Multidimensional and M ­­ ulti-​­​­​­actor Framework for Sustainable Finance from Three Different Perspectives Source: The Authors

According to Loorbach et al. (­­2017), the dynamics of societal transition, when successful, lead to institutionalization as an alternative to the prior paradigm. Thereby, at the final stage of a societal transition, the new system is not an alternative or complement to the prevailing one but becomes mainstream. Following these transition dynamics, sustainable finance has already disrupted the existing status quo, providing options at an accelerated pace to transform the industry and institutionalize the new regime. Once the ­­long-​­​­​ ­term transition culminated, sustainable finance would become the new normal in finance.

Notes 1 Yet, sustainable finance products need to be competitive as compared to traditional ones. The nudging theory of change (­­Thaler & Sunstein, 2008) suggests placing a premium (­­i ncreased cost of funding) on ­­non-​­​­​­sustainable projects to incentivize consumer and organizational behavior towards sustainable initiatives. 2 Sustainable development was defined by the Brundtland Commission in 1987 as “­­development that meets the needs of the present without compromising the ability of future generations to meet their own needs.”

References Aracil, E., ­­Nájera-​­​­​­Sánchez, J. J.,  & Forcadell, F. J. (­­2021). Sustainable banking: A literature review and integrative framework. Finance Research Letters, 42, 101932.

6  Sustainable Finance: A Multidimensional and Multi-actor Framework Avelino, F.,  & Wittmayer, J. M. (­­2016). Shifting power relations in sustainability transitions: A ­­multi-​­​­​­actor perspective. Journal of Environmental Policy  & Planning, 18(­­5), ­­628– ​­​­​­649. Bencivenga, V. R., & Smith, B. D. (­­1991). Financial intermediation and endogenous growth. The Review of Economic Studies, 58(­­2), ­­195–​­​­​­209. Boiral, O., & Henri, J. F. (­­2017). Is sustainability performance comparable? A study of GRI reports of mining organizations. Business & Society, 56(­­2), ­­283–​­​­​­317. Brundtland Report (­­1987). Report of the World Commission on Environment and Development: Our common future. Oxford: Oxford University Press. Freixas, X., & Rochet, J. C. (­­2008). Microeconomics of banking. Cambridge, MA: MIT Press. Global Sustainable Investment Alliance (­­2021). Sustainable Investing Review 2020. https://www.gsi-alliance.org/wp-content/uploads/2021/08/GSIR-20201.pdf (accessed 11.12.2022). Grin, J., Rotmans, J.,  & Schot, J. (­­2010). Transitions to sustainable development: New directions in the study of long term transformative change. Routledge. Guiso, L., Sapienza, P., & Zingales, L. (­­2004). The role of social capital in financial development. American Economic Review, 94(­­3), ­­526–​­​­​­556. ­­H igh-​­​­​­Level Expert Group on Sustainable Finance. (­­2017). Financing a sustainable European Economy. Brussels: European Commission. Loorbach, D., Frantzeskaki, N., & Avelino, F. (­­2017). Sustainability transitions research: Transforming science and practice for societal change. Annual Review of Environment and Resources, 42(­­1), ­­599–​­​­​­626. Rajan, R. G., & Zingales, L. (­­2003). The great reversals: The politics of financial development in the twentieth century. Journal of Financial Economics, 69(­­1), ­­5 –​­​­​­50. Schmuck, D., Matthes, J., & Naderer, B. (­­2018). Misleading consumers with green advertising? An ­­a ffect–­​­­­​­­​­­­reason–​­​­​­i nvolvement account of greenwashing effects in environmental advertising. Journal of Advertising, 47(­­2), ­­127–​­​­​­145. Schoenmaker, D.,  & Schramade, W. (­­2019). Principles of Sustainable Finance. New York: Oxford University Press. UNEP. (­­2016). Definitions and ­concepts – ​­​­​­Background Note. Geneva: ­U NEP – ​­​­​­Inquiry: Design of a Sustainable Financial System. World Bank. (­­2022). State and trends of carbon pricing. Washington, DC: World Bank.

Visual Codes of Sustainable Finance Concepts

The sustainable finance notions described in this book are grouped under specific icons. This system allows the reader to focus on specific themes by easily identifying the corresponding icon. Each icon shows a primary connection; however, one concept might fall under more than one area. For example, biodiversity is primarily related to the planet but is also associated with other themes, such as business, frameworks, and norms. This visually supported classification helps develop a stronger understanding and forges relationships among various dimensions of sustainability and sustainable finance.

Business

Markets

Assets

Planet

Norms

Frameworks

DOI: 10.4324/9781003310891-2

A 2030 Agenda for Sustainable Development

Crescentino, D. & Crescentino, L.

  The 2030 Agenda for Sustainable Development is the UN’s (2015) global development action plan of the international community for 2015–2030. It builds on the principles outlined at the Earth Summits (held since 1972) and the Millennium (2000) and World Summits (2005, 2010, 2015). The Agenda originated in the report published by the UN Secretary-General High-Level Panel on Global Sustainability at the Rio+20 Summit (2012), calling for the endorsement of a set of Sustainable Development Goals (SDGs) (Sachs, 2012). The latter was proposed in 2014 by the UN’s General Assembly and implemented after one year of intergovernmental work. Taken together as an “indivisible whole” where the measures adopted must balance the interests and priorities, it encompasses the transformation of the 8 Millennium Development Goals (MDGs) and their 18 sub-targets into 17 SDGs and 169 sub-targets. These goals redress the traditional concept of sustainable development, founded on social inclusion, economic growth, and environmental protection. SDGs broaden this perspective with the intention of “leaving no one behind” over five dimensions, also known as the 5Ps: people, prosperity, planet, partnership, and peace. This includes the aims of ending poverty and hunger; fostering sustainable consumption, production, and management of natural resources while implementing climate change measures; ensuring economic, social, and technological progress in harmony with nature; boosting peaceful, just, and inclusive societies; and forming a Global Partnership for Sustainable Development (United Nations, 2015). Such a commitment involves support for the design of public policies and the development of monitoring and evaluation tools at national and local levels, engaging in this process civil society, practitioners, academia, and the private sector. Among the criticisms of the 2030 Agenda, the one that comes up most often is the possibility of implementing these objectives at a global level in a context where resources are limited. Ultimately, the 2030 Agenda engages with sustainable finance principles

DOI: 10.4324/9781003310891-3

Active Engagement  9

through two elements. On the one hand, it offers a global strategy to provide a practical roadmap for all agents to coordinate their transition policies towards more sustainable and inclusive economic models. On the other hand, SDG 17 (Partnerships for the goals) expands MDG 8 (Global partnerships for development), reinforcing the role of public and private actors in meeting the Agenda (Elder, Bengtsson, and Akenji, 2016). See also Millennium Development Goals, Sustainable Development, Sustainable Development Goals (SDGs), Paris Agreement, and United Nations Framework Convention on Climate Change (UNFCCC).

References Elder, M., Bengtsson, M., & Akenji, L. (2016). An optimistic analysis of the means of implementation for sustainable development goals: Thinking about goals as means. Sustainability, 8(9), 962–986. Sachs, J. D. (2012). From millennium development goals to sustainable development goals. The Lancet, 379(9832), 2206–2211. United Nations. (2015). Transforming our world: The 2030 agenda for sustainable development. A/RES/70/1. New York: United Nations.

Active Engagement

Sancak, I.

See Sustainable Investment Strategies.

Active Ownership

See Sustainable Investment Strategies.

Sancak, I.

10  Active Voting

Active Voting

Sancak, I.

See Sustainable Investment Strategies.

Anthropogenic Climate Change

Sancak, I.

See Climate Change.

Anthropogenic Emission

See Greenhouse Gases.

Sancak, I.

B Baseline and Credit Mechanism

Gerres, T.

A baseline and credit mechanism is a common design element of environmental policies that can target, among others, an increase in renewable energy consumption, improve energy efficiency, or incentivize emission reductions. In principle, it is also the underlying mechanism of voluntary carbon markets (VCMs). The basic idea behind baseline and credit mechanisms is a country or private sector entity’s obligation (or other motivation) to comply with a specific baseline, for example, renewable energy consumption or carbon emissions, against which the actual performance is measured. If the activities of an entity fail to meet the set baseline, the entity can purchase credits from other entities below the baseline. Hence, an entity above the baseline can “offset” its non-compliance (CCA, 2014). On a global scale, the most prominent example of baseline and credit mechanisms are the “joint implementation” mechanism (Art. 6) and the “Clean Development Mechanism” (CDM) (Art. 12) of the Kyoto protocol. These allow developing countries to implement emission reduction projects, thereby generating certified emission reduction units (ERU) and emission reduction (CER) credits that can be traded with countries with binding commitments to “offset” their emissions. The European Energy Certificate System (EECS), commonly known as trading Guarantees of Origin (GO), can also be understood as a baseline and credit mechanism. Its implementation was motivated by the Renewable Energy Directive (RED) 2009/28/EC, with national commitments to target shares in renewable energy consumption by 2020. The EECS allows consumers to purchase renewable GOs for electricity generation, offsetting part of their non-renewable generation. Similarly, the EU system for the certification of sustainable biofuels allows to generate GO credits that can be sold to other market participants (ECA, 2016). In the case of VCMs, the baseline and credit mechanism allows companies with emission-intensive activities to claim carbon neutrality by offsetting their emissions by purchasing carbon credits. The main difference between baseline and credit mechanisms compared to a cap and trade system is that a baseline and credit system only generates credits for achieved emission reductions that can be used to offset DOI: 10.4324/9781003310891-4

12  Best-in-Class Screening

current or past emissions. In the cap and trade system, emission allowances are generated based on the cap and independently from the potential implementation of emission reduction measures (BMWK, 2022). See Carbon Markets, Carbon Price, and Cap and Trade System.

References BMWK, German Federal Ministry for Economic Affairs and Climate Action (2022). Carbon markets. https://www.carbon-mechanisms.de/en/introduction/ carbon-market-basics (accessed 10.4.22). Climate Change Authority, CCA (2014). Key characteristics of baseline and credit schemes. Australian Government Climate Change Authority. Canberra City. https://www. climatechangeauthority.gov.au/sites/default/f iles/2020-06/CCARRP/CCA_ CFIStudyPublicReportChapter2.pdf (accessed 10.4.22). Economics of Climate Adaptation, ECA (2016). The EU system for the certification of sustainable biofuels. Special Report No 18. European Court of Auditors, Luxembourg.

Best-in-Class Screening

Sancak, I.

See Inclusionary Investing and Sustainable Investment Strategies.

Best-in-Universe Screening

Sancak, I.

See Inclusionary Investing and Sustainable Investment Strategies.

Biocapacity  13

Biocapacity

Sancak, I.

See Ecological Footprint.

Biodiversity

Sancak, I.

Biological diversity or biodiversity means “the variability among living organisms from all sources including, inter alia, terrestrial, marine and other aquatic ecosystems and the ecological complexes of which they are part: this includes diversity within species, between species and of ecosystems” (United Nations, 1992: 3). As species population trends are significant because they measure overall ecosystem health, severe declines are a proxy for the unraveling of nature, and our planet is f lashing red warning signs of systems failure (WWF, 2020). Biodiversity loss refers to the decrease in biological diversity. Biodiversity is being destroyed by humans at an unprecedented rate (WWF, 2020). According to the Global Risks Report 2020, biodiversity loss is one of the top five global risks, together with extreme weather, climate action failure, natural disasters, and human-made environmental disasters, in terms of likelihood. Until 2010, these risks were not seen in the top five (World Economic Forum, 2020). Biodiversity has its own value and feeds the balance of the ecosystem and ecosystem services. Ecosystem services are the core sources of economies. Hence, biodiversity loss not only undermines the natural balance but also poisons the core ingredients of the global economy. Halting biodiversity loss and preserving biodiversity require massive financial resources and relevant financial services, addressing a new field in finance; biodiversity finance. Biodiversity is in the scope of sustainable finance since “biodiversity finance” is vital for delivering transformative changes needed to halt and reverse biodiversity loss (OECD, 2019). An OECD analysis estimates biodiversity finance to be US$ 78–91 billion per year, while another study

14 Biodiversity

estimates an annual gap of more than US$ 500 billion (OECD, 2021). In the financial industry context, environmental risks are financial risks that may potentially cause or be affected by environmental degradation, such as air pollution, water pollution, scarcity of freshwater, land contamination, desertification, biodiversity loss, deforestation, and the loss of ecosystem services (NGFS, 2020). In a green economy, economic activities, infrastructure, and assets reduce carbon emissions and pollution, enhance energy and resource efficiency, and prevent the loss of biodiversity (UNEP, 2021). Green finance and sustainable finance address environmental objectives such as natural resource conservation, biodiversity conservation, and pollution prevention and control (ICMA, 2020). Biodiversity is a part of environmental factors in the ESG context, hence a fundamental subject in sustainable finance. Biodiversity is also a core area of sustainable development. SDG 15 includes the aim of preventing biodiversity loss: “Protect, restore and promote sustainable use of terrestrial ecosystems, sustainably manage forests, combat desertification, and halt and reverse land degradation and halt biodiversity loss” (United Nations, 2015: 27). See Ecosystem Services, Environmental Factors, Sustainable Development, Sustainable Finance Forms, and Sustainability Risks.

References Network of Central Banks and Supervisors for Greening the Financial System, NGFS. (2020). Guide for Supervisors Integrating climate-related and environmental risks into prudential supervision. Paris: Network for Greening the Financial System. Organisation for Economic Co-operation and Development, OECD. (2019). Biodiversity: Finance and the economic and business case for action. Paris: OECD. Organisation for Economic Co-operation and Development, OECD. (2021). Biodiversity, natural capital and the economy: A policy guide for finance, economic and environment ministers. Paris: OECD. United Nations Environmental Programme, UNEP. (2021). Green economy. UN Environment Program: https://www.unep.org/regions/asia-and-pacific/regional-initiatives/supporting-resource-efficiency/green-economy (accessed 5.3.23) United Nations. (1992). Convention on biological diversity. Rio de Janeiro: United Nations. United Nations. (2015). Transforming our world: The 2030 agenda for sustainable development. New York City: United Nations. World Economic Forum. (2020). The global risks report 2020. Geneva: World Economic Forum. World Wildlife Fund, WWF. (2020). Living planet report 2020 – Bending the curve of biodiversity loss. In R. E. A. Almond, M. Grooten & T. Petersen (Eds). Gland: WWF.

Biodiversity Finance  15

Sancak, I.

Biodiversity Finance

 

 

 

 

 

See Biodiversity.

Biodiversity Intactness Index (BII)

Sancak, I.

See Planetary Boundaries Framework.

Biodiversity Loss

Sancak, I.

See Biodiversity.

Biosphere Integrity

See Planetary Boundaries Framework.

Sancak, I.

16  Blended Finance

Sancak, I.

Blended Finance

 

 

 

 

 

See Sustainable Finance Forms.

Blue Bonds

Ocal, T.

A blue bond is a debt instrument issued by public or private entities to fund investments in ocean resources (that is, blue economies), such as marine and coastal ecosystem management, sustainable development, restoration, and pollution control. Blue bonds can finance the construction of new assets and the maintenance, improvement, or repair of existing assets. Blue bond eligible projects exclude lending to financial intermediaries. Due to the interconnection between green and blue environments, a project may be inherently both green and blue. Similar to other thematic bonds, such as green, climate, or social bonds, blue bond earnings are generated from investments in sustainable blue economy projects. Hence, a blue bond framework document is expected to define which projects are eligible for funding. Governments can also develop their blue bond frameworks to ensure trust and transparency in selecting eligible projects. For example, the Asian Development Bank (ADB) introduced the Green and Blue Bond Framework to support its issuance of green and blue bonds. The ADB framework is consistent with the International Capital Markets Association’s Green Bond Principles (ICMA, 2021) and the Sustainable Blue Economy Finance Principles of the United Nations Environment Programme Finance Initiative (UNEPFI, 2022). It contains a typology of eligible project categories for blue bond financing, along with qualifying project examples and exclusion criteria (ADB, 2021). These categories include the following: i. Ecosystem management and natural resources restoration projects to sustainably manage, conserve, and/or restore the health and resilience of coastal, marine, and river ecosystems.

Blue Economy  17

i i. Sustainable fisheries management to improve the environmental sustainability of fisheries and the seafood value chain. iii. Sustainable aquaculture to improve the environmental sustainability of aquaculture, mariculture, and algaculture. iv. Solid waste management to reduce marine debris and/ or associated impacts on marine life. v. Resource efficiency and circular economy to reduce marine debris and/ or associated impacts on marine life. v i. Non-point source pollution to reduce pollution (e.g., nutrients, sediments, and chemicals) of coastal and/or marine environments. v ii. Wastewater management to reduce wastewater pollution of coastal and/ or marine environments. v iii. Ports and shipping to increase environmental performance and sustainability of maritime infrastructure and transport. ix. Marine renewable energy to reduce GHG emissions and increase the contribution of marine and offshore renewable energy and renewable energy projects that support blue economy sectors. Similar to green, climate, and social bonds, blue bonds are fundamental instruments in sustainable finance since they channel funding toward sustainable economy initiatives. See also Green Bonds, Green Bond Principles, and Blue Economy.

References Asian Development Bank, ADB. (2021). Green and blue bond framework. Asian Development Bank. Mandaluyong. https://www.adb.org/sites/default/files/publication/ 731026/adb-green-blue-bond-framework.pdf ((accessed 5.3.23). International Capital Markets Association, ICMA. (2021). Green bond principles. Zürich, Switzerland: International Capital Markets Association. UNEPFI. (2022, June). The sustainable blue economy finance principles. https://www. unepfi.org/blue-finance/the-principles/ (accessed 5.3.23).

Barrachina, M.

Blue Economy

 

 

 

 

 

The “blue economy” notion first emerged at the United Nations Conference on Sustainable Development, Rio+20, hosted in Brazil in 2012 (UNEP,

18  Blue Economy

2012). Blue economy is defined as “the sustainable industrialization of the oceans to the benefit of all” (Smith-Godfrey, 2016:3), where “sustainable” advocates for balancing the needs of development activities along with ocean-dependent communities, “industrialization” encompasses large-scale manufacturing activities, and “the benefit of all” implies a balance between equity and wellbeing. The blue economy notion is similar to the ocean economy concept, and many organizations use them interchangeably. Blue economy is concerned with the conservation and regeneration of coasts, seas, and oceans, through aquaculture, ship building and repair, coastal tourism, maritime transport, oil and gas extraction, desalination, blue biotechnology, ocean energy generation, coastal environmental protection, and offshore wind energy generation, among others. Blue economy activities may coincide with climate change mitigation initiatives, for example, transforming ports into sustainable green ports, increasing the efficiency and competitiveness of the ports, and generating renewable energy in offshore locations. Therefore, blue economy can be considered a part of green economy (UNEP, 2012). Blue economy is also related to the circular economy concept, as all activities performed on coasts, seas, and oceans should be sustainable (European Commission, 2021). Sustainable finance presents a different investment approach; in relation to blue economy, the outcomes that can be achieved through sustainable finance are the preservation and regeneration of the ocean environment. Over the last few decades, harmful activities to the oceans, such as industrial fishing and their use as waste dumping grounds, have evolved into activities aimed at rebuilding ocean ecosystems and developing sustainable sea transportation. Blue finance is a sub-sustainable finance area aiming at supporting blue economy. Blue bonds and blue loans are some blue finance instruments in this domain. In supporting blue economy and blue finance, the Sustainable Blue Economy Finance Principles, the world’s first global guiding framework for banks, insurers, and investors, were launched in 2018 (UNEP FI, 2018). See also Blue Bonds, Circular Economy, Climate Change Mitigation, Green Economy, and Green Growth.

References European Commission (2021). Putting the blue into the green. Sustainable blue economy. Luxembourg: Publications Office of the European Union. https://ec.europa.eu/ oceans-and-fisheries/system/files/2021-05/2021-05-17-sustainable-blue-economy-factsheet_en.pdf (accessed 5.3.23). Smith-Godfrey, S. (2016). Defining the blue economy, maritime affairs. Journal of the National Maritime Foundation of India, 12(1), 58–64. UNEP. (2012). Green Economy in a blue world synthesis report. United Nations Environment Programme. https://wedocs.unep.org/bitstream/handle/20.500.11822/7977/Green%20Economy%20in%20a%20Blue%20World%20Synthesis%20Report20121082.pdf?sequence=3&%3BisAllowed= (accessed 24.05.22) UNEP FI (2018). Sustainable blue economy finance principles. https://www.unepfi. org/blue-finance/the-principles/ (accessed 24.06.22).

Blue Finance  19

Barrachina, M.

Blue Finance

 

 

 

 

 

See Blue Economy.

Brown Economy

Sancak, I.

See Green Economy.

Brown Taxonomy

Sancak, I.

  See Sustainability Taxonomy.

Brundtland Report

Crescentino, D. & Crescentino, L.

20  Brundtland Report

The Brundtland Report (1987), officially titled “Our Common Future,” was published by the World Commission on Environment and Development (WCED) and informally named after its Chair, the former Norwegian Prime Minister Gro Harlem Brundtland. The Commission was created as an independent organization in 1983 by the UN General Assembly to focus on environmental and developmental problems and solutions. In 1972, both the Club of Rome report “The Limits to Growth” and the UN Conference on the Human Environment warned about the impossibility of infinite economic and population growth on a finite planet. In line with this idea, the Brundtland Report reconciled environmental sustainability and economic development through the concept of sustainable development, understood as “development that meets the needs of the present without compromising the ability of future generations to meet their own needs.” Through this comprehension, development was no longer understood as the culprit of ecological decline but as the solution to social and environmental issues (Gómez-Baggethun & Naredo, 2015). By appealing to the commitment of the different actors of the international community in environmental and moral terms, the Report outlined a profound critique of the international consumption model. In turn, it suggested the institutionalization and implementation of a global agenda for change that would unify strategies to respond to these issues at the national and international levels. This long-term strategy was to outline projects for the efficient management of available resources (natural and human), together with increased international assistance for environmental protection by states and environmental organizations. However, it also urged ensuring the needs of the most vulnerable by promoting growth in the least developed countries, hand in hand with adopting rigorous environmental care controls in developed economies. Several of these objectives were absorbed into the 1987 United Nations General Assembly “Environmental Perspective to the Year 2000 and Beyond.” To ensure better coordination in adopting a global agenda for change, the UN General Assembly undertook, on the recommendation of the Brundtland Commission, a Conference on Environment and Development in 1992. As a result, the “Earth Summit” in Rio de Janeiro (1992) laid the foundations for the current architecture of global environmental governance. As a criticism, the Report does not distinguish between development and growth, nor does it take a stand for strong or weak sustainability (Daly, 1990). However, the Brundtland Report allowed different ramifications of the concept of sustainability to come to the fore. Ultimately, the Report serves as a source of inspiration and a starting point that broadens sustainability awareness and financial f lows’ inf luence on the real economy. See also Sustainability, Sustainable Development, and Sustainable Development Goals.

Business Sustainability  21

References Daly, H. E. (1990). Toward some operational principles of sustainable development. Ecological Economics, 2, 1–6. Gómez-Baggethun, E., & Naredo, J. M. (2015). In search of lost time: the rise and fall of limits to growth in international sustainability policy. Sustainability Science, 10(3), 385–395. United Nations (1987). Our common future—The Brundtland report. Report of the World Commission on Environment and Development.

Business Sustainability

Gómez de Liaño, C.

See Corporate Sustainability.

Business-as-Usual

See Sustainable Business Model.

Aracil, E.

C Cap and Trade System

Gerres, T.

Cap and trade system is a common regulatory design element of compliance carbon markets to establish a carbon price. Its underlying concept is that of tradable emission rights, while the availability of emission rights is limited (­the cap) to the desired national pollution levels (­Dales, 1968). This system aims to incentivize private sector emission reduction since companies that achieve a cut in their carbon emissions (­or carbon allowances) can sell them to the market. Moreover, it can imply a source of revenue for governments that can auction emissions credits. As the first and one of the most significant emissions trading markets, the EU Emissions Trading System (­EU ETS) operates under a cap and trade system (­ICAP, 2021; European Commission, 2021). In a cap and trade system, the central authority defines an absolute emission limit (­cap) for all emitters subject to the carbon price for a given period, for example, one year. In the case of the EU ETS, the European Union set the total absolute cap to 1.572 MtCO2e per year for 2021 with a linear annual reduction factor of 2.2% until 2030 for all emissions stemming from the power sector, eligible industrial plants, and aviation. For each unit of emitted carbon dioxide equivalent, for example, 1.0 tCO2e, the central market authority issues one emission right. These rights are auctioned centrally or awarded as free allowance allocation, known as tradable emission right, tradable emission permit, carbon allowance, emission allowance, or carbon credit with some nuances, to the different emitters. By the end of the year, each emitter must hold enough emission rights for all of its occurred emissions, either by purchasing them in centralized auctions or by trading emission rights with other emitters. Hence, a single carbon price is set by matching the supply and demand of available emission rights. In the case of phase IV of the EU ETS, 57% of the emissions rights are auctioned. The remaining 43% are allocated for free based on ­industry-​ ­specific benchmarks and f lexible free allocation based on technological progress and carbon leakage rules. ­Industry-​­specific benchmarks are based on the 10% most efficient installations. Hence, an efficient industrial emitter below the benchmark receives more allocations than needed and can sell the DOI: 10.4324/9781003310891-5

Cap and Trade System  23

remainder. An industrial emitter above the benchmark has to buy emissions rights that correspond to the difference between received free allowances and actual emissions. The cap and trade mechanism of the EU ETS results in the formation of a single carbon price at any given moment in time. However, i­ndustry-​­specific free allowance allocation results in d­e-​­facto ­industry-​­specific emission prices, which can be described by the difference between the actual carbon price and the value of free allowance allocation based on i­ndustry-​­specific benchmarks. Free allowance allocation provides a mechanism to protect industries exposed to global markets from carbon leakage. Emission pricing increases operational costs and jeopardizes their competitiveness compared to companies based in jurisdictions without a carbon price. Alternatively, carbon leakage could be addressed by a carbon border adjustment mechanism or national consumption charges for c­ arbon-​ ­intensive goods, which would allow for a ­phase-​­out of free allowance allocation (­Acworth et al., 2020; Neuhoff et al., 2022). Carbon leakage in the power sector is negligible if the limited physical interconnector capacity constraints imports and exports to other jurisdictions. Hence, the power sector does not receive free allowance allocation in the EU ETS and is the only sector subject to the full carbon price. In the case of the EU ETS, purchased or received emission rights that have not been used do not expire. The main difference between baseline and credit mechanisms compared to a cap and trade system is that a baseline and credit system only generates credits for achieved emission reductions that can be used to offset current or past emissions. In the cap and trade system, emission allowances are generated based on the cap and independently from the potential implementation of emission reduction measures (­BMWK, 2022). See also Carbon Markets, Carbon Price, Decarbonization, Externalities, and Greenwashing.

References Acworth, W., Kardish, C., & Kellner, K., (­2020). Carbon leakage and deep decarbonization. Berlin: International Carbon Action Partnership. BMWK, German Federal Ministry for Economic Affairs and Climate Action, (­2022). Carbon markets. https://­w ww.­carbon-​­mechanisms.de/­en/­i ntroduction/­­ carbon-­​­­m arket-​­basics (­accessed 10.4.22). Dales, J. H. (­1968). Prices: An essay in p­ olicy-​­making and economics. Toronto: University of Toronto. European Commission (­2021). Update of benchmark values for the years 2 ­ 021–​­2025 of phase 4 of the EU ETS. European Commission ­Directorate-​­General for Climate Action. ICAP (­2021). EU Emissions Trading System (­EU ETS). International Carbon Action Partnership. Neuhoff, K., Chiappinelli, O., Gerres, T., Ismer, R., Köveker, T., Linares, P.,  & Richstein, J. (­2022). Addressing export concerns in the CBAM File. Climate Friendly Materials Platform, Climate Strategies.

24  Carbon Allowance

Carbon Allowance

Gerres, T.

See Carbon Markets and Cap and Trade System.

Carbon Bubble

Sancak, I.

See Stranded Asset.

Carbon Credit

Gerres, T.

See Carbon Markets and Cap and Trade System.

Carbon Dioxide (­CO2)

See Greenhouse Gases.

Sancak, I.

Carbon (­Dioxide) Capture   25

Carbon (­Dioxide) Capture

Gerres, T.

Carbon capture consists of a technical filtration process to create concentrated carbon emission streams from exhaust streams of point sources, such as industrial facilities and thermal power plants, or by direct air capture (­DAC) from ambient air. Hence, carbon capture from point sources avoids fossil emissions, whereas DAC reduces the atmospheric carbon dioxide concentration. Carbon capture offers a complement to carbon reduction strategies and, thus, supports climate change mitigation policies. The term carbon capture refers primarily to carbon dioxide (­CO2) capture and is not a mitigation option for other greenhouse gases (­GHG) (­IPCC, 2005, 2022). The role of carbon capture as a climate mitigation option always depends on the source of captured emissions (­fossil, biogenic, or ambient air) and what is done with captured emissions. Carbon capture does not include the further processing and treatment of the concentrated emission stream, either by carbon capture utilization (­CCU) or l­ong-​­term carbon capture storage (­CCS). It should not be confused with natural carbon sinks or biological carbon sequestration (­USGS, 2022). Carbon capture requires installing dedicated filtration technology, which increases capital expenditure (­CAPEX). Additionally, operating carbon capture installations always implies a higher energy consumption, hence reducing the overall energetic system efficiency if capturing emissions of point sources (­IPCC, 2005). Energy costs are the main operational cost position (­OPEX) for carbon capture. In literature, the abatement cost for carbon capture technologies is often expressed financially in €/­tCO2 (­Biermann et al., 2022; Fasihi et al., 2019; Pilorgé et al., 2020). Such cost estimates are always subject to underlying energy price scenarios considered reasonable at the time of publication. Funding solutions to carbon capture technologies are crucial to ensure the energy transition. Climate finance, which refers to the funding of activities aimed at climate change mitigation, supports the development of clean energy solutions such as carbon capture (­Warren, 2019). Thus, financial tools that fund carbon capture processes are a key element in climate finance and, subsequently, in sustainable finance. See also Carbon (­Dioxide) Capture and Storage (­CCS), Carbon (­Dioxide) Capture and Utilization (­ CCU), Climate Finance, Carbon Finance, and Decarbonization.

26  Carbon (­Dioxide) Capture and Storage (­CCS)

References Biermann, M., Langner, C., Roussanaly, S., Normann, F.,  & Harvey, S. (­2022). The role of energy supply in abatement cost curves for CO2 capture from process ­industry – ​­A case study of a Swedish refinery. Applied Energy, 319, 119273. Fasihi, M., Efimova, O., & Breyer, C. (­2019). T ­ echno-​­economic assessment of CO2 direct air capture plants. Journal of Cleaner Production, 224, ­957–​­980. IPCC (­2005). IPCC special report on carbon dioxide capture and storage. IPCC (­2022). Climate change 2022: Mitigation of climate change. Working Group III contribution to the Sixth Assessment Report of the Intergovernmental Panel on Climate Change. Pilorgé, H., McQueen, N., Maynard, D., Psarras, P., He, J., Rufael, T., & Wilcox, J. (­2020). Cost analysis of carbon capture and sequestration of process emissions from the U.S. Industrial Sector. Environmental Science Technology, 54, ­7524–​­7532. USGS (­2022). What’s the difference between geologic and biologic carbon sequestration? United States Geological Survey. https://­w ww.usgs.gov/­faqs/­­whats-­​­­difference-­­​ ­­­between-­​­­geologic-­​­­and-­​­­biologic-­​­­carbon-​­sequestration (­accessed 9.12.22). Warren, P. (­2019). The role of climate finance beyond renewables: ­Demand-​­side management and carbon capture, usage and storage. Climate Policy, 19(­7), ­861–​­877.

Carbon (­Dioxide) Capture and Storage (­CCS)

Gerres, T.

Carbon dioxide capture and storage (­CCS) refers to the processes of separating (­capturing), conditioning, compressing, and transporting carbon dioxide (­CO2) to storage locations for ­long-​­term isolation from the atmosphere (­IPCC, 2018). The ­long-​­term underground storage of captured carbon is one possible option to implement carbon capture as a climate change mitigation technology. The process of storing captured carbon dioxide underground is also referred to as geologic carbon sequestration (­USGS, 2022). CCS is not to be confused with carbon capture and utilization (­CCU). Captured carbon must be transported to suitable underground storage facilities and injected into the geological formation. Basaltic and ultramafic rock formation may allow for mineral carbonation into solid materials within ten years and a storage time of > 100,000 years (­García del Real and Vishal, 2016). Storing carbon emissions in other rock formations is feasible, such as solubility trapping dissolving CO2 in underground water, residual trapping storing CO2 in porous rocks, and stratigraphic trapping below an impermeable layer of ­cap-​ ­rock. However, uncertainties about the ­long-​­term effects of underground

Carbon (­Dioxide) Capture and Storage (­CCS)  27

storage remain (­Zhang, 2014). With regard to its mitigation potential, it is essential to differentiate the storage of emissions captured from fossil point sources, emissions captured from bioenergy (­BECCS) and captured direct air carbon dioxide (­DACCS). DACCS and BECCS are carbon removal technologies that reduce the net concentration of atmospheric carbon dioxide and may generate revenues in carbon markets. Emissions captured from fossil point sources reduce fossil fuel emissions and minimize the emission cost for fossil plant operators (­IPCC, 2022). The cost for all carbon storage technologies encompasses not only the investment (­CAPEX) and operational costs (­OPEX) for transporting captured carbon emissions to the suitable storage facility and its underground injection but also the risks associated with the uncertain l­ong-​­term reliability of geological storage facilities (­Durmaz, 2018). Climate finance has a crucial role in ensuring innovative lending instruments for developing and deploying CCS (­Warren, 2019). Besides, technologically successful CCS innovations might reduce investment risks in highly polluting industries associated with stranded assets. Thus, CCS might indirectly contribute to advancing sustainable finance solutions for companies controlling fossil fuel reserves and, at the same time, avoiding climate change risk. See also Carbon (­Dioxide) Capture, Carbon (­Dioxide) Capture and Utilization (­CCU), Climate Finance, Carbon Finance, and Decarbonization.

References Durmaz, T. (­2018). The economics of CCS: Why have CCS technologies not had an international breakthrough? Renewable and Sustainable Energy Reviews, 95, ­328–​­340. García del Real, P., & Vishal, V. (­2016). Mineral carbonation in ultramafic and basaltic rocks. In: V. Vishal & T. Singh (­eds) Geologic carbon sequestration (­­pp. ­213–​­229). Cham: Springer International Publishing. Intergovernmental Panel on Climate Change, IPCC. (­2018). Annex I: ­Glossary-​­An IPCC Special Report [Matthews, J.B.R. (­ed.)]. Geneva: Intergovernmental Panel on Climate Change (­IPCC). Intergovernmental Panel on Climate Change, IPCC (­2022). Climate change 2022: Mitigation of climate change. Working Group III contribution to the Sixth Assessment Report of the Intergovernmental Panel on Climate Change. USGS (­2022). What’s the difference between geologic and biologic carbon sequestration? United States Geological Survey. https://­w ww.usgs.gov/­faqs/­­whats-­​­­d ifference-​­ ­between-­​­­geologic-­​­­a nd-­​­­biologic-­​­­carbon-​­sequestration (­accessed 9.12.22). Warren, P. (­2019). The role of climate finance beyond renewables: ­Demand-​­side management and carbon capture, usage and storage. Climate Policy, 19(­7), ­861–​­877. Zhang, D. (­2014). Mechanisms for geological carbon sequestration. Procedia IUTAM 9.

28  Carbon (­Dioxide) Capture & Utilization (­CCU)

Carbon (­Dioxide) Capture & Utilization (­CCU)

Gerres, T.

The concept of carbon dioxide capture and utilization (­CCU) refers to processes in which carbon dioxide (­CO2) is captured and then used to produce new products. The utilization of captured carbon is one possible option to implement carbon capture as a climate change mitigation technology. Carbon dioxide is used as feedstock in various industrial processes to date, such as the purification process in sugar mills and crude oil refining. In the future, it can serve as a building block for synthetic hydrocarbons and polymers in the chemical industry (­Pellis et  al., 2021). Furthermore, captured carbon could potentially be transformed into calcium carbonate and magnesium carbonate, common elements in construction materials such as cement and bricks (­Gadikota, 2021). CCU is not to be confused with carbon capture and storage (­CCS). Processing captured carbon dioxide into new materials requires investments in novel production technologies that are more energy intensive than conventional processes, resulting in higher operational costs (­OPEX) (­Wich et al., 2020). Additionally, one of the barriers to carbon utilization is the lifecycle emissions of final products; if captured, fossil carbon dioxide is used as feedstock (­Müller et al., 2020). Combustion of synthetic fuels produced from captured fossil emissions only delays and does not reduce the concentration of carbon dioxide in the atmosphere. Only if processing carbon dioxide is obtained by direct air capture (­DAC) or from biogenic sources, CCU may be a c­ arbon-​­neutral mitigation option or reduce atmospheric carbon dioxide concentration. Hence, the economics of CCU technologies is subject to the lifecycle assessment of their carbon footprint and the associated costs or benefits from carbon markets while facing higher CAPEX and OPEX than conventional production technologies. As a crucial pillar in sustainable finance, climate finance is set to mobilize funding for climate change mitigation solutions, such as CCU, that decarbonize heavy industries. See also Carbon (­Dioxide) Capture, Carbon (­Dioxide) Capture and Storage (­CCS), Climate Finance, Carbon Finance, and Decarbonization.

References Gadikota, G.,(­2021). Carbon mineralisation pathways for carbon capture, storage and utilisation. Communications Chemistry, 4, 23.

Carbon Dioxide Equivalent (­CO2e)   29 Intergovernmental Panel on Climate Change, IPCC. (­2018). Annex I: ­Glossary-​­An IPCC Special Report [Matthews, J.B.R. (­ed.)]. Geneva: Intergovernmental Panel on Climate Change (­IPCC). Müller, L. J., Kätelhön, A., Bachmann, M., Zimmermann, A., Sternberg, A., & Bardow, A. (­2020). A guideline for life cycle assessment of carbon capture and utilization. Frontiers in Energy Resources, 8, 15. Pellis, A., Malinconico, M., Guarneri, A., & Gardossi, L. (­2021). Renewable polymers and plastics: Performance beyond the green. New Biotechnology, 60, ­146–​­158. Wich, T., Lueke, W., Deerberg, G., & Oles, M. (­2020). Carbon2Chem®-​­CCU as a step toward a circular economy. Frontiers in Energy Research, 7, 162.

Carbon Dioxide Equivalent (­CO2e)

Sancak, I.

See Decarbonization.

Carbon Emission

Sancak, I.

See Greenhouse Gases.

Carbon Emission Permit

See Carbon Price, Carbon Markets, and Cap and Trade System.

Gerres, T.

30  Carbon Finance

Taskin, D.

Carbon Finance

 

 

 

 

 

See Climate Finance.

Carbon Footprint

Sancak, I.

See Decarbonization and Ecological Footprint.

Carbon Leakage

Gerres, T.

See Cap and Trade System.

Carbon Markets

Gerres, T.

Carbon Markets  31

Two different types of carbon markets have developed over the last decades. Regulatory compliance markets are mandatory carbon markets that determine the cost of emissions within a given jurisdiction. Voluntary carbon markets (­VCMs) allow especially private sector companies to purchase carbon credits for verified emission reductions (­V ERs). The emergence of mandatory carbon markets is closely linked to the Kyoto Protocol signed in 1997 and the binding commitment of developed countries to significantly reduce their greenhouse gas emissions. The protocol grants developing countries under the “­joint implementation” mechanism (­A rt. 6) and the “­Clean Development Mechanism” (­CDM) (­A rt. 12) to implement emission reduction projects, thereby generating certified emission reduction units (­ERU) and emission reduction (­CER) credits that can be traded with countries with binding commitments to “­offset” their emissions. All transactions between countries are recorded in the international transaction log. This system functions as a baseline and credit mechanism that allows for emission trading between countries in accordance with Art. 17 of the Kyoto Protocol (­U NDP, 2022). In the following, several countries and regions, mostly committed to binding emission reduction targets under the Kyoto Protocol, began implementing domestic regulatory compliance markets for carbon emissions. These carbon markets tend to be often based on cap and trade systems and have been introduced on a national level, such as in the UK (­2002), the European Union (­2002), and New Zealand (­2008), or regional level in the case of California and Quebec (­both 2013) or multiple Chinese provinces (­Calel, 2013). A detailed overview of national carbon markets and taxes is published annually by the World Bank (­2022). Domestic carbon markets tend to include only major point sources for emissions, such as power plants and ­emission-​ ­intensive industries. However, domestic carbon markets fail to cover diffuse sectors, such as private transport, while there are issues regarding enforceability for industrial emitters. In contrast to regulatory compliance markets, voluntary carbon markets (­VCMs) have emerged as decentralized marketplaces for carbon credits that allow companies and governments to offset their emissions and comply with emission reduction targets. While compliance markets mainly but not exclusively operate under a cap and trade system, VCMs are carbon credit mechanisms that allow the holder of carbon credits to emit a certain amount of carbon dioxide or other greenhouse gases. Credit mechanisms may account for actual and past emissions, while cap and trade systems focus on expected and future reductions (­BMWK, 2022). National regulators have developed different approaches to account for such carbon credits from VCM, such as in the United States (­ISDA, 2022). However, missing standardization, lack of oversight, and potential double accounting jeopardize the credibility and suitability of VCM to determine compliance with reduction targets on a national level (­K reibich & Hermwille, 2021). See also Cap and Trade System, Carbon Price, Decarbonization, Externalities, Greenhouse Gases, and Greenwashing.

32  Carbon Neutrality

References BMWK, German Federal Ministry for Economic Affairs and Climate Action (­2022). Carbon markets. https://­w ww.­carbon-​­mechanisms.de/­en/­i ntroduction/­­carbon-​­ ­m arket-​­basics (­accessed 10.4.22). Calel, R. (­2013). Carbon markets: a historical overview: Carbon markets: A historical overview. Wiley Interdisciplinary Reviews: Climate Change, 4, ­107–​­119. International Swaps and Derivatives Association (­ISDA) (­2022). Voluntary carbon markets: Analysis of regulatory oversight in the US. International Swaps and Derivatives Association. Kreibich, N., Hermwille, L., (­2021). Caught in between: Credibility and feasibility of the voluntary carbon market ­post-​­2020. Climate Policy, 21, ­939–​­957. United Nations Development Programme (­U NDP) (­2022). What are carbon markets and why are they important? https://­climatepromise.undp.org/­­news-­​­­a nd-​­stories/ ­what-­​­­a re-­​­­carbon-­​­­m arkets-­​­­a nd-­​­­why-­​­­a re-­​­­they-​­i mportant (­accessed 10.4.22). World Bank (­2022). State and trends of carbon pricing 2022. Washington, DC: World Bank.

Carbon Neutrality

Sancak, I.

See Climate Neutrality.

Carbon Offsetting

Sancak, I.

See Baseline and Credit Mechanism, Carbon Markets, and Decarbonization.

Carbon Price  33

Carbon Price

Gerres, T.

Carbon price refers to the cost of an emitted or avoided ton of carbon dioxide (­CO2) or other harmful greenhouse gases expressed in the CO2 -​­equivalent term. Pricing carbon emissions is a form of externality pricing or internalization applied to carbon dioxide or CO2 -​­equivalent emissions, which creates a financial incentive to decarbonize (­World Bank, 2022). Two main carbon pricing mechanisms exist: taxing emissions and price formation through carbon emission permits in carbon markets. A carbon tax is a Pigouvian Tax on a market transaction creating negative externalities, here carbon emissions, and for parties not directly involved in the transaction. The optimal carbon tax rate should equal the marginal environmental cost caused by pollution. In practice, identifying the correct environmental cost of carbon emissions is challenging. Carbon markets are platforms for carbon pricing based on the concept of tradable property rights and the ability of markets to lead to the optimum utilization of such rights (­Coase, 1960). Dales (­1968) argued that a government limiting the available emissions rights corresponding to desired national pollution levels would result in a market setting the optimal price for emission rights among buyers and sellers. More than 40 emission trading schemes exist globally, mostly following the principles of Dales (­Calel, 2013). These trading systems cover 23% of global GHG emissions (­World Bank, 2022). The European Union’s Emissions Trading System (­ETS), introduced in 2005 as a cap and trade system, also acts as a regulatory compliance market under the EU’s rules providing market oversight. In contrast, voluntary carbon markets (­VCMs) that leave the price formation for emission rights to the sellers and buyers have increasingly come under scrutiny due to a lack of oversight and the risk of greenwashing (­K reibich & Hermwille, 2021). In this context, it’s important to highlight the difference between the c­ ompliance-​ d riven carbon pricing mechanisms and internal carbon pricing methods ­ used by companies to voluntarily determine their environmental cost. Since companies might underestimate their environmental cost, offsetting these environmental costs by buying emission rights on VCMs might not lead to climate change mitigation (­Trinks et al., 2022). Given that both carbon taxes and carbon markets introduce a carbon price, they are not intrinsically complementary. The introduction of carbon markets is a s­ystem-​­based and ­market-​­oriented answer to the market failure of negative environmental externalities due to anthropogenic GHGs problems. Sustainable finance, and in

34  Carbon Removal / Carbon Dioxide Removal (­CDR)

particular carbon finance, provides an international solution to decarbonize the economy by enabling the suitable financial a­ ssets – carbon ​­ c­ redits – and ​­ the markets where these are ­traded – ​­carbon markets. See also Cap and Trade System, Carbon Markets, Decarbonization, Externalities, Greenhouse Gases, and Greenwashing.

References Calel, R., (­2013). Carbon markets: A historical overview. WIREs Climate Change, 4, ­107–​­119. Coase, R. (­1960). The problem of social cost. The Journal of Law & Economics, 3, ­1–​­44 Dales, J. H. (­1968). Prices: An essay in p­ olicy-​­making and economics. Toronto: University of Toronto. Kreibich, N., & Hermwille, L. (­2021). Caught in between: Credibility and feasibility of the voluntary carbon market ­post-​­2020. Climate Policy, 21, ­939–​­957. Trinks, A., Mulder, M., & Scholtens, B. (­2022). External carbon costs and internal carbon pricing. Renewable and Sustainable Energy Reviews, 168, 112780. World Bank (­2022). State and trends of carbon pricing 2022. Washington, DC: World Bank.

Carbon Removal / Carbon Dioxide Removal (­CDR)

Sancak, I.

See Decarbonization.

Carbon Sequestration

See Decarbonization.

Sancak, I.

Carbon Sink  35

Carbon Sink

Sancak, I.

See Decarbonization.

Carbon Taxation

Sancak, I.

  See Decarbonization.

Chief Sustainability Officer

Sancak, I.

A chief sustainability officer (­CSO) is a manager or a member of the management team at a firm to develop and execute sustainability policies. CSOs have become crucially important, ref lecting the increasing prominence of sustainability on the corporate agenda (­­Temple-​­West, 2022) and climate change concerns globally (­Marchant, 2021). According to a recent survey, a CSO’s general responsibilities are to develop sustainability insight considering the external environment, help reconfigure the firm’s strategy, and lead and align teams with sustainability (­Deloitte, 2021). More specifically, CSOs establish ESG governance structures considering the relevant risks, balance stakeholder interests, and support governance bodies in sustainability by advising boards, leading ESG committees and taskforces, and helping shape the agenda on risk, audit, compensation, and major change committees (­Deloitte, 2021). A

36  Chief Sustainability Officer

Change Management Human Resources

Data & IT

Strategy

Procurement

CSO Risk

Finance

Internal Audit

Products

Compliance & Legal

Communications

Figure C.1  Interactions of a CSO in a Typical Organization Source: Adapted from Deloitte (­2 021)

CSO interacts with almost all activities and departments in a typical business organization. Figure C.1 shows a CSO’s major interaction domains. A CSO develops sustainable finance strategies to generate sustainable value and incorporate ESG factors and sustainability risks into pricing, forecasting and budgeting, financial reporting, and capital allocation (­Deloitte, 2021). In addition to other roles and responsibilities, a CSO implements ­organization-​ w ­ ide change management, which requires challenging policies and actions. A CSO might report to the chief executive officer (­CEO) or another top manager based on the type and approach of business organizations. According to a survey conducted at 1,640 listed companies in North America, while 48% of companies have active CSOs, 39% of them have only limited roles (­light CSOs), lacking the inf luence to shape the sustainability transformation (­PwC, 2022). In Europe, the figures are 35% (­active CSOs) and 57%

Circular Economy  37

(­light CSOs). According to the same survey, 13% of them in North America and 9% of them in Europe do not have a CSO. On the other hand, Miller and Serafeim (­2014) show that the role of CSOs changes as companies progress through the stages, from the compliance stage to the innovation stage. While CSOs working for ­first-​­stage companies tend to have relatively limited authority, in the innovation stage, CSOs gain increasing power (­M iller & Serafeim, 2014). Sustainability transformation changes not only the business models of firms but also affects the organizational structure. Assigning a chief sustainability officer and empowering the CSO to deliver sustainability change are two critical steps in sustainability transformation. See also Sustainability, Sustainability Reporting, Sustainability Risk, and Sustainability Transformation.

References Deloitte. (­2021). The future of the Chief Sustainability Officer. London: Deloitte & Institute of International Finance. Marchant, N. (­2021, January 5). What is a CSO and does every company need one? World Economic ­Forum-​­The Davos Agenda. Miller, K., & Serafeim, G. (­2014). Chief sustainability officers: Who are they and what do they do? Harvard Business School Working Paper, 1 ­ 5-​­011. PwC. (­2022). Empowered chief sustainability officers. London: PwC. https://­w ww.strategyand.pwc.com/­de/­en/­f unctions/­­e sg-​­strategy/­­empowered-­​­­chief-­​­­sustainability-​­ officers.html (­accessed 5.3.23). ­Temple-​­West, P. (­2022, July 18). Chief sustainability officers prosper as ESG risks mount. Financial Times.

Barrachina, M.

Circular Economy

 

 

 

 

 

Circular economy is a model for consumption and production based on preserving materials and energy by extending the life cycle of products through various activities, such as reusing, repairing, sharing, leasing, and recycling (­Murray et al., 2017). The benefits of circular economy include improving the environment, enhancing the security of raw materials, boosting competitiveness, encouraging innovation, and improving economic growth (­European Commission, 2021). According to the European Commission Report (­2019), circular economy can be understood as a necessary response to the exponential

38  Circular Economy

population growth and expanding prosperity of the last decades. The linear economy notion emphasizes mass production using raw materials and energy intensively, while less consideration is paid to what happens to these products after their utilization; as a result, most products become waste. The circular economy approach is the exact opposite. In a circular economy, biodegradable resources are emphasized to facilitate reducing, reusing, and recycling. Transitioning from a linear economy to a circular economy would generate business opportunities and new job positions. This process would require the involvement of all economic agents, especially in the private sector, whose progress in a circular economy is usually the result of public initiatives (­Korhopnen et al., 2018). Sustainable finance seeks to direct capital toward sustainable investments and invest in activities related to circular economy. For example, leasing and green loans constitute some of the main sustainable finance products associated with the circular economy notion. The leasing model in this realm enables the use of a product or service without personal ownership; this approach aims to reduce the number of products produced as demand is reduced and also encourages repair and maintenance activities to extend products’ lives. In turn, green loans provide lending specifically to activities that are undertaken to benefit the environment, such as reducing CO2 emissions and climate change mitigation. Circular economy is related to sustainable development, aiming to achieve a better environment, improve social equity, and boost economic prosperity (­WCED, 1987). The sustainable development concept is implemented as part of the circular economy approach (­K irchherr et al., 2017). Circular economy is sometimes, and incorrectly, used synonymously with the recycling industry. However, the circular economy concept implies a more extensive transition from linear economic models as compared to what can be achieved through recycling; moreover, circular economy aims to improve products’ durability. See also Linear Economy, Responsible Consumption, Sustainable Business Model, Sustainable Development, and Sustainable Finance.

References European Commission (­2019). Report on sustainable finance for a circular economy. Luxembourg: Publications Office of the European Union. European Commission (­2021). Circular Economy Action Plan. For a cleaner and more competitive Europe. Publications Office of the European Union. Kirchherr, J., Reike, D., & Hekkert, M. (­2017). Conceptualizing the circular economy: An analysis of 114 definitions. Resources, Conservation and Recycling, 127, ­221–​­232. Korhopnen, J., Honkasalo. A., & Seppälä, J. (­2018). Circular economy: The concept and its limitations. Ecological Economics, 143, ­37–​­46. Murray, A., Skene, K., & Haynes, K. (­2017). The circular economy: An interdisciplinary exploration of the concept and application in a global context. Journal of Business Ethics, 140(­3), ­369–​­380. WCED (­1987). Report of the World Commission on Environment and Development: Our Common Future. http://­w ww.­un-​­documents.net/­­our-­​­­common-​­future.pdf

Climate  39

Climate

Sancak, I.

See Climate Change.

Climate Change

Sancak, I.

Climate change refers to the change in climate patterns over time. Climate, different from the term weather (­referring to only atmospheric conditions that occur locally over short periods, such as rain, winds, and snow), means the l­ong-​­term regional or global average of temperature, humidity, and rainfall patterns over seasons, years, or decades (­NASA Global Climate Change, 2020). Climate change might arise from natural internal processes or external forcings, such as persistent anthropogenic changes in the composition of the atmosphere or in land use (­IPCC, 2018). The term “­anthropogenic” refers to the effects or changes resulting from or produced by human activities (­IPCC, 2018). In connection with that, anthropogenic climate change refers to the climate change caused by humans or human activities. A report by the Intergovernmental Panel on Climate Change (­IPCC, 2014) states that anthropogenic greenhouse gas (­GHG) emissions have increased since the ­pre-​­industrial era and are mainly caused by economic and population growth. The effects of the GHGs, together with other anthropogenic drivers, are highly likely to have been the dominant cause of the observed climate warming since the ­m id-​­twentieth century (­IPCC, 2014). Climate change today is primarily driven by human activities, particularly fossil fuel burning, increasing ­heat-​­trapping GHG levels in Earth’s atmosphere, and average surface temperature, commonly referred to as global warming (­NASA Global Climate Change, 2020). According to the World Economic Forum’s Global

40  Climate Change

Risks Report 2020, extreme weather and climate action failure belong to the top five global risks in terms of likelihood over the next ten years. The current effects and potential impacts of climate change and global warming address the climate crisis the world face today. As an existential threat, the climate crisis forces us to focus on sustainability with many implications of transformations in economies, businesses, and financial services. Climate change mitigation and adaptation are two responses to climate change problems. Climate change mitigation refers to policies, actions, and activities to curb GHG emissions and reduce these gases already in the atmosphere and other mitigation policies. While mitigation policies aim to reach net zero GHG emissions and minimize global warming, the ultimate goal is preserving ecosystem services. In this regard, one of the main themes of the Paris Agreement is climate change mitigation. Climate change adaptation means adjustment processes to reach the actual or expected climate and its effects to minimize probable harmful effects or exploit beneficial opportunities (­IPCC, 2018). Unless climate change and its effects do not end, the world must adapt to climate change outcomes. The ultimate goal of climate adaptation policies is to manage the adverse effects and vulnerabilities. In this regard, the amount of climate finance that should be placed each year plays a critical role. Figure C.2 shows actual climate finance and estimated amounts necessary to realize the 1.5°C pathway. Figure C.2 shows the gap between actual and needed climate finance; hence, it addresses the crucial importance of sustainable finance.

Figure C.2  Global Climate Finance Flows and the Average Estimate Annual Climate Investment Need to 2050 Source: Buchner et al. (­2021)

Climate Change Adaptation  41

See also Climate Finance, ­Climate-​­related Risk, Climate Neutrality, Global Warming, Greenhouse Gases, and Paris Agreement.

References Buchner, B., Naran, B., Fernandes, P., Padmanabhi, R., Rosane, P., Solomon, M., & Guzmán, S. (­2021). Global landscape of climate finance 2021. Delhi, Jakarta, London, Rio de Janerio, San Francisco, Washington, DC: Climate Policy Initiative. Intergovernmental Panel on Climate Change, IPCC. (­2014). Climate change 2014 Synthesis report summary for policymakers chapter. Geneva: Intergovernmental Panel on Climate Change (­IPCC). Intergovernmental Panel on Climate Change, IPCC. (­2018). Annex I: ­Glossary-​­An IPCC Special Report [Matthews, J.B.R. (­ed.)]. Geneva: Intergovernmental Panel on Climate Change (­IPCC). NASA Global Climate Change. (­2020). Overview: Weather, global warming and climate change. NASA Global Climate Change: https://­climate.nasa.gov/­resources/­­g lobal-­​ ­­warming-­​­­vs-­​­­climate-​­change/ (­accesses 5.3.23). World Economic Forum. (­2020). The global risks report 2020. Geneva: World Economic Forum.

Climate Change Adaptation

Sancak, I.

See Climate Change.

Climate Change Mitigation

See Climate Change.

Sancak, I.

42  Climate Crisis

Sancak, I.

Climate Crisis

 

 

See Climate Change.

Climate Disclosure Standards Board (CDSB)

Sancak, I.

See International Sustainability Standards Board (­ISSB)

Taskin, D.

Climate Finance

 

 

 

 

 

Climate finance represents the financial proceeds channeled from public, private, or alternative financing sources to projects that provide mechanisms and actions directed toward neutralizing climate change (­U NFCCC, 2022). In particular, climate finance is related to governments, businesses, and individuals’ expenditures required to switch to ­low-​­carbon emitting sources, mitigate greenhouse gas emissions, and create endurance for climate change (­Hong et al., 2020). Thus, climate finance is a s­ ub-​­field in sustainable finance with a major focus of addressing climate change. As a closely connected concept, carbon finance involves financial activities to mitigate carbon emissions, enabling investing in carbon credits and their derivatives and the provision

Climate Finance  43

of financial proceeds to ­low-​­carbon projects. Increasing greenhouse gases and the deterioration caused by global warming are the primary triggers for the development of carbon finance (­McCollum et al., 2018; Madaleno et al., 2022). In contrast to carbon finance limited to carbon emissions, climate finance is related to the overall funding to deal with climate change (­Gupta, 2016). To keep global warming at 2°C above the ­pre-​­industrial levels, US$ 800 billion in annual clean energy investments between 2010 and 2050 are required (­McCollum et al., 2013). Given this immense investment requirement, the allocation of resources from climate finance is a significant issue. Climate finance provides instruments to deal with c­ limate-​­related projects and tackle issues related to sustainable development. It provides financing means to shift away from ­fossil-​­fuel using technologies to investments that will lead to green growth (­Giglio et  al., 2021; Winkler  & Dubash, 2016). Green bonds and green equity promote green technological developments and are considered among the instruments for climate finance (­Taskin et al., 2022). See also Climate Change, Development Finance, Environmental Finance, and Green Finance.

References Giglio, S., Kelly, B., & Stroebel, J. (­2021). Climate finance. Annual Review of Financial Economics, 13(­1), ­15–​­36. Gupta, A. (­2016). Climate change and kyoto protocol: An overview. In V. Ramiah and G. N. Gregoriou (­Eds.), Handbook of environmental and sustainable finance. Cambridge, MA: Academic Press. Hong, H., Karolyi, G. A., & Scheinkman, J. A. (­2020). Climate finance. The Review of Financial Studies, 33(­3), ­1011–​­1023. Madaleno, M., Dogan, E., & Taskin, D. (­2022). A step forward on sustainability: The nexus of environmental responsibility, green technology, clean energy and green finance. Energy Economics, 109, 105945. McCollum, D., Nagai, Y., Riahi, K., Marangoni, G., Calvin, K., Pietzcker, R., Van Vliet, J., & van der Zwaaan, B. (­2013). Energy investments under climate policy: a comparison of global models. Climate Change Economics, 4(­4), 1340010. McCollum, D. L., Zhou, W., & Bertram, C. (­2018). Energy investment needs for fulfilling the Paris Agreement and achieving the Sustainable Development Goals. Nature Energy, 3, ­589–​­599. Taskin, D., Dogan, E., & Madaleno, M. (­2022). Analyzing the relationship between energy efficiency and environmental and financial variables: A way towards sustainable development. Energy, 252, 124045. UNFCCC. (­2022). United nations climate change. introduction to climate finance. https://­ unfccc.int/­t opics/­­c limate-​­f inance/­­t he-­​­­b ig-​­picture/­­i ntroduction-­​­­t o-­​­­c limate-​ ­f inance. (­accessed ­03– ­​­­06–​­22). Winkler, H., & Dubash, N. K. (­2016). Who determines transformational change in development and climate finance? Climate Policy, 16(­6), ­783–​­791.

44  Climate Neutrality

Climate Neutrality

Sancak, I.

Climate neutrality, or being climate neutral, refers to net zero greenhouse gas (­GHG) emissions, potentially not impacting climate. Countries, economies, sectors, cities, organizations, and individuals are climate neutral when their activities achieve net zero GHG emissions over a specified period. Climate neutrality means either not producing and causing anthropogenic GHGs or performing net zero emissions by removing and offsetting already emitted GHGs. Reaching climate neutrality is a climate mitigation goal. The concepts of net zero emission, decarbonization, and carbon neutrality are closely related to climate neutrality. Net zero GHG emission, or shortly “­net zero,” refers to the removal of an equivalent amount of anthropogenic GHG emissions in a specified period. In some contexts, net zero GHG emission is equal to climate neutrality. Climate neutrality covers all anthropogenic gases that are harmful to the climate, including but not limited to carbon dioxide (­CO2), methane (­CH4), and nitrous oxide (­N2O); GHGs are used here as a c­ atch-​­all term for the harmful substances entering the atmosphere (­UNFCCC, 2021). Climate neutrality is close to carbon neutrality, but while carbon neutrality covers only carbon dioxide, climate neutrality includes all GHGs (­Butler et al., 2015). As another closely related concept, decarbonization refers to carbon d­ ioxide-​­reducing activities with the ultimate goal of reaching a net zero carbon level or carbon neutrality. More broadly, greenhouse gas neutrality has the same meaning for all GHGs. Countries and economies pledge carbon or climate neutrality for the future. As a global goal, achieving climate neutrality for the planet by 2050 is agreed upon by all parties to the Paris Agreement (­UNFCCC, 2021). Many countries that ratified the Paris Agreement have climate neutrality pledges. For example, Germany has the goal of climate neutrality by 2045. Sustainable finance ultimately pursues common good values, which require systematically discouraging all environmentally harmful activities and eliminating GHGs. For example, sustainable finance aims to eliminate negative externalities arising from GHGs by integrating ESG factors into funding allocation criteria and increasing transparency via sustainability reporting and disclosure. See also Decarbonization, Greenhouse Gases (­GHGs), Net Zero Emission, and Paris Agreement.

References Butler, T., Lode, B., Parker, A., Mar, K., Schmidt, F., & Lawrence, M. G. (­2015). ­L ong-​­term climate goals: Decarbonisation, carbon neutrality, and climate neutrality. IASS

Climate Stress Test / Testing  45 ­Potsdam-​­Institute for Advanced Sustainability Studies Potsdam (­IASS). https://­ www.­i ass-​­potsdam.de/­sites/­default/­f iles/­f iles/­policy_brief_decarbonisation.pdf (­accessed 5.3.23). United Nations Framework Convention on Climate Change, UNFCCC. (­2021, ­February 26). A beginner’s guide to climate neutrality. United Nations Framework Convention on Climate Change.

Climate Stress Test / Testing

Sancak, I.

  Climate stress tests or climate stress testing analyze climate change impacts on firms, financial institutions, sectors, and economies by considering various scenarios and assumptions. Climate change impacts financial systems and financial institutions (­NGFS, 2020).Using models and data at the firm or ­system-​­wide level and relying on historical or hypothetical scenarios, stress tests are ­forward-​­looking exercises to evaluate the impact of severe but plausible adverse scenarios (­BIS, 2021). Stress tests are risk management tools that complement firms’ quantitative risk management approaches by providing insights into their risk profile (­BIS, 2021). More specifically, climate stress tests try to capture firms’ resilience to transition risks and physical risks considering acute and chronic extreme weather events (­Ileri  & Clarke, 2022). Stress tests attempt to measure institutions’ ability to withstand extreme ­climate-​­related conditions and weigh up capital levels, particularly for banks, in addition to other measures(­Ileri & Clarke, 2022). Central banks, regulatory and supervisory agencies, and multinational economic and financial organizations are interested in evaluating the effects of climate change and the magnitude of climate change risks. Since financial authorities have become increasingly involved in climate change risks, they have launched stress tests for banks (­Baudino & Svoronos, 2021). Climate stress tests help understand various dimensions of sustainability transition aspects and allow for managing sustainability risks; hence, these tools are, at the same time, sustainable finance tools. See also Climate Change, Global Warming, Physical Risk, Sustainability Risks, and Transition Risk.

References Bank for International Settlements, BIS. (­2021). Stress ­testing  – ​­Executive summary. Bank for International Settlements, https://­w ww.bis.org/­f si/­f sisummaries/­stress_ testing.pdf

46  Climate-related Risk (CrR) Baudino, P., & Svoronos, J.-​­P. (­2021). ­Stress-​­testing banks for climate ­change – ​­A comparison of practices. Basel: ­BIS-​­Bank for International ­Settlements-​­Financial Stability Institute. Ileri, E. C., & Clarke, D. (­2022). What are climate stress tests and how effective are they? Green Central Banking: https://­g reencentralbanking.com/­2022/­03/­14/­­what-­​­­a re-­​ ­­climate-­​­­stress-​­tests/ (­accessed 14.03.2022). Network of Central Banks and Supervisors for Greening the Financial System, NGFS. (­2020). Guide to climate scenario analysis for central banks and supervisors. Paris: Network for Greening the Financial System.

Climate-related Risk (CrR)

Ocal, T.

From a financial risk point of view, ­climate-​­related risk refers to risks posed by the exposure of financial institutions and/­or the financial sector to physical or transition risks related to climate change. Global warming can cause unavoidable increases in climate hazards and present multiple risks to human society and ecological systems. Adverse consequences will affect lives, livelihoods, species and ecosystems, health and ­well-​­being, economic, social, and cultural assets, investments, infrastructure, and services. The actual level of risk will depend on concurrent trends in vulnerability to risks, exposure, adaptation actions, and the degree of socioeconomic development. ­Climate-​­related risks provide a framework for understanding the increasingly severe, interconnected, and often irreversible impacts of climate change on human or ecological systems (­IPCC, 2022). ­Climate-​­related risks can be broadly grouped into two main categories. The first category encompasses physical risks, such as acute or chronic changes in the climate that have economic impacts. The second category covers transition risks in government policy, technological changes, and investor and consumer sentiments arising from the transition to a ­low-​­carbon economy (­BCBS, 2022). These risks have potentially severe adverse consequences for human society or ecological systems as a result of the interaction of climate c­hange-​­related events with vulnerabilities of livelihoods, ecosystems, infrastructure, and social and economic systems. Recognition of ­climate-​­related risks is essential to develop adaptation and mitigation actions to manage such risks. The IPCC defines key ­climate-​­related risks as potentially severe risks relevant to the primary goal of the UNFCCC treaty to avoid dangerous human interference with the climate system and the scale considered. The severity of risks depends on criteria such as the magnitude, irreversibility, timing, likelihood of the impacts, and the adaptive capacity of the affected human or ecological

Common Good Value   47

systems. The key risks include l­ow-​­lying coastal areas, terrestrial and marine ecosystems, critical infrastructures and networks, living standards, human health, food security, water security, and peace and mobility (­IPCC, 2022). C ­ limate-​­related risks are becoming increasingly complex and more challenging to manage. Hazards, exposure, and vulnerability are uncertain in magnitude, and the likelihood of occurrence can change over time due to socioeconomic conditions and human ­decision-​­making. Multiple climate hazards can occur simultaneously, resulting in the dynamic interaction of multiple climatic and ­non-​­climatic risks. This can cause an aggravated overall risk spanning across regions, economies, and ecological systems. Also, responses to climate change can result in new impacts and risks. Such risks can arise from responses not achieving the intended objectives or from potential ­trade-​­offs or negative s­ide-​­effects on broader policy objectives, such as the SDGs. C ­ limate-​­related risks can also spread through global financial markets (­Mandel, 2021). Among other actions, climate finance is a crucial enabler for taking action against c­ limate-​­related risks. Where needed, mobilization of and access to financial resources are essential for climate change adaptation and mitigation. As a subset of sustainable finance, climate finance aims to support climate adaptation and mitigation efforts to increase resilience to the impacts of current and projected c­ limate-​­related risks. See also Physical Risk, Transition Risk, and Climate Finance.

References Basel Committee on Banking Supervision, BCBS. (­2022). Principles for the effective management and supervision of climate related financial risks. Basel: Basel Committee on Banking Supervision. Intergovernmental Panel on Climate Change, IPCC. (­2022). Climate Change 2022 Impacts, Adaptation and Vulnerability. Geneva, Switzerland: Intergovernmental Panel on Climate Change. Mandel, A. (­2021). Risks on Global Financial Stability Induced by Climate Change: The Case of Flood Risks. Climate Change, ­1–​­24. Network of Central Banks and Supervisors for Greening the Financial System, NGFS. (­2019). A call for action: Climate change as a source of financial risk. Network for Greening the Financial System.

Common Good Value

See Integrated Value and Sustainable Finance Stages.

Sancak, I.

48  Community Investing

Community Investing

Sancak, I.

See Sustainable Investment Strategies.

Conference of the Parties (COP)

Sancak, I.

See Paris Agreement.

Corporate Citizenship

Gómez de Liaño, C.

First coined in 1969, corporate citizenship is a metaphor borrowed from political science by which a corporation equates to artificial citizenship and, therefore, as part of society, should behave responsibly. Thus, corporate citizenship implies an organizational behavior that addresses society as a whole, beyond shareholders’ or stakeholders’ interests. Corporate citizenship includes ethical, social, legal, and economic aspects (­Carrol, 1998). On the ethical side, corporate citizenship codifies what it means for a company and its managers to behave ethically; the social angle refers to the important role that companies play in building communities and enhancing their quality of life by actively responding to social needs; the legal face implies that companies

Corporate Citizenship  49

are expected to obey the law; and finally, the economic aspect refers to firms’ economic responsibility of sustainable ­profit-​­making. According to Matten et al. (­2003), corporate citizenship can be explained through a limited, equivalent, and extended perspective. These views assimilate corporate citizenship to philanthropy or community involvement, corporate social responsibility, and to a reconceptualization of b­ usiness–​­society relations, respectively. First, the limited perspective assimilates corporate citizenship to philanthropy or community involvement; the equivalent perspective describes corporate citizenship as corporate social responsibility; finally, the extended perspective understands corporate citizenship as the redefinition of the relationship between business and society. Throughout recent history, several terms have been applied to corporate engagement with environmental and societal challenges, such as corporate citizenship, corporate responsibility (­CR), corporate social responsibility (­CSR), business ethics, environment, social, and governance (­ESG), sustainability, and even philanthropy (­­Ditlev-​­Simonsen, 2022). Until the 1990s, the notion of “­corporate social responsibility” was more widely used than the term “­corporate citizenship.” It was then United States President Bill Clinton who raised awareness of the concept of corporate citizenship with the creation of the “­Ron Brown” Corporate Citizenship yearly award that distinguishes good corporate citizens within American companies (­Carroll, 1998). At present, ­A nglo-​­Saxon countries favor the use of the terminology “­corporate citizenship,” while the European Union and the World Business Council for Sustainable Development use the term “­corporate social responsibility” (­Valor, 2015). Corporate citizenship can also relate to socially responsible investment (­SRI) and how investors decide to invest in stocks as “­responsible” corporate citizens using ESG screening, as well as engagement as criteria to achieve a ­long-​­term positive sustainability impact (­Popescu et al., 2021). See also Corporate Social Responsibility, Socially Responsible Investment (­SRI), Sustainable Investment, and Sustainable Investment Strategies.

References Carroll, A. B. (­1998). The four faces of corporate citizenship. Business and Society Review, 100/­101, ­1–​­7. ­Ditlev-​­Simonsen, C. D. (­2022). Sustainable corporate responsibility. A guide to sustainable corporate responsibility. Cham: Palgrave Macmillan. Matten, D., Crane, A., & Chapple, W. (­2003). Behind the Mask: Revealing the true face of corporate citizenship. Journal of Business Ethics, 45, 1 ­ 09–​­120. Popescu, I. S., Hitaj, C., & Benetto, E. (­2021). Measuring the sustainability of investment funds: A critical review of methods and frameworks in sustainable finance. Journal of Cleaner Production, 314, ­1–​­13. Valor, C. (­2005). Corporate social responsibility and corporate citizenship: Towards corporate accountability. Business and Society Review, 110, ­191–​­212.

50  Corporate Engagement

Corporate Engagement

Sancak, I.

See Sustainable Investment Strategies.

Corporate Governance

 

Brogi, M.

 

Corporate governance can be broadly defined as processes and relations by which firms are managed (­Brogi & Lagasio, 2019). Much of the academic discourse regarding corporate governance has been focused on how to deal with conf licting stakeholder interests. This has given rise to various theories that are topics of ongoing debate for both academics and regulators (­among the others: agency theory (­e.g., Jensen and Meckling, 1976); stakeholders’ theory (­Freeman, 1984); stewardship theory (­e.g., Donaldson and Davis, 1990)). There are numerous definitions of corporate governance. More theoretical ones, such as Zingales, “­the complex set of constraints that shape the ­ex-​­post bargaining over the quasirents generated in the course of a relationship” (­1997: 48) and more practitioner based, such as Tricker “­if management is about running the business, governance is about seeing that it is run properly” (­1984: 7). From a business management viewpoint, corporate governance may be defined as the set of norms and voluntary practices that enable people, first and foremost boards and CEOs but indirectly all other employees to make decisions. Governance structures must comply with the applicable legal provisions of the country of incorporation. Corporate governance is important because of the contribution of effective ­decision-​­making in a company’s l­ong-​­term sustainable success, employment, and job creation, thereby ultimately supporting economic growth. The OECD principles are the key reference for corporate governance worldwide and are part of the Key Standards for Sound Financial Systems issued by the Financial Stability Board. They were first issued in 1999 and later endorsed by G20 leaders in 2015 (­renamed G20/­OECD principles). The principles have been periodically updated. A revised version

Corporate Social Responsibility  51

of the G20/­OECD principles will be issued in 2023. Every two years, the OECD also publishes a Corporate Governance Factbook that provides an updated global benchmark on the institutional, legal, and regulatory frameworks across 50 jurisdictions worldwide. As specified by the OECD, there is no single successful corporate governance model. However, there is a consensus on the need for a robust system of checks and balances customized to fit the specific company, as the same goal can be pursued in different ways. Moreover, as new shortcomings emerge, new corporate governance solutions will be devised. One size does not fit all and does not fit forever (­Brogi et al., 2020). However, one thing will not change: the importance of tone from the top (­i.e., leadership by example) and the key role of people (­i.e., the capabilities and moral standards of board members as well as of employees), which will always remain at the heart of good corporate governance. See also Environmental, Social and Governance Factors, Governance, and Sustainability Reporting.

Reference Brogi, M., & Lagasio, V. (­2019). Do bank boards matter? A literature review on the characteristics of banks’ board of directors. International Journal of Business Governance and Ethics, 13(­3), ­244–​­274. Brogi, M., Lagasio, V., & Pesic, V. (­2020). Can governance help in making an IPO “­successful”? New evidence from Europe. Journal of International Financial Management & Accounting, 31(­3), ­239–​­269. Donaldson, L., & Davis, J. H. (­1990). CEO governance and shareholder returns: Agency theory or stewardship theory. Sydney: Australian Graduate School of Management, University of New South Wales. Freeman, R. E. (­1984). Strategic management: A stakeholders approach. Boston: Pitman Jensen, M. C., & Meckling, W. H. (­1976). Agency costs and the theory of the firm. Journal of Financial Economics, 3(­4), ­305–​­360. Organization for Economic ­Co-​­Operation and Development (­OECD) (­2021). Corporate Governance Factbook 2021. https://­w ww.oecd.org/­corporate/­­corporate-­​ ­­governance-​­factbook.htm Tricker, R. I. (­1984). Corporate governance: Practices, procedures, and powers. In British companies and their boards of directors. Gower Publishing Company, Limited. Zingales, L. (­1997). Corporate governance. In The New Palgrave Dictionary of Economics and Law. Springer.

Corporate Social Responsibility

 

Gómez de Liaño, C.

52  Corporate Social Responsibility

The European Commission defines corporate social responsibility (­CSR) as “­a concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis” (­European Commission, 2001:6). There have been many attempts to develop a definition of CSR. A m ­ eta-​­analysis of 37 definitions of CSR (­Dahlsrud, 2008) identified the following dimensions: stakeholders, social issues, economic issues, volunteering, and (­to a minor level) environmental issues. CSR represents a major change in strategic thinking by shifting from shareholders´ value to stakeholders´ value. This shift means turning companies’ focus from ­short-​­term profitability and shareholders’ wealth maximization to ­long-​­term value creation through increasing sustainability and ethical concerns. For doing so, CSR entails the provision of products and services in a responsible and profitable manner and managing all stakeholders with dignity and respect (­A ntonaras, 2022). Throughout recent history, several terms have been applied to corporate engagement with environmental and societal challenges, such as corporate citizenship, corporate responsibility (­CR), CSR, business ethics, environmental, social, and governance (­ESG), sustainability, and even philanthropy (­­Ditlev-​­Simonsen, 2022). Corporate social responsibility can also relate to socially responsible investment (­SRI) and how investors decide to invest in stocks in “­socially responsible” ways, using ESG screening, as well as engagement, with the aim of having a ­long-​­term positive sustainability impact (­Popescu et al., 2021). See also Corporate Citizenship, ESG Factors (­Environmental, Social, and Governance), Impact Investment, Sustainable Investment.

References Antonaras, A. (­2022). Fundamental concepts of corporate social responsibility and sustainability. Management Association (­Eds.), Research Anthology on Developing Socially Responsible Businesses (­­pp. ­19–​­32). Dahlsrud, A. (­2008). How corporate social responsibility is defined: an analysis of 37 definitions. Corporate Social Responsibility and Environmental Management, 15(­1), ­1–​­13. ­Ditlev-​­Simonsen, C. D. (­2022). Sustainable Corporate Responsibility. A Guide to Sustainable Corporate Responsibility. Cham: Palgrave Macmillan. European Commission. (­2001). Green paper: Promoting a European framework for corporate social responsibility. https://­­eur-​­lex.europa.eu/­LexUriServ/­LexUriServ.do?uri= COM:2001:0366:FIN:EN:PDF Popescu, I. S., Hitaj, C., & Benetto, E. (­2021). Measuring the sustainability of investment funds: A critical review of methods and frameworks in sustainable finance. Journal of Cleaner Production, 314.

Corporate Sustainability  53

Corporate Sustainability

Gómez de Liaño, C.

  Corporate sustainability refers to meeting stakeholder needs in the short and long term while addressing economic, environmental, and social dimensions (­Pranugrahaning et al., 2021). In another view, corporate sustainability entails voluntary company activities, which include social and environmental concerns in business operations (­Van Marrewijk, 2003). First appeared in the general management literature in the 1990s, corporate sustainability has its origins in the Brundtland report’s definition (­1987) of sustainable development (­Montiel & ­Delgado-​­Ceballos, 2014). In the corporate sustainability world, firms might be at various levels of sustainability. However, truly sustainable firms position themselves as responsive citizens of society, and they not only seek to minimize their negative impacts but also maximize their positive impacts in critical and relevant areas for society and the planet (­Dyllick  & Muff, 2015). Specific examples of corporate sustainability actions include contributing to economic development through the quality of products and services offered; focusing on environmental conservation by reducing or eliminating pollutant emissions, moderation to avoid destroying the ecological balance, reducing waste, and implementing recycling measures; and ensuring social responsibility by guaranteeing workers’ health and safety, and job creation ( ­­Jacobo-​­Hernández et al., 2021). Sustainable practices can benefit companies as they can improve brand image, create competitive advantage, increase productivity, and improve employee retention and talent acquisition. In addition, incorporating sustainability within the business strategy can attract impact investors, that is, investors seeking to generate social and environmental impact and financial returns (­Abdulhafedh, 2021). Sustainability reports are the key communication mechanism for corporate commitment and performance on sustainability issues. Business sustainability is used interchangeably in the same context as corporate sustainability (­Dyllick & Muff, 2015). Corporate or business sustainability stays at the center of sustainable finance in numerous aspects. Sustainable business activities are tied to sustainable financial approaches. Transforming from ­business-­​­­as-​­usual to sustainable business models and from f­inance-­​­­as-​­usual to sustainable finance practices is connected. Aligning with ESG factors addresses financial dimensions, business models, and whole business activities. See also ESG Factors, Sustainable Business Model, and Sustainable Investment.

54  Corporate Sustainability

References Abdulhafedh, A. (­2021). The analysis of a corporate sustainability. Journal of City and Development, 3(­1), ­6 –​­11 Dyllick, T., & Muff, K. (­2015). Clarifying the meaning of sustainable business: Introducing a typology from ­business-­​­­as-​­usual to true business sustainability. Organization & Environment, 29, ­1–​­19. ­Jacobo-​­Hernandez, C. A., ­Jaimez-​­Valdez, M. A., & ­Ochoa-​­Jiménez, S. (­2021). Benefits, challenges and opportunities of corporate sustainability. Management, 25(­1), ­51–​­74. Montiel, I., & ­Delgado-​­Ceballos, J. (­2014). Defining and measuring corporate sustainability: Are we there yet? Organization & Environment, 27, ­1–​­27. Pranugrahaning, A., Donovan, J. D., Topple, C., & Masli, E. K. (­2021). Corporate sustainability assessments: A systematic literature review and conceptual framework. Journal of Cleaner Production, 295, 126385. Van Marrewijk, M. (­2003). Concepts and definitions of CSR and corporate sustainability: Between agency and communion. Journal of Business Ethics, 44(­2), ­95–​­105.

D Decarbonization

Sancak, I.

  Decarbonization refers to reducing carbon emissions toward achieving zero fossil carbon existence (­IPCC, 2018). Economies, business organizations, other entities, and individuals can decarbonize their activities or contribute to decarbonization strategies. The Paris Agreement is the global decarbonization determination among around 200 economies. Carbon dioxide (­CO2) is one of the most significant harmful greenhouse gases (­GHGs) causing climate change. Therefore, decarbonization is essential to achieving a ­carbon-​­neutral or ­climate-​­neutral state (­Butler et  al., 2015). Hence, it plays a crucial role in climate change mitigation. Being a net zero economy or in the net zero emission capacity is an idealistic level for economies. In this regard, the global “­Race to Zero” campaign mobilizes a coalition of net zero initiatives, representing 452 cities, 22 regions, 1,101 businesses, 45 of the most prominent investors, and 549 universities from 120 countries to achieve net zero carbon emissions by 2050 at the latest (­World Economic Forum, 2020). Numerous processes and policies can be implemented to achieve a net zero carbon level. In decarbonization, measuring carbon footprint might be the first step. Carbon footprint is the amount of GHGs emissions caused by a human being or a human activity. It is used for carbon emissions and for other GHG emissions through the carbon dioxide equivalent concept (­CO2e, CO2 equivalent, or CO2 -​­eq). Thus, carbon footprint allows comparing emissions from various GHGs by converting other gases to the equivalent amount of carbon dioxide (­Eurostat, 2021). Decarbonization mainly aims to cut or convert ­carbon-​ ­emitting activities. Some governmental policies set a price on carbon or levy a tax (­carbon taxation) or ban ­carbon-​­emitting activities. As technology, carbon removals or anthropogenic removals, such as deploying ­human-​­made carbon sinks and carbon capture and storage (­CCS) methods, can withdraw GHGs from the atmosphere (­IPCC, 2018). Carbon sinks refer to the systems that absorb carbon dioxide. A carbon sink is a source of negative emissions since carbon sinks absorb more carbon than they release. Removals can also be performed by natural processes. Plants, the ocean, and soil are the natural carbon sinks; these ecosystems can offset CO2 emissions. Carbon offsetting is DOI: 10.4324/9781003310891-6

56  Development Finance

also possible by reducing emissions through investment in renewable energy, energy efficiency, or other clean, l­ow-​­carbon technologies (­European Parliament, 2019). Another method of decarbonization is carbon sequestration, a process of storing carbon in a carbon pool (­IPCC, 2018). Although removal technologies, such as sequestration, can be helpful and supportive in achieving either carbon neutrality or climate neutrality, reducing emissions of CO2 and other GHGs are the most effective and reliable way of decarbonization (­Butler et al., 2015). See also Carbon Capture and Storage, Climate Change, Climate Neutrality, Greenhouse Gases, and Paris Agreement.

References Butler, T., Lode, B., Parker, A., Mar, K., Schmidt, F., & Lawrence, M. G. (­2015, November). IASS Potsdam. Institute for Advanced Sustainability Studies Potsdam (­I ASS), https://­w ww.­i ass- ​­p otsdam.de/­s ites/­d efault/­f iles/­f iles/­p olicy_brief_decarboni sation.pdf European Parliament. (­2019, October 3). What is carbon neutrality and how can it be achieved by 2050? https://­w ww.europarl.europa.eu/­news/­en/­headlines/­society/­ 20190926STO62270/­­what-­​­­i s- ­​­­c arbon-­​­­neutrality- ­​­­a nd-­​­­how- ­​­­c an-­​­­it- ­​­­be- ­​­­achieved-­​ ­­by-​­2050 Eurostat. (­2021, June 10). Glossary: Carbon dioxide equivalent. Eurostat Statistic Explained. https://­e c.europa.eu/­e urostat/­­s tatistics- ​­ e xplained/­i ndex.php?title=Glossary: Carbon_dioxide_equivalent Intergovernmental Panel on Climate Change, IPCC. (­2018). Annex I: ­Glossary-​­An IPCC Special Report [Matthews, J.B.R. (­ed.)]. Geneva: Intergovernmental Panel on Climate Change (­IPCC). World Economic Forum. (­2020, November 21). How do we get to ­net-​­zero emissions? 6 experts share their views. https://­w ww.weforum.org/­agenda/­2020/­11/­­how-­​­­world­​­­get-­​­­to-­​­­net-­​­­zero-​­carbon/

Moreno de Tejada, O.

Development Finance

 

 

 

 

 

The field of development finance is an evolving paradigm that shifts in line with changes in worldwide financing f lows and the degree of sophistication of the financial system. Other factors, such as the emergence and evolution of key development actors, the setting of increasingly ambitious development goals, and the existence of ever more pressing global challenges, contribute to this f luctuation. In this context, development finance acts as a bridge for

Development Finance  57

the use of public sector resources to facilitate p­ rivate-​­sector investments in developing countries, without which it would be too risky or unattractive for the private sector to invest in, and which ultimately aims for positive developmental impacts in the recipient country. Development finance emerged as a tool to fight global poverty and reduce income inequality, and today targets a wider variety of profound world challenges, such as climate change and gender equality. Its tools of financial implementation have also progressed; what was once dominated by public spending, Official Development Assistance (­ODA), has become increasingly private. The conclusions reached in the three landmark International Conferences on Financing for Development (­Monterrey 2002, Doha 2008, Addis Ababa 2015) are proof of these shifting approaches. The Addis Ababa Action Agenda is a blueprint for setting a financing strategy to support the 2030 Agenda for Sustainable Development via the alignment of all financing f lows. The Millennium Development Goals and the p­ ost-​­2015 Sustainable Development Goals (­SDGs) also echo these milestones; the former focused on increasing donor assistance to developing countries, whereas the latter emphasizes all forms of finance, positioning the mobilization of ­private-​­sector funding as integral for their fulfillment. Furthermore, the revelation that the C ­ OVID-​­19 pandemic may have magnified the financing gap to achieve the SDGs by 70% (­OECD, 2020) highlights how “­the world needs intelligent development finance […] and to move the discussion from ‘­Billions’ in ODA to ‘­Trillions’ in investments of all kinds: public and private, national and global, in both capital and capacity” (­World Bank et  al., 2015: 1). Implementors of development finance include traditional ones, such as bilateral donors and Multilateral Development Banks (­M DBs)­1 and Development Finance Institutions (­DFIs),2 which focus on investment for ­private-​­sector projects. Instruments used by these development financiers include grants, investment and p­olicy-​­ based loans, guarantees, and equity investments, among others. These can be delivered through, for example, p­ ublic–​­private partnerships or blended finance (­a combination of concessional public finance with ­non-​­concessional private finance). These instruments can address “­innovative finance.” Development finance constitutes an integral component of the broader concept of sustainable finance, which shares the common goal of l­ong-​­term investments in sustainable economic activities and projects. See also 2030 Agenda for Sustainable Development, Climate Change, Green Finance, Impact Investing, Millennium Development Goals, Sustainable Development Goals.

References Organisation for Economic C ­ o-​­operation and Development, OECD. (­2020). Global outlook on financing for sustainable development 2021: A new way to invest for people and planet. Paris: OECD Publishing. World Bank, Af DB, ADB, EBRD, EIB, IDB, IMF. (­2015). From billions to trillions: Transforming development finance: Post 2015 financing for development, Development Committee Discussion Note.

58  Diversity, Equity, and Inclusion

Diversity, Equity, and Inclusion

Gómez de Liaño, C.

Diversity, Equity, and Inclusion (­DE&I) describes strategies, policies, and initiatives that companies undertake to promote the representation and participation of different groups of individuals. In particular, “­d iversity” promotes different backgrounds, experiences, and views in the workplace and is normally identified with gender, age, race, ethnicity, social status, sexual orientation, disability, or religion. In turn, “­equity” provides fair access and treatment for all individuals. Finally, “­inclusion” fosters a sense of belonging and that everybody feels comfortable and supported within the organization as all values and perspectives are respected. To ensure a successful transformation, companies’ strategies should focus on “­DE&I” versus “­d iversity” alone and on creating inclusive team environments that allow for positive staff experiences/­engagement (­Gill et al., 2018). Therefore, DE&I goes beyond not discriminating by depicting the ability of a company to effectively manage its diverse workforce. To deliver measurable impact, DE&I needs to be embedded in the business and supported by senior leaders. Throughout the 21st century, corporations have intensified their focus on DE&I due to increasing globalization, the incorporation of women, and the involvement of people with different cultures, backgrounds, and generations within companies (­Seliverstova  & Pierog, 2021). The UN’s 2030 Sustainable Agenda addresses DE&I in four of the 17 Sustainable Development Goals (­SDGs). SDG 5 (­achieve gender equality and empower all women and girls), SDG 8.5 (­achieve full and productive employment and decent work for all women and men, including for young people and persons with disabilities, and equal pay for work of equal value), SDG 10.2 (­empower and promote the social, economic, and political inclusion of all, irrespective of age, sex, disability, race, ethnicity, origin or economic or another status), and SDG 10.3 (­ensure equal opportunity and reduce inequalities of outcome, including by eliminating discriminatory laws, policies, and practices and promoting appropriate legislation, policies, and action in this regard). The concept of DE&I also addresses ESG factors, mainly social and governance dimensions. See also ESG Factors and Impact Investing.

References Gill, G. K., McNally, M. J., & Berman, V. (­2018). Effective diversity, equity, and inclusion practices. Healthcare Management Forum, 31(­5), ­196–​­199.

Double Materiality  59 Seliverstova, Y., & Pierog, A. (­2021). A theoretical study on global workforce diversity management, its benefits, and challenges. Cross Cultural Management Journal, 1, ­117–​­124.

Double Materiality

Sancak, I.

  Double materiality considers sustainability impacts from both ­inside-​­out and ­outside-​­in organizational perspectives: an enterprise’s material impacts on sustainability (­impact materiality) and material sustainability impacts on an enterprise (­financial materiality). Impact materiality refers to the actual or potentially significant inf luence of a firm’s operations and its upstream and downstream value chains on people and the environment. These can be assessed based on the severity, scale, scope, likelihood of negative or positive effects, and the urgency expressed in social or environmental public policy goals and planetary boundaries (­EFRAG, 2021). Financial materiality refers to sustainability risks and opportunities that positively or negatively affect an enterprise’s performance and value (­EFRAG, 2021). While financial materiality ref lects the o ­ utside-​­in perspective, impact materiality is about the ­inside-​­out perspective, focusing on an enterprise’s environmental impact. Double materiality encapsulates both together. The double materiality concept was first formally proposed by the European Commission by referring to the EU’s ­Non-​­Financial Reporting Directive (­NFRD) in June 2019 (­Adams et al., 2021). The NFRD includes a double materiality perspective, covering financial materiality and impact materiality together (­European Commission, 2019). Figure D.1 depicts the double materiality concept. Social and environmental impacts might be ­non-​­financial and considered ­pre-​­financial, but they might turn into material impacts for financial reporting purposes over time, ref lecting “­dynamic materiality” in sustainability reporting (­EFRAG, 2021). Dynamic materiality requires continuous monitoring of sustainability issues (­Datamaran, 2021). Double materiality assessment is crucial in sustainability reporting (­EFRAG, 2021). Measuring, reporting, and disclosing double materiality are paramount in sustainable finance. Sustainability reporting in the double materiality context supports both ­firm-​­based and e­ conomy-​­based sustainability orientations, serving national and global sustainability goals. Sustainable finance at its highest stage requires firms to consider the common good value, namely their effects on the environment and society, beyond ESG risks. By acknowledging financial

60  Doughnut Economics

Figure D.1  Double Materiality Perspective Source: Adapted from European Commission (­2 019)

and impact materiality, double materiality enables stakeholders to assess firms’ impacts on the environment and society as well as firms’ sustainability risks. See also Integrated Reporting, Materiality, Sustainable Finance Stages, and Sustainability Reporting.

References Adams, C. A., Alhamood, A., He, X., Tian, J., Wang, L., & Wang, Y. (­2021). The double-​­ ­ materiality concept; application and issues. Amsterdam: Global Reporting Initiative. Datamaran. (­2021). Getting started with double materiality: A 5 ­ -​­step plan. London: Datamaran. European Financial Reporting Advisory Group, EFRAG. (­2021). Proposals for a relevant and dynamic EU sustainability reporting ­standard-​­setting. Brussels: European Financial Reporting Advisory Group (­EFRAG)-​­European Reporting Lab. European Commission. (­2019, June 20). Guidelines on n­ on-​­f inancial reporting: Supplement on reporting ­climate-​­related information, ­EUT-​­LEX. https://­­eur-​­lex.europa.eu/­­legal-​ ­content/­EN/­T XT/­PDF/?uri=CELEX:52019XC0620(­01)&from=EN

Wikström, T.

Doughnut Economics

 

 

 

 

 

Doughnut economics or the Doughnut is a term and economics model coined in 2012 in an Oxfam report (­Raworth, 2012) by Oxford academic Kate Raworth, “­a renegade economist focused on making economics fit for

Doughnut Economics  61

21st century realities” (­Raworth, 2022). The ­cutting-​­edge Doughnut concept is now widely recognized globally, the UN General Assembly included. As indicated by Doughnut Economics Action Lab, ­co-​­founded by Raworth, the model can help in thriving and ensuring life’s essentials, such as housing, food, health care, and access to politics, while maintaining the ­life-​ ­supporting systems of planet Earth. Doughnut Economics brings a holistic view into economics that focuses on finding the right mindset and ways of thinking to promote sustainable future life, happiness, and prosperity for all on Earth. This ­systems-­​­­thinking-​­based model draws insights from varied economic perspectives and sees economies and societies as complex and interdependent systems that need to thrive after growth, as growth is but a

Figure D.2  The Doughnut of Social and Planetary Boundaries Credit: Kate Raworth and Christian Guthier. C ­ C-­​­­BY-​­SA 4.­0 Source: Raworth, K. (­2017); Doughnut Economics Action Lab (­2022)

62  Dynamic Materiality

phase and not something permanent. Raworth asks whether we will be the ­turn-​­around generation putting humanity on track to meet the needs of all people yet within the delicate balance of planet Earth (­Lovins et al., 2018). Doughnut economics wishes to reframe and redraw the future of economics by identifying seven critical ways of failed mainstream economics and outdated theories and by reconstructing the character of “­rational economic man” and focusing on the importance of energy and nature’s resources for sustainable economic growth. As indicated in Figure D.2, the ­ring-​­shaped doughnut consists of inner and outer circles, the inner circle representing the zone of deprivation and the outer one indicating the limits of economic growth, beyond which the natural resources of planet Earth will become depleted. Between the ecological ceiling and the social foundation of the Doughnut, there is a safe and just space for humanity with a regenerative and distributive economy. Doughnut Economics is a cornerstone of sustainability thinking, supporting sustainable development, integrating thinking, and helping align with sustainable finance perspectives. See also Planetary Boundaries Framework, Sustainable Development, and Sustainable Development Goals.

References Doughnut Economics Action Lab. (­2022, October 22). About doughnut economics. https://­doughnuteconomics.org/­­about-­​­­doughnut-​­economics Lovins, L. H., Wallis, S., Wijkman, A., & Fullerton, J. (­2018). A finer future: Creating an economy in service to life. New Society Publishers. Raworth, K. (­2012). A safe and just space for humanity. Can we live within a doughnut? Oxfam Discussion Papers. Raworth, K. (­2017). Doughnut economics: Seven ways to think like a 21st century economist. London: Penguin Random House. Raworth, K. (­2022, October 16). About Kate Raworth. https://­w ww.kateraworth. com/­about/

Dynamic Materiality

  See Double Materiality.

Sancak, I.

Dynamic Materiality  63

Notes



1 African Development Bank, Asian Development Bank, Caribbean Development Bank, European Bank for Reconstruction and Development, European Investment Bank, I­ nter-​­American Development Bank, within others. 2 British International Investment (­U K), COFIDES (­Spain), DEG (­Germany), FINNFUND (­Finland), FMO (­Netherlands), PROPARCO (­France), within others.

E Earth Overshoot Day

Sancak, I.

See Ecological Footprint.

Earth System

Sancak, I.

See Planetary Boundaries Framework.

Ecological Footprint

Sancak, I.

Ecological footprint expresses how much nature, such as productive land and water areas, people have and how much nature people use, including how fast nature absorbs the waste of products and carbon emissions (­Global Footprint Network, 2022). It measures people’s consumption effects on Earth’s available natural resources. A closely connected concept to ecological footprint is biocapacity or biological capacity. Biocapacity means ecosystems’

DOI: 10.4324/9781003310891-7

Ecological Footprint  65

productivity, regeneration capacity, and ecological assets, such as cropland, grazing land, forest land, and fishing grounds (­Global Footprint Network, 2022). Biocapacity can change based on various factors, such as climate and human interference. As a common unit, global hectare (­gha) is used to measure biocapacity and ecological footprint. Studies show that improved management practices and increased agricultural yields have steadily increased Earth’s biocapacity since 1961; however, the increase in global ecological footprint outpaces it (­Lin et al., 2018). An ecological footprint account can be considered in a supply and demand logic for a region or a country; while the supply side is about a city, state, or nation’s biocapacity, the demand side represents ecological footprint (­Global Footprint Network, 2022). As the most widely used ecological footprint dataset, the National Footprint Accounts (­NFA) provide information for most countries and the world (­Lin et  al., 2018). “­Biocapacity deficit” or “­ecological deficit” occurs when ecological footprint exceeds biocapacity in a region, that is, the population’s demand for the goods and services that its land and seas can generate exceeds the region’s ecosystems capacity (­Global Footprint Network, 2022). On the other hand, “­biocapacity reserve” occurs when biocapacity exceeds ecological footprint. Ecological footprint can be measured globally, by country, or by another scale. For example, in 2018, the world’s value of ecological footprint was 2.77 global hectares (­gha), and biocapacity was 1.58 gha per person, resulting in a 1.19 gha biocapacity deficit. This marks humanity as a biocapacity debtor (­Global Footprint Network, 2022). At the global level, ecological deficit is also called “­overshoot,” meaning that the planet is running an ecological deficit (­Earth Overshoot Day, 2022). In connection with the ecological footprint, the Global Footprint Network calculates the date of Earth Overshoot Day for each year as follows (­Earth Overshoot Day, 2022): (­Earth’s Biocapacity/­Humanity’s Ecological Footprint) x 365 = Earth Overshoot Day

The Earth Overshoot Day in 2022 is July 28 (­Earth Overshoot Day, 2022). It indicates the date that people consumed all the biological resources that Earth generated during that year (­Earth Overshoot Day, 2022). Although natural resource consumption is increasingly exceeding Earth’s biocapacity, economies continue to underplay the importance of natural resources, particularly biological ones (­Wackernagel et  al., 2021). That’s why the world exceeded six of nine planetary boundaries as of 2022. The factors changing ecological footprint are related to economic activities and financial services. Sustainable finance supports ecosystem services, helps eliminate carbon footprints, and contributes to biocapacity. Therefore, the ecological footprint metric provides crucial information to monitor ecological resource use, a key

66  Ecosystem Services

indicator in sustainable development and sustainable finance. In connection with ecological footprint, a widespread concept is “­carbon footprint.” Carbon footprint measures CO2 emissions generated by individuals, firms, cities, regions, or economies, in general, human activities. In a broader context, carbon footprint also covers other greenhouse gases, such as methane. The ecological footprint notion includes environmental inf luences; however, it also considers carbon emissions. See also Decarbonization, Greenhouse Gases, Planetary Boundaries Framework, Natural Capital, and Sustainable Development.

References Earth Overshoot Day. (­2022, October 27). About earth overshoot day. Earth Overshoot Day. https://­w ww.overshootday.org/­­about-­​­­earth-­​­­overshoot- ​­d ay/ Global Footprint Network. (­2022, October 27). Ecological footprint. https://­w ww. footprintnetwork.org/­­our-​­work/­­ecological-​­footprint/ Lin, D., Hanscom, L., Murthy, A., Galli, A., Evans, M., Neill, E., & Wackernagel, M. (­2018). Ecological footprint accounting for countries: Updates and results of the national footprint accounts, 2­ 012–​­2018. Resources, ­1–​­22. Wackernagel, M., Hanscom, L., Jayasinghe, P., Lin, D., Murthy, A., Neill, E.,  & Raven, P. (­2021). The importance of resource security for poverty eradication. Nature Sustainability, ­731–​­738.

Ecosystem Services

Sancak, I.

  See Natural Capital.

Emission Allowance

See Carbon Markets and Cap and Trade System.

Gerres, T.

Emission Trading  67

Emission Trading

Gerres, T.

See Carbon Markets and Cap and Trade System.

Emissions Trading System

Gerres, T.

See Carbon Markets and Cap and Trade System.

Enlightened Shareholder Value (ESV)

Sancak, I.

See Pieconomics.

Environmental Capital

  See Natural Capital.

Sancak, I.

68  Environmental Economics

Vargas, C.

Environmental Economics

 

 

 

 

 

Environmental economics studies the ­cost-​­effective protection, use, and allocation of natural resources (­Harris  & Roach, 2017; Khanna et  al., 2018). Because economics is the science that handles the allocation of scarce resources, environmental issues are relevant. Among other aspects, environmental economics deals with market failures, such as market systems’ inability to allocate environmental resources efficiently (­Jaffe et al., 2005) or the costs associated with losing public goods, such as clean air (­Sagoff, 1998). Therefore, environmental economics relies on the design of policies to deal with environmental problems, including air pollution, water quality, toxic substances, solid waste, energy efficiency, green growth, and climate change. In addition, it helps regulators better understand the opportunities and challenges of appropriate environmental policies. Environmental economics can either be ­prescriptive-​­based or ­market-​­based. In a prescriptive approach, the regulator imposes a ruling. In comparison, ­market-​­based approaches deploy economic incentives to encourage desired behaviors. Examples of these two approaches can be carbon taxes and c­ ap-­​­­and-​­trade, respectively. Environmental economics aims to protect the environment by supporting human life, as it targets to reduce the negative impacts on the environment of economic activity. Environmental economics differs from ecological economics in that the latter emphasizes the economy as a subsystem of the ecosystem to preserve natural capital (­Van den Bergh, 2001). See also Externalities, Environmental Finance, Natural Capital, Sustainable Development, and Sustainable Finance.

References Harris, J. M., & Roach, B. (­2017). Environmental and natural resource economics: A contemporary approach. Routledge. Jaffe, A. B., Newell, R. G., & Stavins, R. N. (­2005). A tale of two market failures: Technology and environmental policy. Ecological Economics, 54(­­2 –​­3), ­164–​­174. Khanna, M., Swinton, S. M.,  & Messer, K. D. (­2018). Sustaining our natural resources in the face of increasing societal demands on agriculture: Directions for future research. Applied Economic Perspectives and Policy, 40(­1), ­38–​­59. Sagoff, M. (­1998). Aggregation and deliberation in valuing environmental public goods: A look beyond contingent pricing. Ecological Economics, 24(­­2 –​­3), ­213–​­230. Van den Bergh, J. C. (­2001). Ecological economics: themes, approaches, and differences with environmental economics. Regional Environmental Change, 2(­1), ­13–​­23.

Environmental Externalities  69

Sancak, I.

Environmental Externalities

See Externalities.

Sancak, I.

Environmental Factors (E of ESG)

 

 

 

See Environmental, Social, and Governance Factors.

Taskin, D.

Environmental Finance

 

 

 

 

 

Environmental finance has emerged due to the rapid deterioration in ecological conditions, such as weakening air, water, soil quality, and deforestation, significantly impacting human health, economies, and jobs. Environmental finance is a crucial factor in mitigating environmental degradation and is a significant dimension of sustainable development (­Lindlein, 2012). Despite the concept’s popularity, recent decades have witnessed the term generally referred to as sustainable finance (­Heinrichs et  al., 2016) or green finance (­Madaleno et al., 2022). Initially, environmental finance was associated with applying paradigms of environmental economics to financing and investments. For example, using financial derivatives to protect the environment was considered environmental finance (­Tao et  al., 2022). Environmental

70  Environmental Footprint

finance aims to channel the existing financial institutions and instruments to environmentally relevant activities and attract investors to the system by making environmental finance a regular retail product. The recent developments related to the increasing awareness of sustainable investments led the way for many financial instruments to improve environmental quality. See also Climate Finance, Carbon Finance, Green Finance, and Sustainable Finance.

References Heinrichs, H., Martens, P. & Wiek, A. (­2016). Sustainability science. Dordrecht: Springer. Lindlein, P. (­2012). Mainstreaming environmental finance into financial ­m arkets –​ ­relevance, potential and obstacles. In D. Köhn (­Ed.), Greening the financial sector: How to mainstream environmental finance in developing countries. Frankfurt: Springer. Madaleno, M., Dogan, E., & Taskin, D. (­2022). A step forward on sustainability: The nexus of environmental responsibility, green technology, clean energy and green finance. Energy Economics, 109, 105945. Tao, H., Zhuang, S., Xue, R., Cao, W., Tian, J., & Shan, Y. (­2022). Environmental finance: An interdisciplinary review. Technological Forecasting and Social Change, 179, 121639.

Environmental Footprint

SoGReS-MF Research Group

Environmental footprint refers to a tool to measure and communicate a product’s or organization’s potential environmental impacts based on a life cycle approach (­European Commission, 2013). In this respect, the European Commission (­2013) has defined a robust methodology consistent with the most accepted standards for computing environmental impacts, such as ISO 14044:2006, ISO 14025:2006, and ISO 14040:2000 standards, the ILCD Manual, the ecological footprint standards, the WRI/­W BCSD greenhouse gas protocol, among others (­­Escrig-​­Olmedo et al., 2021). Environmental footprint integrates the concept of life cycle assessment since it provides a holistic perspective to assess the real environmental impacts through a product’s life cycle analysis, even considering the supply chains of the companies when the analysis is at the organization level. This fact contributes to understanding the environmental footprint as an information tool to manage, compare, or assess environmental products or corporate performance, avoiding greenwashing practices (­­Muñoz-​­Torres et  al., 2021). Environmental footprint defined by

Environmental Kuznets Curve  71

the European Commission (­2013) consists of 14 impact categories, which are: Climate Change, Ozone Depletion, Ecotoxicity, and Fresh Water, Human ­Toxicity-​­Cancer Effects, Human ­Toxicity-­​­­Non-​­Cancer Effects, Particulate Matter/­Respiratory Inorganics, Ionizing Radiation, Human Health Effects, Photochemical Ozone Formation, Acidification, ­Eutrophication-​­Terrestrial, ­Eutrophication-​­Aquatic, Resource ­Depletion-​­Water, Mineral Fossil, Resource Depletion, and Land Use. Therefore, environmental footprint addresses the leading global environmental challenges included in the main international references and frameworks. For instance, it covers the challenge of climate change considered in COP21, and it is associated with the different SDGs of the 2030 Agenda for Sustainable Development, in particular with SDG 3, “­Good Health and Wellbeing,” SDG 6, “­Clean Water and Sanitation,” SDG 7 “­A ffordable and Clean Energy,” SDG 11 “­Sustainable Cities and Communities,” SDG 12 “­Responsible Consumption and Production,” SDG 13 “­Climate Action,” SDG 14 “­Life below Water,” and SDG 15 “­Life on Land” (­­Muñoz-​­Torres et al., 2021). Sustainable finance integrates environmental and social targets in financial activities, both in investment and financing operations. In this regard, environmental footprint could play a key role in assessing the environmental impacts of financial operations from a life cycle approach. See also 2030 Agenda for Sustainable Development, Climate Change, Ecological Footprint, Environmental Risk, European Green Deal.

References ­Escrig-​­Olmedo, E., ­R ivera-​­Lirio, J. M., and ­Ferrero-​­Ferrero, I. (­2021). Companies and the environment. Dimensions of the Corporate Social Responsibility. Learning materials of the Master’s degree in Sustainability and Corporate Social Responsibility, ­U NED-​­U JI. European Commission (­2013). 2013/­179/­EU: Commission recommendation of 9 April 2013 on the use of common methods to measure and communicate the life cycle environmental performance of products and organisations. ­Muñoz-​­Torres, M. J., ­Fernández-​­Izquierdo, M. Á., ­R ivera-​­Lirio, J. M., ­Ferrero-​ ­Ferrero, I., & ­Escrig-​­Olmedo, E. (­2021). Sustainable supply chain management in a global context: a consistency analysis in the textile industry between environmental management practices at company level and sectoral and global environmental challenges, Environment, Development and Sustainability, 23, ­3883–​­3916.

Environmental Kuznets Curve

Sancak, I.

72  Environmental Kuznets Curve

The environmental Kuznets curve (­EKC) links economic growth and the environment, hypothesizing an inverted ­U-​­shape pattern where economic growth initially deteriorates environmental quality; however, at later stages of growth, the direction of effects changes. The environmental Kuznets curve was named after Simon Kuznets, who received the Nobel Prize in economic sciences in 1971. The Kuznets curve describes the relationship between economic growth and inequality (­Nobel Prize, 2022). Years after Kuznets, in their study first published in 1991, Grossman and Krueger found evidence that economic growth tends to alleviate environmental degradation once a country’s per capita income goes beyond certain thresholds. Examining the ­reduced-​­form relationship between per capita income and various environmental indicators, such as urban air pollution and the state of the oxygen regime in river basins, Grossman and Krueger (­1995) found no evidence that economic growth steadily deteriorates environmental quality. Their study shows that, for most indicators, economic growth leads to environmental deterioration at the initial phase of economic growth, but it brings environmental improvement in the subsequent phase. Considering the resemblance to the pattern of inequality and income described by Simon Kuznets, the relationship between environment and income denominates the environmental Kuznets curve (­Levinson, 2017). Figure E.1 depicts the relationship in this nexus. Various factors might change the direction of initial dynamics, such as increasing awareness of environmental sustainability, technological advancement, and stringent environmental regulations and policies (­Sarkodie & Strezov, 2018). The EKC has conceptual connections with the Porter Hypothesis, which claims that environmental regulations potentially can trigger innovation, partially or more than fully offset the costs of complying with them, enhance competitiveness, and fortify firm productivity (­Porter, 1991). This concept is also connected to sustainable development and Sustainable

Figure E.1  Environmental Kuznets Curve Source: Panayotou (­2 003)

Environmental Risk  73

Development Goals since environmental degradation is tied to the nature of economic growth. Furthermore, the EKC notion addresses the stages of sustainable finance and financial policies. See also Porter Hypothesis, Sustainable Development, Sustainable Development Goals, Sustainable Finance, and Sustainable Finance Stages.

References Grossman, G. M., & Krueger, A. B. (­1991, November). Environmental impacts of a North American free trade agreement. NBER Working Paper Series, 3914, ­1–​­55. Grossman, G. M.,  & Krueger, A. B. (­1995). Economic Growth and the Environment. Quarterly Journal of Economics, 110, ­353–​­377. Levinson, A. (­2017). Environmental Kuznets curve. In S. N. Durlauf, & L. E. (­Eds.), New Palgrave Dictionary of Economics (­­pp. ­1788–​­1789). Palgrave Macmillan. Nobel Prize. (­2022, October 13). Simon Kuznets Facts. https://­w ww.nobelprize.org/­ prizes/­­economic-​­sciences/­1971/­kuznets/­facts/ Panayotou, T. (­2003). Economic growth and the environment. Geneva: United Nations Economic Commission for Europe. Porter, M. E. (­1991). America’s Green Strategy. Scientific American, 264(­4), 168. Sarkodie, S. A., & Strezov, V. (­2018). Empirical study of the environmental Kuznets curve and environmental sustainability curve hypothesis for Australia, China, Ghana and USA. Journal of Cleaner Production, ­98–​­110.

Environmental Risk

Ocal, T.

Environmental risk entails the likelihood or probability of adverse environmental consequences. The growing population, industrial development, and pollution threatening the ecological systems have made environmental problems one of the most important issues facing humanity since the early ­t wenty-​ ­f irst century. Environmental risk covers risks from scarcity of natural resources, natural hazards, water stress, biodiversity loss, air and water pollution, deforestation, land degradation, and hazardous and toxic wastes. Environmental risks originate from two types of sources: (­i) physical risks emanating from climate change, natural disasters, and environmental degradation; and (­ii) transition risks, which are related to unintended consequences resulting from the transition toward an environmentally sustainable and ­carbon-​­neutral economy. Physical risks are also categorized as “­acute” when they are related to extreme

74  Environmental Taxonomy

events, such as droughts, typhoons, and f loods, and “­chronic” when they arise from progressive shifts, such as global warming, ­sea-​­level rises, water stress, biodiversity loss, and habitat destruction (­ECB, 2020). Environmental risks are often connected to each other with complex c­ause-­​­­and-​­effect relationships. Several risks can occur simultaneously within the same country, region, or economy, involving t­ rade-​­offs or balancing policy actions about managing one risk in relation to another. The risks are widespread over the globe and concern both developed and developing countries. They occur in both the industrial and agricultural sectors of the economy. Environmental risks are not always easy to identify; because of their probabilistic nature, methods for environmental risk estimation have limitations. Finally, environmental risks are perceived differently in social and cultural terms. Hence, a material risk in a region may be considered unimportant in the neighboring region (­W hyte & Burton, 1980). Environmental risks can transform into financial risks in multiple ways. Acute physical risks, such as impacts from extreme events, can lead to business disruption and impair asset values through property damage. Chronic risks, particularly from climate change, can affect capital, labor, and agriculture productivity. Transition risks can affect businesses and households, creating financial risks for lenders and investors. They will also affect the broader economy through investment, productivity, and relative pricing channels. Also, there is a potential for more significant impacts due to the combined effects of climate and environmental risks (­NGFS, 2020). Sustainability risks include environmental risks, and sustainable finance takes into account all risks in this domain. See also ­ Climate-​­ related Risk (­ CrR), Physical Risk, Transition Risk, Environmental Factors (­E of ESG), Sustainability Risks.

References European Central Bank, ECB. (­2020). Guide on c­limate-​­related and environmental risks. Frankfurt am Main: European Central Bank. Network for Greening the Financial System, NGFS (­2020). Overview of environmental risk analysis by financial institutions. Paris: Network for Greening the Financial System. Whyte, A. V.,  & Burton, I. (­1980). Environmental risk assessment. New York: John Wiley & Sons.

Environmental Taxonomy

  See Sustainability Taxonomy.

Sancak, I.

Environmental, Social, and Governance Factors/­ESG Factors/­ESG Criteria  75

Environmental, Social, and Governance Factors/­ESG Factors/­ESG Criteria

 

 

 

Sancak, I.

 

Environmental, social, and governance (­ESG) factors represent three fundamental sustainability dimensions, each including numerous sustainability features. Each ESG category has multiple aspects that organizations should consider in their d­ ecision-​­making, strategies, business models, financing, operations, corporate management, risk management, reporting and disclosure policies, and ultimately in their transition to sustainability. ESG has been a mainstream practice in corporate sustainability (­Edmans, 2022). In this way, firms are expected to align with ESG criteria to the broadest extent. Figure E.2 shows major themes in each category of the ESG factors. Although each ESG pillar embeds different contents and targets, individual elements of ESG are intertwined (­Henisz, Koller, & Nuttall, 2019). ESG is extremely important since it can affect a company’s ­long-​­term value and impact wider society (­Edmans, 2022). At a macro level, ESG orientation is an avenue to achieve Sustainable Development Goals. Stakeholders and regulators increasingly demand ESG reporting along with financial reporting (­Edmans, 2022); therefore, ESG is an inextricable part of the business world (­Henisz, Koller, & Nuttall, 2019). Moreover, ESG integration has been the mainstream among sustainable investment strategies. Investors typically assess sustainability attributes using nonfinancial data on ESG factors (­Matos, 2020). Although ESG factors are crucial, they are not better or worse than other intangible assets driving ­long-​­term value and creating positive externalities, such as management quality, corporate culture, and innovative capability (­Edmans, 2022). A genuine ESG orientation entails sustainability transformation, and in an ­ESG-​­oriented sustainability transformation, governance (­G) factors play the most significant role among ESG factors (­Sancak, 2023). In the ESG alignment, one of the most critical issues is ESG ratings. ESG ratings score the ­ESG-​­alignment levels of firms. Rating agencies calculate ESG scores under various calculation methodologies. Although this provides stakeholders with independent ESG information, significant divergences among ESG ratings from different rating agencies (­Berg, Kölbel, & Rigobon, 2022) lead to reliability and comparability concerns of ESG ratings (­NGFS, 2022). OECD (­2022) points out that the methodologies of ESG ratings will need to move from rewarding disclosure to rewarding alignment of corporate activities with climate objectives and progress toward sustainability goals. Therefore, while firms adapt to ESG alignment, they also need to

76  Environmental, Social, and Governance Factors/­ESG Factors/­ESG Criteria

Environmental (E) • Energy consumption and efficiency • Climate change • GHGs emissions • Use of natural resources; water, air, soil, forest • Biodiversity and ecosystems • Recycling and waste management / circular economy • Pollution • Ecological footprint

Social (S)

Governance (G)

• Gender equality and diversity • Data protection, security, and privacy • Employee productivity and education • Labor standards and working conditions • Health and safety • Customer responsibility • Community impact • Human rights

• Risk management • Shareholder rights • Executive compensation • Board diversity and structure • Effectiveness of supervisory boards • Anti-corruption • Effectiveness of audit committee • Whistleblower arrangements • Transparency and compliance

Figure E.2  Major ESG Themes Source: The A ­ uthor

consider significantly diverging approaches and focus on the broadest picture of sustainability. Furthermore, regulators have been developing new frameworks in the ESG field to guide firms in developing more coherent reporting (­NGFS, 2022). Thus, ESG metrics, approaches, and calculation methods are open to further development. From the investing perspective, ESG, responsible investing, and sustainable investing are used similarly (­Matos, 2020). However, sustainable investing includes more strategies than ESG investing. See also ESG Rating, Sustainable Investment Strategy, Sustainability, and Sustainability Transformation.

References Berg, F., Kölbel, J. F., & Rigobon, R. (­2022). Aggregate confusion: The divergence of ESG ratings. Review of Finance, ­1–​­30. Edmans, A. (­2022, September 17). The end of ESG. SSRN, ­1–​­20. Henisz, W., Koller, T., & Nuttall, R. (­2019, November 14). Five ways that ESG creates value. McKinsey Quarterly, ­1–​­12. Matos, P. (­2020). ESG and responsible institutional investing around the world: A critical review. CFA Institute Research Foundation, 1­ –​­72. Network for Greening the Financial System, NGFS. (­2022). Enhancing market transparency in green and transition finance. Paris: Network for Greening the Financial System (­NGFS). Organisation for Economic ­Co-​­operation and Development, OECD. (­2022). ESG ratings and climate transition: An assessment of the alignment of E pillar scores and metrics. Paris: OECD Business and Finance Policy Papers, OECD Publishing. Sancak, I. (­2023). Change management in sustainability transformation: A model for business organizations. Journal of Environmental Management, 330, ­1–​­10.

Equator Principles  77

Equator Principles

Sancak, I.

The Equator Principles, launched in 2003, are guiding foundations for identifying, assessing, and managing environmental and social risks in project financing (­Equator Principles Association, 2022). The Principles mainly serve as a risk management framework for financial institutions in connection with sustainability. According to the Equator Principles Association (­EPA), the Principles apply to all industry sectors globally. The EPA and the International Finance Corporation (­IFC) work together to help strengthen the capacity of financial institutions to manage environmental and social risks in line with IFC’s Environmental and Social Performance Standards (­IFC, 2020). The signatories of the principles have worked with IFC to develop practitioner knowledge in environmental and social risk management (­IFC, 2020). The Equator Principles comprise the following ten principles (­Equator Principles Association, 2020): Principle 1: Review and Categorization Principle 2: Environmental and Social Assessment Principle 3: Applicable Environmental and Social Standards Principle 4: Environmental and Social Management System and Equator Principles Action Plan Principle 5: Stakeholder Engagement Principle 6: Grievance Mechanism Principle 7: Independent Review Principle 8: Covenants Principle 9: Independent Monitoring and Reporting Principle 10: Reporting and Transparency As of October 2022, 137 financial institutions (­Equator Principles Financial Institutions, EPFIs) in 38 countries have officially adopted the Equator Principles (­ Equator Principles Association, 2022Equator Principles Association, 2022). EPFIs report annually under the EPFI Reporting with an exception for the first year. According to the EPA, an EPFI must apply the Principles to any new project that meets the predetermined criteria and amounts, such as project finance with total project capital costs of US$10 million or more (­Equator Principles Association, 2022). The Equator Principles are helpful guiding rules in aligning with sustainability and environmental, social, and governance factors (­ESG) and with sustainability reporting.

78  ESG Analysis

See also Sustainability, Environmental, Social, and Governance (­ESG) Factors, Green Bond Principles, Green Project, Sustainability Reporting, and Sustainability Risks.

References Equator Principles Association (­2020). Equator principles. East Sussex: Equator Principles Association. Equator Principles Association (­2022, October 14). The equator principles. https://­­ equator-​­principles.com/­­about-­​­­the-­​­­equator-​­principles/ International Finance Corporation, IFC. (­2020, February 4). Equator principles association and IFC join forces to build capacity of banks on environmental and social risk management. https://­pressroom.ifc.org/­a ll/­pages/­PressDetail.aspx?ID=24688

ESG Analysis

­SoGReS-​­MF Research Group

ESG analysis refers to collecting information to examine how potential investments (­i.e., companies, countries, and issuers) manage relevant and material ESG issues. ESG issues are classified into three domains/­pillars: environmental criteria (­E), social criteria (­S), and governance criteria (­G). Some of the most used ESG criteria in the financial market to carry out an ESG analysis are (­­Muñoz-​­Torres et al., 2019): Environmental criteria are related to the care and conservation of the environment. Some examples are emissions, energy consumption, ­eco-​ ­efficiency, travel and transport impact, waste management/­reduction, environmental risk management, biodiversity protection, materials recycled and reused, hazardous waste, etc. Social criteria are related to the management of an organization that considers different stakeholders (­employees, suppliers, local community, etc.) who may be affected by its activity. Some examples are labor management, quality working conditions, diversity, health  & safety, freedom of association, talent attraction & retention, customer relationship ­management -​­satisfaction, product safety, quality and impact, community relations, supply chain management, etc. Governance criteria are related to the management and leadership of a company. Some governance criteria are board structure, board diversity

ESG Engagement  79

remuneration of managers, antitakeover policy, audit and control systems, prevention of corruption & bribery, transparency (­e.g., tax transparency), brand management, etc. The ESG analysis assigns a score to each criterion. The score of each criterion determines the score of each domain. The score of each domain determines the overall sustainability score. It will depend on the background and information sources of the analysts. ESG analysis is not easy to develop due to its multidimensionality, the qualitative nature of indicators, the difficulty of choosing proper statistical techniques for aggregation (­that avoid that higher scores for one domain may hide very low scores in another domain), and the complexity of introducing stakeholder’s preferences in the ESG analysis (­­Escrig-​­Olmedo et  al., 2017). A robust ESG analysis underlies sustainable investments (­SIs). On the one hand, the main objective is to achieve a greater knowledge of assets for more rational d­ ecision-​­making of investments. On the other hand, ESG analysis strives to assess nontraditional data to determine which companies are best fit to face sustainability risks (­Folqué et al., 2021). Therefore, ESG analysis allows the creation of asset portfolios advanced in ESG matters seeking to create value for the investor in the long term. See also Environmental, Social and Governance Factors, ESG Rating, Sustainability Rankings, and Sustainability Score.

References Escrig-Olmedo, E., Muñoz-Torres, M. J., Fernández-Izquierdo, M. Á., & Rivera-Lirio, J. M. (­2017). Measuring corporate environmental performance: A methodology for sustainable development. Business Strategy and the Environment, 26(­2), ­142–​­162. Folqué, M., Escrig-Olmedo, E., & Corzo Santamaría, T. (­2021). Sustainable development and financial system: Integrating ESG risks through sustainable investment strategies in a climate change context. Sustainable Development, 29(­5), ­876–​­890. Muñoz-Torres, M. J., Fernández-Izquierdo, M. Á., Rivera-Lirio, J. M.,  & Escrig-Olmedo, E. (­2019). Can environmental, social, and governance rating agencies favor business models that promote a more sustainable development? Corporate Social Responsibility and Environmental Management, 26(­2), ­439–​­452.

ESG Engagement

Sancak, I.

80  ESG Fund

See Sustainable Investment Strategies.

ESG Fund

Jurado, A.

ESG investment funds are those that consider environmental (­E), social (­S), and governance (­G) criteria in their asset  allocation process. ESG criteria have been added to the more traditional financial return and risk criteria (­van Dooren & Galema, 2018). Therefore, companies in the investment universe of an ESG fund portfolio must meet certain requirements of each of the three ESG pillars. The assessment of these criteria has to be measurable and verifiable to allow the fund to monitor and disclose the data in the corresponding ESG reporting (­Beerbaum, 2021). Nevertheless, according to Billio et al. (­2021), when selecting companies for an ESG fund, the exclusion principle is applied first. This principle rules out “­sin” companies whose revenues come from harmful, unethical, or illegal activities, like gambling, adult entertainment, or controversial weapons (­­anti-​­personnel mines, chemical or biological weapons, etc.). Next, the degree of compliance with the ESG criteria is analyzed and applied. In this way, the investment strategy of ESG funds evolves from an exclusionary approach to a positive selection process of companies with higher ESG scores (­Folqué et al., 2021). Still, a notable problem is associated with the term “­ESG fund” (­Talan & Sharma, 2019). Broader terms like “­sustainable investment” and “­responsible investment” include ESG investment. In this regard, sustainable investment funds aim to invest in sustainable products and manage ­sustainable-​­oriented portfolios. See also Environmental, Social and Governance Factors, Sustainable Investment, and Sustainable Investment Strategies.

References Beerbaum, D. O. (­2021). Green Quadriga? ­EU-​­Taxonomy, TCFD, ­Non-­​­­Financial-​ ­Reporting Directive y EBA ESG Pillar III/­IFRS Foundation. ­EU-​­Taxonomy, TCFD, ­Non-­​­­Financial-​­Reporting Directive y EBA ESG Pillar III/­IFRS Foundation (­April 11, 2021). Billio, M., Costola, M., Hristova, I., Latino, C., & Pelizzon, L. (­2021). Inside the ESG Ratings:(­Dis) agreement and performance. Corporate Social Responsibility and Environmental Management, 28(­5), ­1426–​­1445. Folqué, M., Escrig - Olmedo, E., & Corzo Santamaría, T. (­2021). Sustainable development and the financial system: Integrating ESG risks through sustainable investment strategies in a context of climate change. Sustainable Development, 29(­5), ­876–​­890.

ESG Incorporation  81 Talan, G., & Sharma, G.D. (­2019). Doing well by doing good: A systematic review and research agenda for sustainable investment. Sustainability, 11(­2), 353. van Dooren, B. & Galema, R. (­2018). Socially responsible investors and the disposition effect. Journal of Behavioral and Experimental Finance, 17, ­42–​­52.

ESG Incorporation

Sancak, I.

See Sustainable Investment Strategies.

ESG Integration

Sancak, I.

See Sustainable Investment Strategies.

ESG Investing/­Investment

See Sustainable Investment Strategies.

Sancak, I.

82  ESG Rating

ESG Rating

Lagasio, V.

  ESG ratings measure firms’ commitments to environmental, social, and governance (­ESG) investment criteria. It is a method for evaluating and understanding ESG performance internally and in the broader company ecosystem. The rating (­or score) allows investors to judge the firm’s goals regarding how they treat their employees, how the board makes decisions, and whether or not they prioritize environmental responsibilities. For instance, a corporation experiencing litigations against its environmental or human resources procedures may have a poor score and be perceived as not respecting the ESG model’s integrity. A trustworthy rating (­or scoring) system must be objective, precise, and consistent. It should be able to deliver comparable scores across industries and locations for businesses. It should incorporate the perspectives of all interested parties. Scores can be indexed against generally agreed benchmarks, such as the Sustainability Accounting Standards Board (­SASB) standard taxonomy, to assist in eliminating subjectivity. This provides an exhaustive reporting structure for ESG materiality by issues. In addition to understanding its ESG position, there are numerous other reasons why a business requires an ESG score. The rapid growth of ESG investing, with investors seeking portfolios of sustainable assets, is perhaps the most notable. The correlation between strong performance on material ESG concerns and financial performance has been demonstrated to be dependable; therefore, institutional and independent investors utilize ESG scores to identify companies likely to generate high returns. Asset managers associate a positive ESG rating with robust profitability. The rating of companies along ESG dimensions enables socially conscious investors to screen possible investments in accordance with their investment objectives and values (­Brogi et al., 2022). A positive ESG score could persuade investors to invest in a firm, either because the company’s values fit with their own or because the company is sufficiently protected against future risks linked with issues such as pollution or bad corporate governance. A negative ESG score may dissuade an investor who is concerned with ESG from investing in the company. See also Environmental, Social and Governance Factors, Sustainability Reporting, Principles for Responsible Investment (­PRI).

Reference Brogi, M., Lagasio, V., & Porretta, P. (­2022). Be good to be wise: Environmental, Social, and Governance awareness as a potential credit risk mitigation factor. Journal of International Financial Management & Accounting, 33(­3), ­522–​­547.

ESG Reporting  83

ESG Reporting

Sancak, I.

  See Sustainability Reporting.

ESG Risks

Ocal, T.

Environment, social, and governance (­ESG) risks refer to the exposure of ESG factors to a business organization or, more broadly, an industry. Environmental risks stem from climate change and other forms of environmental degradation, including air and water pollution, resource scarcity, biodiversity loss, and land degradation. Social risks are related to labor rights, workplace health and safety, inclusiveness, and human capital. For example, risks arising from broader social issues, including safety concerns, strikes, or uprisings, may imply social risks. In turn, governance risks are related to board independence, payroll structure, audits, internal controls, shareholder rights, and corporate ethics. Also, governance risks include how companies assess and manage environmental and social risks in their policies and procedures. ESG risks are often considered external and e­ xtra-​­financial. However, these risks can become financially material by affecting the value or returns of an economic asset, as double materiality or dynamic materiality indicates. Companies can be impacted by ESG risks (­­outside-​­in) through their business activities, for example, being physically impacted by climate change. Conversely, companies can heighten ESG risks (­­inside-​­out), for example, through their CO2 emissions. Furthermore, different ESG risks can be interrelated. As an illustration, social risks can be driven by environmental risks. Deteriorating environmental conditions, such as water stress, can affect deprived parts of a geographical area and disadvantaged populations. This can magnify social and political unrest in the most affected regions, with potentially more damaging consequences and contagion, as well as economic and financial impact (Şimşek, Aydın,  & Oliwa, 2019). In response to growing concerns

84  ESG Voting

about the implications of ESG practices for businesses, stakeholders have become interested in understanding related ESG risks. As a result, measurement tools such as ESG ratings and Sustainability Accounting Standards (­SAS) have emerged to identify and mitigate ESG risks. For example, banks contribute to significant environmental and social externalities through lending practices. Because ESG risks can have material implications for their corporate borrowers, banks should describe and disclose the integration of ESG risks into their lending processes (­ISSB, 2018). Thus, ESG risk assessment is core to sustainable financial decisions, facilitating investments in sustainable economic activities and projects. See also ­Climate-​­related Risk (­CrR), Environmental, Social, and Governance Factors, Double Materiality.

References Şimşek, T., Aydın, H. İ., & Oliwa, B. (­2019). Environmental, social and governance risk versus company performance. In M. Ziolo, & B. Sergi, Financing sustainable development: Key challenges and prospects (­­pp. ­249–​­269). Palgrave McMillan. European Banking Authority, EBA. (­2021). EBA report on management and supervision of ESG risks for credit institutions and investment firms. Frankfurt am Main: European Banking Authority. International Sustainability Standards Board, ISSB. (­2018). Sustainability accounting standards. International Sustainability Standards Board.

ESG Voting

Sancak, I.

See Sustainable Investment Strategies.

Ethical Investment / Ethical Investing

Sancak, I.

EU Taxonomy for Sustainability  85

See Sustainable Investment Strategies.

EU Taxonomy for Sustainability

Lagasio, V.

  The European Union (­EU) Taxonomy for Sustainability is a classification system for economic activities based on their sustainability features (­European Commission, 2020). It is a foundational infrastructure in the transition to sustainable finance in the European Union, built on the EU Action Plan and the European Green Deal (­Bruno & Lagasio, 2021). Moreover, the Taxonomy constitutes a critical component of a much larger framework for sustainable finance that will provide a full toolset for transition funding. The EU Taxonomy Regulation creates disclosure standards for sustainability performance transparency. Organizations subject to the ­Non-​­Financial Reporting Directive will be required to declare the extent to which their activities satisfy the EU Taxonomy’s requirements. Likewise, financial market actors (­such as asset managers) will be obliged to report the extent to which the financial products meet EU Taxonomy standards. Companies can indicate the level to which they invest, such as through capital expenditures, in extending or enhancing their ­Taxonomy-​­aligned operations, or in upgrading other activities to become T ­ axonomy-​­aligned. Disclosure on green income and green spending will provide the market with information on firms whose operations comply with EU Taxonomy requirements (­through disclosure of share revenue from T ­ axonomy-​­aligned activities) and companies that are taking measures to do so (­through disclosure of green investments). The EU Taxonomy is a green categorization system that converts the EU’s climate and environmental goals into ­investment-​­relevant criteria for specific economic activities. It designates green or environmentally sustainable economic activities that significantly contribute to at least one of the EU’s climatic and environmental objectives while not substantially harming any of these objectives and satisfying fundamental social safeguards (­European Commission, 2022). As a result, the EU Taxonomy facilitates the transition toward sustainability, acting as a catalyst for change that can enable an increase in green investments, which are necessary for the achievement of the European Green Deal and the Paris Agreement. The EU Taxonomy is not a mandatory list of economic activities in which investors must engage, nor it imposes environmental performance criteria for businesses or financial products. Investors can choose their investments (­European Commission, 2022). The Taxonomy

86  Exclusionary Investing

Regulation establishes six environmental goals for the European Union: climate change mitigation and adaptation, the transition to a circular economy, pollution prevention and management, biodiversity conservation, and ecosystem restoration. By incorporating “­environmentally sustainable economic activities” as defined by the EU Taxonomy into the concept of “­sustainable investments” in the SFDR, the standards of the SFDR are aligned with those of the EU Taxonomy. Regulatory technical standards created jointly by ESMA, EBA, and EIOPA outline disclosure criteria for “­d ark green” and “­light green” financial products in terms of substance and presentation of information using uniform templates throughout the financial services sectors (­European Commission, 2022). See also Environmental, Social and Governance (­ESG) Factors, Principles for Responsible Investment (­PRI), Social Taxonomy, Sustainability Reporting, and Sustainability Taxonomy.

References Bruno, M., & Lagasio, V. (­2021). An overview of the European policies on ESG in the banking sector. Sustainability, 13(­22), 12641. European Commission (­2020). Taxonomy: Final technical report. EU technical expert group on Sustainable Finance. European Commission. (­2022, November 06). FAQ: What is the EU Taxonomy and how will it work in practice? https://­ec.europa.eu/­i nfo/­sites/­default/­f iles/­business_ economy_euro/­banking_and_finance/­documents/­­sustainable-­​­­f inance-­​­­taxonomy​­faq_en.pdf

Exclusionary Investing

Benedetti, H.

Exclusionary investing or negative screening is an asset  allocation strategy that dismisses potential constituents of investment portfolios based on predetermined criteria. It is commonly used as an investment strategy in socially responsible investment (­SRI), particularly in ESG, ethical, or sustainable investment funds. Exclusion criteria can be based on publicly available information (­such as industry classification, geographic location, or product and service offerings), firms’ s­elf-​­reported information (­i.e., business and management practices or compliance to ­non-​­mandatory standards), ­third-​­party assessments (­i.e., ratings and scores in ESG, corruption, or human rights,

Exclusionary Investing  87

among others), or proprietary scoring mechanisms combining different information sources. Exclusionary investing is one of the seven investment strategies used by the Global Sustainable Investment Alliance (­GSIA) to classify an investment approach as sustainable. Common exclusionary screening strategies consider excluding direct and indirect investments in companies and financial instruments related to “­sin” sectors (­alcohol, gambling, tobacco, pornography, or weapons); fossil fuels (­i.e., coal mining, oil sands, or arctic drilling); controversial behavior (­human rights violations, governance malpractices, violations, corruption, sanctioned governments, or military contracting.); and lastly, firms that do not conform certain ESG indices and ratings. As t­heme-​­based investment strategies are varied, companies and financial instruments excluded according to an investment theme might be included as a viable allocation in another. For example, a “­sin” company, such as an alcohol producer, can be excluded from an ethical investment fund but be included in an ESG investment fund if the manufacturing process is certified as sustainable. This ­non-​­universal classification of companies and financial instruments poses significant challenges to measuring the return implications of exclusionary investing practices. Exclusionary investment strategies can also affect diversification, for instance, by providing limited exposure to energy and o ­ ver-​­weighting sectors such as technology. Nevertheless, recent research has shown that exposure to traditionally excluded sectors such as “­sin” stocks can be replicated through a ­5 -­​­­factor-​­based investment portfolio. In particular, “­sin” stocks’ performance can be fully explained by profitability and investment factors (­Blitz  & Fabozzi, 2017). Exclusionary investing strategies directly contribute to sustainable finance objectives by clearly identifying and restricting investment in areas that are not compatible with sustainable goals. See also ESG Investing, Inclusionary Investing, Socially Responsible Investment (­SRI), and Sustainable Investment Strategies.

References Blitz, D., & Fabozzi, F. J. (­2017). Sin stocks revisited: Resolving the sin stock anomaly. The Journal of Portfolio Management, 44(­1), ­105–​­111. Global Sustainable Investment Alliance, GSIA. (­2021). Global sustainable investment review 2020. http://­w ww.­g si-​­a lliance.org/­­w p-​­content/­uploads/­2021/­08/­­GSIR-​ ­20201.pdf

88  Exclusionary Screening

Exclusionary Screening

Sancak, I.

See Exclusionary Investing and Sustainable Investment Strategies.

Externalities

Sancak, I.

  Externalities are costs (­negative externalities) or benefits (­positive externalities) from economic activities affecting third parties without being ref lected in the prices of goods and services. Negative externalities are of concern since a third party suffers a negative impact from another economic actor without receiving any compensation. For example, a factory might cause a negative externality by polluting the environment without considering and bearing the cost of pollution on third parties and the environment at large. Environmental pollution is the largest negative externality ever (­Stiglitz, 2006). Externalities cause inefficiency in allocating resources across time, space, and contingencies, and they lead to inequalities in many cases (­Dasgupta & Erhlich, 2013). Externalities entail a market failure since product and service prices do not ref lect the real costs, failing to provide efficient outcomes from a welfare perspective (­Helbling, 2020). Externalities might arise in environmental or social forms. Furthermore, they might come out in consumption or production forms. For example, technological innovations or infrastructure developments might provide positive production externalities. Air and noise pollution arising from production activities or services might cause negative production externalities. As a typical example, smoking causes negative consumption externalities. The effect of externalities can be included in prices via internalization, which refers to the incorporation of the real costs and benefits of externalities (­Helbling, 2020). Internalization can be implemented through public or private measures to ensure that benefits or uncompensated costs are ref lected in the prices of commercial goods and services (­Ding, He, & Deng, 2014). For example, governments can impose taxes on economic activities,

Externalities  89

causing negative externalities. Firms can internalize externalities by incorporating their costs into their business practices (­Schoenmaker  & Schramade, 2019). Consumers or n ­ on-​­profit organizations may also force producers to change their business and production models. Additionally, investors may include ESG considerations in their ­decision-​­making. More sustainability awareness and better regulations, in general, are the drivers of internalization. Carbon taxes and emissions trading markets as part of carbon pricing tools are two sets of policies against externalities problems arising from GHGs emissions. In the carbon pricing context, Pigouvian tax, named after British economist Arthur C. Pigou, refers to the government policy of imposing a tax on economic activities causing negative externalities. Externalities, market and government policy failures all together lead to irresponsible use of natural resources and destruction of environmental values, bringing the world into unsustainable conditions and causing climate change. Sustainable finance tackles the externalities problem by changing the nature of financial services, investment principles, and the financial system. For example, sustainable finance discourages firms from involving in G ­ HGs-​­emitting activities and sets the stage for more sustainable economic activities. From the corporate viewpoint, the integrated value approach is an overarching policy set in the internalization of externalities handling financial, environmental, and social values together. Sustainable finance calls for the internalization of externalities and an integrated value approach, and ultimately common good value approach, which tackles externalities problems idealistically. See also Decarbonization, Social Externalities, Greenhouse Gases, Global Warming, and Integrated Value.

References Ding, H., He, M., & Deng, C. (­2014). Lifecycle approach to assessing environmental friendly product project with internalizing environmental externality. Journal of Cleaner Production, ­128–​­138. Dasgupta, P. S., & Erhlich, P. R. (­2013). Pervasive externalities at the population, consumption, and environment nexus. Science, ­324–​­328. Helbling, T. (­2020, February 24). Externalities: Prices do not capture all costs. IMF Finance and Development. Schoenmaker, D., & Schramade, W. (­2019). Principles of sustainable finance. New York: Oxford University Press. Stiglitz, J. E. (­2006). Global public goods and global finance: does global governance ensure that the global public interest is served? In J. P. Touffut (­Ed.), Advancing public goods (­149, ­pp. ­149–​­164). Elgar Publishing.

F ­Finance-­​­­as-​­Usual

Sancak, I.

  See Sustainable Finance Stages.

Financial Inclusion

Aracil, E.

Financial inclusion refers to how widespread is the access and usage of financial products and services. Financial exclusion occurs not only in l­ow-​­income economies. A population might be involuntarily financially excluded due to discrimination against certain population groups, financial illiteracy, insufficient income, or presenting too high a lending risk. The financial inclusion notion has attracted growing attention from the public as a result of the World Bank’s global initiative of financial inclusion measurement through the Findex database. Findex is an o ­ pen-​­access database available from 2011 which measures the percentage population that has access to current accounts, loans, mortgages, or credit cards, on a country basis. The 2014 edition procured for the first time data on digital financial inclusion, monitoring the usage of financial products through digital means. Data shows that mobile phones broaden the access and usage of financial services, more so in rural regions with scant coverage by traditional bank branches (­­Demirguc-​­Kunt et al., 2018; Lashitew et al., 2019). Financial inclusion is crucial for development (­­Demirguc-​­Kunt & Singer, 2017). Basic financial services provide security as opposed to carrying cash. A financially included population reduces the opportunities for corrupt behavior in organizations and administrative units. Moreover, financial inclusion can stimulate savings and investment, insure against shocks, and favor entrepreneurship (­A racil et al., 2022). Because DOI: 10.4324/9781003310891-8

Financial Materiality  91

financial inclusion helps people save and invest in human capital, such as health and education, it addresses poverty and inequality traps, that is, the perseveration of poverty and inequality across generations. Thus, financial inclusion is not an end in itself (­­Demirguc-​­Kunt et  al., 2017) but a means to achieve developmental goals such as the Sustainable Development Goals (­K lapper et al., 2016). Sustainable finance is very much concerned with financial inclusion. Microfinance is widely known for its potential to extend banking products to the base of the pyramid. However, some studies contradict the beneficial impacts of microfinance as a driver of financial instability and enhanced vulnerability among the poorest (­Banerjee et al., 2015). Fintechs can enhance financial inclusion by developing mobile payment infrastructures that expand access to financial services in emerging countries. Finally, sustainable finance products concerned with the ‘­E’ in ESG can also promote financial inclusion indirectly: for example, impact investing is concerned with funding for small entrepreneurs in developing economies. See also Development Finance, Microfinance, Sustainable Development, Sustainable Development Goals, and Sustainable Finance.

References Aracil, E., ­Gómez-​­Bengoechea, G., & ­Moreno-­​­­de-​­Tejada, O. (­2022). Institutional quality and the financial i­nclusion-​­poverty alleviation link: Empirical evidence across countries. Borsa Istanbul Review, 22(­1), ­179–​­188. Banerjee, A., Duf lo, E., Glennerster, R., & Kinnan, C. (­2015). The miracle of microfinance? Evidence from a randomized evaluation. American Economic Journal: Applied Economics, 7(­1), ­22–​­53. ­Demirguc-​­Kunt, A., Klapper, L., Singer, D., & Ansar, S. (­2018). The Global Findex Database 2017: Measuring financial inclusion and the fintech revolution. World Bank Publications. ­Demirgüç-​­Kunt, A., & Singer, D. (­2017). Financial inclusion and inclusive growth: A review of recent empirical evidence. World Bank Policy Research Working Paper (­8040). Klapper, L., M. ­El-​­Zoghbi, and J. Hess. (­2016). Achieving the Sustainable Development Goals: The Role of Financial Inclusion. Washington, DC: CGAP. Lashitew, A. A., van Tulder, R., & Liasse, Y. (­2019). Mobile phones for financial inclusion: What explains the diffusion of mobile money innovations? Research Policy, 48(­5), ­1201–​­1215.

Financial Materiality

See Double Materiality.

Sancak, I.

92  Fossil Fuel

Fossil Fuel

See Global Warming and Greenhouse Gases.

Sancak, I.

G Global Reporting Initiative

Kanashiro, P.

  The Global Reporting Initiative (­GRI) is a global ­non-​­profit institution with the mission to help companies and other organizations report significant impacts on the economy, environment, and surrounding society, including impacts on human rights. GRI was founded in 1997 in Boston, USA, in response to the environmental damage caused by the Exxon Valdez oil spill. GRI’s purpose was to create an accountability mechanism to ensure that companies adhere to the principles of responsible business. In 2020, t­hree-​­quarters of the G250 (­the world’s largest companies by revenue) reported the application of the GRI Universal Standards. Over 10,000 companies disclosed sustainability information following GRI guidance, representing organizations from multiple sectors, sizes, and regions in the world (­Threlfall et al., 2020), which positions GRI as a leading global standard setter in sustainable finance. The GRI Universal Standards are structured into three series: (­1) GRI Universal Standards, (­2) GRI Sector Standards, and (­3) GRI Topic Standards. The GRI Universal Standards (­GRI, 2021a) detail requirements and principles of sustainability reporting, disclosure about the organization, and guidance on how to conduct materiality assessment. Organizations must adhere to eight reporting principles that ensure ­h igh-​­quality sustainability reporting and proper presentation of the disclosed information: accuracy, balance, clarity, comparability, completeness, sustainability context, timeliness, and verifiability. The GRI Sector Standards (­GRI, 2021b) aim to develop specific guidelines for 40 ­h igh-​­impact sectors and will cover disclosure requirements particular to the context of agriculture, fishing, oil and gas, and the coal sector. As of 2022, GRI has launched GRI 11: Oil & Gas, while other guides are underway. Finally, the GRI Topic Standards (­GRI, 2021c) help companies conduct a materiality assessment using a f­our-​­step approach: (­1) Understand the organization’s context, (­2) Identify actual and potential economic, environmental, and social impacts of the organization, (­3) Assess the significance of these impacts, and (­4) Prioritize the most significant impacts for reporting. For each significant impact (­a lso referred to as a material topic), GRI has developed disclosure requirements and metrics that organizations must report

DOI: 10.4324/9781003310891-9

94  Global Warming

or explain why information is omitted. GRI covers approximately 30 material topics divided into economic (­tax, market presence, a­ nti-​­corruption), environmental (­water and eff luents, biodiversity, emissions), and social (­child labor, local communities, and customer health and safety). Companies choose which topics to disclose based on the materiality assessment. For example, violating indigenous people’s rights is a material topic for a company operating in protected areas. Following GRI Topic Standards for sustainability reporting, the company should report on specific metrics that identify violations involving the rights of indigenous people, the status of the incidents, the review process, and remediation plans. Companies are trending toward an integrated reporting approach combining GRI and other sustainability standard setters such as the International Sustainability Standards Board (­ISSB), Taskforce for ­Climate-​­Related Disclosure (­TCFD), and CDP (­formerly known as Carbon Disclosure Protocol). While GRI has focused on the impact of business on society (­outward impact), SASB, TCFD, and CDP focus on the impact of social and environmental issues on the firm’s value creation (­inward impact). See also Double Materiality, Integrated Reporting, Materiality, and Sustainability Reporting.

References Global Reporting Initiative (­ GRI). (­ 2021a). GRI 1: Foundation 2021 universal standards.  https://­w ww.globalreporting.org/­­how-­​­­to-­​­­u se-­​­­t he- ­​­­g ri- ​­standards/­­g ri­​­­standards-­​­­english-​­language/ Global Reporting Initiative (­GRI). (­2021b). GRI 2: General disclosures 2021 universal standards.  https://­w ww.globalreporting.org/­­how-­​­­to-­​­­u se-­​­­t he- ­​­­g ri- ​­standards/­­g ri­​­­standards-­​­­english-​­language/ Global Reporting Initiative (­GRI). (­2021c). GRI 3: Material topics 2021 universal standards.  https://­w ww.globalreporting.org/­­how-­​­­to-­​­­u se-­​­­t he- ­​­­g ri- ​­standards/­­g ri-­​­­ standards-­​­­english-​­language/ Threlfall, R., King, A., Shulman, J., & Bartels, W. (­2020). The time has come: The KPMG survey on sustainability reporting 2020. https://­a ssets.kpmg/­content/­d am/­ kpmg/­x x/­pdf/­2020/­11/­­the-­​­­t ime-­​­­has-​­come.pdf

Global Warming

Sancak, I.

  Global warming expresses the estimated global average increase in Earth’s temperature over a given period. It is measured by estimating the global

Global Warming  95

average of n ­ ear-​­surface air temperatures over land and s­ ea-​­ice and sea surface temperatures over i­ce-​­free ocean regions (­g lobal mean surface temperature, GMST) (­IPCC, 2018). Global warming is a crucial issue in sustainability since it affects multiple dimensions of ecosystem services, economic and financial activities, and risks. Earth’s average temperature (­­land–​­ocean) rose around 1 degree Celsius in the last 50 years, as indicated by Figure G.1. GHG) emissions and some Increasing anthropogenic greenhouse gas (­ other factors, such as deforestation, increase the atmospheric concentration of GHGs and cause the change in Earth’s h ­ eat-​­trapping levels through the greenhouse effect. As a natural process of Earth, the greenhouse effect refers to trapping heat by GHGs (­NASA, 2022). GHGs, such as carbon dioxide, water vapor, methane, and nitrous oxide, have a crucial function in absorbing solar energy while the heat is radiated back into the atmosphere (­UCAR, 2022). The changing concentration of GHGs in the atmosphere affects the ­heat-​­trapping capacity of the greenhouse effect. As more GHGs are emitted, heat sticks around and makes the planet warmer (­UCAR, 2022). Moreover, weakening G ­ HG-​­eliminating systems, such as forests via deforestation, impairs the greenhouse effect. Increasing concentrations of anthropogenic GHGs in the last century have been causing extra heat traps near Earth’s surface and temperatures to rise (­NASA, 2022). In other words, Earth’s temperature has been rising since the concentration of ­heat-​­trapping gases in the air is increasing (­UCAR, 2022). Under given conditions, increases in GHG concentrations have caused increases in Earth’s global average temperature. In 2021, while the surface temperature (­across land and ocean) was 0.84°C warmer than the ­twentieth-​­century average and 1.04°C warmer than the ­pre-​­industrial period, Earth’s temperature has risen by 0.18°C per decade

Figure G.1  G  lobal Mean Estimates based on Land and Ocean Data, L ­ and–​­Ocean Temperature Index (­base period 1­ 951–​­1980) Source: NASA Goddard Institute for Space Studies (­2022)

96  Global Warming

Increasing Antropogenic GHG Emissions

More Heat Trapping through Greenhouse Effect

Global Warming

Antropogenic (humanrelated) GHGs drastically increased since the Industrial Revolution, and changed the GHG concentrations in the atmosphere.

Increasing GHG concentrations in the atmosphere traps more heat and impairs the balance of cooling system of Earth.

Trapping more heat increased Earth’s global average temperature by about 1°C since the preindustrial period, and the number is currently increasing by 0.2°C per decade.

Figure G.2  Overall Causes of Global Warming Source: Developed by the Author based on NASA (­2 022), NASA Goddard Institute for Space Studies (­2022), UCAR (­2 022), and Lindsey and Dahlman (­2022)

Table G.1  Global Warming Potential for Some GHGs Global Warming Potential (­GWP)

Carbon dioxide (­CO2) Methane (­CH4) Nitrous oxide (­N2O) Perf luoromethane (­CF4) ­Hydrof luorocarbon-​ ­152a, Dif luoroethane (­­HFC-​­152a)

Cumulative Forcing over 20 Years

Cumulative Forcing over 100 Years

   1   84  264 4880  506

   1   28  265 6630  138

Source: IPCC (­2014)

since 1981 (­Lindsey & Dahlman, 2022). Figure G.2 shows the three critical global problems. As a ­heat-​­trapping GHG, in addition to others, carbon dioxide emissions have dangerously increased because of burning fossil fuels, l­and-​­use changes, and industrial processes. It is the reference gas in measuring global warming potential (­GWP) (­IPCC, 2018). Not all GHGs have the same GWP. Therefore, GWP is used as a single metric to compare components based on radiative forcing in a chosen period for various GHGs (­IPCC, 2014). Table G.1 shows the GWPs of some GHGs. Table G.1 shows that some GHGs have much higher GWP than carbon dioxide. GWP is also used in measuring CO2-​­equivalent emissions: the CO2-​ ­equivalent emission is calculated by multiplying the emission of a GHG by its

Global Warming  97

Figure G.3  Global Warming Projections Source: Climate Action Tracker (­2021). Copyright ©2021 by Climate Analytics and NewClimate ­Institute​­

GWP (­IPCC, 2014). The impacts of global warming are disastrous and enormous; global warming causes climate change, amplifies coastal erosion, melts ice caps and glaciers, and triggers some infectious diseases (­R iebeek, 2010). Due to the existential threats of global warming, around 200 nations signed the Paris Agreement on 12 December 2015 to limit global warming to well below 2˚C, or preferably to 1.5˚C, compared to p­ re-​­industrial levels (­UNFCCC, 2022). Figure G.3 shows global warming projections. Sustainable finance has the potential to stop global warming, help mitigate its adverse effects, such as climate change and biodiversity loss, and support adaptation policies. See also Climate Change, Decarbonization, Greenhouse Gases, and Paris Agreement.

References Climate Action Tracker. (­2021, November 9). 2100 warming projections: Emissions and expected warming based on pledges and current policies, https://­climateactiontracker. org/­g lobal/­temperatures/ IPCC. (­2018). Annex I: ­ Glossary-​­ An IPCC special report [Matthews, J.B.R. (­ ed.)]. Geneva: Intergovernmental Panel on Climate Change (­IPCC). IPCC. (­2014). Climate change 2014: Synthesis report. Geneva: Contribution of Working Groups I, II and III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change [Core Writing Team, R. K. Pachauri and L. A. Meyer (­eds.)].

98  Global Warming Potential (GWP) Lindsey, R., & Dahlman, L. (­2022). Climate change: Global temperature. Washington, DC: NOAA. NASA. (­2022, October 22). What is the greenhouse effect? https://­climate.nasa.gov/­ faq/­19/­­what-­​­­is-­​­­the-­​­­g reenhouse-​­effect/ NASA Goddard Institute for Space Studies. (­2022, October 22). GISS Surface Temperature Analysis (­v4). NASA GISS: https://­d ata.giss.nasa.gov/­g istemp/­g raphs_v4/ Riebeek, H. (­ 2010, June 3). Global warming. NASA earth observatory. https://­ earthobservatory.nasa.gov/­features/­GlobalWarming UCAR. (­2022, October 22). The greenhouse effect. https://­scied.ucar.edu/­­learning-​­ zone/­­how-­​­­climate-​­works/­­g reenhouse-​­effect UNFCCC. (­ 2022, September 6). What is the Paris Agreement? https://­unfccc. int/­­process-­​­­a nd-​­meetings/­­the-­​­­paris-​­agreement/­­what-­​­­is-­​­­the-­​­­paris-​­agreement

Global Warming Potential (GWP)

Sancak, I.

  See Global Warming.

Governance Factors (­G of ESG)

 

Lagasio, V.

 

Environmental, social, and governance (­ESG) factors are key for companies in l­ong-​­term sustainable success. The “­G” in ESG refers to the governance characteristics of issuers/­ borrowers, ranging from sovereigns’ policymaking procedures to the allocation of rights and obligations among various corporate participants, such as the board of directors, managers, shareholders, and all the other stakeholders. Investors should build awareness of ­long-​­term systemic threats, including ESG factors, relating to overall economic development, financial market quality, and stability. That is why regulations require public companies to disclose their governance practices in an increasing number of jurisdictions to disseminate and promote their transparency to all stakeholders. Governance encompasses an extensive array of company characteristics, such as the role and composition of board and management structures, risk management,

Green Asset Ratio (GAR)  99

shareholder rights, transparency, and its internal control procedures. In addition, they appreciate companies that encourage shareholder participation and boards of directors that are both accountable and diverse. In addition to the structure and composition of the boards of directors, another facet of governance is the remuneration and monitoring of CEOs and senior executives. Unlike environmental or social data, governance data have been collected for a longer period of time (­Engle et al., 2021), and the criteria for what constitutes good governance and its classification have been more generally studied and recognized. Sustainable investors may evaluate governance practices in the same manner as environmental and social considerations. Negative evaluations can exclude organizations whose governance rules and practices expose them to unacceptable risk levels. It can be a business that engages in illegal or unethical actions or fails to appropriately address l­ong-​­term threats to its business, such as those posed by climate change. Positive assessments may be utilized to discover businesses with strong and transparent governance rules and procedures. Within sustainable finance, the governance component of ESG investment will continue to evolve in response to shifting attitudes, emphasizing enhanced governance to ensure that companies fulfill their environmental and social duties. See also Environmental, Social and Governance Factors, ESG Reporting, and Corporate Governance

Reference Engle, R., Brogi, M., Cucari, N., & Lagasio, V. (­2021). Environmental, Social, Governance: Implications for businesses and effects for stakeholders. Corporate Social Responsibility and Environmental Management, 28(­5), ­1423–​­1425.

Green Asset Ratio (GAR)

Ocal, T.

See Green Assets.

Green Assets

Ocal, T.

100  Green Assets

Green assets are financial instruments identified as environmentally sustainable by technical classifications or regulations. For example, the EU established a framework, the EU Taxonomy, to facilitate sustainable investment by defining how and to what extent the activities of corporations are associated with economic activities that qualify as environmentally sustainable (­EU, 2020). The EU Taxonomy establishes a list of environmentally sustainable economic activities intending to scale up the EU’s sustainable investment and implement the European Green Deal. The Taxonomy regulation defines ­taxonomy-​­aligned activities as those substantially contributing to one of the following six environmental objectives: climate change mitigation, climate change adaptation, the sustainable use and protection of water and marine resources, the transition to a circular economy, pollution prevention and control, and the protection and restoration of biodiversity and ecosystems. In turn, ­t axonomy-​­aligned activities under the EU Taxonomy embed initiatives that do no significant harm to environmental objectives and comply with technical screening criteria and minimum safeguards. The regulation defines the conditions for qualifying as substantial contributors to environmental objectives. For example, pursuing the climate change mitigation objective is possible when an economic activity contributes substantially to stabilizing greenhouse gas (­GHG) emissions. This means that it avoids or reduces them or enhances GHG removals consistent with the l­ong-​­term temperature goal of the Paris Climate Agreement through process innovations or solutions. The technical screening criteria for green assets identify the most relevant potential contributions to an environmental objective while considering both an economic activity’s ­short-​­and l­ong-​­term impacts to avoid significant harm. Along with related concepts such as green bonds, green loans, and green equities, the identification of green assets promotes sustainability considerations in companies’ investment and business strategies. In particular, financial institutions’ classification and disclosure of green assets are expected to accelerate sustainable finance investments. As a closely connected concept, the green asset ratio (­GAR) shows the proportion of green assets to the total assets of a financial institution. The EU’s Taxonomy Regulation serves as a framework to facilitate sustainable investment and requires disclosures as a key performance indicator (­K PI) under the ­Non-​­Financial Reporting Directive (­N FRD) on how and to what extent corporate activities qualify as environmentally sustainable. In this sense, the European Banking Authority (­E BA) proposes the GAR as the main KPI for financial institutions to disclose the ratio of their ­taxonomy-​­compliant exposures to their total exposures. Financial institutions should disclose the GAR as a ­point-­​­­in-​­time for the stock of exposures to show their alignment with ­t axonomy-​­compliant activities and in terms of new lending f lows to show how they are transitioning toward sustainability (­E BA, 2021). See also EU Taxonomy for Sustainability, European Green Deal, Climate Change Adaptation, and Climate Change Mitigation.

Green Bond Principles  101

References EBA. (­2021). Advice to the commission on KPIs and methodology for disclosure by credit institutions and investment firms under the NFRD on how and to what extent their Activities qualify as environmentally sustainable according to the EU Taxonomy regulation. Frankfurt am Main: European Banking Authority. European Union, EU. (­2020). Regulation 2020/­852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment, and amending Regulation (­EU) 2019/­2088 (­OJ L 198, 22.6.2020). Brussels: European Union.

Green Bond Principles

Ocal, T.

The Green Bonds Principles (­GBP) (­2018, 2021) aim to support bond issuers in financing environmentally sound and sustainable projects. An initiative of the International Capital Markets Association, the GBP provides voluntary guidelines that enhance transparency and disclosures in bond issuance, thereby promoting integrity in developing the green bond market (­ICMA, 2021). The GBP recommendations allow stakeholders such as investors, banks, underwriters, and others to understand green bonds’ characteristics and distinguish them from traditional bonds. Moreover, the GBP provides issuers with guidance on the process of launching a credible green bond, supports investors by promoting the availability of necessary information to evaluate the environmental impact of a green bond, and assists underwriters by offering key steps in facilitating green transactions. Four core components feature the GBP: use of p­ roceeds – ​­which should be exclusively applied to finance green projects and described in the legal documentation (­ICMA, 2022)  – process ​­ for project evaluation and selection, management of proceeds, and reporting. The GBP recognizes four broad types of green bonds: standard green use of proceeds bond, green revenue bond, green project bond, and green securitized bond. The GBP does not provide detailed definitions for “­g reen”; however, it broadly suggests a ­non-​­exhaustive list of eligible green project categories such as renewable energy, energy efficiency, pollution prevention and control, environmentally sustainable management of living natural resources and land use, terrestrial and aquatic biodiversity, clean transportation, sustainable water, and wastewater management, climate change adaptation, circular economy adapted products, production technologies and processes, and green buildings. Eligible green projects should provide clear environmental benefits to be

102  Green Bonds

assessed and, if possible, quantified by the issuer. The GBP suggests that the issuer of a green bond should inform investors about: (­i) the environmental sustainability objectives of the eligible green projects; (­ii) the process by which the issuer determines how the project fits within the eligible categories; and (­iii) complementary information on processes by which the issuer identifies and manages the project’s social and environmental risks. Issuers should discuss the alignment of their green bond with the GBP’s four core components in a green bond framework or in their legal documentation, which should be available in a readily accessible format to investors. Issuers should keep ­up-­​­­to-​­date relevant parties on the use of proceeds, to be renewed annually until full allocation and on a timely basis in case of material developments. The GBP also recommends that issuers appoint external third parties to assess the alignment of their green bond with the GBP’s four core components. The GBP provides a framework for supporting green bonds, a fundamental instrument in sustainable finance that allows channeling funds toward environmentally friendly projects. Thus, the GBP is a core tool enabling sustainable finance development. See also Green Bonds, Green Project, Green Finance, and Sustainable Finance.

References ICMA. (­2021). Green bonds p­ rinciples – Voluntary ​­ process guidelines for issuing green bonds. International Capital Markets Association. International Capital Markets Association, ICMA. (­2022). The green bond principles guidance handbook. International Capital Markets Association.

Green Bonds

Ocal, T.

See Green Bond Principles.

Green Company

See Green Economy.

Sancak, I

Green Economy  103

Sancak, I.

Green Economy

 

 

 

 

 

Green economy is defined as “­improved human w ­ ell-​­being and social equity, while significantly reducing environmental risks and ecological scarcities” (­U NEP, 2011: 2). In other words, green economy refers to ­low-​­carbon, ­resource-​­efficient, and socially inclusive economy (­U NEP, 2021). The Green Economy Coalition defines green economy under five principles (­Green Economy Coalition, 2020): The Wellbeing Principle: A green economy enables all people to create and enjoy prosperity. The Justice Principle: The green economy promotes equity within and between generations. The Planetary Boundaries Principle: The green economy safeguards, restores and invests in nature. The Efficiency and Sufficiency Principle: The green economy is geared to support sustainable consumption and production. The Good Governance Principle: The green economy is guided by integrated, accountable and resilient institutions. The term “­g reen” is used in various forms and contexts in economics and finance. For example, green company, green business, and green project are all used for expressing l­ow-​­carbon and r­ esource-​­efficient economic activities, business models, and projects. In some cases, national or international standard setters and industry organizations draw the perimeter of being green. For example, the International Capital Market Association (­ICMA) provides a mapping of the contribution of green project categories and publishes the Green Bonds Principles (­ICMA, 2019). In some cases, market trends and practices lead to some conventions or criteria for being green, such as ESG criteria and sustainability taxonomy in sustainability alignment for corporations oriented to be green companies. From the economic growth perspective, a green economy is pronounced with p­ ro-​­environmental growth, or green growth driven by public and private investments, reducing carbon emissions and pollution, fostering energy and resource efficiency, and preserving biodiversity and ecosystem services (­U NEP, 2011). The green economy notion does not replace sustainable development but creates a focus on the positive social and environmental outcomes from the economy, investment, capital and infrastructure, employment, and skills perspectives (­U NEP, 2021). In other words, a green economy aims at fostering sustainable development and

104  Green Equities

serves Sustainable Development Goals. Green economies support sustainable economic growth by utilizing renewable energy resources and technologies instead of G ­ HG-​­emitting ones, respecting nature, considering planetary boundaries, and internalizing externalities. Greening economies is one of the main aspects of sustainability transformation and a prerequisite of sustainable development. In contrast, brown economies are aligned to encourage the rapid accumulation of physical, financial, and human capital by disregarding the world’s stock of natural wealth (­U NEP, 2011). Brown economy aims at scoring the highest possible growth ignoring sustainability. It is accepted that brown economies have caused existential threats to our planet, such as climate change. As an answer, sustainable finance plays a key role in orienting economic activities from brown into green economic activities, preserving nature and natural resources, and supporting sustainable development. See also Green Finance, Sustainable Development, Sustainable Development Goals, and Sustainable Finance.

References Green Economy Coalition. (­2020, June 7). The 5 principles of green economy: exploring what a green and fair economy looks like in ­principle – and ​­ in practice. https://­w ww.greeneconomycoalition.org/­­news- ­​­­a nd-​­resources/­­t he-­​­­5 -­​­­principles­​­­of-­​­­g reen-​­economy ICMA. (­2019). Green project mapping. Paris: International Capital Market Association. United Nations Environment Programme, UNEP. (­2021, June 10). Green economy. https://­w ww.unep.org/­regions/­­a sia-­​­­a nd-​­pacific/­­regional-​­i nitiatives/­­supporting-­​ ­­resource-​­efficiency/­­g reen-​­economy

United Nations Environment Programme, UNEP. (­2011). Towards a green economy: Pathways to sustainable development and poverty e­ radication – ​­A synthesis for policy makers. Nairobi: United Nations Environment Programme.

Green Equities

Martin Bujack, K.

Green equities or green stocks refer to the shares of those companies whose primary business has a beneficial environmental impact. They are also referred to as sustainable equity, which involves the broad ­multi-​­activity listed equity companies that generate more than 25% of their earnings through projects designed to support sustainable economic development, enhance the quality of life, and safeguard the environment (­Inderst et al., 2012). Currently, these

Green Equities  105

companies are mainly concentrated on alternative energy, energy and material efficiency, clean transportation, water management, and waste management and recycling. Due to the relevant environmental and climate changes in the last decades, growing concerns have raised investors’ and policymakers’ interests in environmentally friendly investments. Companies are not only found to be responsible for profit making but also for contributing to society and the economy in harmony with the natural environment (­Chițimiea et al., 2021). Thus, a wide range of financial instruments targeted toward environmentally friendly economic activities has become popular among investors in the ­twenty-​­first century, growing fast in scope and size. In this context, green bonds and green equities play a critical role in allocating the capital required to finance transformational projects needed to transition to a l­ow-​ ­carbon economy (­Tian, 2018). Since the 2015 Paris Climate Agreement, the green equity market has witnessed extraordinary growth due to the immense capital f lows to green stocks from investors looking for environmentally responsible investments and, at the same time, a high return potential (­Ferrer et al., 2021). This investment strategy focused on clean energy is in line with SDG 13, “­Climate Action,” contributing to a sustainable, ­low-​­carbon future. It is also considered part of Sustainable and Responsible Investments (­SRI). Some exchanges, such as the US Nasdaq, have also developed stock indices to track the growing green sector. These green indices represent companies working on enhancing economic development based on the reduction of carbon usage. One of the most popular is the Nasdaq Green Economy Global Benchmark Index, which is a performance indicator of stocks covering areas such as energy efficiency, clean fuels, renewable energy generation, natural resources, water, pollution mitigation, and advanced materials (­Nasdaq, 2022). See also Green Investments, Green Bonds, Sustainable Investment, and Sustainable Investment Strategies.

References Chițimiea, A., Minciu, M., Manta, A. M., Ciocoiu, C. N., & Veith, C. (­2021). The drivers of green investment: a bibliometric and systematic review. Sustainability, 13(­6), 3507. Ferrer, R., Benítez, R., & Bolós, V. J. (­2021). Interdependence between green financial instruments and major conventional assets: a w ­ avelet-​­based network analysis. Mathematics, 9(­8), 900. Inderst, G., Kaminker, C.,  & Stewart, F. (­2012). Defining and measuring green investments. Nasdaq. (­2022). Green equity indexes. https://­w ww.nasdaq.com/­solutions/­­g reen-­​ ­­e quity- ​­ i ndexes#:~:text=Nasdaq%20provides%20a%20complete%20family, on%20reduction%20of%20carbon%20usage (­accessed ­27-­​­­06-​­22). Tian, H. (­2018). Role of capital market to accelerate the transition to ­low-​­carbon energy system. In Financing for ­low-​­carbon energy transition (­­pp. ­211–​­238). Singapore: Springer.

106  Green Finance

Ocal, T.

Green Finance

 

 

 

 

 

While there is no single definition for green or environmental finance, various sets of criteria have been developed in the context of the global financial system by national regulators and international institutions. For example, the G20 Green Finance Study Group (­2016) defines green finance as financing investments providing environmental benefits in the environmentally sustainable development context. These benefits include, but are not limited to, reductions in air, water, and land pollution, reduction of GHG emissions, energy efficiency improvement, and climate change mitigation and adaptation (­GFSG, 2016). That is, green finance serves as an umbrella notion for financial proceeds to address environmental challenges beyond climate change, tackled explicitly by climate finance. The Organization for Economic Cooperation and Development (­OECD) defines the purpose of green finance as achieving economic growth while reducing pollution and GHG emissions, minimizing waste, and improving efficiency in the use of natural resources (­OECD, 2022). The European Banking Federation’s (­EBF) definition includes but is not limited to environmental aspects, such as pollution, GHG, biodiversity, water or air quality issues, and climate ­change-​­related aspects, such as energy efficiency, renewable energies, prevention and mitigation of climate c­ hange-​­connected severe events (­EBF, 2017). Most green taxonomies link detailed environmental and performance specifications to these definitions to determine green finance eligibility and alignment. Among these taxonomies using different approaches and structures, there is consensus and overlap in most category schemes for green investment and finance. While sustainable finance takes a broad environmental, social, economic, and governance approach, green finance is limited to environmental issues. Climate finance is even more narrowly focused, targeting only climate change mitigation and/­or adaptation. Green finance covers a wide range of green financial products and services and can support green activities in several ways. Examples of these products include green bonds, green loans, green investment funds, climate risk insurance products, or venture capital for innovative green technologies. Like closely connected fields, such as climate finance, green finance responds to some inherent problems in finance. The financial system has three key characteristics that fuel environmental issues: a bias toward s­hort-​­term benefits in d­ ecision-​­making, a narrow focus on maximizing profit for shareholders, and a failure to address externalities

Green Fintech Taxonomy (Green Fintech Classification)  107

(­Thompson, 2021). These issues urge financial institutions to develop an environmentally focused corporate mission with an understanding of the role of the financial system in the economy, society, and the environment. A green approach to finance can help financial institutions and the financial system overall to overcome the challenges of ­short-​­termism, narrow focus, and externalities, potentially leading to positive outcomes to tackle the environmental challenges that the world is globally facing. Supporting the transition to a sustainable, ­low-​­carbon world requires substantial investment. The New Climate Economy (­NCE) 2018 report estimates that a total of $90 trillion is needed until 2030 for financing sustainable infrastructure globally. The massive scale of required investment means that public funds alone will not be sufficient. Thus, financial institutions embracing green finance play a crucial role in mobilizing capital to support the transition to a more environmentally sustainable world. See also Environmental Finance, Climate Finance, and Sustainable Finance.

References European Banking Federation, EBF (­2017). Towards a green finance framework. Brussels: European Banking Federation. Green Finance Study Group, GFSG. (­2016). G20 green finance synthesis report, UNEP. Toronto: G20 Green Finance Study Group. New Climate Economy, NCE. (­2018). Unlocking the inclusive growth story of the 21st century: Accelerating climate action in urgent times. The Global Commission on the Economy and Climate: The New Climate Economy. Organisation for Economic ­ Co-​­ operation and Development, OECD. (­ 2022). Green finance and investment. https://­w ww.­oecd-​­i library.org/­environment/­­g reen-­​ ­­f inance-­​­­a nd-​­i nvestment_24090344 (­accesed16.08.22). Thompson, S. (­2021). Green and sustainable finance: Principles and practice. New York: Kogan Page.

Green Fintech Taxonomy (Green Fintech Classification)

Ocal, T.

  The Green Fintech Taxonomy refers to a classification of green fintech categories, that is, ­technology-​­enabled financial services focusing on green solutions. It was launched by the Green Digital Finance Alliance (­GDFA) and the Swiss Green Fintech Network in 2021 to stimulate the green fintech market. It aims

108  Green Fintech Taxonomy (Green Fintech Classification)

to enable a harmonized approach for policymakers, investors, and other stakeholders to analyze and segment fintech solutions with an e­ nvironmental-​­friendly intent. After collecting industry feedback on the first version of the “­Green Fintech Taxonomy,” the final report has been renamed “­Green Fintech Classification,” constituting an initial classification of green fintech solutions (­GDFA, 2022). The Green Fintech Classification design aims to align closely with existing or emerging fintech taxonomies or with established categorizations such as the classifications of the fintech environment by the Financial Stability Institute (­FSI, 2020) or the fintech categories developed by the Financial Stability Board (­FSB, 2017). Since these classifications do not integrate a green element, they were adapted to ref lect green fintech market segments. As a result, the Green Fintech Taxonomy establishes a Green Fintech Classification under the following eight categories: 1 Green digital payment and account solutions integrating green features as part of the payment experience, 2 Green digital investment solutions that provide automated, ­a lgorithm-​ ­d riven green financial planning and investment services with little to no human supervision, 3 Digital ESG data and analytics solutions for automated green data collection and analytics for finance, including automated green asset rating and indexing, 4 Green digital crowdfunding and syndication platforms to raise capital from a large number of individuals or from institutional investors to finance new projects, 5 Green digital risk analysis and “­insurtech” solutions that help optimize green insurance products and services as well as solutions to minimize physical climate and n ­ ature-​­related risks, 6 Green digital deposit and lending solutions used to finance environmentally beneficial projects or projects linked to green behaviors, 7 Green digital asset solutions with green properties and b­ lockchain-​­based capital market infrastructure built for green use cases, 8 Green “­regtech” solutions as technology-enabled innovations for regulatory, compliance, and reporting requirements of a regulated institution or a financial supervisory authority. The Green Fintech Classification also outlines the main databases leveraged by each green fintech category, grouped into four main types: earth observation data; asset ­self-​­reported data via the internet of things (­IoT); registry and company data; and science and policy databases leveraged by green fintechs for access to climate, biodiversity, and financial data. Green fintech solutions are ­technology-​­enabled innovations applied to financial processes and products while supporting Sustainable Development Goals (­SDGs) or reducing sustainability risks. The Green Fintech Classification belongs to the green finance ecosystem and facilitates the development of sustainable

Green Growth  109

finance by providing an explicit framework of fintech solutions to environmental issues. See also Green Digital Finance Alliance, Green Finance.

References Financial Stability Institute (­FSI). (­2020). FSI Insights on policy implementation No 23: Policy responses to fintech: a c­ross-​­country overview. Basel: Financial Stability Institute. FSB. (­2017). Financial stability implications from FinTech: Supervisory and regulatory issues that merit authorities’ attention. Financial Stability Board. Green Digital Finance Alliance, GDFA. (­2022). Green FinTech classification. Zurich: Green Digital Finance Alliance.

Green Growth

Sancak, I

See Green Economy.

Green Investment

Martin Bujack, K.

 

According to the Oxford English Dictionary, “­g reen” is not just a color. It also refers to making something less harmful to the environment. Likewise, “­investment” is the act of investing money in something, i.e., buying an asset in the hope of making a profit. Consequently, and in an etymological sense, it could be deduced that green investment refers to taking a position in a financial asset related to protecting the environment with the unique goal of receiving financial returns. But it is not. The green investment concept embeds the investment activity of companies, governments, or individuals looking to protect the environment, reduce pollution, reduce carbon emissions, use alternative energy sources, and conserve natural resources (­Chițimiea et al.,

110  Green Investment

2021). It is also referred to as ­eco-​­friendly investment, and it became increasingly popular with the concerns for the green economy and green growth after the 2008 global financial crisis and the 2012 United Nations Conference on Sustainable Development (­Chitimiea et  al., 2021). The environmental considerations of sustainable finance might include climate change mitigation and adaptation, as well as the preservation of biodiversity, pollution prevention, and the circular economy. Therefore, green investing can be considered the “­E” of sustainable finance when the latter is understood as the investment process that takes decisions under Environmental, Social, and Governance (­ESG) considerations. Likewise, Sustainable and Responsible Investments (­SRI) include green investments, and often these notions are used interchangeably (­Hellsten & Mallin, 2006). The ­long-​­term purpose of green investment is to achieve sustainable development, but there is also some evidence of investment decisions following this criterion obtaining superior risk-adjusted returns compared to traditional investing (­e.g., Cunha et al., 2020; Das, Chatterje, Ruf and Sunder, 2018). When making capital allocation decisions, a wide range of green assets are offered as alternatives to investors looking to greenify their portfolios, such as equities, bonds, and exchange traded funds (­ETFs). The global rise of green investments is not only due to concerns about the protection of the environment but also about the climate risk exposures in the portfolios, which include physical and transition risks. Green investments are expected to play a critical role in financing the projects needed for the transition to a l­ow-​­carbon economy (­Ferrer, Benítez, and Bolós, 2021) required by the 2015 Paris Agreement. Furthermore, the evidence shows the correlation between the volume of green investments and a country’s efficiency in achieving the UN’s 2030 Agenda (­Ibragimov, Lyeonov, and Pimonenko, 2019). See also Green Bonds, Green Equities, Green Finance, and Sustainable Investment Strategies.

References Chițimiea, A., Minciu, M., Manta, A. M., Ciocoiu, C. N., & Veith, C. (­2021). The drivers of green investment: a bibliometric and systematic review. Sustainability, 13(­6), 3507. Cunha, F. A. F. D. S., de Oliveira, E. M., Orsato, R. J., Klotzle, M. C., Cyrino Oliveira, F. L., & Caiado, R. G. G. (­2020). Can sustainable investments outperform traditional benchmarks? Evidence from global stock markets. Business Strategy and the Environment, 29(­2), ­682–​­697. Das, N., Chatterje, S., Ruf, B., & Sunder, A. (­2018). ESG ratings and the performance of socially responsible mutual funds: A panel study. Journal of Finance Issues, 17(­1), ­49–​­57. Ferrer, R., Benítez, R., & Bolós, V. J. (­2021). Interdependence between green financial instruments and major conventional assets: A w ­ avelet-​­based network analysis. Mathematics, 9(­8), 900. Hellsten, S. and Mallin, C. (­2006), “­A re ‘­ethical’ or ‘­socially responsible’ investments socially responsible?”, Journal of Business Ethics, 66(­4), ­393–​­406.

Green Lease, Green Leasing  111 Ibragimov, Z., Lyeonov, S., & Pimonenko, T. (­2019). Green investing for SDGs: EU experience for developing countries. In Economic and Social Development (­Book of Proceedings), 37th International Scientific Conference on Economic and Social Development, 868.

Green Lease, Green Leasing

Ocal, T.

See Green Loan and Green Loan Principles.

Green Loan

Ocal, T.

A green loan limits the use of its proceeds exclusively to fund projects that substantially contribute to environmental objectives. Similar to green bonds, green loans follow the Green Loan Principles (­GLP) issued by the Loan Market Association (­LMA) and Loan Syndications and Trading Association (­L STA). The GLP defines green loans as credit instruments to finance or ­re-​ ­finance, exclusively, existing or new g­ reen-​­eligible projects (­LMA/­L STA, 2021a). The GLP provides a ­non-​­exhaustive list of broad categories for the eligibility of green projects. Green loans must also align with GLP’s four core components: utilization of the loan proceeds, project evaluation and selection, management of proceeds, and reporting. The fundamental determinant of a green loan is the utilization of the loan proceeds for green projects. Still, the remaining core components must also be met to achieve a green loan status. Green loans have multiple potential benefits for borrowers and lenders, including but not limited to: a positive impact on the climate and/­or environment, a positive impact on reputation and credibility, building stronger, ­values-​­based relationships with stakeholders, providing greater resilience to market disruption caused by climate change, gaining access to new markets and a wider pool of investors with a positive environmental focus, and meeting regulatory and policy commitments linked to sustainability

112  Green Loan Principles

(­LMA/­L STA, 2021b). The UNFCCC, and the UN Sustainable Development Goals (­SDGs), outline the extensive need for green and sustainable financing solutions. In this sense, green loans can play a vital role for companies to develop sustainable finance strategies and business models aligned with sustainable development requirements. In sustainable lending services, as is the case in sustainable investing, sustainability concerns, particularly environmental, social, and governance factors, play a decisive role. In the sustainable lending category, green leasing, a ­sustainability-​­oriented leasing agreement, has similar functions in the leasing context. Individuals can also benefit from green loans, for example, through green mortgages, which lower the cost of funding contingent on the energy efficiency of the underlying real estate asset. Similar to green bonds, green loans, green mortgages, and green leasing services are fundamental instruments and services in sustainable finance to channel financial proceeds toward a s­ ustainability-​­aligned world. See also Green Loan Principles, Green Project, Green Finance.

References Loan Market Association (­LMA) and Loan Syndications and Trading Association (­L STA). (­2021a). Green loan principles. Loan Market Association & Loan Syndication and Trading Association. Loan Market Association (­LMA) and Loan Syndications and Trading Association (­L STA). (­2021b). Guidance on Green loan principles supporting environmentally sustainable economic activity. Loan Market Association  & Loan Syndication and Trading Association.

Green Loan Principles

Ocal, T.

The Green Loan Principles (­GLP), developed by the Loan Market Association (­LMA) and Loan Syndications and Trading Association (­LSTA), promote the development and integrity and consistency of green loan products (­LMA/­LSTA, 2021), drawing on the Green Bond Principles (­GBP). The Principles present a ­high-​­level framework of voluntary recommended guidelines for green loan products, provide a consistent methodology for their use, and preserve market integrity through its development. The GLP applies to various loan instruments, including term loans and revolving credit facilities. The GLP provides a list of broad eligibility categories for green projects with explicit reference to the GBP list. The categories include renewable energy, energy efficiency,

Green Mortgage  113

pollution prevention and control, environmentally sustainable management of living natural resources and land use, terrestrial and aquatic biodiversity, clean transportation, sustainable water and wastewater management, climate change adaptation, circular economy adapted products, production technologies and processes, and green buildings. Green loans must align with the GLP’s four core components: use of proceeds, process for project evaluation and selection, management of proceeds, and reporting. The fundamental determinant of a green loan is the utilization of the loan proceeds for green projects, as appropriately described in the relevant documents. All designated eligible green projects should provide clear environmental benefits to be assessed and, if possible, quantified, measured, and reported by the borrower. The proceeds of a green loan should be credited to a dedicated account or otherwise tracked by the borrower appropriately. Borrowers are also advised to appoint an external review provider to assess the green loan against the four core components of the GLP. See also Green Loan, Green Project, Green Finance, and Green Bond Principles (­GBP).

References LMA) and Loan Syndications and Trading Association (­L STA). (­2021). Green loan principles. Loan Market Association & Loan Syndication and Trading Association.

Green Mortgage

Ocal, T.

See Green Loan and Green Loan Principles.

Green Premium

Sancak, I

Green premium, or “­g reenium,” expresses cost and yield differences arising from environmental factors, more broadly, sustainability dimensions. In

114  Green Premium

finance, the concept refers to pricing benefits based on the idea that investors can accept to pay extra or bear lower yields in exchange for sustainability impact (­D’incau et al., 2022). It is pronounced mostly with green bonds and, more broadly, f­ixed-​­income securities. In this context, it is the spread between a green bond and a ­non-​­green bond under the same conditions. Thus, green premium is also known as “­g reen bond premium,” expressing the borrowing cost advantage at issuance for green bond issuers (­Caramichael & Rapp, 2022). The green bond premium that investors might pay for green bonds can be seen both in the primary and secondary markets (­H insche, 2021). Green premium varies as driving factors and conditions change over time (­Meyer & Henide, 2020). Evidence shows that green bonds have exhibited green premiums; however, compared to historical figures, current levels indicate shrinking greenium in many major markets (­Luke & Zota, 2021). Figure G.4 shows green premiums for a green bond and its vanilla twin. In addition to its meaning in finance, green premium is used in the real sector context with a similar logic. In this regard, green premium refers to the additional cost of deploying a clean technology compared to the one emitting a greater amount of greenhouse gases (­Breakthrough Energy, 2022). Bill Gates and a coalition of private investors under Breakthrough Energy support the innovations that can lead the world to n ­ et-​­zero emissions and highlight the importance of the green premium concept (­Breakthrough Energy, 2022). However, this can be different even in the opposite way through new solutions over time. Figure G.5 shows the cost of a ton of cement versus the new price after carbon capture.

0.5 Green

Vanilla

0.4 0.3 0.2

Yield

0.1 0 12 May 2021

19 May 2021

26 May 2021

2 June 2021

9 June 2021

16 June 2021

23 June 2021

30 June 2021

Figure G.4  An Example of Green Premiums for a Green Bond and its Vanilla Twin Source: Jones (­2021)/­Climate Bonds ­Initiative

Green Premium  115

Figure G.5  Cost of a Ton of Cement vs. New Price after Carbon Capture Source: Breakthrough Energy (­2 022)

While the typical cost of a ton of cement is around $125, the new price after carbon capture ranges from $219 to $300 since it produces CO2 both from burning fossil fuels for heat and from the chemical reactions that are essential for cement’s inputs (­Breakthrough Energy, 2022). Green premium, both in real and financial sectors, conveys many implications for sustainable finance and sustainability transformation and highlights the importance of innovation in driving sustainability. See also Carbon Capture, Decarbonization, Green Bonds, Greenhouse Gases, Sustainability Transformation, and Sustainable Finance.

References Breakthrough Energy. (­2022, September 22). The green premium: Understanding where to innovate first. https://­w ww.breakthroughenergy.org/­­our-​­challenge/­­the-­​­­g reen-​ p­ remiumCaramichael, J., & Rapp, A. (­2022). The green corporate bond issuance premium. Washington, DC: Federal Reserve. D’incau, F., Mercusa, N., Wijeweera, K., & Zoltani, T. (­2022, April 25). Identifying the ‘­greenium’. UNDP: https://­w ww.undp.org/­blog/­­identifying-​­g reenium

116  Green Project Hinsche, I. C. (­2021). A greenium for the next generation EU green bonds: Analysis of a potential green bond premium and its drivers. Frankfurt: Econstar&Center for Financial Studies (­CFS), Goethe University Frankfurt. Jones, L. (­2021, September 16). Greenium remains visible in latest pricing study. Climate Bonds  Initiative:  https://­w ww.climatebonds.net/­2 021/­0 9/­­g reenium-­​­­r emains-­​­­ visible-­​­­latest-­​­­pricing-​­study Luke, B. D., & Zota, C. (­2021, December 13). From grass to mass: An i­ndex-​­based approach to measuring greenium in Green bonds. S&P Dow Jones I­ ndices – Research. ​­ Meyer, S., & Henide, K. (­2020). Searching for ‘­Greenium’. London: IHS Markit.

Green Project

Sancak, I

See Green Economy.

Green Taxonomy

Sancak, I

  See Sustainability Taxonomy.

Green Water

See Planetary Boundaries Framework.

Sancak, I

Greenhouse Effect  117

Greenhouse Effect

Sancak, I

See Global Warming.

Greenhouse Gas Emission (GHG Emission)

Sancak, I

See Greenhouse Gases.

Greenhouse Gas Neutrality

Sancak, I

See Climate Neutrality.

Greenhouse Gas Protocol (GHG Protocol)

See Scope 1 GHG Emissions.

Sancak, I

118  Greenhouse Gases (GHGs)

Greenhouse Gases (GHGs)

Sancak, I

Greenhouse gases (­GHGs) are the constituents of the atmosphere, both natural and anthropogenic (­resulting from or produced by human activities), that absorb and emit radiation at specific wavelengths within the spectrum of thermal infrared radiation emitted by the Earth’s surface, the atmosphere itself, and by clouds (­IPCC, 2020). Water vapor (­H2O), carbon dioxide (­CO2), nitrous oxide (­N2O), methane (­CH4), and ozone (­O3) are the primary GHGs in the Earth’s atmosphere (­IPCC, 2020). Greenhouse gas emissions (­GHG emissions) are the GHGs released into the atmosphere. GHGs might be natural or anthropogenic; the latter refers to the gases resulting from or produced by human activities. According to the sixth assessment report of the IPCC, global anthropogenic GHG emissions include CO2 from fossil fuel combustion and industrial processes, net CO2 from land use, ­land-​­use change and forestry, methane, nitrous oxide, and f luorinated gases (­HFCs; PFCs, SF6, NF3). Each type of GHGs remains in the atmosphere for different amounts of time, ranging from a few years to thousands of years, and some gases are more effective than others at making the planet warmer (­EPA, 2020). “­CO2-​­equivalent” or “­CO2-​­eq” is used to express the emissions of different GHGs in a common unit (­IPCC, 2022). In the last years, the world emitted yearly around 50 billion tons (­GtCO2-​­eq) of GHGs caused by human activities. Figure G.6 shows anthropogenic GHG emissions by type and amount in the years ­1990–​­2019. Global net anthropogenic GHG emissions were 59±6.6 GtCO2-​­eq (­carbon dioxide equivalent) in 2019, about 12% (­6.5 GtCO2-​­eq) higher than in 2010

Figure G.6  Global Net Anthropogenic GHG Emissions, ­1990–​­2019 Source: IPCC (­2022)

Greenhouse Gases (GHGs)  119

Figure G.7  Global Net Anthropogenic GHG Emissions by Region, 1­ 990–​­2019 Source: IPCC (­2022)

Figure G.8  GHG Emissions by Economy Source: Ritchie (­2019)

and 54% (­21 GtCO2-​­eq) higher than in 1990 (­IPCC, 2022). Among the GHG emissions, carbon emissions are the biggest part, approximately 75% as of 2019. Figure G.7, on the other hand, indicates GHGs by region in the same period. Economies are expected to minimize their GHG emissions, meet the Paris Agreement targets, curb global warming, and reach the n ­ et-​­zero level. ­Net-​ ­zero emissions refer to the zero GHG level considering total anthropogenic emissions and total removals (­negative emissions) via counterbalancing activities. When an economy reaches the ­net-​­zero GHG level, it is called a “­net zero economy.” For example, the EU aims to meet a ­net-​­zero emission target by 2050, addressing climate neutrality at the same time. Not every economy emits the same amount of GHGs. China and the United States are the biggest emitters in the world. Figure G.8 shows GHG emissions by economy.

120 Greenium

Besides, some sectors and economic activities cause the majority of GHGs emissions. Energy (­energy use in ­building – ​­17.5%, ­transport – ​­16.2%, energy use in ­industry – 24.2%, ​­ and energy use in other areas) emits 73.2% of total GHGs (­R itchie, 2020). See also Climate Change, Climate Neutrality, Global Warming, Greenhouse Effect, and Paris Agreement.

References Environmental Protection Agency, EPA. (­2020, August 17). Greenhouse gas emissions. https://­w ww.epa.gov/­g hgemissions/­­overview-­​­­g reenhouse-​­g ases IPCC. (­2022). Climate change 2022: Mitigation of climate ­change-​­summary for policymakers. Geneva: IPCC, WMO, and UNEP. Ritchie, H. (­2019, October 3). Who emits the most CO2 today? Our World in Data. https://­ourworldindata.org/­g rapher/­­a nnual-­​­­co2-­​­­emissions-­​­­per-​­country Ritchie, H. (­2020, September 18). Sector by sector: where do global greenhouse gas emissions come from? Our World in Data. https://­ourworldindata.org/­­g hg-­​­­emissions-­​­­by-​­sector

Greenium

Sancak, I

See Green Premium.

Greenwashing, Greenwash

Sancak, I

Greenwashing or greenwash is a type of information or impression manipulation about the sustainability dimensions of a product, service, or firm. Greenwashing entails misleading or opportunistic information about green features to induce stakeholders’ judgments and decisions (­i.e., to buy a product or service or invest in a firm). Since being green is positively perceived, some

Greenwashing, Greenwash  121

firms signal green features that do not correspond with the underlying reality. Although the initial References were mostly about environmental features, today greenwashing refers to all sustainability features; more broadly, it addresses environmental, social, and governance (­ESG) pillars. Greenwashing might be at a firm level or a product or service level (­Delmas  & Burbano, 2011; Netto et al., 2020). For example, at the firm level, if a firm declares that all production processes are c­ arbon-​­neutral without reaching the ­carbon-​­neutrality level, the firm perpetrates greenwashing. Thus, greenwashing implies dishonest and unethical behavior. It can also be a fraud in some jurisdictions based on the content. For example, for listed companies, greenwashing can imply market manipulation. Financial institutions should bear greenwashing risks in mind when they deliver financial services due to the information asymmetries regarding sustainability between lenders and borrowers. In addition to misinformation risks in credit assessments, banks should also consider greenwashing risks holistically, integrating greenwashing risk control procedures and techniques into the risk management system. Consumers should be vigilant about greenwashing risks when they buy products and services. F ­ irm-​­level and product or s­ervice-​­level greenwashing can also be classified into two crosscutting categories: claim greenwashing and executional greenwashing (­Netto et al., 2020). Claim greenwashing deploys explicit or implicit textual misleading arguments about environmental features (­Netto et al., 2020). In turn, executional greenwashing goes beyond textual elements but uses images and sounds to induce others to evoke a positive impression in the sustainability context (­Parguel et al., 2013). Greenwashing risk is part of sustainability risk, discouraging ESG integration in investment decisions (­Yu et al., 2020). For many years, the prevalence of greenwashing has been threatening consumer and investor confidence (­Delmas & Burbano, 2011). Some strategic solutions are developing coherent and reliable sustainability reporting systems and assurance services. International sustainability taxonomy and international sustainability standards are under development in this regard. More importantly, sustainability consciousness and sustainable finance literacy can significantly help mitigate greenwashing attacks. Sustainable finance literacy expresses fundamental knowledge about sustainable finance products, services, and markets as well as sustainability basics, such as Sustainable Development Goals, climate change, global warming, sustainability risks, sustainability rules and regulations, along with sustainable investment and sustainability investment strategies. Sustainable finance literacy is more about the fundamental knowledge for practical use in daily life for every financial consumer. Being aware of greenwashing risk also belongs to sustainable finance literacy. Financial consumers are vulnerable to greenwashing risks under sustainable finance illiteracy, and they might become easy prey for greenwashing perpetrators (­Filippini et al., 2022). See also ESG Factors, Sustainability Reporting, and Sustainability Taxonomy.

122  Greenwashing, Greenwash

References Delmas, M. A., & Burbano, V. C. (­2011). The drivers of greenwashing. California Management Review, ­64–​­87. Filippini, M., Leippold, M., & Wekhof, T. (­2022, January 3). Sustainable finance literacy and the determinants of sustainable investing. Swiss Finance Institute Research Paper Series ­22-​­02, ­1–​­46. Netto, S. V., Sobral, M. F., Ribeiro, A. R., & Soares, G. R. (­2020). Concepts and forms of greenwashing: a systematic review. Environmental Science Europe, ­1–​­12. Parguel, B., ­Benoit-​­Moreau, F.,  & Russell, C. A. (­2013). Can evoking nature in advertising mislead consumers? The power of ‘­executional greenwashing’. International Journal of Advertising, ­107–​­134. Yu, E. P.-​­y., Luu, B. V., & Chen, C. H. (­2020). Greenwashing in environmental, social and governance disclosures. Research in International Business and Finance, 52, 101192

I Pareja, B.

Impact Finance

 

 

 

 

 

See Impact Investing.

Impact Investing

Pareja, B.

The Global Impact Investing Network (­GIIN) defines impact investments as “­investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return” (­GIIN, 2022: 1). The concept was coined in 2007 at the “­Bellagio meetings” promoted by the Rockefeller Foundation and other leaders of financial, philanthropic, and development organizations (­Harji & Jackson, 2012). Intentionality, measurement, and additionality are essential features in impact investment. Intentionality implies that the organization must have the purpose of generating a social benefit or change all throughout the investment process, from the beginning to the end. Measurement is another substantial element; beyond claiming an impact, it is essential to show the outcomes by measuring the investment outcomes and understanding how and to what extent the investment has contributed to the change. Measurements can use quantitative and qualitative evidence, such as indicators or case studies. Finally, additionality explains the importance of investments from a s­upply-​­side perspective. For instance, an investment becomes highly additional when firms face difficulty in obtaining financial proceeds. For example, emerging economies’ firms without access to local credit. The magnitude of the financial return categorizes impact investing into “­impact first” and “­finance first” investments

DOI: 10.4324/9781003310891-10

124  Impact Lending

(­Agrawal  & Hockerts, 2021). The former encompasses investments whose financial return might be below the market but never negative, whereas, in the latter, the financial return equals or exceeds market returns. Impact investing, similar to other forms of sustainable investments, aims to create social and/­or environmental value for investors, society, and the environment (­Lehner, 2016; Weber & Feltmate, 2018). However, impact investing differs from socially responsible investments: while traditional socially responsible investment focuses on ESG (­environmental, social, and governance), the ambition of impact investors goes beyond ESG, trying to face the major challenges represented in the Sustainable Development Goals (­SDGs) (­La Torre & Calderini, 2018). At first, the term “­impact investment” was more commonly used but recently, “­impact investing” has prevailed, although they are sometimes used as synonyms as well as other equivalent concepts such as “­social impact investing” (­Clarkin & Cangioni, 2016), “­impact finance” (­La Torre & Calderini, 2018) or “­ social impact finance” (­ Phillips  & Johnson, 2021). Broadly handled, impact finance includes impact investing, impact loans, impact lending, and other forms of financial impact products and services. See also Green Finance, Socially Responsible Investment (­SRI), Sustainable Investment Strategies, and Sustainable Finance.

References Agrawal, A., & Hockerts, K. (­2021). Impact investing: Review and research agenda. Journal of Small Business & Entrepreneurship, 33(­2), ­153–​­181. Clarkin, J. E., & Cangioni, C. L. (­2016). Impact investing: A primer and review of the literature. Entrepreneurship Research Journal, 6(­2), ­135–​­173. Global Impact Investing Network, GIIN. (­2022, November 6). Core characteristics of impact investing. https://­thegiin.org/­a ssets/­Core%20Characteristics_webfile.pdf Harji, K., & Jackson, E. T. (­2018). Facing challenges, building the field: Improving the measurement of the social impact of m ­ arket-​­based approaches. American Journal of Evaluation, 39(­3), ­396–​­401. La Torre, M., & Calderini, M. (­2018). Social impact investing beyond the SIB. Palgrave Studies in Impact Finance. Cham: Palgrave Macmillan. Lehner, O. M. (­2016). Routledge handbook of social and sustainable finance. Routledge. Phillips, S. D., & Johnson, B. (­2021). Inching to impact: The demand side of social impact investing. Journal of Business Ethics, 168(­3), ­615–​­629. Weber, O., & Feltmate, B. (­2018). Sustainable banking. University of Toronto Press.

Impact Lending

Pareja, B.

Impact Loan  125

See Impact Investing.

Impact Loan

Pareja, B.

See Impact Investing.

Impact Materiality

Sancak, I.

  See Double Materiality.

Impact Measurement and Management

Ballesteros, C.

  Impact measurement and management (­ IMM) consists of identifying and quantifying ­agreed-​­upon metrics with the stakeholders, which enables measuring the impacts experienced by individuals and the planet due to a specific activity, project, program, or policy and the degree to which the agent contributes to these impacts. Impact measurement generates learning that must govern the company’s actions and intervention management. The unique elements of this definition include 1) Stakeholders’ focus: the interactions with stakeholders and the value they ascribe to the changes resulting from corporate interventions are the cornerstone of the IMM process; 2) Impact contribution: the social changes directly result from the entity’s actions and may be verified. As no intervention is conducted in a vacuum, IMM needs to recognize

126  Impact Measurement and Management

the progress of the contextual variables affecting the goal. This is an exercise of transparency before stakeholders to prevent false results that cannot be attributed to the organization (­Vosmer & De Bruijn, 2017); and 3). The goal is to improve management techniques since measuring is a means for ­decision-​ ­making to improve organizational performance. IMM is closely related to materiality analysis as a tool that connects stakeholders’ priorities with organizational strategy (­Beske, Haustein, & Lorson, 2019; Nicholls, 2007). While materiality analysis connects a company´s priorities with stakeholder preferences, it becomes an ­impact-​­focused analysis when the ­long-​­term perspective and/­or a wide f­ramework – ​­e.g., territorial or even global c­ oncerns – ​­are put in place. A sound measurement system must allow comparisons and a standardized framework. Measurement needs comparison and therefore a standard system of reference terms, such as the EU Taxonomy, and a standard set of indicators, such as IRIS+. IMM is also connected to monitoring, evaluation, and learning processes (­M EL). Controlling the use of resources, evaluating the outputs and outcomes of a project or program, and managing the results for better performance are closely related to what an IMM system pursues (­A nheier & Leat, 2006; Nicholls, 2019). An IMM process starts where MEL finishes: when outcomes are identified (­M EL), impacts are measured (­IMM). IMM applies in impact investing decisions e­x-​­ante such as due diligence to determine if the company analyzed complies with the legal obligations, there are no substantial risks derived from its activity, and it meets social criteria from a positive screening perspective. IMM is also used in ­ex-​­post impact investing to mitigate concerns about the ­so-​­called impact washing, driven by the lack of definitions, guidelines, and common standards. Impact washing “­occurs when investors are misled about a manager’s impact intentions (­including measurement) or the potential impact of an investment” (­Findlay & Moran, 2019: 859), and IMM can shed light on investors’ concerns and contribute to the development of sustainable finance. See also Double Materiality, Greenwashing, Impact Materiality, and Social Impact.

References Anheier, H. K., & Leat, D. (­2006). Creative philanthropy: Toward a new philanthropy for the twenty first century (­1st ed.). Routledge. Beske, F., Haustein, E., & Lorson, P. C. (­2019). Materiality analysis in sustainability and integrated reports. Sustainability Accounting, Management and Policy Journal, 11(­ 1), ­162–​­186 Findlay, S., & Moran, M. (­2019). P ­ urpose-​­washing of impact investing funds: motivations, occurrence and prevention. Social Responsibility Journal, 15(­7), ­853–​­873. Nicholls, J. (­2007). Why measuring and communicating social value can help social enterprises become more competitive. Cabinet Office, ­1–​­15. Nicholls, J. (­2019). Integrating financial, social and environmental accounting. Sustainability Accounting, Management and Policy Journal, 11(­4), ­745–​­769. Vosmer, W., & De Bruijn, M. (­2017). Attribution in results measurement: Rationale and hurdles for impact investors. Donor Committee for Enterprise Development.

Inclusionary Investing  127

Inclusionary Investing

Benedetti, H.

Inclusionary investing is an asset allocation strategy that selects companies or instruments within investment portfolios based on predetermined ­criteria –​ ­a lso referred to as b­ est-­​­­in-​­class or positive screening. It is commonly used as an investment strategy in socially responsible investments (­SRIs), particularly in ESG, ethical, or sustainable investment funds. Inclusion criteria are usually based on positive ESG performance relative to industry peers or ESG rating scores above a certain threshold. Inclusionary investing strategies allow investors to reallocate funds to sustainable finance instruments and indirectly provide incentives to issuers of financial instruments to adopt and comply with sustainable finance objectives. The Global Sustainable Investment Alliance (­GSIA) depicts different investment strategies to classify an investment approach as sustainable: ESG integration, exclusionary investing, corporate engagement, ­norms-​­based screening, ­sustainability-​­themed investing, inclusionary investing, and impact investing. Inclusionary investing is the second least frequent strategy after impact investing (­GSIA, 2021). In contrast, positive screening, ­best-­​­­in-​­class, ­best-­​­­in-​­progress, and ­best-­​­­in-​­universe are widely used. Positive screening selects financial instruments based on a predetermined ESG benchmark, score, or compliance target. ­Best-­​­­in-​­class strategies select the leading instruments within a class. ­Best-­​­­in-​­progress strategies focus on the instruments that present better ratings, while b­ est-­​­­in-​­universe selects the top instruments of all available classes. For the same set of financial alternatives, each strategy could result in a different ranking, and some instruments could even be excluded from the selection. For example, a b­ est-­​­­in-​­progress approach does not rely on the ESG current score but on its evolution across time; hence, the worst score of each class could be the ­best-­​­­in-​­progress. Lastly, the ­best-­​­­in-​ ­universe approach could result in the same selection as the p­ ositive-​­screening strategy, as long as the target benchmark is universal and not class based. Some of the leading sustainable stock indexes, such as S&P Dow Jones Sustainability Indices (­S&P Dow Jones Indices, 2022) or the MSCI ESG Leaders Index (­MCSI, 2021), follow the ­best-­​­­in-​­class approach in their index construction. A challenge to inclusionary investing is the requirement of target instrument ratings and a ranking or benchmark of eligible instruments that serves as a threshold for inclusion. This restriction can be especially burdensome in countries where ESG regulation and/­or disclosure practices are absent, hence the lower use of inclusionary investment strategies in these economies.

128 ­Inside-­out Perspectiv

See also Exclusionary Investing, Socially Responsible Investment (­SRI), and Sustainable Investment Strategies.

References Global Sustainable Investment Alliance, GSIA. (­2021). Global sustainable investment review 2020. http://­w ww.­g si-​­a lliance.org/­­w p-​­content/­uploads/­2021/­08/­­GSIR-​ ­20201.pdf Morgan Stanley Capital Indexes, MSCI. (­2021). MSCI ESG leaders indexes methodology. https://­w ww.msci.com/­eqb/­methodology/­meth_docs/­MSCI_ESG_Leaders_Methodology_May2021.pdf S&P Dow Jones Indices. (­2022). Dow Jones sustainability indices m e t h o d o l o g y . https://­w ww.spglobal.com/­s pdji/­en/­documents/­methodologies/­­methodology-­​ ­­dj-­​­­sustainability-​­i ndices.pdf

­Inside-​­out Perspective

Sancak, I.

  See Double Materiality.

Integrated Report

Sancak, I.

  See Integrated Reporting.

Integrated Reporting

 

Sancak, I.

Integrated Reporting  129

Integrated reporting refers to systematic and formal statements that holistically ref lect an organization’s financial and ­ non-​­ financial dimensions. Integrated reports help understand a firm’s financial and n ­on-​­ financial (­environmental, social, and governance) performance, sustainability risks, and ­long-​­term value creation capacity. Integrated reporting, in a sense, refers to sustainability reporting. Idealistically, integrated reporting addresses financial, environmental, social, and governance factors all together, but not simply as separated dimensions; instead, it holistically handles them and considers their interdependencies. For example, hydrogen and oxygen are two distinct elements, but they can together make water (­H2O) which is different from two separate elements. Likewise, integrated reporting, a product of integrated thinking, is not copying and pasting financial and n ­ on-​­financial reports into a single reporting document. Releasing sound integrated reports is tied to sound integrated thinking and business management from all dimensions, i.e., financial, environmental, governance, and social together, aimed at l­ong-​­term value generation. According to the International Integrated Reporting Council (­IIRC, 2021: 58), “­Integrated reporting is a process founded on integrated thinking that results in a periodic integrated report by an organization about value creation, preservation or erosion over time and related communications regarding aspects of value creation, preservation or erosion.” Furthermore, the IIRC defines the integrated report concept as follows (­IIRC, 2021: 58): “­A concise communication about how an organization’s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation, preservation or erosion of value in the short, medium and long term.” Integrated reports feed all stakeholders interested in a firm’s ability to create value over time (­IIRC, 2021). Integrated reporting encourages integrated ­decision-​­making, enables a clearer articulation of strategy and business model, provides a single report that is easy to access, clear, and concise, links n ­ on-​­financial performance more directly to the business, helps identify risk and opportunities better, and improves internal processes, leading to a better understanding of the business (­Deloitte, 2022). Moreover, integrating reporting envisages the firm as an organization to serve integrated value and potentially common good value or welfare of society. Integrated reporting is one of the core features of sustainable finance. By definition, integrated reporting serves both shareholders and all other stakeholders. It ref lects a firm’s financial value and n ­ on-​­financial value, which are inherently inseparable components of sustainable finance. In contrast, traditional corporate reporting restricted to financial reporting cannot be compatible with sustainable finance. Furthermore, the formality and assurance of financial and n ­ on-​­financial reports might be tied to heterogeneous standards, raising reliability concerns. Integrated reports under the same reporting framework and external audit assurance are potentially more reliable and functional. Various initiatives have introduced integrated reporting standards, principles, and guidelines, such as the Global Reporting Initiative (­GRI), Value Reporting Foundation (­V RF), International Integrated Reporting Council, and International Sustainability Standards Board (­ISSB).

130  Integrated Thinking

See also Integrated Thinking, International Integrated Reporting Framework, International Sustainability Standards Board (­ ISSB), and Global Reporting Initiative (­GRI).

References Deloitte. (­ 2022, July 17). Integrated reporting. https://­w ww2.deloitte.com/­u k/­en/­ pages/­audit/­a rticles/­­i ntegrated-​­reporting.html International Integrated Reporting Council, IIRC. (­ 2021). Integrated ­reporting-​ ­international framework. London: International Integrated Reporting Council (­IIRC).

Integrated Thinking

 

Sancak, I.

 

Integrated thinking refers to a firm’s holistic considerations encompassing financial, environmental, social, and governance dimensions for stakeholders and common good value. It serves as a basis for a firm’s integrated d­ ecision-​ ­making. Integrated thinking and integrated reporting bring together financial and n ­ on-​­financial information, link them, and consider their interactions. The International Integrated Reporting Council (­IIRC) defines integrated thinking as “­the active consideration by an organization of the relationships between its various operating and functional units and the capitals that the organization uses or affects” (­IIRC, 2021: 58). An approach directly addressing integrated thinking, the “­International Framework,” was developed by the IIRC. In this regard, integrated thinking embeds the six capitals model, idealistically integrating financial, manufactured, intellectual, human, social and relationship, and natural capital (­IIRC, 2021). Another integrated thinking approach was proposed by Kate Raworth (­2018) under the Doughnut Economics concept by considering the planetary and social boundaries together. Doughnut Economics consists of 12 social dimensions, such as health, education, gender equality, and social equity, derived from internationally agreed minimum social standards, and idealistically draws an environmentally safe and socially just space between social and planetary boundaries in which humanity can thrive (­Raworth, 2018). As another view in integrated thinking, Alex Edmans (­2021) coined the term Pieconomics (­pie+economics), representing the idea that enterprises can deliver purpose and profit simultaneously by primarily aiming at purpose. Pieconomics depends on the p­ ie-​­growing mentality instead of ­pie-​­splitting, where the pie symbolizes the value that a

Integrated Value  131

firm generates for society (­Edmans, 2021). As the overarching sustainability goals, the Sustainable Development Goals indicate integrated thinking in the sustainable development context. In sustainable finance, financial and ­non-​­financial reporting are considered together under integrated reporting supported by integrated thinking. See also Doughnut Economics, Integrated Reporting, Integrated Value, and Pieconomics.

References Edmans, A. (­2021). Grow the pie: How great companies deliver both purpose and profit. Cambridge and New York: Cambridge University Press. International Integrated Reporting Council, IIRC. (­ 2021). Integrated ­reporting-​ ­international framework. London: International Integrated Reporting Council (­IIRC). Raworth, K. (­2018). Doughnut ­economics – ​­Seven ways to think like a ­21st-​­century economist. London: Random House Business Books.

Sancak, I.

Integrated Value

 

 

Integrated value refers to the financial and ­non-​­financial value generated by a firm. Integrated value entails managing and balancing a firm’s financial, social, and environmental values (­Schoenmaker, 2021). Value is not created, preserved, or eroded by or within an organization alone; it is inf luenced by the external environment, created through relationships with stakeholders, and dependent on various resources (­IIRC, 2021). Integrated value can be created over different time horizons and for various stakeholders through different capitals (­financial, manufactured, intellectual, human, social and relationship, and natural capital); it cannot be created by maximizing just one value dimension, such as financial capital, and disregarding other value dimensions (­IIRC, 2021). Figure I.1 shows the integrated value creation processes. In finance, value arises in the context of meaningful engagement with material stakeholder groups. Thus, defining value involves establishing and prioritizing stakeholders and understanding their relevance to the organization’s purpose and strategy (­IIRC, 2021). Integrated value creation and l­ong-​ ­term value creation (­LTVC) are two closely connected concepts to value creation. LTVC encapsulates integrated value and ref lects the highest stage

132  Integrated Value

Figure I.1  I ntegrated Value Processes Source: IIRC (­2021: 22)

of sustainable finance, shifting from finance as a goal to finance as a means (­Schoenmaker, 2017, 2021). At this stage, sustainable finance is associated with common good value, and the horizon is long term. Truly sustainable value creation depends on a paradigm shift from solely minimizing negative impacts to creating significant positive ones in critical and relevant social and environmental areas (­D yllick & Muff, 2015). Thus, integrated value or integrated value creation is one of the key drivers in sustainable finance. See also Integrated Thinking, Integrated Reporting, International Sustainability Standards Board (­ISSB), and Sustainability Reporting.

References Dyllick, T., & Muff, K. (­2015). Clarifying the meaning of sustainable business: Introducing a typology from b­ usiness-­​­­as-​­usual to true business sustainability. Organization & Environment, ­1–​­19. International Integrated Reporting Council, IIRC. (­ 2021). Integrated ­Reporting-​ ­International Framework. London: International Integrated Reporting Council (­IIRC). Schoenmaker, D. (­2017). From risk to opportunity: A framework for sustainable finance. Rotterdam: Rotterdam School of Management, Erasmus University (­RSM). Schoenmaker, D. (­2021). A new i­ntegrated-​­value assessment method for corporate investment. Brussels: Bruegel.

Integrated Value Creation (IVC)  133

Integrated Value Creation (IVC)

Sancak, I.

See Integrated Value

Crescentino, Intergovernmental Panel on Climate Change L. & Crescentino, D.

  The Intergovernmental Panel on Climate Change (­IPCC) is the UN’s international organization responsible for the scientific analysis of climate change. It was founded in 1988 by the World Meteorological Organization and the United Nations Environment Program. Similar to every UN institution, the Panel is not an association of individuals but an association of countries. Its role is to provide regular assessments of the scientific, technical, and socioeconomic information relevant to the risk of ­human-​­induced climate change. Far from being a research laboratory, the IPCC is an organization that assesses and synthesizes investigations carried out in research centers worldwide. In 30 years, it has published six assessment reports (­1990, 1995, 2001, 2007, 2014, 2021/­2022) and a few special reports (­such as the Special Report on Global Warming of 1.5°C, 2018, following the Paris Agreement in 2015). These reports summarize the most important scientific advances on climate change. The IPCC’s Special Report (­2021; 2022a; 2022b) presents three parts issued by three working groups. Working Group 1 focuses on the physical science basis, the physical functioning of the climate, and past or future climate variations. Working Group 2 addresses the impacts, adaptation, and vulnerability of the biosphere and our socioeconomic system to the risks of climate change. Finally, Working Group 3 covers climate change mitigation, more specifically, greenhouse gas emission scenarios and how to reduce human emissions. Ultimately, the IPCC Special report (­2014) pioneered including a chapter about the effects of investment and finance on global warming. The report recommended coordinated institutional governance between the national, regional, and international levels to foster efficient, effective, and sustainable

134 Internalization

financing of climate change mitigation measures. Moreover, the IPCC Special Report (­2021; 2022a; 2022b) stresses that ­climate-​­related financial risks remain largely underestimated by financial institutions and markets. In line with the objectives of the Paris Agreement, it promotes a reallocation of public and private financial f lows consistent with a pathway toward low GHG emissions and ­climate-​­resilient development. See also Climate Change, Decarbonization, Global Warming, and Greenhouse Effect.

References International Integrated Reporting Council, IPCC. (­2021). Summary for policymakers. In Climate Change 2021: The Physical Science Basis. Contribution of Working Group I to the Sixth Assessment Report of the Intergovernmental Panel on Climate Change. Cambridge: Cambridge University Press. International Integrated Reporting Council, IPCC. (­2022a). Summary for policymakers. In: Climate Change 2022: Impacts, Adaptation, and Vulnerability. Contribution of Working Group II to the Sixth Assessment Report of the Intergovernmental Panel on Climate Change. Cambridge: Cambridge University Press. International Integrated Reporting Council, IPCC. (­2022b). Summary for policymakers. In: Climate Change 2022: Mitigation of Climate Change. Contribution of Working Group III to the Sixth Assessment Report of the Intergovernmental Panel on Climate Change. Cambridge: Cambridge University Press.

Internalization

Sancak, I.

See Externalities.

International Integrated Reporting Council (­I IRC) Sancak, I.

See International Sustainability Standards Board (­ISSB) and Value Reporting Foundation

International Sustainability Standards Board (­ISSB)  135

International Sustainability Standards Board (­ISSB) Sancak, I.

The International Sustainability Standards Board (­ISSB) is a global standard setter organization developing disclosure standards for enterprises on climate and other environmental, social, and governance (­ESG) matters. The ISSB was created under the International Financial Reporting Standards (­IFRS) Foundation in November 2021. Its mission is to deliver a comprehensive global baseline of ­sustainability-​­related disclosure standards (­IFRS, 2022). Thus, under the IFRS Foundation, the International Accounting Standards Board (­IASB) and the ISSB are responsible for accounting and sustainability disclosure standards, respectively. Although each board is independent, their standards complement each other; the ISSB is expected to cooperate with the IASB to enable connectivity and compatibility between accounting standards and sustainability disclosure standards (­CDSB, 2022). The ISSB origins follow a series of global sustainability reporting and disclosure mergers. In June 2022, the VRF consolidated into the IFRS Foundation (­V RF, 2022). The VRF was a global ­non-​­profit organization to develop a common understanding of enterprise value. Earlier, in January 2022, the Climate Disclosure Standards Board (­CDSB) consolidated into the IFRS Foundation to support the work of the ISSB. The CDSB was an international consortium of businesses and environmental NGOs hosted by CDP (­Carbon Disclosure Project), a ­non-​­profit charity focusing on environmental reporting and disclosure (­CDP, 2022). Figure I.2 shows the formation of the ISSB out of various global sustainability standard setters. In addition to the consolidations of the VRF and CDSB, the Task Force for C ­ limate-​­related Financial Disclosures (­TCFD), the Global Reporting Initiative (­GRI), the International Organization of Securities Commissions (­IOSCO), and the World Economic Forum (­W EF) support the ISSB (­IFRS, 2022). The ISSB’s standards will cover thematic and i­ndustry-​­based requirements starting with ­climate-​­related matters. The ISSB’s standards will be built on the existing work and experience of the leading reporting initiatives, including the CDSB, the TCFD, the VRF’s Integrated Reporting Framework, the SASB Standards, and the World Economic Forum’s Stakeholder Capitalism Metrics (­IFRS, 2022). Similar to the IASB’s accounting standards, using the ISSB’s standards is not mandatory; each jurisdictional authority decides whether to mandate their use (­IFRS, 2022). The ISSB is expected to harmonize previously fragmented global sustainability disclosure standards, which help measure and ref lect ­long-​­term value creation performance. The

136  International Sustainability Standards Board (­ISSB)

Figure I.2  Formation of the International Sustainability Standards Board (­ISSB) Source: IFRS (­2022)

ISSB is also positioned as a key international ­standard-​­setting organization in sustainable finance. See also Integrated Reporting, Integrated Thinking, Sustainability Reporting, and Value Reporting Foundation.

References Carbon Disclosure Project, CDP. (­2022, February 1). IFRS Foundation completes consolidation of CDSB from CDP. CDP: https://­w ww.cdp.net/­en/­a rticles/­governments/­­ ifrs-­​­­foundation-­​­­completes-­​­­consolidation-­​­­of-­​­­cdsb-­​­­f rom-​­cdp Climate Disclosure Standards Board, CDSB. (­2022, July 6). Consolidation of CDSB. https://­w ww.cdsb.net International Financial Reporting Standards, IFRS. (­ 2022, July 6). ISSB: Frequently Asked Questions. https://­w ww.ifrs.org/­g roups/­­i nternational-­​­­sustainability-­​ ­­standards-​­board/­­issb-­​­­f requently-­​­­a sked-​­questions/ Value Reporting Foundation. (­2022, June 22). IFRS Foundation and Value Reporting Foundation vote to approve consolidation from 1 July. https://­w ww.valuereportingfoundation. org/­news/­­i frs- ­​­­foundation- ­​­­a nd-­​­­value- ­​­­r eporting- ­​­­foundation-­​­­vote- ­​­­t o- ­​­­a pprove-­​ ­­consolidation-­​­­f rom-­​­­1-​­july/

K Katowice Climate Package

Sancak, I.

  See Paris Agreement.

Keeling Curve

Sancak, I.

The Keeling Curve, named after climate scientist Charles David Keeling who observed that carbon dioxide (­CO2) levels rose steadily from year to year, is a tool to exhibit daily, monthly, or other ­f requencies-​­based records of global atmospheric CO2 concentrations. The Keeling Curve is maintained by the Scripps Institution of Oceanography at the University of California San Diego (­Scripps Institution of Oceanography, 2022). The observation base is the Mauna Loa Observatory, a research station in Hawaii. Figure K.1 shows a Keeling Curve indicating CO2 concentrations since 1958. The abbreviation “­ppm” means “­parts per million,” which indicates how many parts of carbon dioxide contain one million parts of air. For example, 425 ppm means one million air particles contain 415 carbon dioxide particles. Carbon dioxide is an anthropogenic greenhouse gas and a ­by-​­product of burning fossil fuels and biomass, ­land-​­use changes, and industrial processes (­IPCC, 2018). Measuring global atmospheric CO2 concentrations daily is crucial since carbon dioxide emissions affect the Earth’s radiative balance (­IPCC, 2018). It is the reference gas in measuring global warming potential (­GWP) (­IPCC, 2018) through the carbon dioxide equivalent measure (­CO2e, or CO2 equivalent, or CO2 -​­eq), referring to the metric to compare emissions arising from various GHGs by converting other gases to the equivalent

DOI: 10.4324/9781003310891-11

138  Keeling Curve

Figure K.1  K  eeling Curve since 1958, Monthly Carbon Dioxide Concentration (­L atest CO2 Reading, 14 October 2022: 415 ppm) Source: Scripps Institution of Oceanography at UC San Diego

amount of carbon dioxide (­Eurostat, 2021). Since the beginning of the Industrial Revolution, the amount of CO2 in the atmosphere has increased by 50% because of human activities, which is the most critical climate change driver thus far (­NASA, 2022). Therefore, decarbonization is essential to achieving a ­carbon-​­neutral or ­climate-​­neutral state (­Butler et al., 2015). Decarbonization mainly aims to cut or convert c­ arbon-​­emitting activities. Although removal technologies, such as sequestration, can be helpful and supportive in achieving either carbon neutrality or climate neutrality, reducing emissions of CO2 and other GHGs is the most effective and reliable way of decarbonization (­Butler et al., 2015). The Paris Agreement is the global decarbonization determination among around 200 economies. Atmospheric CO2 concentration has been used by the study of Rockström et al. (­2009) as a control variable within the planetary boundaries framework. The proposed planetary boundary was determined at 350 ppm CO2 (­Rockström et al., 2009). The data from Keeling et al. (­2022) shows that this boundary was overstepped by the end of the 1980s. See also Climate Change, Decarbonization, Greenhouse Gases, Planetary Boundaries Framework, Global Warming, and Paris Agreement.

References Butler, T., Lode, B., Parker, A., Mar, K., Schmidt, F., & Lawrence, M. G. (­2015, November). IASS Potsdam. Retrieved from Institute for Advanced Sustainability

Kyoto Protocol  139 Studies Potsdam (­I ASS). https://­w ww.­iass-​­potsdam.de/­sites/­default/­f iles/­f iles/­ policy_brief_decarbonisation.pdf Eurostat. (­2021, June 10). Glossary: Carbon dioxide equivalent. Eurostat Statistic Explained. https://­e c.europa.eu/­e urostat/­­s tatistics- ​­ e xplained/­i ndex.php?title=Glossary: Carbon_dioxide_equivalent IPCC. (­2018). Annex I: G ­ lossary-​­An IPCC Special Report [Matthews, J.B.R. (­ed.)]. Geneva: Intergovernmental Panel on Climate Change (­IPCC). Keeling, R. F., Walker, S. J., Piper, S. C.,  & Bollenbacher, A. F. (­2022, October 15). Scripps CO2 Program. Scripps Institution of Oceanography (­SIO). https://­ scrippsco2.ucsd.edu/­a ssets/­d ata/­a tmospheric/­s tations/­i n_situ_co2/­m onthly/­ monthly_in_situ_co2_mlo.csv NASA. (­2022, October 22). Carbon dioxide. NASA Global Climate Change. https://­ climate.nasa.gov/­causes/ Rockström, J., Steffen, W., Noone, K., Persson, Å., Chapin, F. S., Lambin, E., & Sve. (­2009). Planetary boundaries: Exploring the safe operating space for humanity. Ecology and Society, 14(­2), ­1–​­33. Scripps Institution of Oceanography. (­2022, October 15). The keeling curve. University of California San Diego: https://­sioweb.ucsd.edu/­programs/­keelingcurve/

Kyoto Protocol

Sancak, I.

Adopted on 11 December 1997 in Kyoto, Japan, the Kyoto Protocol operationalizes the UN Framework Convention on Climate Change (­U NFCCC) to limit and reduce GHGs emissions to agreed individual targets (­U NFCCC, 2020). Entered into force on 16 February 2005, the Kyoto Protocol sets binding emission reduction targets for 37 industrialized economies (­U NFCCC, 2020). However, parties have not been limited to the initial ones; later, the number of parties in the Kyoto Protocol went beyond 190 (­U NFCCC, 2020). The targets were designed to add up to an average 5% emission reduction compared to 1990 levels over the period 2­ 008–​­2012. On 8 December 2012, the Doha Amendment was adopted for a second commitment period, lasting until 2020 (­U NFCCC, 2020). The protocol parties have been responsible for reducing and limiting their emissions to promote sustainable development (­U NFCCC, 1997). In this regard, they have been expected to implement and/­or further elaborate policies and measures regarding relation to national circumstances, such as (­U NFCCC, 1997; Article 2): “(­i) Enhancement of energy efficiency in relevant sectors of the national economy;

140  Kyoto Protocol

(­ii) Protection and enhancement of sinks and reservoirs of greenhouse gases not controlled by the Montreal Protocol, taking into account its commitments under relevant international environmental agreements; promotion of sustainable forest management practices, afforestation and reforestation; (­ i ii) Promotion of sustainable forms of agriculture in light of climate change considerations; (­iv) Promotion, research, development and increased use of new and renewable forms of energy, of carbon dioxide sequestration technologies and of advanced and innovative environmentally sound technologies; (­v) Progressive reduction or phasing out of market imperfections, fiscal incentives, tax and duty exemptions and subsidies in all greenhouse gas emitting sectors that run counter to the objective of the Convention and apply market instruments; (­v i) Encouragement of appropriate reforms in relevant sectors aimed at promoting policies and measures which limit or reduce emissions of greenhouse gases not controlled by the Montreal Protocol; (­v ii) Measures to limit and/­or reduce emissions of greenhouse gases not controlled by the Montreal Protocol in the transport sector; (­v iii) Limitation and/­or reduction of methane through recovery and use in waste management, as well as in the production, transport and distribution of energy.” The Kyoto Protocol also envisages the establishment of f lexible market mechanisms based on the trade of emissions permits and offers the parties additional means to meet their targets by way of three ­market-​­based mechanisms: International Emissions Trading, Clean Development Mechanism, and Joint Implementation (­U NFCCC, 2020). The Kyoto Protocol is a key instrument in sustainable development and a trigger of sustainability transformation, hence potentially a sustainable finance driver. See also Emissions Trading, Greenhouse Gases, Montreal Protocol, and Paris Agreement.

References UNFCCC. (­1997). Kyoto Protocol to the United Nations Framework Convention on Climate Change. https://­unfccc.int/­documents/­2409 United Nations Framework Convention on Climate Change, UNFCCC. (­2020). What is the Kyoto Protocol? https://­unfccc.int/­k yoto_protocol

L Land Degradation

Ocal, T.

Land degradation expresses a negative trend in land conditions as a l­ong-​ ­term reduction or loss of biological productivity, ecological integrity, or economic value. Land degradation is directly or indirectly caused by humans and affects people and ecosystems. ­Human-​­induced drivers of land degradation include ­land-​­use changes and unsustainable land management, while agriculture is a dominant sector driving degradation. ­One-​­third of global land is degraded due to agriculture, and 75% of the terrestrial environment is severely altered by human actions (­IPBES, 2018). Anthropogenic climate change increases the rate and magnitude of ongoing land degradation processes and introduces new degradation patterns. Also, land degradation is a driver of climate change through the emission of greenhouse gases (­GHGs) and reduced c­ arbon-​­absorbing. Land degradation occurs over a quarter of the Earth’s ­ice-​­free land area, affecting an estimated 3.2 billion people, most of whom live in poverty in developing countries (­Olsson et al., 2019). Sustainable Development Goal (­SDG) 15.3 aims to restore degraded land and soil and achieve a land ­degradation-​­neutral world. Land degradation neutrality refers to a state whereby the amount and quality of land resources necessary to support ecosystem functions and services for food security remain stable or improve (­U NCCD, 2022). The United Nations Convention to Combat Desertification’s (­U NCCD) goal of land degradation neutrality (­LDN) aims to halt and reverse the global land degradation problem. More than 100 countries participated in the Changwon Initiative of the UNCCD, which supports national voluntary ­target-​­setting processes to achieve LDN. Land degradation can be avoided, reduced, or reversed by implementing sustainable land management, restoration, and rehabilitation practices which will provide many benefits, including adaptation to and mitigation of climate change. Therefore, combating land degradation and restoring degraded land are urgent priorities to protect the biodiversity and ecosystem services vital to all life on Earth and to ensure human w ­ ell-​­being (­IPBES, 2018). As a connected concept, ­land-​­use change expresses changes in the use or management

DOI: 10.4324/9781003310891-12

142  Land Degradation Neutrality

of land, modifying the biological productivity, ecological integrity, or economic value of the land surface. ­Land-​­use change can result from human activities such as agriculture and irrigation, deforestation, reforestation and afforestation, industrialization, or urbanization and is considered a planetary boundary in the Planetary Boundaries Framework. This framework used the forest land area compared to the original forest cover as a control variable. Steffen et al. (­2015) showed that humanity exceeded the l­and-​­system change boundary. Sustainable finance contributes to investing in activities that avoid land degradation and restore degraded land, namely sustainable land management activities. The benefits of land restoration include but are not limited to increased employment, increased business spending, improved gender equality, increased local investment in education, and improved livelihoods. The estimates of the Economics of Land Degradation (­ELD) initiative led by the UNCCD show that the returns on investment from land restorations are very high. For example, sustainable land management could deliver up to US$ 1.4 trillion in increased crop production, and enhancing carbon stocks through soils could create a value of up to USD 480 billion (­ELD, 2022). See also Biodiversity, Climate Change, Ecosystem Services, Natural Capital, and Planetary Boundaries Framework.

References ELD. (­2022, 09 26). The economics of land degradation initiative. https://­w ww.­eld-​ ­i nitiative.org/­en/­­what-­​­­we-​­do/­­sustainable-­​­­land-​­m anagement/ Intergovernmental S­ cience-​­Policy Platform on Biodiversity and Ecosystem Services, IPBES. (­2018). The assessment report on land degradation and restoration. The Intergovernmental S­ cience-​­Policy Platform on Biodiversity and Ecosystem Services. Olsson, L., Barbosa, H., Bhadwal, S., Cowie, A., Delusca, K., ­F lores-​­Renteria, D., & Stringer, L. (­2019). Land Degradation. IPCC special report on climate change, desertification, land degradation, sustainable land management, food security, and greenhouse gas fluxes in terrestrial ecosystems. Steffen, W., Richardson, K., Rockström, J., Cornell, S. E., Fetzer, I., Bennett, E. M., & Veerabh. (­2015). Planetary boundaries: Guiding human development on a changing planet. Science, 347(­6223), 1259855. UNCCD. (­2022). The United Nations Convention to Combat Desertification. https://­ www.unccd.int/­­land-­​­­a nd-​­l ife/­­land-­​­­degradation-​­neutrality/­overview

Land Degradation Neutrality

Ocal, T.

­Land-­system Chang  143

See Land Degradation.

­L and-​­system Change

Ocal, T.

See Land Degradation.

­L and-​­use Change

Ocal, T.

See Land Degradation.

Life Cycle Assessment

SoGReS-​­MF Research Group

Life cycle assessment (­LCA) is a crucial tool to minimize negative environmental and social impact (­a lthough its application in this later dimension is less developed) globally, thus achieving sustainable consumption and production. In this sense, LCA contributes to more sustainable investment and financing decisions since it allows to: •

Manage organizations from an efficiency perspective. It allows for establishing relationships between the inputs (­resources consumed) and the outputs of the process (­products, ­by-​­products, waste), considering the impacts generated. Therefore, under this approach, indicators can be

144  Life Cycle Assessment

•

•

•

• • •

defined that measure the optimization of the use of resources per unit produced. Identify risks and opportunities. Hotspots can be identified based on the life cycle analysis of environmental impacts, from the extraction of natural resources to their final disposal. That represents a significant risk to environmental degradation and/­or an opportunity to improve the system’s effectiveness and efficiency. Promote the development, innovation, and redesign of products and components. It encourages investment in sustainable technologies and production models, increasing the system’s efficiency, reducing negative externalities, and promoting the circular economy. Improve the system, thinking globally and acting locally. It tries to avoid decisions that reduce environmental impacts at a specific life cycle stage, generating a more significant environmental problem in other stages. LCA has a global approach that goes beyond corporate, geographical, or stage boundaries. Minimize environmental degradation. By becoming aware of environmental impacts, LCA contributes to making decisions that avoid environmental degradation, preserving and conserving natural capital. Offer informed preferences. It provides the stakeholders with information about the entire product’s life cycle. Increase collaboration with other participants in the supply chain. It fosters collaboration between different actors to make LCA operational.

Different initiatives, such as ecolabels, sustainability indices, total life cycle cost models, or footprint methodologies, among others, have been adopted by LCA. Many applications are based on the standardization proposed by the standards ISO 14040:2006 ‘­Environmental ­management  – ​­Life cycle ­assessment – Principles ​­ and framework’ and ISO 14044:2006 ‘­Environmental ­management  – ​­Life cycle ­assessment  – ​­Requirements and guidelines.’ ISO 14040:2006 defines LCA as a ‘­compilation and evaluation of the inputs, outputs and the potential environmental impacts of a product system throughout its life cycle.’ LCA can offer useful results to make decisions about the development and improvement of a product, contracting policies, or sustainable finance development, among other applications. To this end, the standard ISO 14040:2006 establishes a methodological framework that is structured in four phases: Phase 1­  – ​­Definition of the objective and scope. The objectives that motivate the study, the system’s limits to be analyzed, and the life cycle components are defined. Phase 2­  – ​­Inventory analysis. It involves collecting and quantifying inputs and outputs for a product system through its lifecycle. Phase 3­  – ​­Impact assessment. The magnitude and significance of the potential environmental impacts of a product system throughout the entire product life cycle are known and evaluated.

Linear Consumption  145

Phase 4­  – ​­Interpretation. Findings from inventory analysis or impact assessment, or both, are assessed against the defined objective and scope to reach conclusions and recommendations. See also Carbon Footprint, Carbon Neutrality, Circular Economy, and Sustainability Reporting.

References ISO (­2006a). ISO 14040:­2006 – ​­Environmental ­m anagement – ​­Life cycle ­a ssessment –​ ­Principles and framework. ISO (­2006b). ISO 14044:2006 Standard, Environmental ­m anagement – Life ​­ cycle ­a ssessment – ​­Requirements and guidelines.

Linear Consumption

Sancak, I.

See Linear Economy.

References Ellen MacArthur Foundation. (­2022, October 30). What is a circular economy? https://­ ellenmacarthurfoundation.org/­topics/­­c ircular-­​­­economy-​­i ntroduction/­overview International Resource Panel, IRP. (­2019). Global resources outlook 2019: Natural resources for the future we want. Nairobi: International Resource Panel and UN Environment. Stockholm Resilience Centre. (­2022). Planetary boundaries. https://­w ww.stockholmresilience.org/­research/­­planetary-​­boundaries.html Schoenmaker, D., & Schramade, W. (­2019). Principles of sustainable finance. New York: Oxford University Press. United Nations Environment Programme, UNEP. (­2022). ­U NEP-​­building circularity. https://­buildingcircularity.org United Nations Environment Programme Finance Initiative, UNEP FI. (­2020). Financing circularity: Demystifying finance for circular economies. Geneva: United Nations Environment Programme Finance Initiative.

Linear Production

Sancak, I.

146  Linear Economy

See Linear Economy.

Linear Economy

Sancak, I.

Linear economy expresses economic activities, perspectives, and systems working with ‘­­take-­​­­make-­​­­consume-​­waste’ models. While the current economic processes take materials from the Earth, make products from them, and finally throw them away as waste, by contrast, circular economies work on waste and pollution elimination, product and material circulation at their highest value, and regeneration of nature (­Ellen MacArthur Foundation, 2022). In a linear economy world, circularity or circular economy concerns are limited or absent. Figure L.1 shows the differences between linear and circular economy processes.

Figure L.1  U NEP Circularity Approach Source: UNEP FI (­2 020); UNEP (­2022)

Long-­term Value Creation (­LTVC)  147

The outer line (­ d ashed and grey) represents a typical linear economy model, while inner circles show circular economy processes. Linear production and consumption work on a system of extracting or using natural resources (­take), processing them into products (­make), consumption (­use), and disposal (­waste) (­Schoenmaker & Schramade, 2019). In linear production and consumption, environmental factors are not at the center. Moreover, linear economies operate under some unrealistic assumptions. Mainly, linear economy models assume that natural resources are unlimited and free of charge, and natural capital has only use value. Neither ecological footprint nor externalities are the primary considerations of linear economy models. Due to such economies and underlying perspectives, on the one hand, since 1970, natural resource use has tripled; on the other hand, natural resource use patterns have aggravated climate change and other sustainability challenges (­IRP, 2019). For example, the extraction and processing of natural resources caused more than 90% of global biodiversity loss, water stress, and about half of climate change impacts (­IRP, 2019). Linear economy models, linear production, and linear consumption irresponsibly deplete natural resources and undermine the sustainability of the Earth system and ecosystem services. Therefore, linear economy practices and perspectives contradict sustainable finance, sustainable development, and Sustainable Development Goals. Expressing this clearly, SDG 12 suggests that economies align with responsible production and consumption. Linear economy models imbalance the planet by exploiting natural resources and transgressing the planetary boundaries. As of 2022, humanity exceeded six of nine planetary boundaries (­Stockholm Resilience Centre, 2022). Hence, economies must transition from linear to circular models, a prerequisite for sustainability and sustainable development. Sustainable finance can help transition from linear economic production and consumption and contribute to a ­resource-​­efficient and circular economy. See also Circular Economy, Ecological Footprint, Externalities, Natural Capital, and Planetary Boundaries Framework.

Long-​­term Value Creation (­LTVC)

See Integrated Value.

Sancak, I.

M Materiality

Esteban-Sánchez, P. & Pardo, E.

  Materiality has been crucial in finance for many decades (­­Messier et  al., 2005), referring to information that, if omitted or misstated, “­­could influence decisions that users make on the basis of financial information about a specific reporting entity” (­­IFRS, 2018:2). Traditionally, materiality has focused on issues that concern investors. In contrast, materiality has a broader scope in sustainable finance and considers issues relevant for all stakeholders (­­Whitehead, 2017), that is, environmental, social, and governance (­­ESG) issues. These issues can impact the business performance, but also the business activities have significant impacts on environmental, social, and governance dimensions. Consequently, a materiality assessment in the sustainable finance context must include economic and ESG issues and focus on aligning ­business  – ​­​­​­strategies and ­operations  – ​­​­​­a nd stakeholders (­­AccountAbility, 2018). Many sustainability accounting and reporting standards, guidelines, and regulatory frameworks have refined the materiality concept, such as the Global Reporting Initiative’s (­­GRI) G4 guidelines, the International Integrated Reporting Framework, the Sustainability Accounting Standards Board, the European Union ( ­­EU) Commission Directive on ­­non-​­​­​­f inancial reporting, the EU Sustainable Finance Disclosure Regulation, and the EU Corporate Sustainability Reporting Directive. These sustainability frameworks encourage companies to evaluate which ­­non-​­​­​­f inancial information matters to be reported together with financial information. According to GRI G4 guidelines, material topics for a reporting organization should “­­include those topics that have a direct or indirect impact on an organization’s ability to create, preserve or erode economic, environmental and social value for itself, its stakeholders and society at large” (­­Global Reporting Initiative, 2011:3). Materiality is an umbrella notion that includes other closely connected concepts, such as “ ­­f inancial materiality,” “­­­­non-​­​­​­f inancial materiality,” and “­­double materiality.” See also ESG Factors, Double Materiality, Integrated Thinking, and Sustainability Reporting.

DOI: 10.4324/9781003310891-13

Microcredit  149

References AccountAbility (­­ 2018). AA100. Accountability principles. https://­­ www.accountability.org/­­static/­­6 b3863943105f2a5c4d5fc96aff b750d/­­a a1000_accountability_ principles_2018.pdf Global Reporting Initiative (­­GRI). 2011. Technical protocol: Applying the report content principles. https://­­w ww.plateformeco2.ch/­­portal/­­documents/­­10279/­­ 17373/­­GRI_Technical+Protocol.pdf/­­­­0e1294be-­​­­­​­­​­­­ce1b- ­​­­­​­­​­­­4c31-­​­­­​­­​­­­9943- ​­​­​­4904c06240fd International Financial Reporting Standards, IFRS. (­­2018). Definition of material. Amendments to IAS 1 and IAS 8. Messier, W. F. Jr., ­­Martinov-​­​­​­Bennie, N., & Eilifsen, A. (­­2005). A review and integration of empirical research on materiality: Two decades later. Auditing: A Journal of Practice & Theory, 24(­­2), ­­153–​­​­​­187. Whitehead, J. (­­2017). Prioritizing sustainability indicators: Using materiality analysis to guide sustainability assessment and strategy. Business Strategy and the Environment, 26(­­3), ­­399–​­​­​­412.

Microcredit

Sancak, I.

See Microfinance.

Microfinance

Sancak, I.

Microfinance expresses financial services with relatively lower barriers and simplified financing criteria for underserved individuals or communities. Microcredit, microloan, microlending, and microinsurance belong to microfinance products and services in their realms offered by microfinance institutions (­­FINCA, 2022). The criteria for providing microfinance services, such as credit history, regular income, and collateral, differ from typical financing conditions. Globally, about 1.4 billion adults do not have an account at a financial institution or through a mobile money provider; they are unbanked, and the majority of them are women (­­­­Demirgüç-​­​­​­Kunt et al., 2022). Furthermore,

150 Microfinance

the financing gap for formal micro, small, and medium-​­​­​­ ­­ sized enterprises is estimated at $5.2 trillion, highlighting the vast need for microfinance services (­­IFC, 2022). Microfinance can support financially underserved and financially vulnerable individuals, communities, and enterprises and contribute to economic and social justice; hence, it fosters sustainable development. In achieving such development through enhanced investment in human capital (­­health and education), underserved households require a wide range of financial services that are convenient, f lexible, and reasonably priced (­­CGAP, 2004). They also need credit and insurance, specifically microcredit and microinsurance (­­CGAP, 2004). In this context, Professor Muhammad Yunus, who earned Nobel Prize in 2006, and his Grameen Bank are known worldwide for their pioneering microfinance practices. He helped poor people escape poverty by providing them with loans with suitable terms and taught them a few sound financial principles (­­Nobel Prize, 2022). Financial inclusion and microfinance enable the poor to save, build businesses, and strengthen communities (­­IFC, 2022). Besides, microfinance is important not only in underdeveloped or developing economies but also in developed ones. For example, 91% of all European businesses are micro-​­​­​­ ­­ enterprises, and in the European Union, 99% of all ­­start-​­​­​­ups are micro or small enterprises, and ­­one-​­​­​­third of those were started by unemployed people (­­EIF, 2022). According to the European Investment Fund (­­EIF, 2022), microfinance consists mainly of ­­m icro-​­​­​­loans, less than €25,000, which are tailored to micro-​­​­​­ ­­ enterprises, and people who are facing difficulties in accessing traditional banking services. Microfinance is core to achieving Sustainable Development Goals (­­SDGs) since increasing access to funding by underserved households and microentrepreneurs serve various SDGs, such as SDG 1 (­­no poverty), SDG 2 (­­zero hunger), SDG 5 (­­gender equality), and SDG 10 (­­reduced inequalities). Furthermore, in line with the SDGs and sustainable development perspectives, sustainable finance aims to support the common good and welfare of all society members and help leave no one behind. See also Financial Inclusion, Sustainable Development, and Sustainable Development Goals.

References Consultative Group to Assist the Poor, CGAP. (­­2004). Key principles of microfinance. Washington, DC: CGAP. ­­Demirgüç-​­​­​­Kunt, A., Klapper, L., Singer, D., & Ansar, S. (­­2022). Global Findex Database 2021. Washington, DC: World Bank Group. European Investment Fund, EIF. (­­2022, October 14). Promoting social inclusion by helping inclusive finance providers to make finance available to ­­micro-​­​­​­entrepreneurs and ­­self-​­​­​­employed. European Investment Fund: https://­­w ww.eif.org/­­what_we_do/­­ microfinance/­­i ndex.htm FINCA. (­­2022, October 22). Microfinance. https://­­f inca.org/­­­­our-​­​­​­work/­­m icrofinance/ International Finance Corporation, IFC. (­­2022, October 14). Microfinance. https://­­ www.ifc.org/­­w ps/­­wcm/­­connect/­­i ndustry_ext_content/­­i fc_external_corporate_ site/­­f inancial+institutions/­­priorities/­­mesm/­­m icrofinance

Microinsurance  151

Nobel Prize. (­­2022, October 15). Nobel Prize 2006. Nobel Prize: https://­­ www.nobelprize.org/­­prizes/­­peace/­­2006/­­y unus/­­biographical/

Microinsurance

Sancak, I.

See Microfinance.

Microloan

Sancak, I.

See Microfinance.

Millennium Development Goals

Crescentino, D.

  The Millennium Development Goals (­­ MDGs) comprise eight goals that shaped the UN’s development agenda from 2000 to 2015. Built on the sustainability concept outlined by the Brundtland Report (­­1987), the MDGs originated from the OECD Development Assistance Committee report “­­Shaping the 21st Century: The Contribution of Development ­­Co-​­​­​­operation” (­­1996). The latter emphasized seven “­­ International Development Goals” configured around economic ­­well-​­​­​­being, social development, and environmental sustainability. These priorities integrated the UN ­­Secretary-​­​­​­General Kofi Annan’s report, “­­We the Peoples: The Role of the United Nations in the 21st Century,” which provided foundations for the joint publication “­­A Better

152  Montreal Protocol

World for All: Progress Towards the International Development Goals” (­­ 2000), elaborated by the UN, OECD, WBG, and IMF. This scheme was later systematized at the Millennium Summit of the UN General Assembly (­­2000) and incorporated into the Millennium Declaration (­­2000). As a result, 189 countries at the UN General Assembly agreed on eight MDGs to guide global action until 2015, with 18 follow-​­​­​­ ­­ up specific targets and 48 monitoring indicators (­­Hulme, 2009). All of them aimed at eradicating extreme poverty and hunger, reaching universal primary education, fulfilling gender equality and women’s empowerment, reducing child mortality, improving health, achieving environmental sustainability, and promoting a global partnership for development concerning governments, international organizations, and civil society (­­United Nations, 2000). This course of action illustrates how the international political scene morphed after the Cold War, from a focus on state actors and “­­hard” issues (­­security and diplomacy) toward collective initiatives to address “­­soft” global issues (­­economic, social, and environmental). Among its targets, it gathered to foster an open, predictable, ­­rule-​­​­​­based, ­­non-​­​­​­d iscriminatory trading, financial, and economic system. This idea was embodied in the 2002 UN International Conference on Financing for Development (­­the “­­Monterrey Consensus”), resulting in a commitment to mitigate financial problems that undermined the MDGs initiative. Therefore, official development assistance (­­ODA) stood out as a crucial tool for attracting sustainable financial f lows to finance the development agenda (­­Claessens & Feijen, 2006). In 2015, the MDGs evolved into the UN Sustainable Development Goals (­­SDGs) through the new 2030 Agenda for Sustainable Development. See also 2030 Agenda for Sustainable Development, Sustainable Development, and Sustainable Developments Goals.

References Claessens, S., & Feijen, E. (­­2006). Financial sector development and the millennium development goals. Washington DC: World Bank. Hulme, D. (­­2009). The millennium development goals (­­MDGs): a short history of the world’s biggest promise. Working Paper 100. Manchester: BWPI. United Nations. (­­2000). United Nations Millennium Declaration. A/­­R ES/­­55/­­2. New York: United Nations. United Nations (­­1987). Our common ­­f uture—​­​­​­The Brundtland report. Report of the World Commission on Environment and Development.

Montreal Protocol

Sancak, I.

Montreal Protocol  153

The Montreal Protocol on Substances that Deplete the Ozone Layer, or shortly Montreal Protocol, is an international environmental agreement completed on 16 September 1987. It aims to regulate, phase down, and ultimately phase out the production and consumption of nearly 100 man-​­​­​ ­­ ­m ade chemicals referred to as ­­ozone-​­​­​­depleting substances or ODS ( ­­U NEP, 2020). The Montreal Protocol arose from scientific evidence that emissions of certain substances harm the ozone layer, and the situation results in adverse effects on human health and the environment, such as causing millions of additional cases of melanoma, other cancers, and eye cataracts, and harms in the global climate system (­­UN, 1987). The stratospheric ozone layer protects the environment, hence humans from harmful levels of ultraviolet radiation from the sun, and the Montreal Protocol was initiated to protect the ozone layer, ultimately, sustainability (­­UNEP, 2020). According to the protocol, developing and developed countries have differentiated responsibilities; however, governments have binding, ­­t ime-​­​­​­t argeted, and measurable commitments (­­UNEP, 2020). The Montreal Protocol has been considered a successfully implemented international agreement to protect the environment (­­EPA, 2022). The protocol’s parties have phased out 98% of ODS globally compared to 1990 levels (­­UNEP, 2020). Similar to the Paris Agreement, the Montreal Protocol has climate mitigation aims by reducing greenhouse gases. Since most ­­ozone-​­​­​­depleting substances are potent greenhouse gases, the protocol also contributes significantly to the protection of the global climate system. For example, the protocol’s measures are estimated to have reduced greenhouse gas emissions by 135 gigatons carbon dioxide equivalent (­­CO2 -​­​­​­eq) in ­­1990–​­​­​­2 010, yearly 11 gigatons (­­UNEP, 2020). Furthermore, under the protocol, a new resolution with the Kigali Amendment is expected to cut emissions and help avoid up to 0.5°C of global temperature rise by the end of the century (­­UNEP, 2020). In this regard, the Montreal Protocol is a sustainable development treaty; it supports Sustainable Development Goals and fosters sustainable finance at large. See also Kyoto Protocol, Paris Agreement, Sustainability, Sustainable Development, and Sustainable Development Goals.

References Environmental Protection Agency, EPA. (­­ 2022, September 16). Recent International Developments under the Montreal Protocol. https://­­w ww.epa.gov/­­­­ozone-­​­­­​­­​­­­layer-​­​­​ ­protection/­­­­recent-­​­­­​­­​­­­i nternational-­​­­­​­­​­­­developments-­​­­­​­­​­­­under-­​­­­​­­​­­­montreal-​­​­​­protocol United Nations, UN. (­­1987, September 16). Montreal protocol on substances that deplete the ozone layer. https://­­t reaties.un.org/­­doc/­­publication/­­unts/­­volume%20 1522/­­­­volume-­​­­­​­­​­­­1522-­​­­­​­­​­­­i-­​­­­​­­​­­­26369-​­​­​­english.pdf United Nations Enviroment Programme, UNEP. (­­2020). About Montreal protocol. https://­­w ww.unenvironment.org/­­o zonaction/­­­­w ho-­​­­­​­­​­­­ we-​­​­​­ a re/­­­­a bout-­​­­­​­­​­­­ m ontreal​­​­​­protocol

N Nationally Determined Contributions

Pauw, P.

Nationally Determined Contributions (­N DCs) are climate action plans that countries submit to the United Nations Framework Convention on Climate Change (­UNFCCC). They are central to the implementation of the Paris Agreement. At the UN climate negotiations in Paris in 2015, countries agreed on a model for NDCs that marks a significant departure from existing policies. NDCs signify ‘­contributions’ instead of the harder ‘­commitments’ traditionally used in international treaties (­Rajamani, 2015). They are n ­ ear-​­universal, ­medium-​­term targets and ways to implement them are determined nationally. Priorities and ambitions are set in the context of the shared aim of the Paris Agreement of keeping the increase in global temperature to well below 2°C and pursuing efforts to limit the temperature increase to 1.5°C above ­pre-​­industrial levels (­Article 2.1(­a)) and ‘­common but differentiated responsibilities and respective capabilities, in the light of different national circumstances’ (­Article 4.3) (­Rajamani, 2016). Pursuant to the Paris Agreement’s Article 4.3, countries ‘­shall’ communicate successive NDCs every five years, representing a progression beyond the current NDC and ref lecting its highest possible ambition. This process is crucial to raising ambitions (­Rajamani, 2016) and effectiveness (­Pauw & Klein, 2020). The Katowice Climate Package (­decision 4/­CMA.1) guides the NDC formulation, although it neither refers to costs nor finance. However, finance is crucial to NDC implementation, as most developing countries made their NDCs conditional upon climate finance provided by developed countries (­Pauw et al., 2020). Sustainable finance receives little attention in NDCs. Of the first 124 new and updated NDCs, only nine mention Article 2.1(­c) of the Paris Agreement (­Pauw et  al., 2022), which is about making finance f lows consistent with the agreement’s mitigation and adaptation objectives. However, NDCs by both developed and developing countries do frequently refer to fiscal policy, financial regulation, and policy and public finance (­Pauw et al., 2022), all of which are crucial for countries to implement Article 2.1(­c) (­Whitley et al., 2018). Even without elaboration on NDCs, sustainable finance can nevertheless be important for NDC implementation and for setting ambitions of future

DOI: 10.4324/9781003310891-14

Natural Capital  155

NDCs, both of which are nationally determined, if sustainable finance policies help to reduce emissions and/­or increase resilience. See also Climate Finance, Paris Agreement, and United Nations Framework Convention on Climate Change.

References Pauw, W. P., Beck, T.,  & Valverde, M. J. (­2022). NDC Explorer. German Development Institute, African Centre for Technology Studies (­ACTS), Stockholm Environment Institute (­SEI), Frankfurt S­ chool – UNEP ​­ Collaborating Centre for Climate & Sustainable Energy Finance. Pauw, W. P., Castro, P., Pickering, J., & Bhasin, S. (­2020). Conditional nationally determined contributions in the Paris Agreement: foothold for equity or Achilles heel? Climate Policy, 20(­4), ­468–​­484. Pauw, W. P., & Klein, R. J. T. (­2020). Beyond ambition: increasing the transparency, coherence and implementability of Nationally Determined Contributions. Climate Policy, 20(­4), ­405–​­414. Rajamani, L. (­2015). Negotiating the 2015 climate agreement : Issues relating to Legal Form and Nature Negotiating the 2015 Climate Agreement : Issues relating to Legal Form and Nature (­Issue 28). Rajamani, L. (­2016). Ambition and differentiation in the 2015 Paris Agreement: Interpretative possibilities and underlying politics. International and Comparative Law Quarterly, 65(­2), ­493–​­514. https://­doi.org/­10.1017/­S0020589316000130 Whitley, S., Thwaites, J., Wright, H., & Ott, C. (­2018). Making finance consistent with climate goals: Insights for operationalising Article 2.1c of the UNFCCC Paris Agreement.

Natural Capital

Sancak, I.

  Natural capital encapsulates the stock of natural resources, mainly water, air, land, habitats, ecosystems, plants, and species. In other words, natural capital expresses living and nonliving components, excluding people and what they manufacture (­Guerry et al., 2015). The Natural Capital Coalition agrees on the following definition (­Natural Capital Coalition, 2016: 12): ‘­Natural capital is another term for the stock of renewable and n­ on-​­renewable natural resources on earth (­e.g., plants, animals, air, water, soils, minerals) that combine to yield a flow of benefits or “­services” to people.’ Natural resources include renewable or abiotic resources, such as mineral resources and fossil fuels, and n ­ on-​­renewable or biological or biotic resources, such as fresh water and solar energy (­Natural

156  Natural Capital

Capital Coalition, 2016; Schoenmaker & Schramade, 2019). Natural capital underpins all economic activities and is accepted to be the world’s most important asset (­OECD, 2021). Natural capital or environmental capital is the natural source of ecosystem services. Ecosystem services generate or help generate benefits for people (­Guerry et al., 2015). Therefore, it is crucial to maintain natural capital for future f lows of ecosystem services (­Guerry et al., 2015). Ecosystem services provide services contributing to human w ­ ell-​­being in the following four categories (­M illennium Ecosystem Assessment, 2005): • • • •

Provisioning services, such as food, fresh water, wood, fiber, and fuel. Regulating services, such as climate regulation, f lood regulation, disease regulation, and water purification. Cultural services, such as aesthetic, spiritual, educational, and recreational. Supporting services, such as nutrient cycling, soil formation, and primary production.

Deterioration of nature or ecosystem services not only destroys the ecological balance and natural wealth in the world but also undermines economies. The reality is that nature has been deteriorating at an unprecedented level (­World Bank Group, 2020). Such ecosystem damage can cause systemic impacts on human w ­ ell-​­being and economies (­World Bank Group, 2020). Climate change and biosphere integrity are two core planetary boundaries that have already been crossed. These are existential threats to the world. The value of ecosystem services explains the critical importance of realizing the SDGs, which encompass ­nature-​­related dimensions and the protection of ecosystem services. For many years, economic models and business practices have not included all natural capital elements in their production functions or business models. These economic and business models, addressing baseline scenarios or ­business-­​­­as-​­usual (­BAU), refer to the historical trend of production and business; no change in economic, financial, and business models in the context of protecting natural assets, hence the lack of mitigation policies. Unsustainable economic and business models work on the assumption that natural resources are free and limitless to use, addressing negative externalities and unsustainable development. From the big picture perspective, these assumptions crossed four of nine planetary boundaries, and their outcomes threaten our planet. These problems arising from unsustainable economic models force the world to develop new policies, namely sustainable development at the macroeconomic scale, responsible business at the firm scale, and sustainable finance at the industry scale of financial services. See also Biodiversity, Externalities, Green Finance, and Planetary Boundaries Framework.

References Guerry, A. D., Polasky, S., Lubchenco, J.,  & Vira, B. (­2015). Natural capital and ecosystem services informing decisions: From promise to practice. Proceedings of the National academy of Sciences, 112(­24), ­7348–​­7355.

Natural Resource  157 Jansson, A. M., Hammer, M., Folke, C., & R. C. (­1994). Investing in natural capital: The ecological economics approach to sustainability. Washington, DC: Island Press. Millennium Ecosystem Assessment. (­2005). Ecosystems and human ­well-​­being: Synthesis. Washington, DC: World Resources Institute. Natural Capital Coalition. (­2016). Natural capital protocol. Gravenhage www.naturalcapitalcoalition.org/­protocol: Capitals Coalition. Organisation for Economic C ­ o-​­operation and Development, OECD. (­2021). Biodiversity, natural capital and the economy: A policy guide for finance, economic and environment ministers. Paris: OECD Environment Policy Papers, No. 26, OECD Publishing. Schoenmaker, D., & Schramade, W. (­2019). Principles of sustainable finance. New York: Oxford University Press. World Bank Group. (­2020). Mobilizing private finance for nature. Washington, DC: World Bank Group.

Natural Resource

Sancak, I.

  See Natural Capital.

Negative Emission

Sancak, I.

  See Greenhouse Gases.

Negative Externalities

 

Sancak, I.

158  Negative Screening

See Externalities.

Negative Screening

Sancak, I.

See Exclusionary Investing and Sustainable Investment Strategies.

Net Zero Economy

Sancak, I.

See Greenhouse Gases.

Net Zero Emission

Sancak, I.

See Greenhouse Gases.

Non-Financial Information

 

Sancak, I.

­Non-­Financial Reportin  159

See Sustainability Reporting.

­Non-​­Financial Reporting

Sancak, I.

  See Sustainability Reporting.

Norms-​­based Screening

See Sustainable Investment Strategies.

Sancak, I.

O OECD Guidelines for Multinational Enterprises

Sancak, I.

The OECD Guidelines for Multinational Enterprises state ­ non-​­ binding principles and standards for responsible business conduct (­OECD, 2011). The Guidelines have a suggestive nature, and unless they coincide with national regulations, they are not legally enforceable. They were adopted in 1976 and updated in 2011 for the fifth time (­OECD, 2022). The Guidelines cover all areas of business responsibility (­OECD, 2016). Aiming to promote positive contributions by multinational enterprises to economic, environmental, and social progress worldwide, the Guidelines point out the shared values of the governments of countries from which a large share of international direct investment originates; therefore, the governments adhering to the Guidelines are expected to implement them and encourage their use (­OECD, 2011). In this way, participating governments establish National Contact Points to promote the Guidelines. The Guidelines draw the perimeter of responsible business conduct with the following domains under the stated general principles (­OECD, 2011): • • • • • • • • •

Disclosure Human Rights Employment and Industrial Relations Environment Combating Bribery, Bribe Solicitation, and Extortion Consumer Interests Science and Technology Competition Taxation

The Guidelines also set forth implementation procedures. Since 2011, the Guidelines have included a chapter on Human Rights aligning with the UN Guiding Principles for Business and Human Rights (­U NGPs) (­OECD, 2016). Additionally, the Guidelines contain references to relevant provisions of the ILO Tripartite Declaration of Principles concerning Multinational

DOI: 10.4324/9781003310891-15

­Outside-­in Perspectiv  161

Enterprises and Social Policy and the Rio Declaration (­OECD, 2016). In this regard, the Guidelines set the fundamentals of sustainability and sustainability features expressed with environmental, social, and governance (­ESG) factors for multinational enterprises. Similarly, the Guidelines are instrumental for sustainable finance by guiding business organizations with sustainability features. The Guidelines are used as the cornerstone sustainability rule set in various sustainability and sustainable finance regulations. For example, as part of the EU’s sustainable finance policies, the EU Taxonomy for sustainability addresses the OECD Guidelines for Multinational Enterprises within one of the technical screening criteria in classifying economic activities as taxonomy aligned (­EU Technical Expert Group on Sustainable Finance, 2020). Even though the Guidelines focus on multinational enterprises, they also apply to nationally operating business organizations. See also United Nations Guiding Principles for Business and Human Rights, Environmental, Social, and Governance (­ESG) Factors, and Principles for Responsible Investment.

References EU Technical Expert Group on Sustainable Finance. (­2020). Taxonomy: Final report of the Technical Expert Group on Sustainable Finance. Brussels: European Commission. OECD. (­2011). OECD Guidelines for Multinational Enterprises. Paris: OECD Organisation for Economic ­Co-​­operation and Development, OECD. (­2016). Implementing the OECD Guidelines for Multinational Enterprises: The National Contact Points from 2000 to ­2015-​­Key Findings. Paris: OECD. Organisation for Economic C ­ o-​­operation and Development, OECD. (­2022, October 2). 2011 Update of the OECD Guidelines for Multinational Enterprises. https://­ www.oecd.org/­d af/­i nv/­m ne/­oecdguidelinesformultinationalenterprises.htm

­Outside-​­in Perspective

See Double Materiality.

Sancak, I.

P Paris Agreement

Sancak, I.

  The Paris Agreement, or Paris Climate Agreement, as the first legally binding global climate change treaty, aims to strengthen the global response to the threat of climate change by keeping a global temperature rise this century well below 2 degrees Celsius (­2°C) above ­pre-​­industrial levels and pursuing efforts to limit the temperature increase even further to 1.5 degrees Celsius (­U NFCCC, 2022a). The Paris Agreement was adopted by 196 parties at the Conference of the Parties, or COP (­the supreme ­decision-​­making body of the United Nations Framework Convention on Climate ­Change – ​­UNFCCC) in Paris on 12 December 2015 and entered into force on 4 November 2016 (­U NFCCC, 2022b). The Agreement envisages, promotes, and incentivizes the mitigation of greenhouse gas (­GHG) emissions. To achieve the ­long-​­term temperature goal, the parties of the Agreement aim to reach the global peaking of GHG emissions as soon as possible and to undertake rapid reductions thereafter in accordance with the best available science to achieve a balance between anthropogenic emissions by sources and removals by sinks of GHGs (­United Nations, 2015, Art. 4/­1). Each party is expected to prepare, communicate, and maintain successive nationally determined contributions (­N DCs) that it intends to achieve (­United Nations, 2015, Art. 4/­2). The Agreement also aims to foster climate change adaptation by “­Increasing the ability to adapt to the adverse impacts of climate change and foster climate resilience” (­United Nations, 2015, Art. 2/(­b)). Furthermore, the Agreement addresses the financial dimensions of fighting climate change by stating the aim of “­Making finance flows consistent with a pathway towards low greenhouse gas emissions and ­climate-​­resilient development” (­United Nations, 2015, Art. 2/(­c)). Thus, finance stays at the heart of the Agreement in implementation, recognizing the importance of mobilizing climate finance from a wide variety of sources, instruments and channels, noting the significant role of public funds, through a variety of actions, including supporting ­country-​­driven strategies, and taking into account the needs and priorities of developing country parties. (­United Nations, 2015, Art. 9/­3) DOI: 10.4324/9781003310891-16

Paris Agreement  163

In addition to climate change mitigation, climate change adaptation, and climate finance, the Agreement supports sustainable development. Various articles address and emphasize the importance of sustainable development, such as articles 2/­1, 4/­1, 6/­1, 6/­2, and 6/­4. The Agreement’s approaches to achieving the aims rely on enhancing public and private sector participation. In December 2018, the operational details of the Agreement for implementation, stating rules, procedures, and guidelines, were set out at the United Nations Climate Change Conference (­COP24) in Katowice, Poland, and finalized at COP26 in Glasgow, Scotland, in November 2021 (­U NFCCC, 2022c). These details toward operationalizing the Agreement are known as the Paris Rulebook or Katowice Climate Package. The Paris Agreement, as a global strategic endeavor, is one of the main catalyzers of sustainability, climate finance, and sustainable finance. Figure P.1 summarizes the main dimensions of the Paris Agreement.

It aims to pursue efforts to limit the temperature increase even further to 1.5°C

Rich countries must provide a floor for financing, 100 billion dollars, starting from 2020.

A review every five years; a 5-year cycle.

It aims to keep a global temperature rise this century well below 2°C above preindustrial levels.

Countries/Parties submit their plans for climate action known as Nationally Determined Contributions (NDCs).

By 2050, Parties aim to reach net-zero emissions.

Paris Agreement

It requires economic and social transformation, and it addresses sustainable development.

It was adopted by 196 Parties in Paris on 12 December 2015 and entered into force on 4 November 2016.

Parties are expected to cut GHGs as soon as possible.

193 Parties out of 197 have ratified the Agreement.

The first legally binding global climate change agreement.

Figure P.1  Key Features of the Paris Agreement Sources: UNFCCC (­2022a), UNFCCC (­2 022b), UNFCCC (­2 022c), United Nations (­2015)

164  Parts per Million (­ppm)

See also Climate Change, Climate Finance, Nationally Determined Contributions (­N DCs), and United Nations Framework Convention on Climate Change (­UNFCCC).

References United Nations Framework Convention on Climate Change, UNFCCC. (­2022a, September 6). Key aspects of the Paris Agreement. https://­unfccc.int/­­process-­​­­a nd-​ ­meetings/­­t he-­​­­paris- ​­a greement/­­t he-­​­­paris- ​­a greement/­­key-­​­­a spects- ­​­­of-­​­­t he-­​­­paris-​ ­agreement United Nations Framework Convention on Climate Change, UNFCCC. (­2022b, September 6). What is the Paris Agreement? UNFCCC: https://­unfccc. int/­­process-­​­­a nd-​­meetings/­­the-­​­­paris-​­agreement/­­what-­​­­is-­​­­the-­​­­paris-​­agreement United Nations Framework Convention on Climate Change, UNFCCC. (­2022c, September 6). The Katowice climate package: Making the Paris Agreement Work For All. https://­ unfccc.int/­­process-­​­­and-​­meetings/­­the-­​­­paris-​­agreement/­­katowice-­​­­climate-​­package United Nations. (­2015, December 12). Paris Agreement. UNFCCC: https://­unfccc. int/­sites/­default/­f iles/­english_paris_agreement.pdf

Parts per Million (­ppm)

Sancak, I.

See Keeling Curve.

Physical Risk

Sancak, I.

Physical risks express the risks associated with the probable physical impacts of climate change (­TCFD, 2017). Physical impacts might be acute, such as storms, f loods, wildfires, landslides, and drought, or chronic, such as sea level rise and desertification (­TCFD, 2017). Sustainability risks can be classified into ­climate-​­related risks and environmental risks. Furthermore, ­climate-​ ­related risks can be grouped into transition risks and physical risks (­TCFD,

Physical Risk  165

Figure P.2  P  hysical Risk Drivers and Transmission Channels Source: NGFS (­2019)

2017). Moreover, c­ limate-​­related and environmental risks are connected and overlap to some extent (­NGFS, 2020). Physical risks have numerous implications for financial institutions and businesses (­TCFD, 2020). For example, extreme temperature changes can affect firms’ premises, operations, supply chain, transport needs, and employee safety (­TCFD, 2020). Physical risks can also affect businesses directly, indirectly, or through interrelated factors (­TCFD, 2020). Figure P.2 shows physical risk drivers in an economy. Physical risks, in the form of extreme weather events or gradual climate changes, threaten the financial system through direct or indirect transmission channels (­NGFS, 2019). Physical risks are sources of financial risks; the physical effects of climate change and environmental degradation drive financial risks (­NGFS, 2020). Physical risks impact financial institutions in numerous aspects. For example, physical risks affect banks’ credit risks through their counterparties (­BIS, 2021). Furthermore, physical and transition risks are drivers of existing risks, such as credit risk, operational risk, market risk, liquidity risk, credit spread risk, real estate risk, and strategic risk (­ECB, 2020). The magnitude and distribution of c­ limate-​­related risks change based on the level and timing of mitigation measures (­ECB, 2020). See also Climate Change, Transition Risk, Sustainability Risks, and Sustainability Transformation.

References BIS. (­2021). ­Climate-​­related risk drivers and their transmission channels. Basel: Bank for International Settlements.

166 Pieconomics European Central Bank, ECB. (­2020). Guide on c­limate-​­related and environmental risks. Frankfurt: European Central Bank. Network of Central Banks and Supervisors for Greening the Financial System, NGFS. (­2019). A call for action climate change as a source of financial risk. Paris: Network of Central Banks and Supervisors for Greening the Financial System (­NGFS). Network of Central Banks and Supervisors for Greening the Financial System, NGFS. (­2020). Guide for Supervisors Integrating c­limate-​­related and environmental risks into prudential supervision. Paris: Network of Central Banks and Supervisors for Greening the Financial System (­NGFS). Task Force on Climate Related Financial Disclosure. TCFD. (­ 2017). Technical ­Supplement  – the ​­ Use of Scenario Analysis in Disclosure of C ­ limate-​­Related Risks and Opportunities. Basel: ­TCFD-​­Task Force on Climate Related Financial Disclosures. Task Force on Climate Related Financial Disclosures, TCFD. (­2020). task force on ­climate-​­related financial disclosures; guidance on risk management integration and disclosure. Basel: Task Force on C ­ limate-​­related Financial Disclosures (­TCFD).

Pieconomics

Sancak, I.

  Pieconomics (­pie+economics), coined by Edmans (­2021), posits that firms can deliver purpose and profit simultaneously by primarily aiming at purpose. Pieconomics draws on the p­ie-​­ growing mentality as opposed to ­pie-​­splitting, where the pie symbolizes a firm’s value creation toward stakeholders, including investors (­Edmans, 2021). In Pieconomics, profits are crucial but not the end goal; instead, profits come out as a ­by-​­product of creating value, being purpose is the ultimate goal (­Edmans, 2021). Pieconomics seeks to generate value for investors by focusing on ­pie-​­growing strategies for society or stakeholders. Pieconomics offers much more than corporate social responsibility (­CSR). For example, charitable acts and the “­do no harm” policies can be good enough in the CSR domain for a tobacco company but not in the Pieconomics realm. Here, the core business still causes social harm and contradicts the p­ ie-​­growing mentality (­Edmans, 2021). As a key tenet, Pieconomics points out that it is crucial for a firm to “­actively do good.” Considering the content of Pieconomics, stakeholder capitalism is a related term, a form of capitalism in which companies focus on ­long-​­term value creation by taking into account the needs of all their stakeholders and society at large, instead of optimizing only ­short-​­term profits for shareholders (­Schwab & Vanham, 2021). Enlightened shareholder value (­ESV) shares many similarities with Pieconomics. Pieconomics and ESV recognize the link between profit and purpose, and both concepts

Pigouvian Tax  167

appreciate ­ long-​­ termism; however, ESV attributes more importance to profit than social value and focuses on profit. Triple bottom line (­T BL) (­E lkington, 1998) is also a closely connected concept and has similar features to Pieconomics. TBL posits that enterprises should consider their social and environmental impacts in addition to their financial performance; instead of merely focusing on one bottom line, namely profit, they should commit to a triple bottom line that includes people, planet, and profit (­M iller, 2020). Pieconomics and TBL differ in the ­pie-​­growing mentality; while TBL focuses on a balance among people, planet, and profit, Pieconomics prioritizes value creation (­Edmans, 2021). Pieconomics inherently considers sustainability dimensions and ESG factors by promising active contribution to environmental and social factors and not ignoring the importance of financial and economic dimensions. Pieconomics addresses the highest stage of sustainable finance by requiring active contribution to the common good value in society. The h ­ ighest-​­level sustainable finance requires the optimization of environmental and social impacts subject to financial value, mainly focusing on the common good value creation in the long term (­Schoenmaker & Schramade, 2019). See also Corporate Social Responsibility (­CSR), Enlightened Shareholder Value (­ESV), Stakeholder Capitalism, Sustainable Finance, Triple Bottom Line (­T BL)

References Edmans, A. (­2021). Grow the pie: How great companies deliver both purpose and profit. Cambridge and New York: Cambridge University Press. Elkington, J. (­1998). Partnerships from cannibals with forks: The triple bottom line of 21st-century business. Environmental Quality Management, 8(­1), ­37–​­51. Miller, K. (­2020). The triple bottom line: What it is & why it’s important. Harvard Business School Online: https://­online.hbs.edu/­blog/­post/­­what-­​­­is-­​­­the-­​­­t riple-­​­­bottom-​­l ine Schwab, K.,  & Vanham, P. (­2021). What is stakeholder capitalism? World Economic Forum: https://­w ww.weforum.org/­agenda/­2021/­01/­­k laus-­​­­schwab-­​­­on-­​­­what-­​­­is-­​ ­­stakeholder-­​­­capitalism-­​­­h istory-​­relevance/ Schoenmaker, D., & Schramade, W. (­2019). Principles of sustainable finance. Oxford: Oxford University Press.

Pigouvian Tax

 

Sancak, I.

168  Planetary Boundaries

See Externalities.

Planetary Boundaries

Sancak, I.

See Planetary Boundaries Framework.

Planetary Boundaries Framework

Sancak, I.

The planetary boundaries framework scientifically explains the stability and resilience of the Earth through nine crucial processes and their frontiers (­Stockholm Resilience Centre, 2022). Developed in 2009, the framework addresses environmental factors and anthropogenic pressures on the Earth system, defined as the integrated biophysical and socioeconomic processes and interactions among the Earth’s spheres: atmosphere, hydrosphere, biosphere, and anthroposphere (­human enterprise), and others (­Rockström et al., 2009). The first study (­Rockström et al., 2009) introducing the framework concluded that the boundaries in three systems, rate of biodiversity loss (­biosphere integrity), climate change, and human interference with the nitrogen cycle were already exceeded. Figure P.3 picturizes the framework with the initial findings in 2009. In Figure P.3, the first two inner circles indicate the proposed safe operating space of nine planetary systems, and wedges represent an estimate of the position for each parameter; three of the wedges exceeded the first two circles as of 2009 (­Rockström et al., 2009). While staying in the defined planetary boundaries enables humanity to operate safely, crossing one or more planetary boundaries might trigger n ­ on-​­linear and abrupt environmental changes (­Rockström et al., 2009). Steffen et al. (­2015) updated and extended the study of Rockström et al. (­2009), finding that the anthropogenic perturbation levels of four of the Earth system processes (­climate change, biosphere integrity,

Planetary Boundaries Framework  169 ch Climate ange

Oce an ac id i

Nitro g cycl en P e ho (bio s g flow eoch c pho bou em yc n da ica ry )

s ru le

l

loss ity s r ive od i B

ric tosphe Stra depletion ne ozo

Atmosphe r aerosol load ic ing (not yet quanti fied )

ion at fic

C (no hem ty i e

tion llu ified) o l p nt ca qua t

bal Glo ter use a shw fre

Change in l a nd us e

Figure P.3  Planetary Boundaries Framework (­2009) Source: Rockström et al. (­2009)

biogeochemical f lows, and ­land-​­system change) exceeded the proposed planetary boundaries. Table P.1 summarizes the updated variables, their available values, and the proposed boundaries. In the framework, climate change and biosphere integrity constitute core boundaries based on their fundamental importance for the Earth system (­Steffen et al., 2015). Biodiversity loss was extended to biodiversity loss and extinctions, or biosphere integrity, in the 2015 study. In this boundary, Biodiversity Intactness Index (­BII) is also used as a control variable. A BII estimates the change in the average abundance of native terrestrial species or ecological communities in a region under human impacts (­Palma et al., 2021). The 2015 study could not quantify three variables or their values: atmospheric aerosol loading, novel entities, and the functional role of biosphere integrity (­Steffen et  al., 2015). Nonetheless, the framework considered new forms of existing substances and modified life forms that have the potential for unwanted geophysical and/­or biological effects (­Steffen et al., 2015). A recent study (­Persson et  al., 2022) highlighting plastic pollution found evidence that humanity exceeded another planetary boundary, novel

Stratospheric Ozone Depletion

Biochemical Flows

(­M illions of tons per year) Stratospheric O3 concentration, in Dobson Units (­DU)

Industrial and Intentional Biological Fixation of Nitrogen (­N )

283 DU (­2009) Only transgressed over Antarctica in Austral spring (~200 DU) (­2015)

Min 276 DU (­2009) Under 5% reduction from the ­pre-​­industrial level of 290 DU, assessed by latitude (­2015)

~150 Tg N yr−1

~22 Tg P yr−1 ~14 Tg P yr−1

Max 11 Tg P yr−1 Max 6.2 Tg yr−1 mined and applied to erodible (­agricultural) soils

Max 62 Tg N yr−1

84%, applied to Southern Africa only (­not global level)

Maintain BII at 90% or above

2.3 W m−2 ­100–​­1000 E/­MSY

Max 1 Under 10 E/­MSY (­E/­MSY =extinctions per million ­species-​­years)

Functional diversity: Biodiversity Intactness Index (­BII) Global Phosphors (­P) f low from freshwater systems into the ocean, and Regional P f low from fertilizers to erodible soils

398.5 ppm CO2

Max 350 ppm CO2

Atmospheric CO2 concentration (­parts per million, PPM by volume) Energy imbalance at ­top-­​­­of-​ ­atmosphere (­watts per meter squared, W m−2) Genetic diversity: Extinction rate

Climate Change (­Core)

Change in Biosphere Integrity (­R ate of Biodiversity Loss, 2009) (­Core)

Value (­2015)

Proposed Planetary Boundary

Control Variable (­s)

Earth System Process

Table P.1  Planetary Boundaries Framework: Control Variables, Proposed Boundaries, and V ­ alues-​­2015 Update

170  Planetary Boundaries Framework

Mean Surface Seawater Min 80% of the p­ re-​­industrial Saturation State with Respect aragonite saturation state of to Aragonite mean surface ocean, including natural diel and seasonal variability Area of forested land as % of Min 75% original forest cover

Source: Steffen, et al. (­2015)

Freshwater Use

Max 4000 km 3 yr−1 Maximum amount of consumptive blue water use (­cubic kilometers per year; km 3yr−1) Air Pollution/­Atmospheric Aerosol Aerosol Optical Depth (­AOD) NA Loading NA NA Introduction of Novel Entities (­Chemical Pollution, 2009)

­L and-​­System Change

Ocean Acidification

NA

NA

~2600 km 3 yr−1

62%

~84% of the ­pre-​­i ndustrial aragonite saturation state

Planetary Boundaries Framework  171

172  Planetary Boundaries Framework

Figure P.4  P  lanetary Boundaries Framework (­2022) Credit: Azote for Stockholm Resilience Centre, based on analysis in ­Wang-​­Erlandsson et al. 2022 / Licenced under CC ­BY-­​­­NC-​­N D 3.0. Source: Stockholm Resilience Centre (­2 022)

entities, due to annual production and releases increasing at an outstripping pace. Another study (­­Wang-​­Erlandsson et al., 2022) indicated that the sixth boundary was exceeded: the boundary for green water. Green water means the water transpired by the plant. Soil keeps water from rainwater or other sources, and then, partly, the water is transpired by crops as green water. Green water, a fundamental feature of the Earth system, is extensively perturbated by human activities, and the green water planetary boundary is already exceeded (­­Wang-​­Erlandsson et al., 2022). Figure P.4 shows the current picture of boundary variables, including the latest study (­­Wang-​­Erlandsson et al., 2022) within the framework. In Figure P.4, the fully circled area indicates a safe operating space for humanity. Since transgressing the boundaries increases the risk of generating or triggering l­arge-​­scale abrupt or irreversible environmental changes, the

Porter Hypothesis  173

planetary boundaries framework conveys numerous implications for science, policy, and practice (­Stockholm Resilience Centre, 2022), including sustainable finance and, most importantly, humanity’s future. It is clear that humans and their activities are a part of the Earth system and interact with other components (­Rockström et al., 2009). It is also clear that the framework has many policy implications for economic and financial models, highlighting the importance of sustainable development, n ­ et-​­zero economy, sustainability, and sustainable finance. More specifically, the framework conveys numerous implications for the importance of sustainable finance, particularly green finance, blue finance, and biodiversity finance, in curbing b­ oundary-​­crossing anthropogenic activities. See also Doughnut Economics, Green Finance, Blue Finance, Biodiversity Finance, Sustainability, and Sustainable Finance.

References Palma, A. D., Hoskins, A., Gonzalez, R. E., Börger, L., Newbold, T., ­Sanchez-​ ­Ortiz, K.,... Purvis, A. (­2021). Annual changes in the biodiversity intactness index in tropical and subtropical forest biomes, ­2001–​­2012. Nature, ­2001–​­2012. Persson, L., Almroth, B. M., Collins, C. D., Cornell, S., Wit, C. A., Diamond, M. L.,... Mi. (­2022). Outside the safe operating space of the planetary boundary for novel entities. Environmental Science and Technology, 1­ 510–​­1521. Rockström, J., Steffen, W., Noone, K., Persson, Å., Chapin, F. S., Lambin, E.,... Sve. (­2009). Planetary boundaries: Exploring the safe operating space for humanity. Ecology and Society, 14(­2). Steffen, W., Richardson, K., Rockström, J., Cornell, S. E., Fetzer, I., Bennett, E. M.,... Veerabh. (­2015). Planetary boundaries: Guiding human development on a changing planet. Science, 347(­6223), 1259855. Stockholm Resilience Centre. (­ 2022, October 07). Planetary boundaries. https://­ www.stockholmresilience.org/­research/­­planetary-​­boundaries.html

­ ang-​­Erlandsson, L., Tobian, A., Ent, R. J., Fetzer, I., Wierik, S. t., Porkka, W M.,... Cornell, S. (­ 2022). A planetary boundary for green water. Nature Reviews Earth & Environment, ­380–​­392.

Porter Hypothesis

Sancak, I.

The Porter hypothesis asserts that w ­ ell-​­crafted environmental regulations can drive firms’ innovation and competitiveness, in addition to their environmental benefits. The hypothesis was first introduced in 1991 by Michael

174  Porter Hypothesis Environmental Performance Environmental Regulations

Innovation Business Performance

Figure P.5  Schematic Representation of the Porter Hypothesis Source: Ambec et al. (­2013)

Porter, a Harvard Business School professor, and named after him. It was later elaborated on in an academic article by Porter and van der Linde in 1995. The traditional stance of environmental regulations before the Porter hypothesis was that such regulations increase firms’ costs, undermine competitiveness, and reduce their profits by curbing their externalities and restricting their business options (­A mbec et al., 2013). Contrary to this view, the Porter hypothesis claims that environmental regulations can potentially trigger innovation, which partially or more than fully offset the costs of complying with them, enhance competitiveness, and fortify firm productivity. The authors cite e­ nergy-​­saving investments as an example; strict regulations bring about cost saving in energy consumption, and thus can offset the cost of compliance with those regulations. Figure P.5 depicts the Porter hypothesis. Porter and van der Linde (­1995) argue that w ­ ell-​­designed environmental regulations can serve at least six purposes. They signal likely resource inefficiencies and potential technological improvements, trigger corporate awareness by requiring information gathering, reduce uncertainty in the environmental policy realm, force economic actors toward innovation and progress, and provide equal opportunities in transition periods. Nonetheless, in the short term, innovations may not always offset the cost of compliance since adaptation to ­innovation-​­based solutions might take time and be costly (­Porter & van der Linde, 1995). There are weak and strong versions of the Porter hypothesis (­A mbec et  al., 2013). In the weak form, the hypothesis asserts that properly designed environmental regulations can foster innovation, but this content does not tell the business outcomes of such innovations for firms. The strong form of the hypothesis conveys the argument that environmental regulations can generate business value via innovation above compliance costs, hence fostering business performance and competitiveness (­A mbec et al., 2013). According to the Porter hypothesis, environmental regulations such as carbon taxes and g­ overnment-​­initiated emission trading systems can induce innovations connected to sustainable finance on numerous points. For example, reducing GHGs emissions via deploying innovative solutions in manufacturing helps reduce health issues and insurance premiums. Developing such innovations might require funding to a large extent. Furthermore, safer working conditions and environmentally friendly

Positive Externalities  175

production processes may also support social factors in a workplace, contributing to social dimensions of sustainability. Therefore, innovations arising from environmental regulations claimed by the Porter hypothesis fall into the sustainable finance realm in various ways. See also Externalities, Carbon Markets, and Carbon Price.

References Ambec, S., Cohen, M. A., Elgie, S., & Lanoie, P. (­2013). The Porter hypothesis at 20: Can environmental regulation enhance innovation and competitiveness? Review of Environmental Economics and Policy, 7(­1), ­2 –​­22. Porter, M. E. (­1991). America’s green strategy. Scientific American, 264(­4), 168. Porter, M. E., & van der Linde, C. (­1995). Toward a new conception of the e­ nvironment-​ ­competitiveness relationship. Journal of Economic Perspectives, 9(­4), ­97–​­118.

Positive Externalities

Sancak, I.

See Externalities.

Positive Screening

Sancak, I.

See Inclusionary Investing and Sustainable Investment Strategies.

Principles for Responsible Banking

Ocal, T.

176  Principles for Responsible Banking

The Principles for Responsible Banking (­PRB), created in 2019, provide a framework to ensure banks’ alignment with the Sustainable Development Goals (­SDGs) and the Paris Climate Agreement (­PCA). The SDGs and the PCA identify the most pressing societal, environmental, and economic world challenges, where banks have a pivotal role in ensuring the required financial proceeds for their fulfillment/­accomplishment. The SDGs and the PCA include specific targets and program areas where banks can make substantial contributions and align themselves clearly with the needs of their countries, society, and customers. As shown in Figure P.6, the PRB consists of six principles to be implemented by banks across all business areas at the strategic, portfolio, and transactional levels. (­U NEP FI, 2022a). In essence, signatory banks are, first, required to analyze the most significant impacts of their activities on society, the environment, and the economy. Banks should then identify specific targets for achieving the greatest positive impacts while minimizing the negative effects of their activities. Finally, banks should disclose the contributions and impacts on sustainability to the public. By implementing the PRB, banks can meaningfully contribute to the SDGs, the PCA, and relevant other frameworks such as the European Central Bank (­ECB) Guide on C ­ limate-​­related and Environmental Risks. Although 1.Alignment

2.Impact & Target Setting

•We will align our business strategy to be consistent with and contribute to individuals’ needs and society’s goals, as expressed in the Sustainable Development Goals, the Paris Climate Agreement and relevant national and regional frameworks.

•We will continuously increase our positive impacts while reducing the negative impacts on, and managing the risks to, people and environment resulting from our activities, products and services. To this end, we will set and publish targets where we can have the most significant impacts.

4. Stakeholders • We will proactively and responsibly consult, engage and partner with relevant stakeholders to achieve society’s goals.

•We will work responsibly with our clients and our customers to encourage sustainable practices and enable economic activities that create shared prosperity for current and future generations.

5. Governance & Culture

6. Transparency & Accountability

• We will implement our commitment to these Principles through effective governance and a culture of responsible banking.

• We will periodically review our individual and collective implementation of these Principles and be transparent about and accountable for our positive and negative impacts and our contribution to society’s goals.

Figure P.6  Principles for Responsible Banking Source: UNEP FI, ­2 022a

3.Clients & Customers

Principles for Responsible Investment (­PRI)  177

a voluntary framework, the Principles have been signed by 290 banks globally as of June 2022. These banks represent over $80 trillion in total assets, with 45% of global banking assets worldwide (­U NEP FI, 2022b). The PRB aims to integrate sustainable finance into business strategies and processes of banking activities. Signatory banks started to align financing and investment practices toward positive sustainability impacts, and, as of 2021, 87 banks reported that $2.3 trillion of sustainable finance had been mobilized (­U NEP FI, 2021). See also Sustainable Developments Goals (­SDGs) and Paris Agreement.

References UNEP FI. (­2021). Responsible banking: Building foundations. The first collective progress report of the UN Principles for Responsible Banking signatories. United Nations Environment Programme Finance Initiative. United Nations Environmental Programme Finance Initiative, UNEP FI. (­2022a). Principles for responsible banking guidance document. Geneva: United Nations Environmental Programme Finance Initiative. United Nations Environmental Programme Finance Initiative, UNEP FI. (­2022b, June 30). Signatories. https://­w ww.unepfi.org/­banking/­bankingprinciples/­prbsignatories/

Principles for Responsible Investment (­PRI)

Benedetti, H.

The Principles for Responsible Investment (­PRI) present a framework of six voluntary and aspirational investment principles to shape a more sustainable global financial system. The principles were developed in 2006 by an independent association under the same name in response to an invitation by the United Nations S­ ecretary-​­General Kofi Annan. The PRI defines responsible investment as a strategy and practice to incorporate environmental, social, and governance (­ESG) factors in investment decisions and active ownership. The PRI signatories (­asset managers and asset owners) seek to understand the investment implications of ESG and to support their network in incorporating ESG in their investment decisions (­PRI, 2021). Becoming a PRI signatory entails a public demonstration of commitment to responsible investment. Signatories of the PRI commit to 1) incorporate ESG issues into investment analysis and d­ ecision-​­making processes; 2) be active owners and incorporate ESG issues into ownership policies and practices; 3) seek appropriate disclosure on ESG issues by the entities in which they invest; 4)

178  Principles for Sustainable Insurance (­PSI)

promote acceptance and implementation of the Principles within the investment industry; 5) work together to enhance their effectiveness in implementing the Principles; and 6) report on their activities and progress toward implementing the Principles (­PRI, 2017). While the PRI association is an independent organization, it is supported by the United Nations through partnerships with the UN Environment Programme Finance Initiative and the UN Global Compact. As of March 2021, the PRI accounted for almost 4,000 signatories with collective assets under management of over US$121 trillion (­PRI, 2021). PRI signatories present a higher level of sustainable investments in their portfolios, evidenced by a higher p­ ortfolio-​­level ESG score than n ­ on-​ ­PRI signatories. This higher score differs according to investment managers’ geographic location, investment strategy, and ESG selection and engagement mechanisms. N ­ on-­​­­US-​­based PRI signatories show a higher score in the social and governance dimensions and higher active engagement and company stewardship. Regarding ­holdings-​­based returns, there are no statistical differences between PRI and n ­ on-​­PRI signatories; however, PRI signatories show lower portfolio risk, evidencing risk management capacities (­Gibson et al., 2022). The PRI framework provides guidelines for investors and asset managers to consider and include ESG factors in their investment decisions, enhancing the sustainable finance ecosystem’s depth, breadth, and quality. See also ESG Investing, Sustainable Investment Strategies, and Sustainable Finance.

References Gibson Brandon, R., Glossner, S., Krueger, P., Matos, P., & Steffen, T. (­2022). Do responsible investors invest responsibly? Review of Finance, 26(­6), ­1389–​­1432. Principles for Responsible Investing. Principles for Responsible Investing, PRI. (­2017). A blueprint for responsible investing. UNPRI: https://­w ww.unpri.org/­download?ac=5330 Principles for Responsible Investing, PRI. (­ 2021). PRI Annual Report 2021. UNPRI: https://­w ww.unpri.org/­­a nnual-­​­­report-​­2021

Principles for Sustainable Insurance (­PSI)

Sancak, I.

The Principles for Sustainable Insurance are a set of guidelines for the insurance industry on the way to a green economy. Insurance is sustainable when all activities in the insurance services and value chain, including interactions

Principles for Sustainable Insurance (­PSI)  179

with stakeholders, and when risks and opportunities associated with environmental, social, and governance (­ESG) factors are taken into account (­U NEP FI, 2012). Developed by the UN Environment Programme’s Finance Initiative (­U NEP FI), the Principles for Sustainable Insurance are a framework for the global insurance industry to address ESG risks and opportunities (­U NEP FI, 2012). The UNEP FI launched the following principles in June 2012 in Rio de Janeiro, Brazil, to support the aims of the UN Conference on Sustainable Development (­U NEP FI, 2012). Principles for Sustainable Insurance (­PSI) • Principle 1: We will embed in our ­decision-​­making environmental, social, and governance issues relevant to our insurance business. • Principle 2: We will work together with our clients and business partners to raise awareness of environmental, social and governance issues, manage risk, and develop solutions. • Principle 3: We will work together with governments, regulators, and other key stakeholders to promote widespread action across society on environmental, social, and governance issues. • Principle 4: We will demonstrate accountability and transparency in regularly disclosing publicly our progress in implementing the principles.

As an initiative, the PSI is the largest collaboration between the United Nations and the insurance industry globally (­U NEP FI, 2022). According to the statistics (­September 2022), the collaboration represents US$ 15 trillion of total assets, 132 signatories, 96 supporting institutions, and 33% of global premiums (­U NEP FI, 2022). See also Environmental, Social, and Governance Factors, Transition Risk, Sustainability Risks, and Sustainable Finance Taxonomy.

References UNEP FI. (­2012, June). Principles for Sustainable Insurance. https://­w ww.unepfi.org/­ psi/­­w p-​­content/­uploads/­2012/­06/­­PSI-​­document.pdf United Nations Environment Programme Finance Initiative, UNEP FI. (­2022, September 18). Principles for Sustainable Insurance. https://­w ww.unepfi.org/­insurance/­insurance/

R Race to Zero

Sancak, I.

See Decarbonization.

Renewable Energy

Sancak, I.

  Renewable energy, clean energy, and renewables refer to natural s­ources-​ ­based energy, such as wind energy, solar energy, and bioenergy. Renewable energy relies on natural sources, such as sunlight and wind, that are replenished at a higher rate than they are consumed (­United Nations, 2022). Figure R.1 shows major renewable energy types. Renewable energy help decarbonize economies and eliminate anthropogenic greenhouse gases. Fossil fuels, such as oil, gas, and coal used to produce energy, are the primary factors of existential sustainability issues, such as climate change, the planet has faced since the Industrial Revolution. Renewable energy is one of the key sustainability topics since it is the solution in the world of fossil f­uels-​­based economies. Renewable energy production has its own drivers in economies since it gains more attraction as climate problems become more visible. The cost of renewables is now lower than fossil fuel energy in many countries, and the renewable energy sector generates three times more jobs than the fossil fuel sector (­United Nations, 2022). The transition from fossil fuel energy to renewable e­ nergy-​­driven economies addresses transition finance and raises the importance of sustainable finance instruments, such as green bonds. Similarly, at a firm scale, organizations need to

DOI: 10.4324/9781003310891-17

Renewable Energy  181 Hydropower (Energy from water moving from higher to lower elevations)

Ocean Energy (Energy from seawater)

Solar Energy (Energy from sunlight)

Wind Energy (Energy from wind)

Geothermal Energy (Thermal energy from the Earth’s interior, geothermal reservoirs)

Bioenergy (Energy from biomass and agricultural crops)

Figure R.1 Major Renewable Energy Types. Source: Adapted from United Nations (­2 022)

eliminate all greenhouse ­gas-​­emitting operations and broadly consider renewable energy transformation under sustainability transformation policies. As technologies and related markets develop over time, firms gain a cost advantage in renewable energy, particularly under stringent environmental policies and in economies with a more developed banking sector (­Kempa, Moslener, & Schenker, 2021). Besides, renewable energy production does not always mean zero greenhouse gas emissions. For example, bioenergy emits greenhouse gases (­United Nations, 2022). Moreover, when used traditionally, mainly for cooking and heating, it pollutes household air and causes severe consequences on health, forest degradation, and biodiversity loss (­IRENA, 2022). However, in bioenergy production, biomass use has been modernized and increased in efficiency in recent years (­IRENA, 2022). Transition to a ­low-​­carbon economy, particularly achieving the Paris Agreement targets, requires not only phasing out fossil fuel and plugging in renewables but also various other solutions, such as increasing energy efficiency, electrification (­use of clean electricity in transport and heat applications), and removals (­IRENA, 2022). Renewables are the exit tickets toward phasing down and ultimately phasing out anthropogenic carbon dioxide emissions; hence, investments in renewable energy technology decrease the need for fossil f­uel-​ ­d riven power generation (­IEA, 2022). Renewables are expected to account for over ­one-​­third of the carbon dioxide emission reductions in 2­ 020–​­2030 under the ­net-​­zero emissions by 2050 scenario, thus playing a critical role in clean energy transitions (­I EA, 2022). See also Decarbonization, Greenhouse Gases, and Sustainability Transformation.

References IEA. (­2022, October 31). Renewables. https://­w ww.iea.org/­reports/­renewables International Renewable Energy Agency, IRENA. (­2022). World Energy Transitions Outlook 2022: 1.5°C Pathway. Abu Dhabi: ­ IRENA-​­ International Renewable Energy Agency. Kempa, K., Moslener, U., & Schenker, O. (­2021). The cost of debt of renewable and ­non-​­renewable energy firms. Nature Energy, 6(­2), ­135–​­142. United Nations. (­ 2022, October 31). What is renewable energy? https://­w ww. un.org/­en/­climatechange/­­what-­​­­is-­​­­renewable-​­energy

182  Responsible Consumption

Responsible Consumption

Fernández-​­Olit, B.

  Responsible consumption embeds acts of consumption or n ­ on-​­consumption that are deliberately aimed at achieving changes in the market that benefit the community. This phenomenon is also called ethical consumption, consumer activism, or political consumption. According to Micheletti (­2003), these are actions carried out by individuals who choose between producers and products to change institutional or market practices with which they disagree. For many citizens, consumption serves a dual function: expressive, as a public statement of personal values and beliefs, and punitive, as a way of inf luencing ­decision-​­making. In addition, responsible consumption should include deliberate ­non-​­consumption, which could be termed “­market resistance” (­Webb et  al., 2008): people who reduce their consumption reject the purchase of unnecessary goods and consumerism because they understand that it is their responsibility to ensure the sustainability of the planet. The characteristics of responsible consumption would be: to be conscious and deliberate, that is, the consumer decides by weighing several variables such as price, convenience, and social factors; to be carried out routinely, being a habit of considering the effects of purchasing decisions, rather than an occasional purchase; to act in the external i­nterest – focused ​­ on o ­ thers – rather ​­ than or in addition to one’s own; to seek, to a greater or lesser extent, to modify the context or market structures, changing business or institutional practices. Gabriel and Lang (­2015) argue that responsible consumption should be seen as a continuum, defined by a great complexity of acts and decisions, guided by different motivations. Each individual, or act of consumption, will be situated at a point on this continuum. There are different responsible consumption strategies: exit strategies, or boycotts, which consist of “­abandoning” a brand or product due to disagreement with business practices or social or environmental results. Voice strategies consist of favoring the purchase of products, services, or brands from the conventional market that demonstrate responsible production and distribution and are materialized through labels or certifications. And alternative consumption strategies, which involve satisfying consumer needs in alternative markets (­including those that function as forms of barter), are rooted in value systems radically different from those of the mainstream market, such as Fair Trade, local organic agriculture, or time banks. However, the divisions between strategies are not firm: phenomena such as the sharing economy have moved beyond alternative strategies of responsible consumption to the mainstream market (­Hossain, 2020). Regarding financial

Responsible Investment  183

consumers, strategies aimed at sustainable finance, such as selecting socially responsible investment (­SRI) products or services from ethical banking institutions, can be considered responsible consumption. See also Circular Economy, Responsible Investment, and Responsible Production.

References Gabriel, Y., & Lang, T. (­2015). The unmanageable consumer. Sage. Hossain, M. (­2020). Sharing economy: A comprehensive literature review. International Journal of Hospitality Management, 87, 102470. Micheletti, M. (­2003). Political virtue and shopping. Individuals, consumerism, and collective action. Palgrave McMillan, New York. Webb, D. J., Mohr, L. A.,  & Harris, K. E. (­2008). A r­e-​­examination of socially responsible consumption and its measurement. Journal of Business Research, 61(­2), ­91–​­98.

Responsible Investment

Fernández-​­Olit, B.

Responsible investment (­ R I) is the practice of integrating sustainability criteria (­ESG ratings) in investment analysis (­Widyawati, 2020). RI can be understood as the broadest conceptualization that encompasses the different evolutions of the term (­Valor et  al., 2009): it began as ethical investment, carried out for moral or religious reasons by certain g­ roups  – such ​­ as the ­Quakers – ​­by excluding certain activities (­a lcohol, gambling, etc.) from their investments; it continued from a social approach in the 1970s and 1980s being considered as a lobbying tool against companies collaborating in the Vietnam War or in the Apartheid; in the 1990s, it was consolidated as (­but not restricted to) Socially Responsible Investment (­SRI), a new form of financial asset management, growing among several other C ­ SR-​­related initiatives; and finally, at the end of the 2010s, it loses the label of “­social,” due to the increasing preponderance of investments in climate change and energy transition, forcing the term to be simplified rather than made more complex by including and highlighting environmental objectives in it. RI has grown significantly and has gained increasing attention over recent years: According to the Global Sustainable Investment Alliance (­GSIA, 2021), 35.3 trillion euros were managed under RI criteria in 2020, more than a third of global investment, experiencing a 54% growth since 2016. The concept of RI should not

184  Responsible Investment

be confused with “­social investment” (­Carroll, 2008) or corporate giving or philanthropy, whereby companies support the community or social projects by allocating funds that can be a pure donation or an impact investment with a greater or lesser need for a return. See also Corporate Social Responsibility, Sustainable Investment, and Sustainable Investment Strategies.

References Carroll, A. B. (­2008). A history of corporate social responsibility: Concepts and practices. The Oxford handbook of corporate social responsibility. Global Sustainable Investment Alliance, GSIA (­2021). Global Sustainable Investment Review 2020. http://­w ww.­g si-​­a lliance.org/­­w p-​­content/­uploads/­2021/­08/­­GSIR-​ ­20201.pdf Valor, C., de la Cuesta, M.,  & Fernandez, B. (­2009). Understanding demand for retail socially responsible investments: A survey of individual investors and financial consultants. Corporate Social Responsibility and Environmental Management, 16(­1), ­1–​­14. Widyawati, L. (­2020). A systematic literature review of socially responsible investment and environmental social governance metrics. Business Strategy and the Environment, 29(­2), ­619–​­637.

S SASB Standards

Kanashiro, P.

  The SASB Standards, developed by the Sustainability Accounting Standards Board (­SASB), identify the minimum set of sustainability issues most likely to impact a company’s performance in a given industry. The SASB Standards address investors’ demand for standardized, ­decision-​­useful disclosure of material topics that impact business value creation. The SASB Standards significantly contribute to sustainable finance and integrated reporting as they align financial outcomes with social and environmental opportunities and risks. The SASB Standards target investors interested in addressing how ­sustainability-​­related risks and opportunities may affect an organization’s financial condition (­i.e., its balance sheet), operating performance (­i.e., its income statement), or risk profile (­i.e., its market valuation and cost of capital). Businesses can use the SASB Standards for sustainability reporting purposes to identify, manage, and communicate information likely to be material to the company, enhancing transparency, trust, and risk management. Since 2018, the SASB has launched 77 Industry Standards with accounting and ­non-​­accounting metrics for industries in various sectors such as consumer goods, extractives and minerals processing, health care, food and beverage, financials, transportation, and others. Each SASB Standard includes: •

•

Disclosure topics: Minimum set of disclosure sustainability topics that are likely to be material in the industry. The range of SASB sustainability topics spans five dimensions: environment, leadership & governance, business model & innovation, human capital, and social capital. Accounting metrics: Quantitative and qualitative accounting metrics to measure performance. For example, a company in the coal operations industry should disclose several metrics, including (­1) gross global scope 1 emissions and the percentage covered under ­emissions-​­limiting regulations, (­2) discussions of ­long-​­term and ­short-​­term strategy or plan to manage Scope 1 emissions, emissions reduction targets, and an analysis of performance against those targets, (­3) the percentage of (­1) proved and (­2) probable reserves in or near indigenous land, and (­4) discussion

DOI: 10.4324/9781003310891-18

186  Scope 1 GHG Emissions

• •

of engagement processes and due diligence practices with respect to the management of indigenous rights. Technical protocols: Each accounting metric is accompanied by guidance to meet criteria as established by ­third-​­party assurance processes. Activity metrics: Quantify the scale of a business to facilitate the normalization of data. For example, a coal company should disclose the production of thermal coal and the production of metallurgical coal.

The SASB follows a ­multi-​­stakeholder due process to develop sustainability reporting standards that meet the tenets of development: ­evidence-​­based, ­market-​­informed, ­industry-​­specific, and transparent. As sustainability topics evolve, the SASB Standards are revised and updated to ensure coverage of timely topics and broader stakeholder consultation. In July 2020, the SASB Standards and the Global Reporting Initiative (­GRI), another major sustainability reporting standard setter, initiated a collaboration to enhance the complementarity of both standards in approaching materiality. Moreover, both organizations encourage companies to report sustainability impacts using an integrated reporting approach. Whereas the SASB Standards focus on ESG topics that may be relevant to investors and other capital providers, the GRI Standards focus on firms’ economic, social, and environmental impact on society; therefore, information is targeted to a broader range of stakeholders. See also International Sustainability Standards Board (­ISSB), Global Reporting Initiative, Materiality, Integrated Reporting, and Sustainability Reporting.

References Sustainability Accounting Standards Board (­SASB) (­2018a). Coal operations: Sustainability accounting standard. https://­w ww.sasb.org/­standards/­download/?lang=­en-​­us Sustainability Accounting Standards Board (­SASB) (­2018b). SASB standards application guidance. https://­w ww.sasb.org/­­w p-​­content/­uploads/­2018/­11/­­SASB-­​ ­­Standards-­​­­Application- ­​­­Guidance-­​­­2018-​­10.pdf Sustainability Accounting Standards Board (­SASB) (­n.d.). SASB standards & other ESG frameworks. https://­w ww.sasb.org/­about/­­sasb-­​­­a nd-­​­­other-­​­­esg-​­f rameworks/ (­accessed ­2 -­​­­06-​­22).

Scope 1 GHG Emissions

Sancak, I.

Scope 1 GHG Emissions  187

Scope 1, Scope 2, and Scope 3 greenhouse gas (­GHG) emissions, defined by the GHG Protocol, are the classification of GHG emissions based on their sources from the reporting entity’s perspective. Initiated in 1998, the Greenhouse Gas Protocol (­GHG Protocol) is a m ­ ulti-​­stakeholder partnership of businesses, n ­ on-​­governmental organizations (­NGOs), governments, and others convened by the World Resources Institute (­W RI) and the World Business Council for Sustainable Development (­W BCSD) (­W RI&WBCSD, 2011). The GHG Protocol’s mission is to develop internationally accepted GHG accounting and reporting standards and tools and promote their adoption to achieve a low emissions economy worldwide (­W RI&WBCSD, 2011). The GHG Protocol defines direct and indirect emissions as follows (­GHG Protocol, 2020): • •

Direct GHG emissions are emissions from sources owned or controlled by the reporting entity. Indirect GHG emissions are emissions that are a consequence of the activities of the reporting entity but occur at sources owned or controlled by another entity.

The GHG Protocol further classifies direct and indirect emissions into three broad scopes: • • •

Scope 1: All direct GHG emissions. Scope 2: Indirect GHG emissions from purchased electricity, heat, or steam consumption. Scope 3: Other indirect emissions, such as the extraction and production of purchased materials and fuels, ­transport-​­related activities in vehicles not owned or controlled by the reporting entity, ­electricity-​­related activities not covered in Scope 2, outsourced activities, waste disposal, and others.

The emissions caused by the value chain of the reporting entity, including both upstream and downstream emissions, are in the scope 3 category. For some companies, scope 3 emissions account for most of their total emissions. The GHG Protocol developed Corporate Value Chain (­Scope 3) Accounting and Reporting Standard, or Scope 3 Standard, providing requirements and guidance for entities to prepare and publicly report a GHG emissions inventory that includes indirect emissions resulting from value chain activities (­W RI&WBCSD, 2011). Figure S.1 indicates an overview of the three GHG Protocol scopes and categories of scope 3 emissions. A fully effective GHG reduction plan considers all emissions (­W RI&WBCSD, 2011). Measuring the emissions and spotting their sources are primary steps in sustainability management. Hence, classifying the source of emissions and calculating their amounts help manage sustainability policies. Moreover, sustainability standards, such as ISSB and EFRAG’s (­d raft)

Source: WRI&WBCSD (­2011)

Figure S.1  O  verview of GHG Protocol Scopes and Emissions across the Value Chain

188  Scope 1 GHG Emissions

Scope 2 GHG Emissions  189

standards, require reporting entities to report their GHG emissions under three scopes. Information regarding Scope 1, Scope 2, and Scope 3 are crucial in sustainable finance since responsible investors prioritize investments toward companies that present a positive evolution in GHG emission reduction. Moreover, sustainability rating providers use Scope 1, Scope 2, and Scope 3 as input information to calculate sustainability ratings and scores. See also Greenhouse Gases (­GHGs), Climate Neutrality, Sustainability Reporting.

References GHG Protocol. (­ 2020, November 21). Calculation tools. https://­g hgprotocol. org/­­calculationg-­​­­tools-​­faq World Resources Institute and World Business Council for Sustainable Development, WRI&WBCSD. (­ 2011). Corporate Value Chain (­ Scope 3) Accounting and Reporting Standard. USA.

Scope 2 GHG Emissions

Sancak, I.

See Scope 1 GHG Emissions.

Scope 3 GHG Emissions

See Scope 1 GHG Emissions.

Sancak, I.

190  Shareholder Action

Shareholder Action

Sancak, I.

See Sustainable Investment Strategies.

Shareholder Activism

Sancak, I.

See Sustainable Investment Strategies.

Shareholder Primacy

Sancak, I.

See Sustainable Finance Stages.

Shareholder Value

Fernández-​­Olit, B.

Shareholder Value  191

Shareholder value is the total financial return that shareholders obtain for their stake in a company. It usually comprises the sum of dividends and the change in the share price of listed companies. Shareholder value creation can be understood as exceeding investors’ expectations, and its motivation is to compete for capital. As Rappaport (­1999, p­ .  1) stresses, shareholder value has become “­the global standard for measuring corporate performance,” with increasing acceptance of this viewpoint since the globalization processes of the late 1980s, in particular those of capital markets and corporate competition, and the wave of takeovers resulting from privatizations in the United States. During the 1990s, this vision spread to Japan and Europe, although in several countries there has been increasing political tension between those promoting this ­hyper-​­competitiveness in capital markets and the welfare state tradition. The assumption of shareholder value maximization as the main objective of the company conditions management and governance actions (­L azonick,  & O’Sullivan, 2000): in terms of management, it may lead to taking more risks or promoting higher ­cash-​­f lows (“­downsize and distribute”) in detriment of resources retention (“­retain and reinvest”); in terms of governance, it means prioritizing the ­short-​­term interest of certain shareholders, against the ­long-​­term interest of investors, other stakeholders, and sustainable strategies. In accordance with the theory of agency, various factors (­R appaport, 1999) have been pointed out that promote managers and CEOs alignment with shareholder value maximization, such as achieving public visibility, a broad ownership position, or having their remuneration linked to it. Lazonick and O’Sullivan (­2 000) provide an example of its divergence with the employees’ interest: CEO pay packages in US companies were 44 times higher than those of factory workers in 1965 but 419 times in 1998. Nevertheless, several authors highlight that financial performance in the long ­term  – ​­and, thus, ­long-​ ­term shareholder ­value  – is ​­ positively linked to the satisfaction of other stakeholders’ expectations, like consumers (­A nderson et  al., 2004) or the environment (­Dou et al., 2017). See also Integrated Value, Pieconomics, S ­ hort-​­termism, and Sustainable Finance Stages.

References Anderson, E. W., Fornell, C., & Mazvancheryl, S. K. (­2004). Customer satisfaction and shareholder value. Journal of Marketing, 68(­4), ­172–​­185. Dou, J., Su, E. & Wang, S. (­2017). When does family ownership promote proactive environmental strategy? The role of the firm’s ­long-​­term orientation. Journal of Business Ethics, 158, ­81–​­95. Lazonick, W., & O’Sullivan, M. (­2000). Maximizing shareholder value: a new ideology for corporate governance. Economy and Society, 29(­1), ­13–​­35. Rappaport, A. (­1999). Creating shareholder value: a guide for managers and investors. Simon and Schuster.

192 ­Short-­Termis

­Short-​­Termism

Fernández-​­Olit, B.

S­ hort-​­termism is articulated by Laverty (­1996: 826) as “­decisions and outcomes that pursue a course of action that is best for the s­ hort-​­term but suboptimal over the long run.” No fixed time horizon determines s­hort-​­termism, but in investment markets, it usually refers to the prioritization of quarterly results. Following Sewchurran et  al. (­2019), ­short-​­termism could be defined as a culture of reasoning derived from the value system of the shareholders, by which the organizational structure, the decision system, and the resource allocation of business are defined to maximize their returns. This vision may affect the revitalization of capabilities needed to maintain the value proposition for other stakeholders and be detrimental to future competitiveness and performance, generating intertemporal ­trade-​­offs. Thus, s­hort-​­termism poses a conf lict for CEO decisions and responsible management between the expectations of ­short-­​­­termism-​­oriented investors and the value generation for ­long-​­term oriented ­investors – such ​­ as those applying Socially Responsible Investment (­SRI) ­criteria – ​­as well as other stakeholders (­Moreno et al., 2022). As Rappaport (­2005) states, from a broad economic point of view, s­ hort-​­termism is a barrier to allocating financial resources efficiently. From a management point of view, many academic authors (­Porter  & Kramer, 2011; Schoenmaker  & Schramade, 2019) and t­hink-​­ tanks (­ e.g., The Edelman Trust Barometer Global Report, 2018) agree that s­hort-​­termism is a problem in promoting good corporate governance practices, ethical commitment or proactive environmental and social strategies. See also Responsible Investment, Sustainable Investment Strategies, and Sustainable Finance Stages.

References Edelman (­2018). Edelman trust barometer global report 2018. https://­w ww.edelman.com/­sites/­g /­f iles/­a atuss191/­f iles/­­2 018-​­10/­2 018_Edelman_Trust_Barometer_Global_Report_FEB.pdf Laverty, K. J. (­1996). Economic ­short-​­termism: The debate, the unresolved issues, and the implications for management practice and research. Academy of Management Review, 21(­3), ­825–​­860. Moreno, M., ­Mañas-​­A lcón, E., ­Montes-​­Pineda, O., & ­Fernández-​­Olit, B. (­2022). Is Corporate Social Responsibility Really Able to Create ­L ong-​­Term Sustainability Value? In Handbook of Research on Global Aspects of Sustainable Finance in Times of Crises, ­194–​­216. IGI Global.

Sin Company  193 Porter, M. E.  & Kramer, M. R. (­2011). Creating shared value. Harvard Business Review, ­January–​­February 2011. Rappaport, A. (­2005). The economics of ­short-​­term performance obsession. Financial Analysts Journal, 61(­3), ­65–​­79. Schoenmaker, D. & Schramade, W. (­2019). Investing for ­long-​­term value creation. Journal of Sustainable Finance & Investment, 9, ­356–​­377. Sewchurran, K., Dekker, J. & McDonogh, J. (­2019). Experiences of embedding ­long-​ ­TSewerm thinking in an environment of ­short-​­termism and ­sub-​­par business performance: Investing in intangibles for sustainable growth. Journal of Business Ethics, 157, ­997–​­1041.

Sin Company

Fernández-​­Olit, B.

A sin company is involved in certain activities considered harmful for ethical, moral, religious, or social reasons. This is a relative concept that depends on the cultural and social context: for example, a company engaged in wine production may be considered a sin company in Islamic countries or among Protestant communities such as the Quakers, whereas, in Mediterranean European countries, it will not. The most common categories of “­sin” business activities are the production of tobacco, alcohol, gambling, adult services and pornography, nuclear energy, and w ­ eapons – ​­sometimes just applying to controversial armament such as nuclear, chemical or ­anti-​­personnel landmines, considered in international ­treaties -​­, and some biotechnology activities (­Phillips, 2011) – especially ​­ those involving embryo testing, s­ tem-​­cell or genetic ­manipulation-​­. Recently, the fast food and sugary drinks industry has been included (­Fabozzi et al., 2019), considering their effects on public health. ­A nimal-​­related activities are also considered sin companies, either for carrying out animal testing or activities such as fur production, which are questioned by animal rights groups or for engaging in pork production, which Islamic investors reject. Sometimes, it is difficult to determine a company as a sin business because many companies in those sectors also produce other products apart from their sin products (­e.g., automobile manufacturers that produce armed military vehicles). Somehow, the European regulation on sustainable finance, the Sustainable Finance Disclosure Regulation (­SFDR), develops this concept of harmful activities and includes in articles 8 and 9 a categorization of controversial activities (­e.g., controversial weapons, tobacco, and fossil fuel). See also Exclusionary Screening, Sin Stock, Responsible Investment.

194  Sin Stock

References Fabozzi, F. J., Lamba, A. S., Nishikawa, T., Rao, R. P., & Ma, K. C. (­2019). Does the corporate bond market overvalue bonds of sin companies? Finance Research Letters, 28, ­165–​­170.

Phillips, P. J. (­2011). Sin stocks in self managed superannuation funds. Australasian Accounting, Business and Finance Journal, 5(­2), ­39–​­51.

Sin Stock

Fernández-​­Olit, B.

Sin stocks, also called vice stocks, are publicly tradable securities of a sin company. Sin stocks are closely related to exclusionary strategies, where the company’s activity is excluded from the universe of potential investments for ­extra-​­financial reasons. This is the oldest responsible investment ­strategy –​ ­developed since the ­1920s  – ​­(­Valor et  al., 2009) and, until the ­m id-​­2010s, the most widespread (­Eurosif, 2021). The latest available data (­Eurosif, 2018) indicate that the top exclusion criteria on sin stock were, in order of importance and according to investment volume in the European market: controversial armaments, tobacco, armaments in general, gambling, pornography, nuclear energy, alcohol, genetically modified organisms (­GMO) and animal testing. Evidence suggests that institutions with regulatory constraints, such as pension schemes, have a lower share in sin stocks than in other securities with comparable characteristics (­Hong & Kacperczyk, 2009). However, there is also a specific interest in investing in sin stocks, for example, through ­so-​ ­called “­v ice funds,” as sin stocks also have a higher expected return than comparable securities (­Fabozzi et al., 2019). See also Exclusionary Screening, Negative Screening, Sin Company.

References Eurosif (­2021). Eurosif Report 2021. Fostering Investor Impact. Placing it at the heart of sustainable finance. https://­w ww.eurosif.org/­­w p-​­content/­uploads/­2021/­11/­­2021-­​ ­­Eurosif-­​­­Report-­​­­Fostering-­​­­i nvestor-​­i mpact.pdf Eurosif (­ 2018). European SRI Study 2018. https://­ w ww.eurosif.org/­­ wp-​ ­content/­uploads/­2021/­10/­­European-­​­­SRI-­​­­2018-​­Study.pdf Fabozzi, F. J., Lamba, A. S., Nishikawa, T., Rao, R. P., & Ma, K. C. (­2019). Does the corporate bond market overvalue bonds of sin companies? Finance Research Letters, 28, ­165–​­170.

Social Bank  195 Hong, H., & Kacperczyk, M. (­2009). The price of sin: The effects of social norms on markets. Journal of Financial Economics, 93(­1), ­15–​­36. Valor, C., de la Cuesta, M.,  & Fernandez, B. (­2009). Understanding demand for retail socially responsible investments: A survey of individual investors and financial consultants. Corporate Social Responsibility and Environmental Management, 16(­1), ­1–​­14.

Social Bank

Cotelo-​­Ouréns, Y.

Social banks are institutions that deliver banking services to contribute to the development of people, the planet, and the economy (­Weber & Remer, 2011). Different traditions such as “­Monte di Pietá” and, more recently, saving and cooperative banks have worked to provide services to the poor, and access to segments of the population is generally excluded. Social banking today largely builds upon this context and background, driven by the objective of achieving sustainable development on various levels of society. This means simultaneously considering their activities’ social, environmental, governance, and economic impacts to create blended value (­Emerson, 2003). Thus, the triple bottom line principle is at the core of social banks’ business model, according to the increasingly accepted idea that businesses should not operate at the expense of but contribute to the common good (­E lkington, 1997). In coherence, social banks are characterized by simple relational intermediation principles that bring closer depositors and borrowers beyond a product focus. This reliance on ­deposit-​­taking reduces the liquidity risk of their funding strategies (­GABV, 2022). Besides, their loans and investments are led by ethical and sustainable criteria, stabilizing fair profits while reducing the investment risk and ­non-​­performing loans. Social banks must target disclosure transparency, independent corporate governance, and stakeholder engagement. Finally, social banks aim to achieve sustainable development as a ­long-​­term goal by means of banking. Thus, social banking is a component of the bigger umbrella of sustainable finance. Several notions are applied as close synonyms to social banking: ethical banking, alternative banking, ­value-​­based banking, or green banking. However, they are frequently used to emphasize slightly different focuses. Hence, rather than synonyms, these terms can be seen as different innovative models through which financial institution work based on the criteria of delivering sustainable economic, environmental, and social development.

196  Social Bonds

See also Triple Bottom Line, Sustainable Development, Sustainable Finance, Social Finance, and ­Value-​­Based Bank.

References Elkington, J. (­1997). The triple bottom line. In V. M. Russo (­Ed.), Environmental management: readings and cases (­2nd ed., ­pp. ­49–​­66). Sage. Emerson, J. (­2003). The blended value proposition: Integrating social and financial returns. California Management Review, 45(­4), ­35–​­51. Global Alliance for Banking on Values, GABV. (­2022). 2021 Real ­Economy-​­Real Returns: The business case for ­values-​­based banking. https://­w ww.gabv.org/­­resources​­research/­­real-­​­­economy-­​­­real-­​­­returns-​­2021/ Weber, O., & Remer, S. (­2011). Social banks and the future of sustainable finance. London: Routledge.

Social Bonds

Cotelo-​­Ouréns, Y.

­ Social bonds are debt securities sold to investors, whose proceeds are used exclusively to finance new or existing projects with positive social outcomes (­e.g., promoting utilities such as electricity or water, affordable housing, employment generation, food security, health, and education) (­Park, 2018). In this sense, their objective is to provide capital access to projects that contribute to socioeconomic advancement and empowerment, i.e., sustainable development (­Brundtland, 1987). Consequently, social bonds aim to become an essential contributor to financing the development of the Sustainable Development Goals (­SDGs) linked to the social dimension of the UN’s 2030 Agenda (­United Nations, 2015). A social bond may be issued by a financial institution (­public or private), a company, a n ­ on-​­profit organization, or a governmental entity; however, to date, public financial institutions have been the predominant issuers. Currently, the social bond market constitutes a very small portion of the global capital markets, in contrast to the more significant and ­better-​­established green bonds dedicated to environmental projects (­Park, 2018). Sustainability bonds, a hybrid of social and green bonds, support projects that address social and environmental objectives (­ICMA, 2021). Social, green, and sustainability bonds consist of impact investment instruments, a sustainable finance notion that seeks to align the goals of sustainable development and the global financial system (­Höchstädter & Scheck, 2015).

Social Externalities  197

See also Green Bonds, Sustainable Development Goals (­SDGs), 2030 Agenda for Sustainable Development, Sustainable Development, Social Finance.

References Brundtland, G. H. (­1987). Our common future. Oxford and New York: Oxford University Press. Höchstädter, A. K., & Scheck, B. (­2015). What’s in a name: An analysis of impact investing understandings by academics and practitioners. Journal of Business Ethics, 132(­2), ­449–​­475. International Capital Market Association, ICMA. (­2021, June). Social bond principles. https://­w ww.icmagroup.org/­­sustainable-​­f inance/­­t he-­​­­principles-­​­­g uidelines-­​­­a nd-​ ­handbooks/­­social-­​­­bond-­​­­principles-​­sbp/ Park, S. K. (­2018). Social bonds for sustainable development: A human rights perspective on impact investing. Business and Human Rights Journal, 3(­2), ­233–​­255. United Nations. (­2015). Transforming our world: the 2030 Agenda for Sustainable Development. UN: https://­w ww.un.org/­ga/­search/­v iew_doc.asp?symbol=A/­R ES/­70/­1& Lang=E

Social Externalities

Cotelo-​­Ouréns, Y.

Social externalities refer to the positive or negative consequences of economic activity on social capital (­Costanza et al., 2007). They stem from producing or consuming a good or service that impacts a third party outside the market mechanism. That is, externalities are not ref lected in economic transactions despite their impact on people’s welfare and community sustainability. As a result, there is a gap between the returns or costs of organizations and society’s aggregate gain or loss. Externalities can be as well classified by their impact as social or environmental; however, they are often interlinked as they typically produce environmental but also social costs. Pollution is a common example of both types of externalities since it presents environmental and social costs, as it decreases the quality of life of people living in polluted areas. Therefore, social externalities represent market failures, understood as inefficiencies of market distribution in society. In this view, correcting externalities or market failures would require tax, subsidies, or regulation to discourage them (­Pigou, 1920). However, some proposals advocate for ­market-​­based corrective solutions such as bargaining, e.g., patent and property rights of R&D (­Coase, 1960). Recognizing social externalities is key to sustaining the social

198  Social Factors (­S of ESG)

systems and fostering a just development of the economy and society. For this reason, sustainable finance considers social externalities in its analyses, focusing on issues such as inequality, inclusiveness, investment in human capital and local communities, labor relations, and human rights issues. See also Environmental Externalities, Pigouvian Tax, Environmental, Social, and Governance Factors; ESG Factors, and Social Factors (­S of ESG).

References Coase, R. (­1960). The problem of social cost. Journal of Law and Economics, 3(­1), ­1–​­44. Costanza, R., Graumlich, L., Steffen, W., Crumley, C., Dearing, J., Hibbard, K., & Schimel, D. (­2007). Sustainability or collapse: What can we learn from integrating the history of humans and the rest of nature? AMBIO: A Journal of the Human Environment, 36(­7), ­522–​­527.

Pigou, A. C. (­1920). The economics of welfare. London: Macmillan.

Social Factors (­S of ESG)

 

­Cotelo-​­Ouréns, Y.

 

Social factors (­S dimension of ESG) refers to firms’ management of their relationship with stakeholders, including the workforce, customers, suppliers, and the community. Social factors in ESG cover human capital development, human rights, health conditions, a living wage, ethical supply chain practices, and social opportunities, among others. Companies that exhibit ESG responsibility are less likely to suffer significant, adverse events in ESG areas during different market periods (­Nofsinger & Varma, 2014). Specifically, the assumption of social factors by a firm limits the likelihood of undergoing, for example, ­employee-​­related lawsuits, among other legal prosecutions, and fines, fostering more stable relations with communities (­Maxwell, Lyon,  & Hackett, 2000; McGuire, Sundgren,  & Schneeweis, 1988; Verwijmeren  & Derwall, 2010). Moreover, a firm concerned with social factors can open new paths to risk reduction and further growth, resulting in a positive impact on firm performance and value (­Fatemi & Fooladi, 2013; Fatemi, Fooladi, & Tehranian, 2015; Porter  & Kramer, 2006). Together with environmental and governance, social factors conform the three ESG pillars within investment analysis, ­decision-​ ­making, and portfolio construction in sustainable finance. Consequently, sustainable finance promotes the consideration of social factors to the “­S” of ESG. See also Environmental, Social, and Governance Factors, Corporate Social Responsibility (­CSR), Social Finance, and Social Taxonomy.

Social Finance  199

References Fatemi, A. M., & Fooladi, I. J. (­2013). Sustainable finance: A new paradigm. Global Finance Journal, 24(­2), ­101–​­113. Fatemi, A. M., Fooladi, I. J., & Tehranian, H. (­2015). Valuation effects of corporate social responsibility. Journal of Banking & Finance, 59, ­189–​­192. Maxwell, J. W., Lyon, T. P., & Hackett, S. C. (­2000). ­Self-​­regulation and social welfare: The political economy of corporate environmentalism. The Journal of Law and Economics, 43(­2), ­589–​­618. McGuire, J. B., Sundgren, A., & Schneeweis, T. (­1988). Corporate social responsibility and firm financial performance. Academy of Management Journal, 31(­4), ­854–​­872. Nofsinger, J., & Varma, A. (­2014). Socially responsible funds and market crises. Journal of Banking & Finance, 48, ­180–​­193. Porter, M. E.,  & Kramer, M. R. (­2006). Strategy and society: The link between competitive advantage and corporate social responsibility. Harvard Business Review, 84(­12), ­78–​­92. Verwijmeren, P.,  & Derwall, J. (­2010). Employee w ­ ell-​­being, firm leverage, and bankruptcy risk. Journal of Banking & Finance, 34(­5), ­956–​­964.

­Cotelo-​­Ouréns, Y.

Social Finance

 

 

 

 

Social finance defines a set of different financial services approaches for financing projects that address social, environmental, and developmental challenges creating just economic value (­Weber  & Duan, 2012). It includes a variety of models and tools, such as community investment, crowdfunding, social banking, microfinance, social impact bonds, and social impact investing, among others possible (­Howard, 2012). Their aim is, therefore, to create blended value, a notion founded on the fact that value inherently arises from more than one measurement of performance, that is, social, environmental, and governance value (­Emerson, 2003). This would contrapose social finance to traditional finance, whose main objective is the maximization of profits. For example, traditional finance works with conventional investing practices involving the provision of financial resources for the highest financial return (­Höchstädter & Scheck, 2015), while for social finance, the financial return is not the sole objective, but also the social and environmental impact (­Louche, Arenas, & van Cranenburgh, 2012). Social finance also differs from philanthropy which shares a similar mission; however, it secures its sustainability by being profitable for investors, while philanthropy does not. Accordingly, social finance would lay inside the notion of sustainable ­f inance – ​­aggregated of

200  Social Taxonomy

the sustainability ­d imensions – ​­ref lecting the strategies to foster the achievement of sustainable development. See also Impact Finance, Green Finance, and Sustainable Finance Stages.

References Elkington, J. (­1997). The triple bottom line. In V. M. Russo (­Ed.), Environmental management: readings and cases (­­pp. ­49–​­66). Sage. Emerson, J. (­2003). The blended value proposition: Integrating social and financial returns. California Management Review, 45(­4), ­35–​­51. Höchstädter, A. K., & Scheck, B. (­2015). What’s in a name: An analysis of impact investing understandings by academics and practitioners. Journal of Business Ethics, 132(­2), ­449–​­475. Howard, E. (­2012). Challenges and Opportunities in Social Finance in the UK. New York, NY: Cicero Group. Louche, C., Arenas, D., & van Cranenburgh, K. (­2012). From preaching to investing: Attitudes of religious organisations towards responsible investment. Journal of Business Ethics, 110, ­301–​­320. Weber, O., & Duan, Y. (­2012). Social Finance and Banking. In K. H. Baker, & J. R. Nofsinger (­Eds.), Socially responsible finance and investing: Financial institutions, corporations, investors, and activists (­­pp. ­161–​­180). John Wiley & Sons.

Social Taxonomy

Paraskevas, P.

  A social taxonomy defines a specific and common language that allows a homogeneous interpretation for market participants and policymakers of the economic activities that address social objectives. For example, the EU Social Taxonomy consists of a specific classification system tool that clarifies which activities can be considered sustainable from a social perspective and define their sustainability level (­European Commission, 2022). The social taxonomy is funded on international norms and principles which embed a variety of social goals such as labor rights, social protection and inclusion, ­non-​­discrimination, the right to health care, housing, education and food, assistance in case of unemployment or ­self-​­employment, consumer protection, peaceful and inclusive societies, and the fight against corruption and tax evasion. Within each of these objectives, there are different types of substantial contributions: first, the inherent social benefits of the activity itself, for example, the research and marketing of pharmaceuticals; second, avoiding

Socially Responsible Investment (­SRI)  201

and addressing negative impacts on workers, consumers, and communities; and, third enabling activities which foster social benefits. The social taxonomy facilitates the active progress and implementation of the Sustainable Development Goals (­SDGs) since it provides authoritative guidelines on how companies can implement and measure their contribution to achieving the SDGs. The rationale is that specific economic activities are a prerequisite for both adequate living (­United Nations, 1966) and accomplishing economic, social, cultural, and human rights. Some examples of economic activities that entail inherent social benefits include access to housing, healthcare, transport, and telecommunications, which in turn can be associated with basic human needs covered in SDGs ­1–​­4, 6, and 8. See also, EU Taxonomy Regulation, Sustainable Development, Paris Agreement, and Sustainability Taxonomy.

References United Nations (­1966). International Covenant on Economic, Social and Cultural Rights, Article 11. Office of the High Commissioner Human Rights (­OHCHR). https://­w ww.ohchr.org/­EN/­ProfessionalInterest/­Pages/­CESCR.aspx European Commission (­2022). Communication from the Commission to the European Parliament, the European Council, the Council, the European Economic and Social Committee and the Committee of the Regions, The European Green Deal, COM/­2019/­640 final, 11.12.2019.

Socially Responsible Investment (­SRI)

Paraskevas, P.

  Socially Responsible Investment (­SRI) incorporates investment criteria compatible with the principles of environmental, social, and governance (­ESG), focusing on people, the planet, and profit. SRI falls under the umbrella of responsible investing (­see responsible investing). SRI embeds different products with environmental and social objectives, such as minimizing social damage or actively contributing to generate measurable social benefits. Therefore, SRI refers to specific investments and investment strategies that attempt to generate positive social change, minimize environmental damage, and/­or incorporate religious or ethical beliefs. The modern SRI process uses different strategies such as the ­values-​­based avoidance screens (­see exclusionary investing), proactive s­ ustainability-​­based analytics or ESG Investing (­see inclusionary investing), corporate engagement (­see active engagement), and impact

202  Stakeholder Capitalism

investing (­see impact investing). SRI can also be defined as an investment process that integrates ethical values, environmental protection, improved social conditions, and good governance into traditional investment d­ ecision-​ ­making (­Revelli, 2017). While some authors (­­Matallín-​­Sáez et al., 2019) use “­socially responsible investment,” “­ethical investment,” and “­ethical funds” as synonyms, others prefer to apply the term “­ethical investment” instead of SRI because ethical investment better describes the internal process in which ­values-​­based organizations apply internal ethical principles to an investment strategy. The rationale behind this “­sustainable” investing approach is that socially and environmentally responsible firms can enhance their performance in the long term (­Revelli & Viviani, 2015). See also, Corporate Social Responsibility (­CSR), ESG Investing, Sustainable Investing, Ethical Investing, Impact Investing, Community Investing.

References Matallín-Sáez, J. C., Soler-Domínguez, A., de Mingo-López, D. V.,  & Tortosa-Ausina, E. (­2019). Does socially responsible mutual fund performance vary over the business cycle? New insights on the effect of idiosyncratic SR features. Business Ethics: A European Review, 28(­1), ­71–​­98. Revelli, C. (­2017). Socially responsible investing (­SRI): From mainstream to margin? Research in International Business and Finance, 39, ­711–​­717. Revelli, C., & Viviani, J. L. (­2015). Financial performance of socially responsible investing (­SRI): what have we learned? A meta-analysis. Business Ethics: A European Review, 24(­2), ­158–​­185.

Stakeholder Capitalism

Sancak, I.

See Pieconomics.

Stewardship

Sancak, I.

Stranded Asset  203

See Sustainable Investment Strategies.

Stranded Asset

Sancak, I.

Assets that are exposed to unanticipated or premature w ­ rite-​­downs, devaluations, or conversion to liabilities because of sustainability factors are stranded assets (­Caldecott & McDaniels, 2014). The transition to a l­ow-​­carbon economy or sustainability transformation can change the value of some assets. Numerous factors can profoundly alter asset values, such as climate change, water constraints, new government regulations, clean energy prices, and evolving social norms (­Caldecott & McDaniels, 2014). Considering driving factors, these assets can be classified into three major categories: Economic ­stranding – due ​­ to a change in relative costs or prices; physical s­tranding –​ ­due to distance, f lood, or drought; and regulatory stranding ­assets – ​­due to a change in the policy of legislation (­Carbon Tracker, 2017). The term is commonly used in the fossil fuels context. For example, ­climate-​­related risks force many companies to change their production models and decrease the demand for fossil fuels. Thus, fossil ­fuels-​­related products, reserves, production systems, production facilities, distribution facilities, and vehicles, such as pipelines and tankers, might be stranded assets. Global treaties, such as the Paris Agreement, can change the course of economic activities. Nearly 60% of oil and gas and 90% of coal reserves should remain unextracted to stay within a 1.5°C level by 2050 (­Welsby et al., 2021). A closely connected concept to stranded assets is carbon bubble. The term carbon bubble refers to the relatively higher values of fossil ­fuels-​­related assets and firms, assuming that as the world moves to a l­ow-​­carbon economy, fossil f­ uel-​­dependent firms and assets, or fossil fuels, will lose their values. It conveys the typical economic bubble meanings in connection with fossil ­fuels-​­related economic activities. Currently, investments amounting to trillion euros made under the assumption of utilizing fossil fuels for more years, for example, 50 more years, will be worthless. Their assets and facilities will be stranded as the world follows the Paris Agreement’s provisions, countries actively follow a ­net-​­zero emission policy, or technological developments lead to new horizons. For example, the shares of conventional vehicle producers might be considered overvalued, considering a possible regulatory ban on these vehicles. The magnitude of the loss from stranded fossil fuel assets may amount to a discounted global wealth loss of US$­1–​­4 trillion, which implies gigantic carbon bubbles

204 Sustainability

(­Mercure et al., 2018). Stranded assets and carbon bubble issues are related to sustainability risks, mainly transition risks, in sustainable finance. See also Paris Agreement, Sustainable Development, Sustainability Risk, Sustainability Transformation, and Transition Risk.

References Caldecott, B., & McDaniels, J. (­2014). Stranded generation assets: Implications for European capacity mechanisms, energy markets and climate policy. Oxford: University of Oxford Smith School of Enterprise and the Environment. Carbon Tracker. (­ 2017, August 23). Stranded Assets. https://­carbontracker. org/­terms/­­stranded-​­a ssets/ International Renewable Energy Agency, IRENA. (­2017). Stranded Assets and Renewables: How the energy transition affects the value of energy reserves, buildings and capital stock. Abu Dhabi. Mercure, J.-​­F., Pollitt, H., Viñuales, J. E., Edwards, N. R., Holden, P. B., Chewpreecha, U., & Knobloch, F. (­2018). Macroeconomic impact of stranded fossil fuel assets. Nature Climate Change, 8(­7), ­588–​­593. Welsby, D., Price, J., Pye, S., & Ekins, P. (­2021). Unextractable fossil fuels in a 1.5 °C world. Nature, ­230–​­234.

SoGReS-​­MF Research Group

Sustainability

 

 

 

 

 

Sustainability is a construct directly connected with the concept of sustainable development, defined by Griggs et al. (­2013, p­ . 306) as “­the development that meets the needs of the present while safeguarding Earth’s ­life-​­support system, on which the welfare of current and future generations depends.” This is an evolution of the definition stated in Brundtland Report (­1987), depicting sustainability as acting to meet our current needs without compromising the ability of future generations to meet their own needs. Academics and practitioners have addressed sustainability from different perspectives depending on the knowledge field, contributing to the transdisciplinarity of the sustainability concept. In line with ­Muñoz-​­Torres et al. (­2018), the operationalizing of this definition highlights basic and common conceptual principles that any policy, process, action, or strategy should meet to be qualified as “­sustainable.” The first principle refers to the indispensable equilibrium among the three dimensions of sustainability (­environmental, ­financial-​­economic, and social) and the balance among them and seeks to

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create a balanced performance among the three sustainability dimensions. To achieve an effective balance among the three dimensions, positive results in some of the pillars cannot hide poor results in the others. This implies the integration of the three dimensions, neither prioritizing nor undermining a dimension over the others. The second principle comprises the time perspective, introducing an intergenerational perspective and considering the l­ong-​­term effects of today’s decisions, which requires a balance between short and ­long-​­term decision perspectives. This angle implies a risk analysis perspective, managing the risks of current decisions concerning the needs of future generations as well as envisaging how future generations will be able to meet their needs. The third principle covers the stakeholder approach. In the stakeholder approach, stakeholder engagement is a fundamental tool for understanding the different stakeholders’ needs, expectations, and interests. Sustainability involves identifying the needs of current and also future generations. These needs correspond to different groups of stakeholders that organizations must bear in mind when analyzing the organizational impact of their different needs and expectations. Finally, the fourth principle is directly connected with the complexity and length of current supply chains. This means introducing a life cycle thinking (­LCT) perspective in ­decision-​­making. In complex global supply chains, sustainability involves a broad set of economic, environmental, and social concerns for d­ ecision-​ ­m akers, which cross frontiers and legal boundaries. From an organizational perspective, responsibilities do not end at companies’ doors; they appear upstream and downstream of organizational boundaries and force them to be accountable for the practices of their business partners in the supply chain. Accordingly, this thinking can also be applied to the supply chain. The integration of the concept of sustainability in the financial system implies the integration of social, environmental, and governance (­ESG) aspects, in addition to the financial ones, in the policies and processes developed by the different institutions that comprise it and in the design of the financial products negotiated by them. This is crucial for sustainable finance and sustainable development. See also Sustainable Finance, Sustainable Development, and ESG Factors.

References Brundtland Report (­1987). Our common future. UN World Commission on Environment and Development. Griggs, D., S­ tafford-​­Smith, M., Gaffney, O., Rockström, J., Öhman, M. C., Shyamsundar, P., & & Noble, I. (­2013). Sustainable development goals for people and planet. Nature, 495(­7441), ­305–​­307. ­Muñoz-​­Torres, M. J., ­Fernández-​­Izquierdo, M. Á., ­R ivera-​­Lirio, J. M., ­Ferrero-​ ­Ferrero, I., ­Escrig-​­Olmedo, E., ­Gisbert-​­Navarro, J. V., & Marullo, M. C. (­2018). An assessment tool to integrate sustainability principles into the global supply chain. Sustainability, 10(­2), 535.

206  Sustainability Accounting Standards Board (­SASB)

Sustainability Accounting Standards Board (­SASB) Sancak, I.

See International Sustainability Standards Board (­ISSB) and Value Reporting Foundation

Sustainability Disclosure

Pardo, E. & ­Esteban-​­Sánchez, P.

  Sustainability disclosure (­or ­non-​­financial disclosure) refers to ­information-​ ­providing activities on ESG commitments, frameworks, and impacts. This allows the reporting company or institution to be accountable to its stakeholders and gain institutional and social legitimacy and even competitive advantages (­Bebbington, Larrinaga & Moneva, 2008; Deegan, 2009; Jamali, 2008). The information provided is usually reported following voluntary reporting standards (­e.g., GRI, Integrated Reporting, AA1000), fulfilling the requirements arising from voluntary adherence to international principles (­e.g., Global Compact), or complying with the requirements imposed by national legislation (­e.g., EU Corporate Sustainability Reporting D ­ irective –­​ ­­CSRD – ​­and national laws mainly in the field of corporate governance). In this regard, it is worth noting that governments have progressively increased the legal requirements for companies to publicly disclose their ESG practices and impacts at the entity and product levels. To prevent greenwashing and strengthen its contribution to proper accountability, the information disclosed must comply with certain principles in terms of identification, publication, and verification (­Bebbington, Russell & Thomson, 2017; Manetti et al., 2012). These principles include materiality, comparability, completeness, and verifiability (­De la Cuesta  & Valor, 2013; GRI, 2022). From a sustainable finance perspective, the importance of ­non-​­financial disclosure is twofold. On the one hand, corporate sustainability disclosure is a key input for sustainable investment ­decision-​­making. ­H igh-​­quality and comparable corporate sustainability disclosures allow investors and asset managers to properly

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include ESG criteria in their investment decisions. Corporate disclosure is so important that investors, asset managers, and rating agencies can consider transparency part of a company’s ­non-​­financial performance (­Pardo & de la ­Cuesta-​­González, 2020). Besides, sustainability disclosure requirements on asset owners, investment managers, and service providers have increased in recent years. A ­non-​­comprehensive summary of these recent initiatives has been published by UNPRI (­2022). It especially stands out in the EU Sustainable Finance Disclosure Regulation (­SFDR), aiming to improve transparency in the market for sustainable investment products and prevent greenwashing (­Eurosif, 2022). The SFDR includes, among others, transparency requirements on the integration of sustainability risks, environmental/­social characteristics, and sustainable investment in financial products. See also Double Materiality, Integrated Reporting, and Sustainability Reporting.

References Bebbington, J., Larrinaga, C., & Moneva, J. (­2008). Corporate social reporting and reputation risk management. Accounting, Auditing  & Accountability Journal, 21(­3), ­337–​­361. Bebbington, J., Russell, S., & Thomson, I. (­2017). Accounting and sustainable development: Ref lections and propositions. Critical Perspectives on Accounting, 48(­C), ­21–​­34. De la Cuesta, M., & Valor, C. (­2013). Evaluation of the environmental, social and governance information disclosed by Spanish listed companies. Social Responsibility Journal, 9(­2) ­220–​­240. Deegan, C. (­2009). Financial accounting theory. ­McGraw-​­H ill. European Parliament (­2019). Regulation (­EU) 2019/­2088 of the European Parliament and of the Council of 27 November 2019 on sustainability-related disclosures in the financial services sector. Eurosif (­2022, September 28). https://­w ww.eurosif.org/­policies/­sfdr/ GRI (­2022). GRI 1: Foundation 2021. https://­w ww.globalreporting.org/­­how-­​­­to-­​­­use-­​­­the­​­­g ri-​­standards/­­g ri-­​­­standards-­​­­english-​­language/ Jamali, D. (­2008). A stakeholder approach to corporate social responsibility: A fresh perspective into theory and practice. Journal of Business Ethics, 82(­1), ­213–​­231. Manetti, G., & Toccafondi, S. (­2012). The role of stakeholders in sustainability reporting assurance. Journal of Business Ethics, 107(­3), ­363–​­377. Pardo, E., de la C ­ uesta-​­González, M. (­2020). Corporate tax responsibility: Do investors care? In B. Díaz, N. Capaldi, S. Idowu, & R. Schmidpeter (­Eds.), Responsible business in a changing world. CSR, sustainability, ethics & governance. Cham: Springer. UNPRI. (­2022). Review of trends in ESG reporting requirements for investors. UNPRI: https://­w ww.unpri.org/­download?ac=16705

208  Sustainability Index

Sustainability Index

Aracil, E.

  Sustainability indexes or indices are stock market indices or baskets whose constituents restrict to companies that meet specific sustainability criteria determined by the index provider. These criteria consist of a b­ est-­​­­in-​­class approach and/­or negative screening. That is, only the ­top-​­ranked companies within each industry are included. In this case, constituents are recognized as sustainability leaders in their respective sectors. Membership in a recognized sustainability benchmark helps create value (­Forcadell & Aracil, 2017; Soana, 2011). The inclusion in a sustainable index enhances shareholder awareness of a firm’s sustainability achievements and builds a reputation for being socially responsible. Reputation can positively inf luence customers’ and investors’ perceptions and ultimately enhance financial performance. Membership in a sustainable index serves as a signal to investors on the sustainability leadership of a given company, as determined by an external third party, i.e., the index provider. This is sometimes preferred or complementary to sustainability assessments through the contents of annual reports. Constituents benefit from the growing demand for s­ustainability-​­related products, which might lead to better stock performance than ­non-​­sustainable companies. Inclusion in sustainability indexes is also increasingly considered a corporate goal, as revealed by the rising number of firms that link compensation to inclusion in sustainability indexes, among other measurements. The evolution of sustainable indexes vs. traditional indexes allows for comparing the market performance of sustainable companies ­v is-­​­­à-​­vis those that are less sustainable or not sustainable. Many individual and institutional investors restrict their holdings to environmental and socially conscious investments. As a result, these indexes constitute a popular benchmark for sustainable responsible investment (­SRI) fund managers, who build their portfolios to track them. Sustainability indexes are also used as an indication for individual stock selection and as underliers of e­ xchange-​­traded funds (­ETFs). There is a wide variety of sustainability indexes, such as Dow Jones Sustainability Indexes (­DJSI), and MSCI Sustainable Indexes, among others. Most sustainability index providers offer a wide range of individual sustainability indexes referred to specific geographic regions. Not all indices evaluate the same sustainability factors. In addition, different providers follow different methodologies, which are disclosed in the index provider’s guidebook. Corporate sustainability assessment features questions on economic, environmental, social, and governance issues, focusing on i­ndustry-​­specific criteria that are particularly

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relevant within a given sector due to their material impact. Information is sourced through ­sector-​­specific questionnaires to CEOs and investor relations, company reports, and stakeholder statements, among others. This focus on i­ndustry-​­specific analysis allows index providers to compare peers and thereby identify sustainability leaders. A company may be categorically excluded from the index based on a variety of ethical exclusions, including its exposure to alcohol, gambling, tobacco, armaments, firearms, nuclear power, nuclear weapons, and adult entertainment. In contrast, polluting industries such as base materials or oil and gas are not dismissed but evaluated based on their decarbonization efforts. Sustainability index constituents are reviewed annually, and companies that fail to show consistent progress or do not behave under sustainability guidelines may be removed from the index. The annual index reviews prompt companies to constantly intensify their sustainability initiatives. Sustainability assessments of financial companies cover ­industry-​­specific issues related to economic, environmental, and social challenges, such as corporate citizenship, controversial issues, dilemmas in lending or financing, and financial inclusion. Furthermore, economic criteria explicitly include brand management, codes of conduct and corruption, and customer relationship management. See also ­Best-­​­­in-​­class Screening, ESG Investing, Sustainability, and Sustainability Rankings.

References Forcadell, F. J., & Aracil, E. (­2017). European banks’ reputation for corporate social responsibility. Corporate Social Responsibility and Environmental Management, 24(­1), ­1–​­14. Soana, M. G. (­2011). The relationship between corporate social performance and corporate financial performance in the banking sector. Journal of Business Ethics, 104(­1), ­133–​­148.

Sustainability Linked Loans

See ­Sustainability-​­Linked Loan Principles.

Ocal, T.

210 ­Sustainability-­Linked Loan Principle

­Sustainability-​­Linked Loan Principles

Ocal, T.

The ­Sustainability-​­Linked Loan Principles (­SLLP) were issued by the Loan Market Association (­LMA) and Loan Syndications and Trading Association (­L STA) in 2019 and updated in 2022. The SLLP defines ­sustainability-​­linked loans (­SLL) as any type of loan instruments and/­or contingent facilities that incentivize the borrower’s achievement of predetermined sustainability performance objectives (­LMA&LSTA, 2022a). In other words, SLLs aim to facilitate and support sustainable economic activity and growth by enabling lenders to incentivize the sustainability performance of the borrowers. The borrower’s sustainability performance is measured via predefined sustainability performance targets (­SPTs) represented by predefined key performance indicators (­K PIs). The success in meeting the selected predefined SPT(­s) characterizes an SLL loan. The SLLP sets out a framework enabling all market participants to clearly understand the features of an SLL based on five core components: selection of KPIs, calibration of SPTs, loan characteristics, reporting, and verification. The SLLP recognizes that the definitions of “­sustainable” and “­sustainability” may vary depending on sector and geography. Still, it provides a n ­ on-​­exhaustive list of indicators of the KPIs in environmental, social, and governance categories. The KPIs should be relevant, core, and material to the borrower’s core sustainability and business strategy. They should also address relevant environmental, social, and governance (­ESG) challenges of the industry sector. The KPIs should be measurable or quantifiable on a consistent methodological basis and as benchmarkable as possible against an external reference and/­or industry standard. The SPTs should be set in good faith and remain relevant to the borrower’s overall sustainability and/­or ESG strategy throughout the life of the SLL. The SPTs should encourage ambitious and positive change through incentives, representing a material improvement in the respective KPIs. The selection of SPTs can utilize ambitious ESG metrics and targets included in the borrower’s sustainability strategies, external analysis to establish ­sector-​­specific ESG criteria and b­ est-​­practice performance, or industry metrics reported against frameworks with verification by external reviewers (­LMA & LSTA, 2022b). Borrowers should inform lenders of the rationale for the selection of KPIs and the motivation for the SPTs within the context of their sustainability objectives, strategy, and processes. Borrowers should also provide lenders with sufficient and updated information to allow them to monitor the performance of the SPTs to ensure that they remain ambitious and relevant to the borrower’s

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business. Borrowers should obtain independent and external verification of the borrower’s performance level against each SPT for each KPI at least once a year. The UNFCCC and the UN Sustainable Development Goals (­SDGs) outline the extensive need for sustainable financing solutions. In this sense, the SLLP plays an important role in promoting the development and integrity of s­ustainability-​­linked loan products, hence, broadening sustainable finance instruments. See also S ­ ustainability-​­Linked Loan, Key Performance Indicators, Green Loan Principles, ­Business-­​­­as-​­Usual, and Sustainability.

References Loan Market Association & Loan Syndications and Trading Association, LMA&LSTA. (­2022a). Sustainability linked loan principles. London, New York. Loan Market Association & Loan Syndications and Trading Association, LMA&LSTA. (­2022b). Guidance on sustainability linked loan principles. London, New York.

Sustainability Rankings

Madera del Pozo, A.

  Sustainability rankings classify different entities according to their sustainability profile, allowing for comparisons across different financial alternatives. Sustainability rankings draw on the calculation of a sustainability rating or score, either internally through the ranking provider’s methodologies or ­third-​­party scores or ratings. Once the scoring system has been defined, the next step is the classification process, usually from a threshold onwards, e.g., the top 100. The classification process behind a sustainability ranking can be simple or complex. A simple sustainability ranking provides a list from lowest to highest (­or vice versa) sustainability performance so that the best (­or worst) investment assets in terms of sustainability profiles are at the beginning (­or end) of the ranking. In turn, complex rankings classify investment opportunities into predefined categories (­e.g., green, amber, and red) based on the assigned sustainability scores or ratings. The main obstacle in the second system lies in narrowing the upper and lower ranges of each category, with a mix of statistical techniques and expert analysis being the most used to define these ranges. Rankings are updated annually. Sustainability rankings are very useful for investors, as they allow them to compare the sustainability performance of a financial asset against alternatives, helping them to fulfill ­best-­​­­in-​­class investment strategies and other sustainable investment strategies.

212  Sustainability Rating Providers

Moreover, these rankings also present important advantages for companies, as their inclusion in a given sustainability ranking entails positive effects on their market valuation (­K aspereit & Lopatta, 2016). The main criticism relies on the fact that generally, they classify exclusively based on ESG parameters rather than other financial aspects that are very important for r­isk-​­taking investment decisions. Moreover, Ragazzi and Ghidini (­2017) highlight other problems as the lack of thresholds or scoring bands. There are more than 500 sustainability rankings (­Mooij, 2017), such as Global 100 Most Sustainable Corporations in the World by Corporate Knights, which lists the 100 most sustainable companies, and the Sustainability Yearbook published by S&P Global. Sustainability rankings are not limited to ­companies – although ​­ they are the most c­ ommon – but ​­ a wide universe of rankings exists, classifying, for example, sustainable cities (­A rcadis Sustainable Cities Index) or green universities (­­U I-​­GMR), among others. See also Sustainability Rating, Sustainability Score, and Sustainable Investment Strategies.

References Kaspereit, T., & Lopatta, K. (­2016). The value relevance of SAM’s corporate sustainability ranking and GRI sustainability reporting in the European stock markets. Business Ethics: A European Review, 25(­1), ­1–​­24. Mooij, S. (­2017). The ESG rating and ranking industry; vice or virtue in the adoption of responsible investment? SSRN. Ragazzi, M. & Ghidini, F. (­2017). Environmental sustainability of universities: Critical analysis of a green ranking. Energy Procedia, 119, ­111–​­120.

Sustainability Rating Providers

Madera del Pozo, A.

  Sustainability rating providers analyze how a company manages risks and opportunities from the environmental, social, and governance dimensions. Their analysis results in impact assessments of the company’s financial situation and over the environment (­a lso called double materiality), being responsible for evaluating and subsequent issuance of ratings and scores. According to their nature, sustainability rating providers can be classified into two groups: traditional credit rating agencies (­CRAs) and specialized rating agencies. The first group includes mainly Moody’s, S&P, Fitch, or DBRS Morningstar in North America, whilst some examples in Europe would cover EthiFinance

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Ratings and Scope Ratings, among others. These providers have integrated sustainability in their credit assessments twofold: by including it within the traditional analytical process (­which implies a credit analysis taking into account double materiality) and by offering sustainability ratings. Sustainability has traditionally been considered by these providers whenever it was material to the rating; nonetheless, the Principles for Responsible Investment (­PRI) in 2006 accelerated this practice. There are also specialized rating agencies, such as RobecoSAM, Sustainalytics, MSCI, or Vigeo Eiris (­Cash, 2021). As a result, these providers issue many ESG ratings and scores based on their surveys and access to other sources of information. There has been a significant integration between the two groups, e.g., Moody’s and Vigeo or Morningstar and Sustainalytics, which lowers the number of specialized agencies in favor of CRAs. While CRAs are subject to rigorous regulation in Europe regarding transparency about rating criteria (­including ESG), one of the main criticisms against sustainability rating providers is the absence of specific rules and common definitions of sustainability (­Cash, 2021). In addition, greater transparency is required at the methodological level. As a result, there is a lack of harmonization between agencies, leading to a low correlation between sustainability ratings from different providers (­Berg et al., 2022). Although it is true that part of these differences can be justified by the lack of harmonization in the reporting standards of n ­ on-​­financial information, it is also relevant that discrepancies exacerbate users’ distrust of the ratings. See also Sustainability Rating, Sustainability Score, and Sustainability Rankings.

References Berg, F., Koelbel, J. F., & Rigobon, R. (­2022). Aggregate confusion: The divergence of ESG ratings. Review of Finance, ­1–​­30. Cash, D. (­2021). Sustainability rating agencies vs credit rating agencies. The Battle to serve the mainstream investor. Palgrave Macmillan.

Sustainability Ratings

Zeidan, R.

  Sustainability ratings or credit score systems use n ­ on-​­financial performance to generate scores similar to standard ratings. Credit ratings are fundamental building blocks of international financial systems. Historically, ratings have been broadly divided into household, sovereign, and corporate scores

214  Sustainability Ratings

and have been mainly concerned with basic information on repayment rates based on financial data. The intervals for standard corporate credit scores are usually from AAA to C or D, the former representing corporations with the highest credit quality and the latter, firms that have defaulted on their obligations and are likely to face liquidation (­or are already amidst bankruptcy procedures). Sustainability and ESG ratings are usually developed so analysts can differentiate companies regarding their ­non-​­financial performance. Sustainability ratings generate scores that can be used alongside regular credit ratings. Thus, a firm could be rated A+ concerning its regular credit rating and B ­ BB-​­regarding its sustainability commitments and impact. Sustainability ratings can be produced with various methods and scoring systems, presenting divergent results (­Berg et al., 2022). For example, the Sustainability Credit Score System (­Zeidan et  al., 2015) draws on the analytic hierarchy process methodology. The system comprises six matrices for six sustainability dimensions, requiring a weighting matrix for each dimension. Each matrix is   Ai = aij , in which aij =  1≤i. j ≤n  

( )

1 if i = j . 1 a ji if i ≠ j

Ai is composed of five questions, and a final questionnaire of 30 questions yields a final sustainability credit score that ranges from 0 to 1, which can be mapped into the scale typically used in credit scores. The Sona Sustainability Credit Score System (­Sona Analytics, 2022) is similar. Values from 0.95 to 1 indicate prime credit (­an obligor has a robust capacity to meet its sustainability commitments). In contrast, values below 0.5 indicate that a company is a n ­ on-​­investment grade (­from BB+ to D). Other sustainability credit ratings include a tripartite rating incorporating Techniques for Order Preference by Similarity to the Ideal Solution (­TOPSIS, as in Rahdary, 2016) and another that considers TOPSIS and the ­Best-​­Worst Method (­BWM) (­Roy and Shaw, 2022). ESG ratings are a subset of more general sustainability credit score systems. The former types of ratings rely primarily on information companies publish. For instance, the Sustainalytics ESG Risk Ratings measure a company’s exposure to ­industry-​­specific material ESG risks, dividing companies into five ESG risk severity categories, from negligible to severe (­Sustainalytics, 2022). More general systems, such as those developed for banks and that estimate the risk of small and ­medium-​­sized companies, may use proprietary data from lenders and other financial institutions. See also ESG Rating, Sustainability Rating Provider, Sustainability Reporting, Sustainability Risks.

References Berg, F., Kölbel, J. F., & Rigobon, R. (­2022). Aggregate confusion: The divergence of ESG ratings. Review of Finance, ­1–​­30.

Sustainability Reporting  215 Rahdari, A. H. (­2016). Developing a fuzzy corporate performance rating system: a petrochemical industry case study. Journal of Cleaner Production, 131, ­421–​­434. Roy, P. K., & Shaw, K. (­2022). Modelling a sustainable credit score system (­SCSS) using BWM and fuzzy TOPSIS. International Journal of Sustainable Development & World Ecology, 29(­3), ­195–​­208. Sona Analytics (­2022). Sona Sustainability Credit Score System (­SSCSS). https://­ www.sonaanalytics.com/­sscss/. Sustainalytics (­2022) ESG Risk Ratings: A consistent approach to assess material ESG risk. https://­w ww.sustainalytics.com/­­esg-​­d ata. Zeidan, R., Boechat, C.,  & Fleury, A. (­2015). Developing a sustainability credit score system. Journal of Business Ethics, 127(­2), ­283–​­296.

Sustainability Reporting

 

Sancak, I.

 

Sustainability reporting ref lects an enterprise’s sustainability matters under double and dynamic materiality perspectives. This reporting allows stakeholders to understand, measure, and communicate the impacts on sustainable development and common good value. Various sustainability standard setter organizations, such as Task Force for ­Climate-​­related Financial Disclosures (­TCFD), Climate Disclosures Standards Board (­CDSB), Carbon Disclosure Project (­CDP), Global Reporting Initiative (­GRI), International Integrated Reporting Council (­ IIRC), Sustainability Accounting Standards Board (­SASB), and International Sustainability Standards Board (­ISSB), publish sustainability reporting standards. A joint paper published by the CDSB, CDP, GRI, IIRC, and SASB (­2020:32) defines sustainability reporting as follows “­a company’s practice of reporting publicly on its most significant economic, environmental, and/­or social impacts, and hence its ­contributions – positive ​­ or ­negative – ​­towards the goal of sustainable development.” Thus, sustainability reporting aims to provide transparency on how an organization contributes or aims to contribute to sustainable development (­GRI, 2021). Sustainability reporting ref lects all significant impacts and typically addresses the broadest range of sustainability matters (­CDSB, CDP, GRI, IIRC, and SASB, 2020). In this regard, ESG reporting, focusing on ESG factors, ESG risks, and opportunities, is also considered sustainability reporting. Sustainability reporting feeds the highest stage of sustainable finance via minimizing asymmetric information among stakeholders. Asymmetric information is an important issue in finance since lenders and borrowers do not share the same amount and/­or quality of information. In the particular case of sustainable finance, in addition to the

216  Sustainability Risks

informational asymmetries regarding financial features, there are asymmetries concerning sustainability attributes. In this context, sustainability reporting provides a clear and transparent source of information that minimizes information asymmetries and underpins sustainable finance transactions. Sustainability reporting envisages a single reporting document ref lecting financial (­f inancial ­value-​­related) and ­non-​­f inancial information (­environmental, social, and governance ­factors-​­related) under integrated thinking approaches. Integrated reporting and integrated thinking are two closely connected concepts. Integrated thinking is the base for integrated d­ ecision-​­making and actions that consider the creation, preservation, or cause erosion of value (­IIRC, 2021). Having sound integrated reports is tied to having sound integrated thinking, meaning that considering business activities with all dimensions; financial, environmental, governance, and social factors together in the ­long-​­term value generation for a firm. Similarly, having sound sustainability reporting is directly connected to sustainability understanding and thinking, sustainability standards, and a broad understanding of the big picture in sustainable finance. In some reports and contexts, n ­ on-​­financial reporting is used as a synonym for sustainability reporting; however, the sustainability reporting notion is more precise, depicting deeper and broader dimensions of sustainability. See also ESG Factors, Integrated Reporting, Integrated Thinking, International Sustainability Standards Board (­ISSB), and Global Reporting Initiative (­GRI).

References CDP, CDSB, GRI, IIRC and SASB. (­2020). Reporting on enterprise value: Illustrated with a prototype c­limate-​­related financial disclosure standard. London, Amsterdam, San Francisco: CDP, CDSB, GRI, IIRC, and SASB. Global Reporting Initiative, GRI. (­2021). GRI 1: Foundation 2021. Amsterdam. International Integrated Reporting Council IIRC. (­ 2021). Integrated ­reporting-​ ­international. London.

Sustainability Risks

SoGReS-MF Research Group

Sustainability risk is defined as “­an environmental, social or governance event or condition that, if it occurs, could cause an actual or potential material negative impact on the value of the investment arising from an adverse sustainability impact” (­SFDR, 2019;

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Art.2). Sustainability risk is estimated based on the probability of the occurrence of environmental and social events and their impacts. Sustainability risk covers a broad range of environmental, social, and governance (­ESG) factors. Every year the World Economic Forum publishes a report on the main global sustainability risks based on the answers given by opinion leaders surveyed from the business, academic and social fields. According to the Annual Report of the World Economic Forum (­2021) on Global Risks, among the risks with the greatest impact in the next decade are infectious diseases, followed by climate action failure and other environmental risks, weapons of mass destruction, livelihood crises, debt and the breakdown of information technology infrastructures. The management and assessment of sustainability risks gain great importance for the survival of companies, financial markets, and economies. There are two main globally accepted risk management frameworks: the Committee of Sponsoring Organizations of the Treadway Commission (­COSO) Enterprise Risk Management Framework (­2002) and the International Organization for Standardization (­ISO) 31000 Risk Management Standard (­W BCSD, 2016). In recent years, several proposals have emerged (­e.g., F ­ ernández-​­Izquierdo et  al., 2014) to integrate sustainability risks into the ERM Integrated Framework. In recent years, some economies have been handling sustainability risk management more broadly and systematically. For example, sustainability risk management is a key objective of the EU sustainable finance policy. In March 2018, the European Commission published its Action Plan for Financing Sustainable Growth introducing sustainability to the political agenda for its financial markets. Financial markets, specifically institutional investors, have the opportunity to be an integral part of the global sustainability agenda, integrating sustainability risks into the investment ­decision-​­making process through sustainable investment. Integrating sustainability risks into the assessment processes allows for achieving more accurate valuations of financial assets and offering more suitable information for socially responsible investors to make their investment decisions. The assessment of sustainability risks is being carried out by the sustainability rating agencies (­­Escrig-​­Olmedo et al., 2019). Sustainability risk management is an integral part of sustainable finance. In the financial markets, “­sustainability risk” and “­ESG risk” are used interchangeably. See also ESG Risks, C ­ limate-​­related Risk, Environmental Risk, Physical Risk, and Transition Risk.

References ­Escrig-​­Olmedo, E., ­Fernández-​­Izquierdo, M. Á., ­Ferrero-​­Ferrero, I., ­R ivera-​­Lirio, J. M., & M ­ uñoz-​­Torres, M. J. (­2019). Rating the raters: Evaluating how ESG rating agencies integrate sustainability principles. Sustainability, 11(­3), 915. ­Fernández-​­Izquierdo, M.A., ­Muñoz-​­Torres, M.J.  & ­Ferrero-​­Ferrero, I., (­2014). Comprehensive management and financial and e­xtra-​­financial risk control to overcome the business crisis. European Company Law, 11(­2).

218  Sustainability Science SFDR (­ 2019): Regulation (­ EU) 2019/­ 2088 of the European Parliament and of the Council of 27 November 2019 on s­ ustainability-​ related disclosures in the financial services sector. https://­­ ­ eur-​­ lex.europa. eu/­­legal-​­content/­EN/­T XT/?uri=CELEX%3A32019R2088 WBCSD. (­ 2016) Sustainability and enterprise risk management: The first step towards integration. https://­w ww.wbcsd.org/­A rchive/­­A ssess-­​­­a nd-­​­­Manage-​ ­Performance/­Resources/­­Sustainability- ­​­­a nd- ­​­­enterprise-­​­­r isk-­​­­m anagement-­​­­T he-­​ ­­f irst-­​­­step-­​­­towards-​­i ntegrationn World Economic Forum (­2021). Global Risks Report 2021, 16th Edition. https://­ www.weforum.org/­reports/­­the-­​­­g lobal-­​­­r isks-­​­­report-​­2021

Sustainability Science

Sancak, I.

Sustainability science is an emerging field of research dealing with the interactions between natural and social systems, and with how those interactions affect the challenge of sustainability: meeting the needs of present and future generations while substantially reducing poverty and conserving the planet’s life support systems (­PNAS, 2021). It is an extraordinarily multidisciplinary field, spanning the natural, social, and technological sciences (­K ates, 2011). Core questions in sustainability science focus on the fundamental interactions between nature and society and society’s role in guiding those interactions toward more sustainability (­K ates et al., 2001). Some core questions are (­K ates et al., 2001: 642): “­How can the dynamic interactions between nature and s­ociety-​­including lags and ­inertia-​­be better incorporate into emerging models and conceptualizations that integrate the Earth system, human development, and sustainability.” “­W hat systems of incentive ­structures-​­including markets, rules, norms, and scientific ­information-​­can most effectively improve social capacity to guide interactions between nature and society toward more sustainable trajectories.” “­How can today’s operational systems for monitoring and reporting on environmental and social conditions be integrated or extended to provide more useful guidance for efforts to navigate a transition toward sustainability.” Sustainability science has been an explosively growing field since the late 1980s (­Bettencourt  & Kaur, 2011). A growing number of universities are committed to teaching the

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field’s methods and findings (­Clark, 2007). It is a scientific field, like health science, defined by the problems it addresses more than by the disciplines it uses (­Clark, 2007). It has two distinct research streams: d­ escriptive-​­analytical and transformational (­Wiek & Lang, 2016). D ­ escriptive-​­analytical sustainability science describes and analyzes sustainability problems, and the transformational stream aims at developing e­ vidence-​­supported solution options to solve relevant problems (­Wiek & Lang, 2016). Sustainability science is crucial for the progress toward sustainable development and sustainable finance. See also Sustainability, Sustainable Finance, Sustainable Development, Sustainable Transformation, and Sustainability Risks.

References Bettencourt, L. M., & Kaur, J. (­2011). Evolution and structure of sustainability science. Proceedings of the National Academy of Sciences, ­19540–​­19545. Clark, W. C. (­2007). Sustainability Science: A room of its own. Proceedings of the National Academy of Sciences, ­1737–​­1738. Kates, R. W. (­2011, December 6). What kind of a science is sustainability science? Proceedings of the National Academy of Sciences, ­19449–​­19450. Kates, R. W., Clark, W. C., Corell, R., Hall, J. M., Jaeger, C. C., Lowe, I.,... N. (­2001). Sustainability Science. Science, 292(­5517), ­641– ​­642. Proceedings of the National Academy of Sciences, PNAS. (­2021, July 17). Sustainability Science. ­PNAS-​­Proceedings of the National Academy of Sciences. https://­ www.pnas.org/­portal/­sustainability Wiek, A.,  & Lang, D. J. (­2016). Transformational Sustainability Research Methodology. In M. P. Heinrichs (­Ed.), Sustainability Science (­­pp.  ­31–​­41). Dordrecht: Springer.

Sustainability Score

 

Madera del Pozo, A.

 

A sustainability score is an evaluation tool that measures a company’s sustainability performance, developed ­in-​­house (­e.g., by institutional investors) or by external data providers. These scores rely on numerical or binary indicators as key performance indicators (­K PIs) on environmental, social, and governance (­ESG) performance chosen by their materiality (­i.e., their potential impact on the firm’s performance) and a dataset built with information from different ­sources – ​­including ­sectorial-​­ and company ­d isclosures-​­. The provider establishes a weight of each KPI into the score and the normalization process of the raw data. Finally, an algorithm calculates an ­a lpha-​­numerical

220  Sustainability Taxonomy

sustainability score. For example, Refinitiv ESG score uses more than 630 measures of ten main themes that underlie ESG pillars. S&P Global ESG Scores are drawn from more than 130 questions with more than 1,000 data points. Sustainability scores’ main advantages lie in their comparability and speed of calculation thanks to automation, as they only require a single set of ESG data to evaluate sustainability performance for a broad set of investment opportunities. In addition, they are widely used for elaborating rankings (­see sustainability rankings) required for ­best-­​­­in-​­class strategies. However, automation in sustainability scores presents itself as a disadvantage because it can sometimes lead to over or undervaluing a given investment. Sustainability ratings can overcome this issue (­see sustainability rating). In addition, since each provider uses its calculation methodology, comparability between different scores is difficult (­Berg et al., 2022). Another limitation of sustainability scores lies in their dependence on external ESG data providers to obtain the necessary inputs for their calculation which are limited by problems of lack of uniformity and transparency in sustainability reporting. Finally, there is a bias in sustainability scores availability toward medium and large companies (­Gregory, 2022) due to these datasets often lack information on small companies because these companies face greater difficulty in measuring and reporting their impact, and they are not yet affected by existing regulation on ­non-​­f inancial reporting. See also Sustainability Ratings, Sustainability Rankings, and Sustainability Ratings Provider.

References Berg, F., Koelbel, J. F., & Rigobon, R. (­2022). Aggregate confusion: The divergence of ESG ratings. Review of Finance, ­1–​­30. Gregory, R.P. (­2022). ESG scores and the response of the S&P 1500 to monetary and fiscal policy during the C ­ ovid-​­19 pandemic. International Review of Economics and Finance, 78, ­444–​­456

Sustainability Taxonomy

Sancak, I.

  Taxonomy, in its literal meaning, is the classification of organisms. The Cambridge Dictionary (­2022) defines it as “­a system for naming and organizing things.” A sustainability taxonomy serves mainly as a transparency tool and is a classification system of economic activities based on their sustainability

Sustainability Taxonomy  221

characteristics. Vague and speculative claims about the sustainability features of products, services, and businesses might cause informational asymmetry for investors or market participants to a large extent. Since sustainability drives economic value for businesses, there might be attempts to pretend to be sustainable while no sustainability feature exists. What makes the case worse is that sustainability claims without objective classification criteria might fuel the accountability gap and greenwashing allegations in markets, undermining real or true sustainability. Against this background, a sustainability taxonomy levels the playing field, providing companies, investors, and policymakers with appropriate definitions for economic activities (­European Commission, 2022). Therefore, classifying economic activities based on their sustainability features is a technical requirement for reporting, disclosure, investment, and transformation in finance. Hence, a sustainability taxonomy is a prerequisite for a sound financial system. Sustainability taxonomy is not only about environmental dimensions but also social aspects. As is the case in the EU, a sustainability taxonomy consists of both social and environmental frameworks, where the social one is called “­social taxonomy,” and the environmental one is named “­environmental taxonomy” or “­g reen taxonomy.” A green taxonomy only categorizes green features, whilst a brown taxonomy classifies only brown economic activities or environmentally harmful ones. The EU Taxonomy (­EU 2020/­852) is a green classification system. However, not all activities outside the green taxonomy realm are brown. In the financial industry, in referring to sustainability taxonomy, “­sustainable finance taxonomy” is also used. Sustainable finance channels capital f lows to sustainable activities. Sustainability taxonomy is a crucial element in this orientation since it reduces information asymmetries regarding sustainability claims and mitigates greenwashing concerns. Classifying economic activities in terms of sustainability features paves the way for better sustainability reporting, disclosure, and transformation, which benefits sustainable finance. Therefore, a sustainability taxonomy is a bedrock of sustainable finance. Sustainability taxonomy requires financial and ­non-​­financial firms to quantify their sustainability dimensions with key performance indicators (­K PIs), such as green asset ratio (­GAR) for financial organizations, turnover, capital expenditure (­CapEx), and operational expenditure (­OpEx) for corporates. Then, sustainability taxonomy produces measurable and comparable figures for sustainability reporting and disclosure along with other financial and regulatory requirements, as is the case in the EU Taxonomy. A sustainability taxonomy is also an instrumental tool for sustainability ratings and rankings. In summary, a sustainability taxonomy helps reduce greenwashing, provides homogeneous and rigorous evaluation, supports stakeholder engagement, and might increase new business opportunities by attracting demand for sustainable products and services, boosts the availability and quality of corporate data for sustainability, supports harmonization of reporting, and fosters coherence and alignment with national and international standards (­Raux  & Fischer, 2021).

222  Sustainability Transformation

See also EU Taxonomy, Sustainability Disclosure, Sustainability Reporting, Sustainability Transformation, Social Taxonomy.

References Cambridge Dictionary. (­2022, May 16). Taxonomy. https://­d ictionary.cambridge. org/­d ictionary/­english/­t axonomy European Commission. (­2022, May 13). EU Taxonomy for Sustainable Activities. https://­ec. europa.eu/­i nfo/­­b usiness- ­​­­ e conomy- ​­ e uro/­­b anking- ­​­­ a nd-​­ f inance/­­s ustainable-​ ­f inance/­­eu-­​­­t axonomy-­​­­sustainable-​­activities_en Raux, C., & Fischer, S. (­2021). Testing the application of the EU Taxonomy to core banking products: High Level Recommendations. Geneva: UNEP Finance Initiative and European Banking Federation.

Sancak, I.

Sustainability Transformation

 

 

 

 

 

Sustainability transformation refers to converting organizations (­business, financial, NGO, government, and others) or economies from an unsustainable status to an augmented social and environmental responsibility model. For example, moving from ­business-­​­­a s-​­usual to ­ESG-​­oriented business can be a sustainability transformation for business and financial firms. As for economies, Sustainable Development Goals (­SDGs) are the primary considerations. Sustainability transformation affects many organizational dimensions, such as business models, finance models, organizational structure, human resources policy, client profile, and compliance requirements, among others. In some sources, “­transition” is used instead of “­transformation.” Transition and transformation have only nuances; they are not mutually exclusive, and their differences may partially result from their etymological origins (­Hölscher, Wittmayer, & Loorbach, 2018). Sustainability transformation is a planned organizational change, a specific area in organizational change management. Planned organizational change refers to deliberate activities to move an organization from its present state to its desired state (­Stouten, Rousseau,  & Cremer, 2018). Sustainability transformation is a ­solution-​ ­oriented field aiding humanity with normative goals in its transition toward sustainability (­Abson et al., 2017). Ultimately, both economies and organizations transform to align with the SDGs under the guidance of sustainability science. Wiek and Lang (­2016) classify sustainability science into two

Sustainability Transformation  223

distinct research streams: ­descriptive-​­analytical and transformational. Sustainability transformation falls into the transformational sustainability science area. Sustainable finance is crucial in sustainability transformation since it provides funding to transition toward a green and just economic model (­Ryszawska, 2016). Since digital transformation and resultant business model innovations have been fundamentally altering consumers’ expectations and behaviors, pressuring traditional firms, and disrupting numerous markets (­Verhoef et al., 2021), organizations are under the pressure of digital requirements at the same time, addressing another concept; twin transformation. Twin transformation refers to concurrent transformations, namely sustainability and digital transformations. For example, a financial institution transforms its operations and business models from analog to digital and deploys digital technologies, such as artificial intelligence and machine learning, in delivering financial services. The same financial institution also changes its activities from ­business-­​­­a s-​­usual to ­ESG-​­oriented ways by deploying digital technologies. Having both transformations simultaneously coins the term “­t win transformation.” Various performance reports and rankings are being published periodically to indicate the performance of sustainability transformation. At the countries scale, the yearly Sustainable Development Report (­formerly the SDG Index & Dashboards) assesses each country’s stance with regard to achieving the Sustainable Development Goals, and the EU’s Transition Performance Index tracks the evolution of countries’ transition to sustainability based on four ­d imensions – ​­economic, social, environmental and governance. At the organizational scale, environmental, social, and governance (­ESG) ratings are widely used. Additionally, sustainability taxonomies indicate the sustainability stance of firms, hence, their transformation performance over time. See also Sustainability Science, Environmental, Social, and Governance (­ESG) Factors, Sustainable Development Goals.

References Abson, D. J., Fischer, J., Leventon, J., Newig, J., Schomerus, T., Vilsmaier, U.,... Lang, D. J. (­2017). Leverage points for sustainability transformation. Ambio, ­30–​­39. Hölscher, K., Wittmayer, J. M., & Loorbach, D. (­2018). Transition versus transformation: What’s the difference? Environmental Innovation and Societal Transitions, ­1–​­3. Ryszawska, B. (­2016). Sustainability transition needs sustainable finance. Copernican Journal of Finance & Accounting, 5(­1), ­185–​­194. Stouten, J., Rousseau, D. M.,  & Cremer, D. D. (­2018). Successful organizational change: Integrating the management practice and scholarly literatures. Academy of Management Annals, ­752–​­788. Verhoef, P. C., Broekhuizen, T., Bart, Y., Bhattacharya, A., Dong, J. Q., Fabian, N., & Haenlein, M. (­2021). Digital transformation: A multidisciplinary ref lection and research agenda. Journal of Business Research, ­889–​­901. Wiek, A., & Lang, D. J. (­2016). Transformational sustainability research methodology. In M. P. Heinrichs H. (­Ed.), Sustainability Science, ­31–​­41. Dordrecht: Springer.

224  Sustainability Transition

Sancak, I.

Sustainability Transition

 

 

 

 

 

See Sustainability Transformation.

Sustainability-themed Investing

Sancak, I.

See Sustainable Investment Strategies.

Sustainable Business Model

Aracil, E.

A business model represents an organization’s system of interacted activities to create and capture economic value (­Teece, 2010). Sustainable business models or business models for sustainability embed sustainability into business purposes and processes (­Bocken et al., 2014). Thus, they require repurposing the business for a wide range of stakeholders, explicitly incorporating society and the environment. For example, sustainable business models preserve the environment and enhance the quality of life and social w ­ ell-​­being. It follows that firms engaging in sustainable business models need a broader ­value-​ ­network perspective that allows for creating economic value and environmental and social value. Sustainable business models serve as a critical driver of competitive advantages, providing superior value to customers, companies, and society. Therefore, sustainable business models propose a ­w in-​­win scenario, delivering benefits for both the firm and the society/­environment.

Sustainable Business Model  225

Since they align the interests of all stakeholders, sustainable business models act as drivers of sustainable development across businesses and industries and a lever for sustainability transitions (­Schaltegger et  al., 2012). Contrary to sustainable business models, ­business-­​­­as-​­usual (­BAU) expresses any business model that primarily considers producing economic value without concerns about environmental and social factors; in general, businesses under BAU models do not have E ­ SG-​­driven approaches. BAU represents the current economic paradigm, relying on a purely economic view of business activities and pursuing economic value production in profit, market value, or shareholder value (­Dyllick & Muff, 2015). In other words, BAU mainly benefits shareholders, not all stakeholders, or does not aim at the common good. BAU, more importantly, cause numerous sustainability problems, such as global warming, climate change, and biodiversity loss. Diametrically different, sustainable business models focus on solving sustainability challenges and creating value for the common good (­Dyllick  & Muff, 2015). On the other hand, sustainable business models apply to financial institutions’ management (­Yip  & Bocken, 2014) and overall industries that seek funding. While the former guarantees a direct impact of banks in the sustainability race, the latter explains the indirect contribution that finance can have to sustainability in allocating funding. Sustainable finance faces risk assessments in the credit approval process based on financial and e­ xtra-​­financial factors. Financial institutions have already started to apply negative screening on environmental and social issues. However, they are still in the process of verifying borrowers’ positive impact on grand challenges. Sustainable business models can signal how a certain organization is heading toward “­doing good” beyond the “­do not harm” imperative. This can work as a nudge by which only those institutions whose business models are sustainable can achieve a certain amount of funding at a competitive cost. See also ESG Factors, Integrated Thinking, Sustainability, and Sustainability Transformation.

References Bocken, N. M., Short, S. W., Rana, P., & Evans, S. (­2014). A literature and practice review to develop sustainable business model archetypes. Journal of Cleaner Production, 65, ­42–​­56. Dyllick, T.,  & Muff, K. (­2015). Clarifying the Meaning of Sustainable Business: Introducing a Typology From ­Business-­​­­as-​­Usual to True Business Sustainability. Organization & Environment, ­1–​­19. Schaltegger, S., L ­ üdeke-​­Freund, F., & Hansen, E. G. (­2012). Business cases for sustainability: the role of business model innovation for corporate sustainability. International Journal of Innovation and Sustainable Development, 6(­2), ­95–​­119. Teece, D. J. (­2010). Business models, business strategy and innovation. Long Range Planning, 43(­­2 –​­3), ­172–​­194. Yip, A. W., & Bocken, N. M. (­2018). Sustainable business model archetypes for the banking industry. Journal of Cleaner Production, 174, ­150–​­169.

226  Sustainable Development

Aracil, E.

Sustainable Development

 

 

 

 

 

The UN’s World Commission of Environment and Development Conference, in its report “­Our Common Future” (­1987), also known as the Brundtland Report (­ after the Commission’s Chairperson Gro H. Brundtland), defines sustainable development as “­development that meets the needs of the present without compromising the ability of future generations to meet their needs” (­­p. 43). This definition has acquired a global diffusion among academics from different disciplines, policymakers, and the private sector, serving as a guiding policy goal and institutional principle (­Sneddon et  al., 2006). At the same time, the underlying tenets of sustainable development have been subject to various interpretations, emphasizing its multidimensional nature, covering the environment, society, and the required tools to achieve the transformation (­Zhu  & Hua, 2017). To clarify what is to be “­sustained” and what is to be “­developed,” Parris and Kates (­2003) propose a taxonomy shown in Table S.1. Sustainable development is an anthropocentric notion since it refers to human needs. In general terms, it aims to combine the relationship between nature and humans, or, in other words, between environmental and socioeconomic issues (­Hopwood et  al., 2005). These interconnections are bidirectional in that environmental issues can affect human ­well-​­being (­for Table S.1  Taxonomy of Sustainable Development What is to Be Sustained:

What is to Be Developed:

Nature

Earth Biodiversity Ecosystems

People

Life support

Ecosystem services Economy Resources Environment Cultures Society Groups Places

Community

Source: Parris & Kates (­2003)

Child survival Life expectancy Education Equity Equal opportunity Wealth Productive sectors Consumption Institutions Social capital States Regions

Sustainable Development Goals (­SDGs)  227

example, climate hazards leading to massive migrations). At the same time, human action is the main responsible for pollution and environmental degradation. A grand social challenge involves a complex issue at a global scale that requires collaborative action, for example, extreme poverty, environmental degradation, and ­political-​­economic injustice. Market failures associated with society’s grand challenges comprise global development issues under growing scrutiny by the private sector (­i.e., Bill & Melinda Gates Foundation) and the academia (­Buckley et al., 2017), urging firms to act on these challenges. Sustainable development seeks to address these grand challenges through transformational solutions in the ­so-​­called age of sustainable development (­Sachs, 2015). See also Sustainable Development Goals (­SDG), Sustainability, and Sustainable Finance.

References Buckley, P. J., Doh, J. P., & Benischke, M. H. (­2017). Towards a renaissance in international business research? Big questions, grand challenges, and the future of IB scholarship. Journal of International Business Studies, 48(­9), ­1045–​­1064. Hopwood, B., Mellor, M., & O’Brien, G. (­2005). Sustainable development: Mapping different approaches. Sustainable Development, 13(­1), ­38–​­52. Parris, T. M., & Kates, R. W. (­2003). Characterizing and measuring sustainable development. Annual Review of Environment and Resources, 28(­1), ­559–​­586. Sachs, J. D. (­2015). The age of sustainable development. In The Age of Sustainable Development. New York: Columbia University Press. Sneddon, C., Howarth, R. B., & Norgaard, R. B. (­2006). Sustainable development in a ­post-​­Brundtland world. Ecological Economics, 57(­2), ­253–​­268. Zhu, J., & Hua, W. (­2017). Visualizing the knowledge domain of sustainable development research between 1987 and 2015: A bibliometric analysis. Scientometrics, 110(­2), ­893–​­914.

Sustainable Development Goals (­SDGs)

Aracil, E.

  The SDGs were launched by the UN’s General Assembly resolution “­Transforming our world: The 2030 agenda for sustainable development” (­United Nations, 2015), which emphasized that “­this agenda is a plan of action for people, planet and prosperity” (­­p. 1). The SDGs constitute the most ambitious initiative to address society’s grand challenges (­Buckley et al., 2017)

228  Sustainable Development Goals (­SDGs)

and progress toward sustainable development that guarantees the w ­ ell-​­being of present and future generations (­Brundtland Report, 1987) in collaboration with state and ­non-​­state actors such as the financial sector. This global agenda extends and improves the preceding UN initiative, the Millennium Development Goals (­M DG). The SDGs rely on the Brundtland Report1 (­1987) definition of sustainable development, which encompasses, same as the SDGs, the following principles: (­i) the m ­ ulti-​­stakeholder perspective associated with social needs, (­ii) the limitations imposed by scarce resources and the balance among the environmental, social and economic dimensions, and (­iii) the intergenerational justice (­Vasconcellos Oliveira, 2018). The SDGs account for the different dimensions of sustainable development. Although interrelated (­Le Blanc, 2015), they can be grouped using different classifications, for example, the 3 “­Ps” perspective (­people, planet, and prosperity) (­Kolk et al., 2017). Figure S.2 indicates 17 SDGs. To monitor the progress, the UN’s SDG dashboard database (­U N Statistical Division), the World Bank, and the IMF tend to report on regional and national developments in implementing these normative goals and how they shape governments and corporate agendas (­Horn & Grugel, 2018). Note that the SDG and the MDG focus on the degree of advancement toward relevant normative objectives (­­Fukuda-​­Parr, 2010). Moreover, intrinsic to the SDG is the call for partnering (­Kolk & Lenfant, 2015) between public and private agents “­a ll countries and stakeholders acting collaboratively will implement this plan” (­United Nations, 2015). This declaration places private firms in the epicenter as key ­non-​­governmental agents for the advancement of the SDG internationally (­Kolk et  al., 2017). To contribute to the SDG, firms

Figure S.2  Sustainable Development Goals Source: United Nations (­2 022)

Sustainable Development Goals (­SDGs)  229

must implement transformational changes in their business models through true sustainability initiatives (­Scheyvens et  al., 2016). Van Tulder and van Zander (­2018) posit that to achieve the SDG transformational spirit, firms need to move beyond passive elaborations (“­no harm”) toward active (“­ do good”) impactful contributions. The financial sector has been proactive in s­ustainable-​­oriented actions, as shown by industry initiatives such as the Equator Principles (­2003) to assess environmental and social risks in project management, or the Global Alliance for Banking on Values (­2009), a bank’s network using finance to deliver sustainable economic, social, and environmental development. More recently, leading international banks have joined in signing the UN’s Principles for Responsible Banking (­2019), which provides a single framework to align their business practices with social goals as expressed by the SDG. Banks can contribute to the SDG directly by promoting financial inclusion (­K lapper et al., 2016). However, they can indirectly enhance the SDG by allocating funds, favoring ­SDG-​­aligned firms. See also Sustainable Development, Sustainability, and Sustainable Finance.

References Buckley, P. J., Doh, J. P., & Benischke, M. H. (­2017). Towards a renaissance in international business research? Big questions, grand challenges, and the future of IB scholarship. Journal of International Business Studies, 48(­9), ­1045–​­1064. ­Fukuda-​­Parr, S., Greenstein, J., & Stewart, D. (­2013). How should MDG success and failure be judged: Faster progress or achieving the targets?. World Development, 41, ­19–​­30. Horn, P.,  & Grugel, J. (­2018). The SDGs in m ­ iddle-​­income countries: Setting or serving domestic development agendas? Evidence from Ecuador. World Development, 109, ­73–​­84. Klapper, L., E ­ l-​­Zoghbi, M., & Hess, J. (­2016). Achieving the Sustainable Development Goals: The role of Financial Inclusion. Washington, DC: CGAP. Kolk, A., Kourula, A., & Pisani, N. (­2017). Multinational enterprises and the Sustainable Development Goals: What do we know and how to proceed? Transnational Corporations, 24(­3), ­9 –​­32. Le Blanc, D. (­2015). Towards integration at last? The sustainable development goals as a network of targets. Sustainable Development, 23(­3), ­176–​­187. Scheyvens, R., Banks, G., & Hughes, E. (­2016). The private sector and the SDGs: The need to move beyond ‘­business as usual’. Sustainable Development, 24(­6), ­371–​­382. United Nations. (­2015). Transforming our World: The 2030 Agenda for Sustainable Development. A/­R ES/­70/­1. New York: United Nations. United Nations. (­2022, November 11). Communications materials. Retrieved from UN: https://­w ww.un.org/­sustainabledevelopment/­news/­­communications-​­m aterial/ Vasconcellos Oliveira, R. (­2018). Back to the future: The potential of intergenerational justice for the achievement of the sustainable development goals. Sustainability, 10(­2), 427. Zanten, J. A., & Van Tulder, R. (­2018). Multinational enterprises and the Sustainable Development Goals: An institutional approach to corporate engagement. Journal of International Business Policy, 1(­­3 –​­4), ­208–​­233.

230  Sustainable Digital Finance

Sancak, I.

Sustainable Digital Finance

 

 

 

 

 

Sustainable digital finance refers to an area of finance focusing on bringing together sustainable finance and digital finance toward a more sustainable digital world. Sustainable digital finance is an emerging field (­Puschmann & Leifer, 2020). While the broader definition of sustainable finance includes technology (­Bassen, 2018), sustainable digital finance primarily focuses on promoting digital finance with sustainability concerns, both in theory and practice. Until recently, two disciplines have been considered distinct areas. However, sustainable finance and digital finance have many commons and symbiotic relationships. Digital finance, which includes big data, artificial intelligence (­A I), mobile platforms, blockchain, and the Internet of things (­IoT), is demonstrating its ability to promote sustainable economic growth (­­Bayat-​­Renoux, Svensson, & Chebly, 2018). In turn, sustainability can tackle the perils of digitalization (­Forcadell et al., 2020). It is indicated that digital finance can contribute to achieving 13 SDGs (­­Bayat-​­Renoux, Svensson, & Chebly, 2018). In terms of ­technology-​ ­based solutions in financial sectors, FinTech, or financial technology, is the buzzword. Some others are regulatory technology (­RegTech), supervisory technology (­SupTech), and insurance technology (­InsurTech). These solutions are, at the same time, the main ingredients of sustainable finance. For example, RegTech and SupTech can be used in the consumer protection domain, particularly in fighting greenwashing. Moreover, sustainable finance technology, or SuFTech, is another avenue of sustainable digital finance (­Zeranski & Sancak, 2020). Sustainable digital finance is an interdisciplinary field comprising sustainability, finance, and digitalization, as illustrated in Figure S.3. Various initiatives support the sustainable digital finance field. For example, the Green Digital Finance Alliance (­GDFA) aims to leverage digital technologies and innovations to enhance financing for sustainable development. The GDFA enhances the knowledge base through research and analysis, creating a network of Fintechs, financial players, policymakers, and other stakeholders that collaborate and promote sustainable digital finance practices at national and international levels and supporting action at the country level (­GDFA, 2022). See also Green FinTech Taxonomy, Sustainability Reporting, Sustainability Transformation, and Sustainable Finance Technology.

Sustainable Digital Finance  231

Sustainability

Sustainable Digital Finance

Finance

Digitalization

Figure S.3  I nterdisciplinary Nature of Sustainable Digital Finance Source: Adapted from Puschmann & Leifer (­2020).

References Bassen, A. (­2018). Sustainable Finance in G ­ ermany – What ​­ are We Waiting for? 2018 Almanac of Sustainability: Ideas and Actions. Transformation, ­30–​­38. ­Bayat-​­Renoux, F., Svensson, U.,  & Chebly, J. (­2018). Digital Technologies for Mobilizing Sustainable ­Finance – ​­Applications of Digital Technologies to Sustainable Finance. Amsterdam: Sustainable Digital Finance Alliance. Bassen, A. (­2018). Sustainable Finance in ­Germany – ​­What are We Waiting for? 2018 Almanac of Sustainability: Ideas and Actions. Transformation!, ­pp. ­30–​­38. Forcadell, F. J., Aracil, E., & Ubeda, F. (­2020). Using reputation for corporate sustainability to tackle banks digitalization challenges. Business Strategy and the Environment, 29(­6), ­2181–​­2193. Green Digital Finance Alliance, GDFA. (­2022, September 17). Objective and Approach. https://­g reendigitalfinancealliance.org/­­about-​­gdfa/ Puschmann, T., & Leifer, L. J. (­2020). Sustainable Digital Finance: The Role of FinTech, InsurTech & Blockchain for Shaping the World for the Better. California, Zürich: Stanford University and University of Zurich. Zeranski, S.,  & Sancak, I. E. (­2020). Digitalisation of Financial Supervision with Supervisory Technology (­SupTech). Journal of International Banking Law and Regulation, ­309–​­330.

232  Sustainable Finance

Aracil, E. & Sancak, I.

Sustainable Finance

 

 

 

 

 

 

See Sustainable Finance: A Multidimensional and ­Multi-​­actor Framework.

Sancak, I.

Sustainable Finance Forms

 

 

 

 

 

Sustainable finance forms express the ­sub-​­fields of sustainable finance across various sustainability contents. Blue finance, green finance, and blended finance are examples of sustainable finance forms. Sustainable finance forms include but are not limited to the following fields in Table S.2. Each form addresses some part of sustainable finance with dedicated focus areas. For example, as a form of sustainable finance, blended finance refers to the mixed financing of private capital and public or philanthropic sources to catalyze private sector investments in sustainable development (­Convergence, 2022). OECD (­2020:5) defines “­blended finance as the strategic use of development finance for the mobilisation of additional finance towards sustainable development in developing countries.” Three characteristics define blended finance: at least some parties in transactions aim at achieving the SDGs, parties expect positive financial returns, and public and/­or philanthropic parties catalyze financing transactions (­Convergence, 2022). In blended finance, a concessional rate is extended by the public sector as the catalyzing factor. Such financing can also be named concessional finance or blended concessional finance. Concessional finance comprises a wide range of b­ elow-­​­­market-​­rate financing solutions used to foster climate or development objectives (­Duarte, 2021). It is one of the most significant methods that development finance institutions can use to help mobilize private investments toward a particular direction (­IFC, 2022). Another example of sustainable finance forms is transition finance. Although it has numerous interpretations in economics and finance, the term “­transition” is used in the context of achieving sustainable

Sustainable Finance Forms  233 Table S.2  Major Forms of Sustainable Finance

Sustainable Finance Forms

Biodiversity Finance Blended Finance Blue Finance Carbon Finance Climate Finance Development Finance Environmental Finance Green Finance Impact Finance Social Finance Sustainable Digital Finance Transition Finance

Source: The Author

development and SDGs; hence, transition finance here refers to the financing of transition toward S­ DG-​­oriented sustainable development (­Piemonte et al., 2019). A more s­ cope-​­oriented version of transition finance, climate transition finance, means financing programs and solutions supporting the implementation of climate change strategies (­ICMA, 2020). Such strategies include business model adaptations to positively contribute to the transition toward a ­low-​­carbon economy (­ICMA, 2020). Sustainable finance forms are not limited to the listed ones; new forms can emerge over time, and their content might change as new solutions are discovered. See Biodiversity Finance, Blue Finance, Carbon Finance, Climate Finance, Development Finance, Environmental Finance, Green Finance, Social Finance, and Sustainable Digital Finance.

References Convergence. (­ 2022, November 15). Blended Finance. https://­w ww.convergence. finance/­about Duarte, M. (­2021, September 16). What You Need to Know About Concessional Finance for Climate Action. Retrieved from The World Bank: https://­w ww.worldbank. org/­en/­news/­feature/­2 021/­09/­16/­­what-­​­­you-­​­­need-­​­­to-­​­­k now-­​­­about- ­​­­concessional-­​ ­­f inance-­​­­for-­​­­climate-​­action International Capital Market Association, ICMA. (­ 2020). Climate Transition Finance Handbook: Guidance for Issuers. Paris: International Capital Market ­A ssociation-​­ICMA. International Finance Corporation, IFC. (­2022, November 15). Blended Finance. https://­w ww.ifc.org/­w ps/­wcm/­connect/­topics_ext_content/­i fc_external_corporate_site/­bf Organisation for Economic ­Co-​­operation and Development, OECD. (­2020). Blended Finance Principles Guidance. Paris: Organisation for Economic C ­ o-​­operation and ­Development- ​­OECD. Piemonte, C., Cattaneo, O., Morris, R., Pincet, A., & Poensgen, K. (­2019). Transition Finance: Introducing a New Concept. Paris: OECD.

234  Sustainable Finance Literacy

Sancak, I.

Sustainable Finance Literacy

See Greenwashing.

Sancak, I.

Sustainable Finance Stages

  Sustainable finance stages indicate various evolutionary forms of sustainable finance. Unlike traditional finance, sustainable finance channels financial resources and transforms financial services into ­sustainability-​­aligned economic activities for a ­low-​­carbon, resilient, and ­resource-​­efficient economy. However, different sustainable finance stages present heterogeneous sustainability features and contents. Table S.3 compares four different finance typologies. Table S.3  Traditional Finance and Three Stages of Sustainable Finance (­SF) Finance Typology

Value Created

Ranking of Factors

Optimization

Horizon

­Finance-­​­­a s-​ ­Usual SF 1.0*

Shareholder value Refined shareholder value Stakeholder value Common good value

F

Max F

Short term

F > S and E

Max F subject to Short term S and E

I = F+S+E

Optimize I

Medium term

S and E > F

Optimize S and E subject to F

Long term

SF 2.0 SF 3.0

F: Financial value, S: Social impact, E: Environmental impact, I: Integrated value, SF: Sustainable Finance Stages. *The maximization of F is subject to minor S and E constraints. Sources: Schoenmaker (­2017); Schoenmaker & Schramade (­2019).

Sustainable Finance Stages  235

­Finance-­​­­a s-​­usual ref lects the traditional finance perspective, mainly focusing on financial value (­F ) maximization for shareholders. ­Finance-­​­­as-​ ­usual operates under shareholder primacy, the typical ­shareholder-​­centric approach, aiming at maximizing shareholder value and giving shareholders’ interests superiority instead of focusing on balancing value among all stakeholders and ultimately considering common good value. In this stage, ­short-​ ­termism is another defining characteristic. In sustainable finance (­SF) 1.0, firms might have some environmental and social concerns; however, profit maximization still stays as firms’ only aim and guiding principle, addressing a mere economic concern (­Schoenmaker  & Schramade, 2019). In SF 2.0, firms attach a financial value to social and environmental impacts and switch to the integrated value approach, considering financial, social, and environmental values together (­Schoenmaker & Schramade, 2019). In this stage, sustainable finance is not at the highest level since environmental and social concerns still do not prevail. Truly sustainable value creation depends on a paradigm shift from minimizing negative impacts to creating significant positive ones in critical and relevant social and environmental areas (­D yllick & Muff, 2015). In SF 3.0, firms still consider profit maximization; however, environmental and social factors gain greater importance. Thus, firms become catalyzers of sustainable development by generating common good value. Common good value refers to features and qualities serving and supporting the whole society or its majority. Economic and financial activities in the sustainability context should generate common good values without causing any harm to the environment and society and increase welfare with innovative business and financial solutions. In this discourse, saying that “­a n investment bank extended a large amount of credit to a firm for an environmental project that will serve the common good” means that this financing will generate new value, namely, it will contribute to the common good value in the environmental domain. The highest stage of sustainable finance idealistically addresses a foundational shift from finance as a goal to finance as a means (­Schoenmaker, 2017). Higher stages are also associated with longer horizons. In the long run, finance turns to fully sustainable finance, aligning with common good value concerns and mainly serving society to the largest extent possible. Sustainable finance stages can be connected with sustainable investment strategies. For example, SF 1.0 is related to exclusion approaches, ESG integration comes into play in SF 2.0, and impact investing is associated with the SF 3.0 stage (­Schoenmaker  & Schramade, 2019; Busch, 2021). See also Sustainability, Sustainable Finance, Sustainable Development Goals, and Sustainable Investment Strategies.

References Busch, T. (­2021). Impact investments: a call for (­re)­orientation. SN Business & Economics, ­1–​­13.

236  Sustainable Finance Taxonomy Dyllick, T.,  & Muff, K. (­2015). Clarifying the Meaning of Sustainable Business: Introducing a Typology From ­Business-­​­­as-​­Usual to True Business Sustainability. Organization & Environment, 29(­2), ­156–​­174. Schoenmaker, D. (­2017). From Risk to Opportunity: A Framework for Sustainable Finance. Rotterdam: Rotterdam School of Management, Erasmus University (­RSM). Schoenmaker, D.,  & Schramade, W. (­2019). Principles of Sustainable Finance. New York: Oxford University Press.

Sustainable Finance Taxonomy

Sancak, I.

  See Sustainability Taxonomy.

Sustainable Finance Technology (­SuFTech)

Sancak, I.

Sustainable finance technology, or SuFTech, refers to the technology supporting sustainability in financial sectors. Some technology solutions inherently support sustainability in financial industries. For example, the dematerialization (­converting from a physical form to an electronic form) of securities and i­ n-​­house digitalization of financial institutions are environmentally supportive technological solutions (­Zeranski & Sancak, 2020). Thus, they are, at the same time, SuFTech elements. In this way, the European Commission addresses SuFTech with its Circular Economy Action Plan (­European Commission, 2020): Innovative models based on a closer relationship with customers, mass customisation, the sharing and collaborative economy, and powered by digital technologies, such as the internet of things, big data, blockchain and artificial intelligence, will not only accelerate circularity but also the dematerialisation of our economy and make Europe less dependent on primary materials. SuFTech helps develop “­sustainable digital finance” deploying various digital technologies, such as big data, artificial intelligence, machine learning,

Sustainable Insurance  237

Internet of Things, or IoT, and others. The use of digital technologies in financial sectors also fosters new use cases, such as regulatory technology (­RegTech) and supervisory technology (­SupTech). Furthermore, technology boosts many w ­ ell-​­known financial activities and their components and ingredients, such as voluntary or regulatory disclosures. Sustainable finance requires more transparency and more data, and timely disclosure solutions. One of the proposed solutions under current technology implementations is prudential supervisory disclosure. Prudential supervisory disclosure is the set of disclosure rules for financial supervisors to inform the market participants timely about m ­ arket-​­wide harmful conditions and activities to preserve market integrity and protect markets from detrimental rumors, orders and transactions by deploying SupTech (­Zeranski & Sancak, 2021). A SupTech system enables supervisors to collect much better information timely (­Zeranski  & Sancak, 2021). And by having m ­ arket-​­wide information, supervisors should reveal information as part of a prudential supervisory disclosure policy to calm down markets, especially in stressful times, increase informational efficiency, cope with ­market-​­wide rumors, and increase confidence in markets (­Zeranski & Sancak, 2021). Sustainable finance technology, or SuFTech, will emerge with more intelligent solutions as “­sustainable digital finance” develops. See also Green Fintech Taxonomy, Sustainable Digital Finance, and Twin Transformation.

References European Commission. (­ 2 020). Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions: A new Circular Economy Action Plan For a Cleaner and More Competitive Europe. Brussels: European Commission. Zeranski, S.,  & Sancak, I. E. (­2020). Digitalisation of Financial Supervision with Supervisory Technology (­SupTech). Journal of International Banking Law and Regulation, ­309–​­330. Zeranski, S., & Sancak, I. E. (­2021). Prudential supervisory disclosure (­PSD) with supervisory technology (­SupTech): lessons from a FinTech crisis. International Journal of Disclosure and Governance.

Sustainable Insurance

Sancak, I.

238  Sustainable Investing, Sustainable Investment, Sustainability Investment (­SI)

See Principles for Sustainable Insurance.

Sustainable Investing, Sustainable Investment, Sustainability Investment (­SI)

SoGReS-​­MF Research Group

Sustainability investment (­SI) is a ­long-­​­­term-​­oriented investment approach that integrates environmental, social, and governance (­ESG) factors, in combination with financial considerations, in the research, analysis, and selection process of securities within an investment portfolio (­GSIA, 2019). Additionally, Eurosif (­2014) defines SI as the financial investment process which takes into account ESG ­impacts – and/­ ​­ or investment in the community and shareholder activism, and European Commission (­SFDR, art. 2, 17; 2019), as an investment in an economic activity that contributes to an environmental objective, as measured, or on its impact on biodiversity and the circular economy, or an investment in an economic activity that contributes to a social objective, in particular, an investment that contributes to tackling inequality or that fosters social cohesion, social integration, and labor relations, or an investment in human capital or economically or socially disadvantaged communities, provided that such investments do not significantly harm any of those objectives and that the investee companies follow good governance practices, in particular concerning sound management structures, employee relations, remuneration of staff and tax compliance. The sustainability investment market has grown substantially over time. The key driver of the market remains institutional investor demand. Large investors undertake most SI, whereas retail investors comprise a small fraction of total SI, usually through participation in SI funds. Most of the SI occurs via institutional investors. Sustainable investing is the natural evolution of ethical and socially responsible investing (­SRI). SI has its origins in what was termed ethical investment with moral screening. In the 17th century in North America, the Quakers refused to profit from weapons and the slave trade. The first modern mutual fund employing screens based on religious convictions was the “­Pioneer Fund” in 1928. The Vietnam War and Apartheid in South Africa resulted in a new model for SI. The first modern SI mutual fund, “­Pax World Fund,” was founded in 1971. SI continued growing with the development combine one or different types of screens and combined different approaches: ­Sustainability-​ ­themed investment, ­best-­​­­in-​­class investment selection, ­norms-​­based screening, exclusion of holdings from the investment universe, integration of ESG

Sustainable Investment Fund  239

factors in financial analysis, engagement and voting on sustainability matters, and impact investment. See also Sustainability, Socially Responsible Investment (­SRI), and Sustainable Investment Strategies.

References Global Sustainable Investment Alliance, GSIA (­2019). Global sustainable investment review, http://­w ww.­g si-​­a lliance.org/­­w p-​­content/­uploads/­2019/­03/­GSIR_Review2018.3.28.pdf European Commission (­2019). Regulation (­EU) 2019/­2088 of the European Parliament and of the Council on sustainability-related disclosures in the financial services sector. https://­­eur-​­lex.europa.eu/­­legal-​­content/­ES/­T XT/?uri=CELEX:32019R2088. Eurosif (­2014). European SRI Study 2014, http://­www.eurosif.org/­­our-​­work/­research/­sri/­­ european-­​­­sri-­​­­study-​­2014/

Sustainable Investment Fund

Jurado, A.

See ESG Fund.

Sustainable Investment Strategies

Sancak, I.

Sustainable investment strategies express any financial investment approaches in connection with sustainability, specifically environmental, social, and governance (­ESG) factors, green projects, and sustainable finance instruments. Figure S.4 summarizes seven fundamental sustainable investment strategies. Active ownership refers to active engagements by shareholders of a company on sustainability issues. Active engagement on ESG issues and ESG activism or active ownership, differ in motivation from traditional shareholder activism by institutions, such as pension funds and mutual funds. Traditional shareholder activism and hedge fund activism typically emphasize issues related

240  Sustainable Investment Strategies Active Engagement / Active Ownership / Active Voting / Corporate Engagement / Shareholder Action / Shareholder Activism / Stewardship ESG Integration / ESG Incorporation / ESG Investing / ESG Engagement / ESG Voting

Exclusionary Investing / Exclusionary Screening / Negative Screening

Inclusionary Investing / Positive Screening / Best-in-Class / Best-in-Universe

Impact / Community Investing

Norm-based Investing / Norm-based Screening

Thematic / Sustainability-themed Investment

Figure S.4  Fundamental Sustainable Investment Strategies Source: Developed by the Author based on CFA Institute Research Foundation (­2017), EUROSIF (­2021), GSIA (­2021), USSIF (­2020)

to the interests of shareholders only. In contrast, ESG activism focuses on a broader range of stakeholders’ interests, including employees, customers, and creditors (­Dimson, Karakas, & Li, 2015). Stewardship, also known as active ownership, refers to the use of inf luence by investors over current or potential investees or issuers, policymakers, service providers, and other stakeholders to maximize overall ­long-​­term value in the sustainability context (­PRI, 2021). In this category, active voting, active engagement, corporate engagement, shareholder activism, or shareholder action can be used in the same direction. In other words, these strategies refer to activating shareholder power to direct the firm toward more sustainability via corporate engagement approaches, such as communicating with senior management and/­or boards of companies, filing or ­co-​­filing shareholder proposals, and proxy voting guided by ESG factors (­GSIA, 2021). Another category, ESG integration, ESG incorporation, or ESG investing approach, is to consider ESG criteria in investment decisions. ESG alignments of firms are critical in attracting investment from investment communities and financial consumers. Here, the potential impact of ESG issues on company financials affects the integration decision (­EUROSIF, 2021). ESG voting and ESG engagement can be considered under both ESG integration and active ownership approaches. Some sources classify each one separately. While investors or shareholders exercise their voting rights considering ­ESG-​­alignment expectations in ESG voting cases, ESG engagement refers to shareholders’ activities aiming at convincing management to align with ESG criteria or further improve ESG performance (­Swiss Sustainable Finance, 2020). In turn, exclusionary investing, exclusionary screening, or negative

Sustainable Investment Strategies  241

screening, is an approach to exclude companies from the investment universe under predetermined exclusion criteria. For example, investors might exclude companies staying below certain ESG or sustainability taxonomy thresholds and firms that operate in fossil fuels or sin sectors, such as alcohol, tobacco, and gambling. Exclusion might be broader than product and company levels. For example, some investors might exclude companies operating or established in countries that systematically violate human rights. On the other hand, the strategies of inclusionary investing, ­best-­​­­in-​­class screening, ­best-­​­­in-​­universe screening, and positive screening have similar features. In this category, investors include instruments conveying sustainability qualities above certain thresholds. However, they have some slight differences. Inclusion approaches name the strategies. For example, ­best-­​­­in-​­class screening is an approach to comparing with peers regarding sustainability criteria, such as ESG performance or sustainability ratings, and including the best performers within an asset class. B ­ est-­​­­in-​­universe, however, considers the asset universe. In another category, impact investments aim to generate positive, measurable social and environmental impact alongside a financial return (­GIIN, 2020). The core characteristics of impact investing are (­GIIN, 2020): Intentionally contributing to positive social and environmental impact, using evidence and impact data in investment design, managing impact performance, and contributing to the growth of impact investing. Similarly, community investing aims to direct the capital to traditionally underserved individuals, communities, and businesses with a social or environmental purpose (­GSIA, 2021). ­Norms-​­based screening is an approach to consider investments based on specific norms determined by mainly national or international standard setters or industry organizations, such as OECD, ILO, and UN. Norms might be, for example, the OECD Guidelines for Multinational Enterprises and UN Guiding Principles on Business and Human Rights. Separately, thematic investing approaches focus on overarching themes and trends, such as environment and resources and transformative technologies, that have potential in the sustainability realm. This approach capitalizes on macroeconomic, geopolitical, and technological opportunities, addressing ­long-​­term, structural, and transformative shifts (­MSCI, 2022). Similarly, s­ ustainability-​­themed investments aim to specifically contribute to sustainable solutions, such as sustainable agriculture, green buildings, lower carbon tilted portfolio, gender equality, and diversity (­GSIA, 2021). In addition to the seven major categories indicated in Figure S.4, a c­ ross-​­cutting sustainable investment approach is ethical investing, referring to considering investments under ethical and moral values and principles. In this regard, sin companies might be excluded under ethical investing approaches. Moreover, ethical investing might be in the realm of ESG investing in various parallel considerations, such as child labor and corruption. The given sustainability investment strategies take into account sustainability dimensions in investments. However, unlike philanthropy, sustainability investment strategies also seek financial returns on capital. Since sustainable investment is used interchangeably with responsible investment (­GSIA, 2021), some sources pronounce sustainable

242  Sustainable Investment Strategies

investment strategies as responsible investing or responsible investment strategies. EUROSIF identifies seven responsible investment strategies: ­best-­​­­in-​­class, engagement and voting, ESG integration, exclusions, impact investing, n ­ orm-​ ­based screening, and ­sustainability-​­themed (­EUROSIF, 2021). Similarly, PRI handles sustainable investment strategies in connection with the responsible investment concept by using mainly an ESG lens and classifying other sustainable investment strategies (­integration, screening, thematic, engagement, proxy voting) based on their orientation to ESG investment strategies (­PRI, 2021). However, there is a tendency to use “­sustainable investment strategies” as an umbrella concept in this realm (­Busch, 2021). In the same direction, some sources use “­sustainable investment approaches” as an overarching term for the given investment strategies, as Swiss Sustainable Finance (­SSF) and the Center for Sustainable Finance and Private Wealth (­CSP) at the University of Zurich prefer (­Swiss Sustainable Finance, 2020). Sustainable investments have increased significantly, and their direction among sustainable investment strategies is changing over time. By the beginning of 2020, the global sustainable investment amounts to USD 35.3 trillion, making 35.9% of total assets under management globally (­GSIA, 2021). Among various sustainable investment strategies, ESG integration came forward with USD 25.2 trillion and took the first place from exclusionary screening in recent years. Figure S.5 depicts the investment figures of seven major sustainable investment strategies. Figure S.6 shows the global growth of assets under management in sustainable investing strategies. The main argument supporting this ESG growth within sustainable investment strategies is to have measurable standards. Although ESG ratings diverge drastically by scope, measurement, and weight (­Berg, Kölbel,  & Rigobon, 2022), ESG investing provides more measurable and comparable metrics than other sustainability strategies, such as ­norm-​­based screening and ethical investing, which might differ significantly across individuals. Impact/community investing

$1 $17 $212 $16 $106

Positive/best-in-class screening Sustainability themed $1,688 investing

$3 $16 $3 $37

$136 $572

$658

$74 $145 $803 $262

Norms-based $3,074 screening

Corporate engagement $4,743 and shareholder action

$1,980 $2,045 $1,735

Negative/exclusionary $9,242 screening ESG integration $4,140

0

Europe United States Canada Australia/NZ Japan

$1,042 $1,254

$3,404

$89

$16,059

5k

$2,302 $794 $1,900

10k

15k

20k

25k

Figure S.5  Sustainable Investments by Strategy & Region in 2020 (­Billions ­US-​­Dollars) Source: GSIA (­2021)

Sustainable Investment Strategies  243 Impact/community investing Positive/best-in-class screening Sustainability themed investing Norms-based screening Corporate engagement and shareholder action

$352 $444 $248 $1,384 $1,842 $818 $1,948 $1,018 $276

2020 2018 2016

$4,140 $4,679 $6,195 $8,385

$10,504 $9,835 $15,030

Negative/exclusionary screening

ESG integration 0

$19,771

$15,064

5k

10k

$10,353

$17,544

15k

20k

$25,195

25k

Figure S.6  G  lobal Growth of Sustainable Investing Strategies in ­2016–​­2020 (­Billions ­US-​­Dollars) Source: GSIA (­2021)

See also Green Investing, ESG Criteria, Exclusionary Screening, Responsible Investment, Socially Responsible Investment, and Sustainable Investment/­Investing.

References Berg, F., Kölbel, J. F., & Rigobon, R. (­2022). Aggregate confusion: The divergence of ESG Ratings. Review of Finance, 1­ –​­30. Busch, T. (­2021). Impact investments: a call for (­re)­orientation. SN Business & Economics, 1(­2), 1­ –​­13. CFA Institute Research Foundation. (­2017). Handbook on sustainable finance: Background information and practical examples for institutional asset owners. New York and Zürich: CFA Institute Research Foundation & Swiss Sustainable Finance. Dimson, E., Karakas, O., & Li, X. (­2015). Active ownership. The Review of Financial Studies, 28(­12), ­3225–​­3268. EUROSIF. (­2021). Responsible investment strategies. https://­w ww.eurosif. org/­­responsible-­​­­i nvestment-​­strategies/ Global Impact Investing Network, GIIN. (­2020, November). Core characteristics of impact investing. https://­thegiin.org/­a ssets/­Core%20Characteristics_webfile.pdf Global Sustainable Investment Alliance, GSIA. (­2021). Global sustainable investment review 2020. Brussels: Global Sustainable Investment Alliance (­GSIA). Morgan Stanley capital Index, MSCI. (­2022). Thematic investing. https://­w ww.msci. com/­­our-​­solutions/­i ndexes/­­thematic-​­i nvesting Principles for Responsible Investment, PRI. (­2021). Stewardship. https://­w ww.unpri. org/­­a n-­​­­i ntroduction-­​­­to-­​­­responsible-​­i nvestment/­­a n-­​­­i ntroduction-­​­­to-­​­­responsible-­​ ­­i nvestment-​­stewardship/­7228.article Swiss Sustainable Finance. (­2020). Swiss Sustainable Investment Market Study 2020. Zurich: University of Z ­ urich-​­Swiss Sustainable Finance (­SSF) and the Center for Sustainable Finance and Private Wealth (­CSP). US Sustainable Investment Forum, US SIF. (­2020). Sustainable investing basics. https://­ www.ussif.org/­sribasics

244  Sustainable Lending

Sustainable Lending

Ocal, T.

See Green Loan and Green Loan Principles.

Note 1 Our Common Future (­U N, 1987), also known as the Brundtland Report, defines sustainable development as “­development that meets the needs of the present without compromising the ability of future generations to meet their own needs.”

T Sancak, I.

Taxonomy

  See Sustainability Taxonomy.

Sancak, I.

Thematic Investing

See Sustainable Investment Strategies.

Gerres, T.

Tradable Emission Permit

See Carbon Markets and Cap and Trade System.

Tradable Emission Right

Gerres, T.

DOI: 10.4324/9781003310891-19

246  Transition Finance

See Carbon Markets and Cap and Trade System.

Sancak, I.

Transition Finance

 

 

 

 

 

See Sustainable Finance Forms.

Transition Management

Vargas, C.

See Transition Risk.

Transition Risk

Vargas, C.

Transition risk can occur due to intended modifications to reduce climate impact, that is, by shifting to l­ow-​­carbon technology, reducing pollution, greening the economy, and going net zero. Such actions represent a transition that could result in significant shifts in asset values or higher costs and liability issues (­Bank of England, 2021). Transition risks can include technological, policy, regulatory, market, reputational, and legal risks (­CISL, 2019). Policy and regulatory risks are associated with the economic effects of new policies or regulations. Technological risk occurs when the development of technology disrupts or changes the economy. Market risk considers changes in supply or demand over time as the market shifts to a more

Triple Bottom Line  247

responsible or comprehensive understanding of climate change. Reputational risks refer to the perception that stakeholders can get of institutions or individuals regarding their actions or inactions regarding climate risk. Legal risks regard the potential and actual litigations from interested or involved parties and shareholders against those with climate risks (­Open Risk Manual, 2021). Transition management deals with transition risk and can be linked to sustainable development as it requires changes in ­socio-​­technical systems and broader societal c­ hange  – in ​­ beliefs, values, and governance that c­o-​­evolve with technology changes (­Kemp et  al., 2007). Transition finance, also known as ‘­climate transition finance,’ is financing such efforts to advance change. The 2030 Agenda for Sustainable Development defines it as ‘­the journey towards that goal’ (­Piemonte, 2019). Transition finance includes the extent to which an issuer’s financing program supports the implementation of its climate change strategy (­Climate Transition Finance and ICMA, 2020). See also Decarbonization, Net Zero Economy, Sustainable Development, and Sustainability Transformation.

References Bank of England (­2021). The Bank of England’s c­limate-​­related financial disclosure 2021. https://­w ww.bankofengland.co.uk/­­prudential-​­regulation/­publication/ ­2021/­june/­­climate-­​­­related-­​­­f inancial-­​­­d isclosure-­​­­2020-​­21 CISL. (­2019). Transition Risk framework report step by step guide. Cambridge: University of ­Cambridge-​­. Climate Transition Finance and ICMA (­2020). Climate transition finance handbook guidance for issuers. https://­w ww.icmagroup.org/­­sustainable-​­f inance/­­the-­​ ­­principles-­​­­g uidelines-­​­­a nd-​­handbooks/­­climate-­​­­t ransition-­​­­f inance-​­handbook/. Kemp, R., Loorbach, D., & Rotmans, J. (­2007). Transition management as a model for managing processes of c­o-​­evolution towards sustainable development. The International Journal of Sustainable Development & World Ecology, 14(­1), ­78–​­91. Open Risk Manual (­2021). Climate change transition risk. https://­w ww.openriskmanual.org/­w iki/­i ndex.php?title=Climate_Change_Transition_Risk&oldid=25627. Piemonte, C., Cattaneo, O., Morris, R., Pincet, A., & Poensgen, K.(­2019). Transition finance: Introducing a new concept. OECD Development C ­ o-​­operation Working Papers, 54, OECD Publishing, Paris.

Triple Bottom Line

Aracil, E.

248  Twin Transformation

The Triple Bottom Line is a sustainability framework that incorporates social and environmental aspects into firms’ goals and performance assessments beyond economic criteria. According to Elkington’s (­1998) seminal work, organizations need to foresee three different ‘­bottom lines or results,’ the traditional financial result (­profit) and the results associated with people and the planet. Thus, the Triple Bottom Line is sometimes known as the ‘­3Ps.’ The joint analysis of traditional business models frameworks along with social and environmental considerations has evolved in Triple Bottom Line business models (­Elkington, 1998), shared value business models (­­Lüdeke-​ ­Freund et al., 2016), green business models (­Bansal & Roth, 2000), or social business models (­Yunus et  al., 2010). Sustainable business models defined under the Triple Bottom Line approach aim to create value beyond financial performance, which implies defining firms’ mission and evaluating firms’ performance considering the environment and the society as if these were stakeholders (­Stubbs & Cocklin, 2008). Because the Triple Bottom Line and sustainability are interrelated, there is a linkage between the former and sustainable finance (­A lhaddi, 2015). First, sustainable financial institutions need to be managed according to the Triple Bottom Line approach. Simultaneously, sustainable financial services and lending favor Triple Bottom Line business models since funding 3Ps’ organizations allows channeling proceeds toward initiatives that embed environmental and social dimensions. See also ESG Factors, Pieconomics, and Sustainability.

References Alhaddi, H. (­2015). Triple bottom line and sustainability: A literature review. Business and Management Studies, 1(­2), ­6 –​­10. Bansal, P., & Roth, K. (­2000). Why companies go green: A model of ecological responsiveness. Academy of Management Journal, 43(­4), ­717–​­736. Elkington, J. (­1998). Partnerships from cannibals with forks: The triple bottom line of 21st-century business. Environmental Quality Management, 8(­1), ­37–​­51. ­Lüdeke-​­Freund, F., Massa, L., Bocken, N., Brent, A., & Musango, J. (­2016). Business models for shared value. Network for Business Sustainability: South Africa. Stubbs, W.,  & Cocklin, C. (­ 2008). Conceptualizing a “­ Sustainability Business Model”. Organization & Environment, ­103–​­127. Yunus, M., Moingeon, B., & L ­ ehmann-​­Ortega, L. (­2010). Building social business models: Lessons from the Grameen experience. Long Range Planning, 43(­­2–​­3), ­308–​­325.

Sancak, I.

Twin Transformation

 

 

See Sustainability Transformation.

 

 

 

U United Nations Framework Convention on Climate Change (­U NFCCC)

Pauw, P.

The United Nations Framework Convention on Climate Change (­U NFCCC) is a framework convention to stabilize greenhouse gas (­GHG) concentrations in the atmosphere at a level that will prevent dangerous human interference with the climate system in a timeframe that allows ecosystems to adapt naturally and enables sustainable development (­Kuyper et  al., 2018). The UNFCCC entered into force in 1994 and enjoys near universal membership. It is the parent treaty of the Kyoto Protocol (­1997) and the Paris Agreement (­2015). The latter has refined the ultimate objective of the UNFCCC and aims to hold ‘­the increase in the global average temperature to well below 2°C above p­ re-​­industrial levels and pursuing efforts to limit the temperature increase to 1.5°C above p­ re-​­industrial levels’ (­U NFCCC, 2015; Art. 2.1(­a)). Finance has three distinct meanings under the UNFCCC (­Zamarioli et al., 2021). First, finance can refer to the contributions by signatory parties to cover the operational costs of the UNFCCC and its Secretariat. Second, what became known as ‘­climate finance’ refers to developed countries’ support to developing countries (­­non-​­Annex I) to help them with the implementation of the UNFCCC. As this topic evolved under the UN climate negotiations, quantified climate finance targets were set in the Copenhagen Accord (­2009) and the Cancun Agreements (­2010): US$30 billion ­fast-​­start finance for 2­ 010–​­2012 and US$100 billion of mobilized climate finance annually by 2020. Developed countries failed to reach the US$100 billion goal in 2020 (­OECD, 2022). The size and nature of a new, quantified climate finance target will be negotiated prior to 2025 (­Pauw et al., 2022). The third meaning of finance under the UNFCCC is most relevant to sustainable finance. Article 2.1(­c) goes beyond ‘­climate finance’ and has ­far-​­reaching implications (­Zamarioli et  al., 2021): all countries must engage in making all financial f lows consistent with ­low-​­carbon and c­limate-​­resilient development pathways, albeit in c­ontext-​­specific and differentiated ways. Article 2.1(­c) thus sends a signal beyond the Paris Agreement signatories to all unspecified actors involved in the generation, management, transfer, and application of finance

DOI: 10.4324/9781003310891-20

250  United Nations Global Compact

f lows. Implementation will necessitate additional policies to, for example, fix market imperfections and create enabling environments for n ­ on-​­state actors to move toward sustainable financing (­Zamarioli et al., 2021). However, the ­sub-​­article was not further specified and lacks a ‘­home’ where its further development and implementation are negotiated (­Bodle & Noens, 2018). See also Paris Agreement, Kyoto Protocol, Climate Finance, and Nationally Determined Contributions.

References Bodle, R., & Noens, V. (­2018). Climate Finance: Too Much on Detail, Too Little on the Big Picture? Carbon & Climate Law Review, 12(­3), ­248–​­257. Kuyper, J., Schroeder, H., & Linnér, B.-​­O. (­2018). The evolution of the UNFCCC. Annual Review of Environment and Resources, 43, ­343–​­368. Organisation for Economic C ­ o-​­operation and Development, OECD. (­2022). Aggregate trends of climate finance provided and mobilised by developed countries in ­2013–​­2020. Washington, DC: OECD. Pauw, W. P., Moslener, U., Zamarioli, L. H., Amerasinghe, N., Atela, J., Affana, J.-​­P. B., Buchner, B., Klein, R. J. T., Mbeva, K. L., Puri, J., Timmons Roberts, J., Shawoo, Z., Watson, C., & Weikmans, R. (­2022). ­Post-​­2025 climate finance target: how much more and how much better? Climate Policy. United Nations Framework Convention on Climate Change, UNFCCC. (­2015). Adoption of the Paris Agreement. Zamarioli, L. H., Pauw, W. P., Koenig, M., & Chenet, H. (­2021). The climate consistency goal and the transformation of global finance. Nature Climate Change, 11, ­578–​­583.

United Nations Global Compact

Sancak, I.

The United Nations Global Compact is one of the major global corporate sustainability initiatives, calling for companies to align with sustainability features. As stated by its mission, the UN Global Compact supports companies to develop responsible business approaches with ten key principles on human rights, labor, environment, and ­anti-​­corruption and to align with overarching sustainability goals, such as the UN Sustainable Development Goals (­SDGs), encouraging and emphasizing collaboration and innovation. The UN Global Compact was established in July 2000 by the United Nations under ­Secretary-​­General Kofi Annan (­U N Global Compact, 2021). The initiative aims to accelerate and scale the collective global impact of business

United Nations Global Compact  251 Human Rights Principle 1: Businesses should support and respect the protection of internationally proclaimed human rights; and Principle 2: make sure that they are not complicit in human rights abuses.

Labour Principle 3: Businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining; Principle 4: the elimination of all forms of forced and compulsory labour; Principle 5: the effective abolition of child labour; and Principle 6: the elimination of discrimination in respect of employment and occupation.

Ten Principles of the United Nations Global Compact

Environment Principle 7: Businesses should support a precautionary approach to environmental challenges; Principle 8: undertake initiatives to promote greater environmental responsibility; and Principle 9: encourage the development and diffusion of environmentally friendly technologies.

Anti-Corruption Principle 10: Businesses should work against corruption in all its forms, including extortion and bribery.

Figure U.1  Ten Principles of the UN Global Compact Source: UN Global Compact (­2022)

by upholding the Ten Principles of the Global Compact and contributing to delivering the SDGs through companies committed to responsible business practices and sustainability ecosystems (­U N Global Compact, 2021). The UN Global Compact provides enterprises with a universal corporate responsibility language mainly stated in its Ten Principles. Figure U.1 gives the Ten Principles of the UN Global Compact. These principles of the United Nations Global Compact are developed based on the Universal Declaration of Human Rights, the International Labour Organization’s Declaration on Fundamental Principles and Rights at Work, the Rio Declaration on Environment and Development, and the United Nations Convention Against Corruption (­UN Global Compact, 2022a). Business and n ­ on-​ ­business organizations can join the United Nations Global Compact regardless of size, complexity, and location. The web portal of the UN Global Compact publishes the names of participating organizations with their sector, country, and date of participation. As of 2022, the list includes more than 20.000 participants, of which are more than 15.000 business organizations representing every industry and size and coming from more than 150 developed and developing countries (­UN Global Compact, 2022b). Today, the UN Global Compact is the world’s largest corporate sustainability initiative (­UN Global Compact, 2021). See also Corporate Sustainability, Responsible Investment, Principles for Responsible Investment, Sustainable Development Goals, and Sustainability.

252  United Nations Guiding Principles for Business and Human Rights

References UN Global Compact. (­2022a, October 3). The ten principles of the UN global compact. https://­w ww.unglobalcompact.org/­­what-­​­­is-​­gc/­m ission/­principles UN Global Compact. (­2022b, October 3). Participation. https://­w ww.unglobalcompact.org/­participation/­join UN Global Compact. (­2021). UN global compact strategy ­2021–​­2023. New York: United Nations Global Compact.

United Nations Guiding Principles for Business and Human Rights

Pardo, E. & ­Esteban-​­Sánchez, P.

The United Nations Guiding Principles for Business and Human Rights (­U NGPs) are a set of 31 principles on transnational corporate conduct on human rights. Human rights, or people’s right to be treated with dignity, include, at minimum, the International Bill of Human Rights and the International Labour Organization’s Declaration on Fundamental Principles and Rights at Work (­United Nations, 2014). The principles were developed by the former Special Representative of the S­ ecretary-​­General on human rights and transnational corporations and other business enterprises, John Ruggie, and unanimously endorsed in 2011 by the United Nations Human Rights Council in its resolution A/­H RC/­R ES/­17/­4. The opinions of stakeholders from over 100 countries were considered in their definition, including governments, companies, civil society, and investors (­United Nations, 2014). UNGPs are based on three chapters: (­i) the state duty to protect human rights, (­ii) the corporate responsibility to respect human rights, and (­iii) the access to remedy for individuals and groups affected by ­business-​­related human rights abuse. Each chapter consists of both a set of foundational principles and a set of operational principles (­United Nations, 2011). Although human rights are ref lected in international and domestic laws, the principles in themselves can be considered a voluntary tool for helping states and companies to fulfill their duties and responsibility regarding business impacts on human rights. Nevertheless, some governments have adopted specific laws requiring mandatory human rights due diligence, such as the UK Modern Slavery Act, the French Corporate Duty of Vigilance Law, and the Dutch Child Labour Due Diligence Law. Also, other international standards and guidelines have included UNGPs as a reference on human rights issues, such as the 2011 update of the OECD Guidelines for Multinational Enterprises.

United Nations Guiding Principles for Business and Human Rights  253

Human rights due diligence is a core concept included in the UNGPs that should be highlighted for its importance in enabling companies to properly manage their responsibilities for human rights. According to the UNGPs, a company’s human rights due diligence ‘­should include assessing actual and potential human rights impacts, integrating and acting upon the findings, tracking responses, and communicating how impacts are addressed’ (­United Nations, 2014:17). From a sustainable finance perspective, UNGPs are a useful framework to include human rights and SDGs contributions as criteria in sustainable investments. Thus, they can be used for channeling funds to those companies and projects with better performance on human rights or divesting on those that generate a negative impact on human rights. Finally, UNGPs may serve investors to engage with companies to improve their human rights practices and disclosure (­U N Working Group on Business and Human Rights, 2021; UNPRI, 2020). See also: ESG Factors, OECD Guidelines for Multinational Enterprises, and Sustainable Developments Goals (­SDGs).

References UN Working Group on Business and Human Rights. (­2021). Taking stock of investor implementation of the UN Guiding Principles on Business and Human Rights. https://­ www.ohchr.org/­s ites/­d efault/­f iles/ ­D ocuments/­I ssues/ ­B usiness/­U NGPs10/­ ­Stocktaking-­​­­i nvestor-​­i mplementation.pdf United Nations. (­2011). Guiding principles on business and human rights: Implementing the United Nations ‘­protect, respect and remedy’ framework. https://­w ww.ohchr. org/­s ites/­d efault/­f iles/­D ocuments/­P ublications/­G uidingPrinciplesBusines sHR_EN.pdf United Nations. (­2014). Frequently asked questions about the guiding principles on business and human rights. https://­w ww.ohchr.org/­sites/­default/­f iles/­Documents/­Publications/ ­FAQ_PrinciplesBussinessHR.pdf United Nations Principles for Responsible Investing, UNPRI. (­2020). Why and how investors should act on human rights. https://­w ww.unpri.org/­­human-​­r ights/­­why-­​­­a nd-­​ ­­how-­​­­i nvestors-­​­­should-­​­­act-­​­­on-­​­­human-​­r ights/­6636.article (­accessed ­06-­​­­23-​­22).

V Value Reporting Foundation

Sancak, I.

The Value Reporting Foundation (­V RF) was a global nonprofit organization to develop a common understanding of enterprise value. Initially declared in November 2020, the International Integrated Reporting Council (­IIRC) and the Sustainability Accounting Standards Board (­SASB) announced their merger on 9 June 2021 to form the Value Reporting Foundation. The aim was to simplify comparability, increase clarity in sustainability reporting and disclosure, and focus on enterprise value creation together (­SASB, 2022). The SASB was a nonprofit organization founded in 2011 to help develop a common language about the financial impacts of sustainability (­SASB, 2022). Identifying the subset of environmental, social, and governance (­ESG) issues most relevant to financial performance in each industry, the SASB Standards were developed to guide corporate disclosure of financially material sustainability information (­SASB, 2022). The IIRC was an international organization focusing on integrated thinking with l­ong-​­term value creation approaches in sustainability reporting. The IIRC consisted of regulators, investors, companies, standard setters, NGOs, accounting professionals, and academics (­IIRC, 2021). The IIRC developed and shared views about value creation, preservation, or erosion in the integrated reporting context. One of the cornerstone integrated reporting frameworks, the ‘­International Framework,’ was developed by the IIRC. The International Framework and SASB Standards are expected to provide a more complete picture of ­long-​­term enterprise value creation with comparable, consistent, and reliable information (­Guillot & Tilley, 2021). The VRF developed resources to deliver its mission and combined the tools and resources of the SASB and IIRC. The resources include the Integrated Reporting Framework, Integrated Thinking Principles, and SASB Standards, which are adopted in over 70 countries (­Value Reporting Foundation, 2021). The VRF was a key global organization supporting sustainable finance by developing and publishing sustainability reporting and disclosure frameworks. The VRF and IFRS Foundation were separate global reporting standard setters. Announced on 22 June 2022 and to be completed on 31 July 2022, the Value Reporting Foundation consolidated into the IFRS Foundation to support the work of the

DOI: 10.4324/9781003310891-21

­Values-­based Bankin  255

International Sustainability Standards Board (­ISSB) (­Value Reporting Foundation, 2022). The ISSB’s standards will be built on the existing work of the leading reporting initiatives, including but not limited to the VRF’s Integrated Reporting Framework and SASB Standards (­IFRS, 2022). Sustainable finance grows in parallel to reporting standards. The growth interest underlies the development of homogeneous and transparent reporting standards. See also Integrated Reporting, International Sustainability Standards Board (­ISSB), and Integrated Thinking.

References Guillot, J.,  & Tilley, C. (­ 2021). Strengthening an Integrated Report Using SASB Standards. Value Reporting ­ Foundation  – ​­ SASB Standards: https://­ w ww.sasb. org/­blog/­­strengthening-­​­­a n-­​­­i ntegrated-­​­­report-­​­­using-­​­­sasb-​­standards/ International Financial Reporting Standards, IFRS. (­2022). ISSB: Frequently asked questions. https://­w ww.ifrs.org/­g roups/­­i nternational-­​­­sustainability-­​­­standards-​ ­board/­­issb-­​­­f requently-­​­­a sked-​­questions/ International Integrated Reporting Council, IIRC. (­ 2021). Integrated ­Reporting-​ ­International Framework. London: International Integrated Reporting Council (­IIRC). Sustainability Accounting Standards Board, SASB. (­ 2022). SASB Standards connect business and investors on the financial impacts of sustainability. https://­w ww.sasb. org/­about/ Value Reporting Foundation. (­2021). IIRC and SASB form the Value Reporting Foundation, providing comprehensive suite of tools to assess, manage and communicate value, https://­w ww.integratedreporting.org/­n ews/­­i irc- ­​­­ a nd- ­​­­ s asb-­​­­ f orm-­​­­ t he-­​­­ v alue-­​ ­­r eporting- ­​­­ f oundation- ­​­­ p roviding- ­​­­ c omprehensive- ­​­­ s uite- ­​­­ o f- ­​­­ t ools- ­​­­ t o- ­​­­ a ssess-­​ ­­m anage-­​­­a nd-­​­­communicate-​­value/ Value Reporting Foundation. (­2022). IFRS Foundation and Value Reporting Foundation vote to approve consolidation from 1 July. https://­w ww.valuereportingfoundation. org/­news/­­i frs- ­​­­foundation- ­​­­a nd-­​­­value- ­​­­r eporting- ­​­­foundation-­​­­vote- ­​­­t o- ­​­­a pprove-­​ ­­consolidation-­​­­f rom-­​­­1-​­july/

­Values-​­based Banking

Cotelo-​­Ouréns, Y.

­Values-​­based banking refers to ­purpose-​­driven banks with a clear set of values in their mission and at the heart of their business model (­­Kocornik-​­Mina, ­Bastida-​­Vialcanet,  & Eguiguren Huerta, 2021). Such values simultaneously enhance a triple impact on people, the planet, and the economy. Therefore,

256 ­Values-­based Bankin

the aim of a v­ alues-​­based bank is to meet the needs of society and safeguard the environment while generating the reasonable profits needed to ensure ­long-​ ­term business sustainability and resilience (­GAVB, 2022). In other words, ­value-​­based banks aim to foster sustainable development by providing inclusive financial services. In this sense, they are committed to financial inclusion, meaning that individuals and businesses can access valuable and affordable financial products and services for their needs, delivered responsibly and sustainably (­World Bank, 2022). In coherence, they are grounded in communities and work to enable new business models that meet their needs. To this end, they build ­long-​­term relationships and focus on the real economy, that is, the economic activities that generate goods and services, as opposed to a financial economy that is concerned exclusively with financial market activities that deliver financial returns in the short term (­­Kocornik-​­Mina, ­Bastida-​ ­Vialcanet, & Eguiguren Huerta, 2021). Specific values may slightly diverge between institutions; however, ­value-​­based banks share the ability to translate their culture and impact principles into services that characterize them, together with their ref lection on the internal practices related to governance, human resource management, advocacy, and transparency. All this differentiates ­value-​­based banks from conventional banks strictly focused on profitability (­­San-​­Jose, Retolaza, & ­Gutierrez-​­Goiria, 2011). Different denominations, such as ethical, alternative, and social banks, are frequently used to emphasize slightly different aspects of the innovative models that v­ alue-​­based banking use to achieve this common end of contributing to sustainable development (­Da S­ ilva-​­Inácio & Delai, 2022; Relano, 2015; Weber & Remer, 2011). See also Financial Inclusion, Integrated Value, Triple Bottom Line, and Social Finance.

References Da S­ ilva-​­Inácio, L., & Delai, I. (­2022). Sustainable banking: A systematic review of concepts and measurements. Environment, Development and Sustainability, 24, ­1–​­39. Global Alliance for Banking on Values, GAVB. (­2022, May 21). Banking on values. A movement of leading ­purpose-​­driven banks. https://­w ww.gabv.org/­w pcontent/­ uploads/­2022/­02/­Principles_def.pdf ­Kocornik-​­Mina, A., ­Bastida-​­Vialcanet, R., & Eguiguren Huerta, M. (­2021). Social impact of v­ alue-​­based banking: Best practises and a continuity framework. Sustainability, 7681. Relano, F. (­2015). Disambiguating the concept of social banking. ACRN Oxford Journal of Finance and Risks Perspectives, ­48–​­62. ­San-​­Jose, L., Retolaza, J. L., & G ­ utierrez-​­Goiria, J. (­2011). Are ethical banks different? A comparative analysis using the radical affinity index. Journal of Business Ethics, 100(­1), ­151–​­173. Weber, O., & Remer, S. (­2011). Social Banks and de Future of Sustainable Finance. New York, NY: Routledge. World Bank. (­ 2022). Financial Inclusion. https://­w ww.worldbank.org/­en/­topic/ ­f inancialinclusion

Appendix – List of International Organizations in Sustainable Finance

Organization Name

Acronym

Web Portal

Bank for International Settlements Breakthrough Energy Carbon Disclosure Project Carbon Tracker Climate Action Tracker Climate Disclosure Standards Board Climate Policy Initiative Coalition of Environmentally Responsible Economies DivestInvest Ellen MacArthur Foundation European Financial Reporting Advisory Group European Institute of Innovation and Technology, Climate-Knowledge and Innovation Community (KIC) European Sustainable Investment Forum Glasgow Financial Alliance for Net Zero Global Impact Investing Network

BIS

https://www.bis.org

BE CDP

https://www.breakthroughenergy.org https://www.cdp.net/en

CT CAT

https://carbontracker.org https://climateactiontracker.org

CDSB

https://www.cdsb.net

CPI

https://www.climatepolicyinitiative.org

CERES

https://www.ceres.org

https://www.divestinvest.org https://ellenmacarthurfoundation.org/ EFRAG

https://www.efrag.org

EIT https://www.climate-kic.org ClimateKIC

EUROSIF

https://www.eurosif.org

GFANZ

https://www.gfanzero.com

GIIN

https://thegiin.org (Continued )

258  Appendix – International Organizations in Sustainable Finance Organization Name

Acronym

Web Portal

Global Reporting Initiative

GRI

https://www.globalreporting.org

Global Sustainability Standards Board Global Sustainable Investment Alliance Green Digital Finance Alliance Greenhouse Gas Protocol Institutional Investors Group on Climate Change Intergovernmental Panel on Climate Change Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services International Capital Market Association International Energy Agency International Finance Corporation-Green Banking Academy (World Bank Group) International Financial Reporting Standards Foundation International Monetary Fund International Organization for Standardization ISO/TC 322 Sustainable Finance-Technical Committee International Organization of Securities Commissions International Renewable Energy Agency International Resource Panel International Sustainability Standards Board

GSSB

https://www.globalreporting.org

GSIA

http://www.gsi-alliance.org

GDFA

https://www.greendigitalfinancealliance.org

GHGP

https://ghgprotocol.org

IIGCC

https://www.iigcc.org

IPCC

https://www.ipcc.ch

IPBES

https://ipbes.net

ICMA

https://www.icmagroup.org

IEA

https://www.iea.org

IFC-GBAC https://www.ifc.org

IFRS https://www.ifrs.org Foundation https://www.integratedreporting.org https://www.valuereportingfoundation.org IMF https://www.imf.org/en/Topics/SDG ISO ISO/TC 322

https://www.iso.org/ https://www.iso.org/committee/7203746. html

IOSCO

https://www.iosco.org

IRENA

https://www.irena.org

IRP

https://www.resourcepanel.org/

ISSB

https://www.ifrs.org/groups/ international-sustainability-standardsboard/

Appendix – International Organizations in Sustainable Finance  259 Organization Name

Acronym

Web Portal

Loan Market Association

LMA

https://www.lma.eu.com

Loan Syndications and Trading Association Net Zero Asset Managers Initiative Net-Zero Banking Alliance Net-Zero Insurance Alliance Network of Central Banks and Supervisors for Greening the Financial System Organisation for Economic Cooperation and Development Partnership for Carbon Accounting Financials Platform on Sustainable Finance

LSTA

https://www.lsta.org

NZAM

https://www.netzeroassetmanagers.org

NZBA

NGFS

https://www.unepfi.org/ net-zero-banking/ https://www.unepfi.org/ net-zero-insurance/ https://www.ngfs.net/en

OECD

https://www.oecd.org

PCAF

https://carbonaccountingf inancials.com

PSF

SBTi

https://finance.ec.europa.eu/sustainablefinance/overview-sustainable-finance/ platform-sustainable-finance_en https://unfccc.int/climate-action/ race-to-zero-campaign#eq-1 https://sciencebasedtargets.org

SDSN

https://sdgcompass.org https://www.unsdsn.org

SIF

https://www.sustainableinsuranceforum.org

TCFD

https://www.fsb-tcfd.org

TNFD

https://tnfd.global

TPI

https://www.transitionpathwayinitiative.org

UN UN SDGs

https://www.un.org/en/ https://sdgs.un.org

Race to Zero Campaign Science Based Targets initiative SDG Compass Sustainable Development Solutions Network Sustainable Insurance Forum Task Force on Climate-related Financial Disclosures Task Force on Naturerelated Financial Disclosures Transition Pathway Initiative United Nations (United Nations Sustainable Development Goals)

NZIA

(Continued )

260  Appendix – International Organizations in Sustainable Finance Organization Name

Acronym

United Nations UNEP FI Environment Programme Finance Initiative United Nations Framework Convention on Climate Change United Nations Principles for Responsible Investment World Business Council for Sustainable Development World Economic Forum World Resources Institute World Wildlife Fund

Web Portal https://www.unepfi.org

UNFCCC

https://unfccc.int

UNPRI

https://www.unpri.org

WBCSD

https://www.wbcsd.org

WEF

https://www.weforum.org

WRI

https://www.wri.org

WWF

https://www.worldwildlife.org

Notes on Contributors

Carlos Ballesteros is the director of the Social Impact Chair at Universidad Pontificia Comillas – ICADE – and the academic director of the postgraduate program in Social Impact Measurement and Management. He also coordinates the Service-Learning initiative for undergraduate students at the same business school. He has been teaching for almost 30 years. He holds a doctorate in economics and business as well as a master’s in social economy and a postgraduate in social innovation and leadership. He has been visiting professor at several universities, both in Europe and Latin America, and he is a well-known keynote speaker. He has written several books and papers. Mercedes Barrachina studied BSc and MSc in Telecommunications Engineering and developed her master’s thesis at the German Aerospace Center in Germany. She also completed a BSc in Economics, she has completed her PhD, and she is pending to defend the thesis. As SAP Innovation lead at IBM, she has led different technological projects in many different countries, such as Japan, United Arab Emirates, Russia, Peru, Switzerland, and France. She also has a strong background working with Big Data and developing neural networks for predicting purposes. She has attended different courses related to Data Science, Machine Learning, Blockchain, and Innovation in prestigious international schools (IE Business School (Spain), MIT (Boston, USA), and Berkeley (San Francisco, USA). Hugo Benedetti is an assistant professor and the academic director of the Executive Master’s in Finance and Investments Program at ESE Business School, Universidad de Los Andes, Chile. His research focuses on entrepreneurial finance, venture capital, and FinTech, particularly blockchain technology and blockchain-enabled assets. The Economist, Bloomberg, The Wall Street Journal, Nasdaq, and several crypto-industry publications have featured his research. Professor Benedetti often delivers workshops on entrepreneurial finance, venture capital, and FinTech to incubators, angel investor networks, and venture capital funds. He has advised and mentored several FinTech and blockchain projects. Before joining academia,

262  Notes on Contributors

he co-founded a financial advisory boutique and held leadership roles in corporate finance, financial advisory, and venture capital at world-class firms. Professor Benedetti is a Fulbright scholar and received a PhD in finance from Boston College. Marina Brogi is a full professor of International Banking and Capital Markets at Sapienza University of Rome. She is the author of numerous publications on corporate governance, banking, and capital markets. Complementary to her academic experience, Prof. Brogi serves as an independent non-executive director on the Boards of listed and unlisted companies. From January 2014 to June 2016, she was one of the five top-ranking independent academics appointed among the 30 members who make up the Securities and Markets Stakeholder Group of the European Securities and Markets Authority (ESMA). Since 2022, she has been a member of the CFA Institute Systemic Risk Council – an independent international body founded in the USA in 2012 made up of 17 former government officials, former members of the authorities, and internationally recognized experts. Yolanda Cotelo-Ouréns is a researcher FPI at Money in Transformation: Actors, Processes and Social Effects of Financial Innovation – MONFIN, a project of the Ministry of Science and Innovation at the University of A Coruña and a PhD candidate in Economic Analysis and Business Strategy at the same university. Her research focuses on social banking, corporate social responsibility, financial innovation, and financial inclusion. She develops wide research activities, including presentations at international conferences and dissemination in social media. She holds a bachelor’s degree in Political Science and Administration from the University of Santiago de Compostela (Spain), a master’s degree in Economics from the Complutense University of Madrid (Spain), and a postgraduate degree in Sustainability and Social Innovation from the University of A Coruña. Diego S. Crescentino  is a lecturer in International Relations and a researcher at the Grupo de Estudios de Relaciones Internacionales (GERIUAM, Spain) and Labmundo (IESP-UERJ, Brazil). He holds a bachelor’s degree in Political Science and Public Administration (Universidad Nacional de Cuyo, Argentina), a master’s degree in International Relations and African Studies (Universidad Autónoma de Madrid, Spain), and a PhD in History of International Relations (Universidad Autónoma de Madrid with an international mention from Columbia University in the City of New York). He has published, carried out research stays, and participated in scientific conferences and seminars in several countries in the Americas and Europe. His research interests are the theory and history of international relations, development studies, foreign policy analysis, identity and resistance studies, and Brazilian studies. He is Editor-in-Chief of Relaciones Internacionales (1699–3950).

Notes on Contributors  263

Luis A. Crescentino is a business analyst at Lexmark International. He has more than ten years of experience working on digital transformation in global companies in the IT and publishing industries. He holds a bachelor’s degree in Political Studies (Sciences Po Rennes, France), a master’s degree in IT applications and Management (Université Sorbonne-Nouvelle, France), and a master’s degree in International Relations (Université Panthéon-Sorbonne, France). He participates in NPOs that aim to limit climate change and the dependency of the economy on fossil fuels. His research interests are environmental issues, energy, climate change, CSR, ICT sustainability, and Free Software. Elena Escrig-Olmedo  (SOGRES group) holds a PhD in Sustainability of the Organizations (2013) from the University Jaume I. Currently, she works as an Associate Professor at the Finance and Accounting Department of the University Jaume I, Spain. Her research focuses on Sustainable Finance, Corporate Sustainability Assessment, Corporate Social Responsibility Management, Sustainability Risk Analysis, Sustainable Business Models, Sustainability Reporting, and Circular Economy. She has published scientific papers in high-impact international academic journals and is involved in several externally funded research projects such as H2020 Sustainable Market Actors for Responsible Trade (SMART) (2016–2020) and HE ToNoWaste Project (2022–2026), funded by the EU’s framework programs. Pablo Esteban-Sánchez  is an associate lecturer at UNED accredited by National Agency for Quality Assessment and Accreditation. He holds a PhD (cum laude) in Corporate Finance (Universidad Complutense) and Bachelor of Economics and Business Sciences (University of Deusto). He teaches subjects related to sustainable finance, ESG integration, and impact investing. He is a research associate at UNED–FINRES. This research group works on strategies and tools to manage social, ethical, environmental, and good governance aspects in organizations in order to achieve the needs of society and the 2030 agenda for SDGs. His interest is focused on studying the relevant role that finance plays in the transition to an environmentally and socially sustainable economy. He has published several academic papers in Q1 and Q2 JCR journals. He is an ESG and sustainability Senior Expert at SpainSif, a Spanish multi-stakeholder platform for sustainable investments and finance development. He also has collaborations with UNEP FI. His professional background has also been developed in international development cooperation and banking in Latin America: 25-year experience as a Senior Representative in Europe of Banco de la Provincia of Buenos Aires (1997–2022). He is Vice President of the Spanish Association of Delegates and Foreign Banks Representatives (AERBE). María Ángeles Fernández-Izquierdo (SOGRES group) holds a PhD in Economics from the Valencia University. She is a Full Professor in finance in the

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Department of Finance and Accounting at the University Jaume I. She is a member of the Spanish Institute of Financial Analysts. She coordinates the research group SoGReS-MF. Her research focuses on stock markets and their derivatives, CSR, and socially responsible investing, and she has published scientific papers in high-impact international academic journals. She is involved in several externally funded research projects, such as H2020 Sustainable Market Actors for Responsible Trade (SMART) (2016–2020) and HE ToNoWaste Project (2022–2026), funded by the EU’s framework programs. Beatriz Fernández-Olit is a lecturer of Applied Economics at the University of Alcalá (Madrid, Spain). She holds a PhD in Economics from the National University of Distance Education (UNED). She is an expert in corporate social responsibility. She is also a researcher at the Institute of Economic and Social Analysis of the UAH and member of the research groups SOCIRES – “Social Responsibility and Sustainability” (UAH) and FINRES – “Sustainable Finance and Social Responsibility” (UNED). Before fully entering academia, she has worked in the social sector and in development cooperation, as an advisor to socially responsible investors, as a representative of the sustainability rating agency EIRIS. Currently, her research focuses on financial exclusion, socially responsible finance, CSR and its application to the banking sector, and business and sustainable development. Idoya Ferrero-Ferrero (SOGRES group) holds a PhD in Financial Economics and Accounting (2012) from the University Jaume I. Currently, she works as an Associate Professor at the Finance and Accounting Department of the University Jaume I, Spain. Her current research interest is focused on corporate governance, sustainability assessment, and reporting. She has published scientific papers in high-impact international academic journals and is involved in several externally funded research projects such as H2020 Sustainable Market Actors for Responsible Trade (SMART) (2016–2020) and HE ToNoWaste Project (2022–2026), funded by the EU’s framework programs. Timo Gerres  received his MSc in Systems Engineering, Policy Analysis, and Management from TU Delft (NL) in 2014. After working for 2.5 years as a project manager for the transmission system operator TenneT in Germany, he joined the Instituto de Investigación Tecnológica of Universidad Pontificia Comillas as a Research Assistant. In January 2022, he defended his PhD thesis, titled “Understanding the implications of industrial decarbonization: a multidisciplinary approach towards the transition of the basic materials industry and its impact on our energy systems.” As a member of the Chair for Low Carbon Hydrogen Studies, his ongoing research and consultancy projects focus on the technical, economic, and regulatory dimensions of the transition and especially its role in the decarbonization of the emission-intensive basic materials sector.

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José Vicente Gisbert-Navarro (SOGRES group) is an agricultural engineer from the Polytechnic University of Valencia, Specialization in Agrofood Industries. José Vicente Gisbert-Navarro has a master’s degree in Health and Safety at Work and is an expert in Production Management and Water and Carbon Footprints Assessment. With 30 years of experience in the production sector, he has worked as Director of the Engineering Department at AINIA, has been CEO at ANECOOP Frankfurt, SAT VALLSAT, and Tilla Huelva Co., as Deputy General Director at Leonardo Ramón S.A., and Chief Operating Officer at Frutas Franch S.A. and Agrios el Carril. Currently, he is a researcher at iWAYS Project. He is also a member of Sustainability of Organizations and Social Responsibility Management-Financial Markets Research Group. Concepción Gómez de Liaño is the chief operating officer for Spain at Credit Suisse Wealth Management. She is a member of the Spanish Management Committee, the European Operations Committee, and the European Risk Committees. She believes that innovation, sound corporate governance, and the promotion of diversity are fundamental for the transformation that the financial sector needs. Member of the Spanish Institute of Directors (ICA), Credit Suisse’s Diversity Committee, and a founder member of the Executive Committee during six years of EJE&CON (Asociación Española de Ejecutivas y Consejeras), which promotes gender- and age-neutral talent. Convinced of the need to bring companies and universities closer together, she has been combining her professional and teaching facets for 18 years at Universidad Pontificia de Comillas. She holds a degree in Business Administration from ICADE, a degree in Law from UCLM, and has completed executive development programs at ESADE and UCLA. Ana Jurado graduated in Law and Diploma in Business (E-1) from the Universidad Pontificias de Comillas. She has developed her professional career in the financial sector as director of marketing and communication at Tressis since its inception and previously at Banco Santander in specialized areas of marketing, products, and services. She is a doctoral candidate in the DBA program (Doctorate in Business Administration) at ICADE (Universidad Pontificia de Comillas), preparing a research thesis on factors that inf luence the adoption of socially responsible investment by private banking clients. Patricia Kanashiro (PhD, The George Washington University) is a consultant in sustainability and a recognized author in sustainability strategy. Previously, she was a tenured Associate Professor at Loyola University Maryland and served in sustainability-related roles at ABN AMRO Bank, Institutional Shareholder Services (ISS), and the United Nations – International Labour Organization (ILO). Dr. Kanashiro is an engaged member of her professional association: She received an Outstanding Service Award from the Academy

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of Management – Organization and the Natural Environment (ONE) division and is an editorial board member of the Organization & Environment journal. She received a two-year Fulbright scholarship to pursue graduate education in the US and remains committed to promoting her Latinx heritage through board volunteering service. She is a sansei (third generation from Japan) born in Sao Paulo, Brazil, and lives in Bethesda, MD, with her husband and two boys. Valentina Lagasio is Assistant Professor in Financial Markets and Institutions at the Department of Management, Sapienza University of Rome. Her research interests are mainly focused on banking and financial intermediation, capital markets and artificial intelligence. She authored several publications in the field of banking and corporate governance. Antonio Madera del Pozo  is an economist, holds a PhD in Financial Economics from the Universidad Pontificia Comillas of Madrid, and is winner of the Ramón de San Pedro Prize for the best doctoral thesis defended in the faculties of Economics and Law at the Universidad Pontificia Comillas. He also holds a master’s degree in Research in Economics and a master’s degree in Finance, both from ICADE and a master’s degree in International Trade from ESIC. He currently works as Head of sovereign and financial institutions ratings at Ethifinance ratings and is a lecturer at both the Universidad Pontificia Comillas – ICADE – and the Universidad Europea de Madrid. Previously, he worked in the risk department of Banco Cooperativo Español and Caja Madrid. He is a regular contributor to the economic press, as well as to academic journals and conferences. Karin Martin Bujack  holds a PhD in Finance. She also holds a master’s degree in Banking and Financial Consulting. After 15 years of working in the financial markets, she is currently a lecturer and researcher in Finance at ICADE, Universidad Pontificia de Comillas (Madrid), where she teaches courses in Finance. Her current research lines include derivatives markets, the market efficiency of financial assets, credit risk, green hydrogen, and socially responsible investment, and publishing in international journals and conference proceedings on these topics. She is also a reviewer of Finance Research Letters and SAGE Open. Olga Moreno de Tejada holds a master’s in International Relations: Economics, Politics, and Law from Universidad Pontificia Comillas ICADE, where she investigated the impact of financial inclusion in poverty reduction. She has recently achieved the CFA certificate in ESG Investing and holds a BA in Politics, Philosophy, and Economics from the University of Exeter, UK. Her first joint publication was in 2021, which focused on institutional quality and the financial inclusion–poverty alleviation link. She works as a consultant at the Inter-American Development Bank’s Office of Outreach and Partnerships, where she contributes to the strengthening of strategic alliances with European member countries. Olga has worked for the Permanent Mission

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of Spain to the United Nations in New York as an advisor on development and security issues in conflict-prone countries. She has been a volunteer in Kenya, Guatemala, Paraguay, and Greece, focusing on vulnerable populations, education, health, and the European refugee crisis. María Jesús Muñoz-Torres (SOGRES group) holds a PhD in agricultural economics from the Polytechnic University of Valencia (1994). She is a Professor in finance in the Department of Finance and Accounting at the University Jaume I. Her research currently focuses on CSR valuation, socially responsible investing, sustainable efficiency of public financial support to companies, and Sustainable Business Models. She has published scientific papers in high-impact international academic journals and is involved in several externally funded research projects such as H2020 Sustainable Market Actors for Responsible Trade (SMART) (2016–2020) and HE ToNoWaste Project (2022–2026), funded by the EU’s framework programs. Talha Ocal  is a financial sector consultant in international development with 18+ years of experience and a proven track record in developing countries. Working with clients, including the World Bank and Asian Development Bank, he led international technical assistance projects on public sector capacity building, regulatory framework formulation, and policy guidance for the financial sector. His recent assignments involve the evaluation of various climate finance and environmental sustainability projects in the financial sector. He previously worked at Turkey’s financial regulatory and supervisory authority, where he performed the examinations of financial institutions as a sworn-in bank examiner. Talha holds a PhD degree in finance from Istanbul University (Turkey). He previously earned a master’s in business administration degree at Georgetown University (the US) and a bachelor’s degree in finance at Ankara University (Turkey). He also owns the financial risk manager (FRM) designation of the Global Association of Risk Professionals. Paraskevas Paraskevas is an equity derivatives and execution trader counting with 17 years of experience within the financial sector industry. His main focus has been on exotic derivatives as well as vanilla options, structuring, hedging, and execution. As a trader, his main tasks include all the aspects related to derivative and cash instruments, such as pricing and hedging. Also, he is a part-time PhD candidate at ICADE University investigating the relation between ESG metrics and Idiosyncratic Risk. In parallel, he gives periodic seminars and classes to the ICADE University related to Option Derivatives and the Risks Involved and the Greeks. He holds an MSc in Economics and Financial Economics from the University of Nottingham (UK) and a BA(Hons) in Business and Financial Economics from Staffordshire University (UK). He has great enthusiasm for ESG issues, accomplishing a certification from the University of Pompeu Fabra in “Sustainable Investments.”

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Eva Pardo is a lecturer in Applied Economics at Universidad Nacional de Educación a Distancia (UNED) and a researcher at the UNED research group on Sustainable Finance and Social Responsibility (UNED-FINRES). Her recent research is focused on the fields of corporate social responsibility, ESG disclosure, socially responsible investment, and circular economy. She teaches various postgraduate courses in these areas, including the UNED-UJI inter-university official master’s in sustainability and CSR, PhD (cum laude) in Economics and Business Administration (UNED), Expert Degree in CSR (UNED), and Bachelor of Economics and Business Sciences (Universidad San Pablo-CEU). Previously, she worked at the Central American Bank for Economic Integration (CABEI), where, among other functions, she participated as a technical assistant to the Executive President and Vice-president in the credit committee and in the design and implementation of the impact assessment framework. Braulio Pareja is Head of Academic Research at Impact Bridge and Lecturer of Economics and Business Ethics at Universidad Pontificia Comillas (ICAI-ICADE) and the University of San Diego. After he finished his degree in History at Universidad de Salamanca, he studied for a master’s in International Development Cooperation at Universidad Pontificia Comillas. When he finished it in 2012, he was awarded an FPU research grant to study for his PhD within the Chair of Economics and Business Ethics at Universidad Pontificia Comillas in Madrid. After studying for a master’s in Business and Economic Investigations, he read his doctoral Cum Laude thesis “The Financing of the Social Entrepreneurship. The profile of the impact investor and his behavior in making investment decisions, An approach from Behavioral Finance.” Since 2017, he investigates social entrepreneurship and impact investing and is a lecturer of Sustainability and Business Ethics in a number of degrees and master’s at Universidad Pontificia Comillas and the University of San Diego. In 2012, he founded Socialemprende, the Social Entrepreneurs Spanish Association. Other experiences include social impact measurement consultancy for a Spanish NGO in Nairobi (Kenia). Willem Pieter Pauw is a researcher at the Technology, Innovation & Society (TIS) group at the Eindhoven University of Technology and provides policy advice on climate finance and international climate policy. He published numerous scientific papers, book chapters, reports, and policy papers, among others, on private finance, climate finance, climate fairness, and Nationally Determined Contributions. Pieter Pauw led the development of the online data tool NDC Explorer and was a lead chapter author of 2016, 2020, and 2021 UNEP Adaptation Gap Reports. He wrote his PhD on private sector financing of climate change adaptation at the Copernicus Institute of Sustainable Development of the Utrecht University and is also an adj. ass. Professor here. Pieter Pauw is also an associate of the

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Stockholm Environment Institute (SEI) and Clingendael Institute. Previously, he worked, among others, at the German Development Institute (DIE) and the Frankfurt School-UNEP Collaborating Centre for Climate and Sustainable Energy Finance. Juana Maria Rivera-Lirio  holds a PhD in Business Management (2007) from the University Jaume I. Currently, she works as an Associate Professor at the Finance and Accounting Department of the University Jaume I, Spain. Her current research interest is focused on sustainable finance, corporate social responsibility management, and sustainability assessment. She has published scientific papers in high-impact international academic journals and is involved in several externally funded research projects such as H2020 Sustainable Market Actors for Responsible Trade (SMART) (2016–2020) and HE ToNoWaste Project (2022–2026), funded by the EU’s framework programs. F. Dilvin Taşkın is a professor of finance at Yasar University, Turkey. She received her PhD in 2011 at Dokuz Eylul University. Her research interests include behavioral finance, energy economics, sustainability, financial intermediaries, and corporate governance. She is a scientific member of various organizations and serves as the manager of the Financial Economics Association, which has around 40.000 members all around the world. She has several publications in national and esteemed international journals like Energy Economics, Environmental Science and Pollution Research, Energy, etc. Carlos Vargas is a professor of Finance at EGADE Business School at Tecnológico de Monterrey and a Sustainable Finance and Environmental Economics Instructor at Harvard University DCE. He has experience in sustainable finance, renewable energy, financial analysis, business planning, development economics, and real estate finance. Vargas was formerly CFO for New Evolution Ventures Mexico and COO for the Vertex Companies, USA, where he helped manage and consolidate the energy services portfolio to gain increased revenue in the first year. He managed the real estate investment portfolio at BBVA Asset Management Mexico. Vargas has written financial editorials for inf luential newspapers and has been invited to guest lecture at several universities in the United States, Europe, and Latin America. Vargas holds a PhD from the University of Zurich, Switzerland, an MBA from IPADE Business School in Mexico, and an ALM from Harvard Extension School. Tiina Wikström is a senior lecturer and a postdoctoral researcher at Laurea University of Applied Sciences, Finland. She completed her Indigenous sustainability and nature wellness-related PhD at the University of Helsinki in 2020, creating a new concept Ecologue®, focusing on the holistic and sustainable nature relationship with circles and cycles. She is a member of SUCH (Sustainable Change Research Network), Planetary

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Health Alliance Harvard, and Inner Development Goals Initiative. She has attended many international seminars and published widely, and in spring 2022, she presented her PhD and postdoctoral research at Ecological Spiritualities Conference at Harvard, USA. She has also participated in several EU projects as a researcher, and she teaches, for example, sustainability, circularity, nature wellness, interculturality, and multi-professionality-related topics at Laurea and partner Universities. Rodrigo Zeidan is a professor of Practice of Business and Finance at NYU Shanghai and an Affiliate Professor at Fundacao Dom Cabral. Professor Zeidan is the author of Economics of Global Business (MIT Press), The General Model of Working Capital Management (Palgrave Macmillan), and five other books. His research has also been published in some of the top journals in finance and economics, such as the Journal of Corporate Finance, Nature Sustainability, Energy Economics, Harvard Business Review, International Journal of Production Economics, and Journal of Business Ethics. His more recent research focuses on Sustainable Finance alongside issues in Corporate Finance and Industrial Economics. Rodrigo has a biweekly column at Folha de S. Paulo, the largest Brazilian newspaper. He has written extensively for international media outlets, including the New York New Times, CNN, the World Economic Forum, Bloomberg, and Americas Quarterly. Rodrigo is also Associate Editor of the Journal of Economic Surveys, Journal of Sustainable Finance & Investment, and the Brazilian Review of Finance.