Current extensive and in-depth challenges are shaping the way modern economic systems work and establishing a novel approach to the analysis of economic phenomena. Environmental and social risks in assessing general transaction risk are growing because of the impact and the role of such factors as increasing climate change, aging of societies, social exclusion and polarization, changes in the model of consumption, and globalization, as well as the automation of industrial processes. The criteria for assessing the risk of transactions change under the influence of economic changes. This is clear in the conditions of āgreeningā the economy and social inclusion. These two phenomena, referring to the environmental and social pillars of sustainable development, strongly weigh on the necessity of extending the risk assessment criteria used by financial institutions for ESG risk (environmental, social, corporate governance). The demand for extending the risk assessment methodology with ESG components is emphasized by the Environmental Program Financial Initiative (UNEP FI), and the state of implementation of this postulate by financial institutions, depending on the country and institutions, is still at various levels of development. Investigating the economy moving on a greener path, the sharing economy, industry 4.0, and banking 3.0 are just preferred contexts of these changes that are setting the stage for a fresh look at the economy and the ways it is financed, broadly considered. In the context of environmental and social challenges that are continuously affecting modern states, the sustainability concept is receiving increasing recognition as a means to counter the effects of negative externalities.
One of the conditions necessary for successful implementation of sustainable development is adequate financing. Thus, financial markets face challenges in matching financial products and services to the needs of sustainable development. An active financial sector, distributing capital and managing associated risk, is essential for a well-functioning economy. The conventional motivation of the financial sector is the one-dimensional goal of maximizing profits. The neoclassical approach to finance, based on private property theory, discounts environmental and social considerations. A strict neoclassical finance perspective holds that social responsibility is outside the duties of directors of corporations and should be solely the concern of the government. The approach to finance based on the efficient market hypothesis and the maximization of cash-flow generating processes neglects the interface between the field and sustainable development. Yet there is a desire and an expectation expressed by people, governments and financial markets that contemporary companies are human agents satisfying economic, environmental and social needs.
The concept of sustainable finance addresses the need for a pioneering approach to financing sustainable development. Sustainable finance includes among other factors: development finance, environmental finance, carbon finance, socially responsible finance, green finance, ethical finance, and microfinance. Moreover, contemporary changes in the financial landscape are not limited to the nature and availability of financial capital, because finance is, in fact, the key to solving social and environmental problems. Therefore, representatives of both classical and neoclassical schools of economic thought are now considering factors such as value for money and āsmartā finance that transcends the parameters of conventional finance. The recent global financial crisis that resulted from the credit crunch in 2007 forced financial markets and companies to rethink systemic risk exposure. As a result, the importance of the integration of ESG factors and sustainable development with corporate and investment decisions is even more critical todayāthis is not a future matter. Companies, financial market entities, and regulators are asking new questions, looking for new threats, and searching for new opportunities in the markets of the future. There are innovative approaches to creating sustainable shareholder value that require companies and investors to adopt a systemic and long-term vision and to understand the financial significance of ESG factors within the full spectrum of threats and opportunities.
Sustainable finance is characterized by a different approach to traditional financeāthe role and function of finance, profit, and riskāas well as a different approach to the awareness of economic value and benefits. Novel economic, social, and environmental perspectives that currently characterize sustainable finance allow for adequate adaptation of financial systems and the financial sphere to new challenges. The financial sphere reacts by responding to new dilemmas and challenges with a time lag in the real sphere. The financial changes that concern the macro, mezzo, and micro scale in the functional, instrumental, and institutional dimensions are considered. The transformation processes are carried out in all sub-disciplines of finance. In the area of āābanking, the sustainability concept has found expression in green and responsible banking. The offer of green banking services supports the process of adaptation and transformation towards the green economy, and responsible banking also implements the assumptions of the concept of social inclusion and respects and promotes ethical standards. The perspective of public finance concerns primarily the impact on pro-social and pro-market attitudes of market participants through tax policy instruments (green taxes) and, more broadly, fiscal policy. However, the redistributive function of public finances should not be overlooked here in the context of the impact on the social inclusion process and the leveling of income inequalities. Sustainable finances are also perceptible in the finances of enterprises, in entrepreneurs making decisions about socially responsible investments or pro-environmental investments and implementing specific consumption patterns. At the micro level, the demands of newly sustainable finances are reshaping the concept of microfinance as well as personal and behavioral finance.
Dissemination of the sustainable finance concept takes place through institutions and instruments used within the financial market. Therefore, respecting the demands of sustainable finance is also a challenge from an institutional economics perspective. The organization of the financial sphere, including the financial system, to enable it to adapt to the requirements of sustainable finance necessitates a systematic and ongoing process of change and of structural and organizational quality; this may involve extensive changes in institutional culture and a rethink of operational mission. The execution of these changes should be orderly and controlled, which is effected by strict regulation. Regulations are essential primarily for the shaping and supervision of the supply of financial products and services, and the security and stability of the banking and financial sector, depending on the quality of risk management (including the ESG risk approach). The ESG risk has relevance to financial institutions. Finansinspektionenās report highlights the importance of banks being more open so that their customers, investors, counterparts, and other stakeholders can form a more definite opinion of how the banking sector takes account of environmental and sustainability issues in its lending procedures. Apart from the environmental factors, social and corporate governance issues also impose considerable risks and opportunities for the business sector across the world.
Expectations of the financial sphere and its role are changing over time. The process of adjusting to the sustainable finance paradigm is long-lasting and requires compromise. A proper understanding of the need for change by all market participants and cooperation between the public, private, and third sectors is key to its smooth implementation, as each of these sectors has a significant impact on the success and dissemination of the rules and principles of sustainable finance. Sustainable finance, in turn, is an essential element in the implementation of postulates of development and sustainable growth, and in this context, they act on the indicators of goal achievement in these two areas. The interdependence and adequacy of the real sphere and the financial sphere molding development and sustainable growth is, therefore, a critical factor for the success of both concepts and a strategically crucial factor from the perspective of ensuring the quality of states, economies, and societies on a global scale.
Considering contemporary development trends in finance and challenges facing financial markets in the conditions of sustainable growth and development, we have tried to comprehensively present phenomena and problems focusing on sustainable finances, including markets and financial systems. The next thirteen chapters address the questions driving a growing body of literature to elaborate theoretical and practical achievements showing the relationship between the financial market and the processes of growth and development, with an emphasis on growth and sustainable development. The concept of green, sustainable, responsible finances in terms of supply and demand is approximated and reviewed. The institutional and legal dimensions of sustainable finances is defined, identifying essential initiatives and institutions supporting the concept of sustainable finance. The chapters analyze the role of finances in financing environmental protection measures, the importance of socially responsible investments in the economy, and the role of sustainable finances in minimizing the phenomenon of financial and social exclusion. The increasing demand for green and responsible banking in the context of environmental risk management and shaping the offer of banking products supporting sustainable development are discussed. Attention is paid to the category of the ecological, financial market, with emphasis on the instruments of this market. The importance of public finances in stimulating the processes of sustainable development, especially with the use of tax policy instruments, is discussed.
The book covers the cognitive gap concerning the financing of sustainable development and shows trends in sustainable finance and sustainable financial markets. Each chapter begins with a brief summary and ends with a conclusion. Chapter 1 includes an introduction. Chapter 2 aims to draw attention to the significant gap in the existing research, along with the issues of sustainable development. The concept of sustainable development, if placed in an economic category, needs much attention, but seeing from the perspective of the discipline of finance, the latter is unsatisfactory, with questions left unanswered. The ranking problem, its strategic dimension, and the amount of financial resources distributed and disbursed to focus on sustainable development, and the identification of financial phenomena included in this category, is seen as a priority. Chapter 3 considers the role that banks play in society and points out that they can significantly influence sustainable development goals. Many banks in the United States and Europe have begun to adapt their financial policies for investments in environmentally sustainable businesses. The authors analyze the role of green banking in the implementation of environmental sustainability, identify green financial products, and point out the role of green banking networks. Chapter 4 aims at highlighting the key relationships between sustainability, innovation, and efficiency. First, it examines the concept of sustainability, looking at the neoclassical literature on sustainability and its relationship with innovation. Then, it analyzes different theoretical approaches and discusses the policy issues for sustainability where innovation, natural capital, human capital, population, ...