Sustainability challenges and the ambivalent role of the financial sector

Abstract

Over the past few decades, the financial sector has sought to positively contributing to sustainable development through innovative products and services. However, in its business-as-usual the financial sector continues to contribute to military interventions, environmental degradation, growing disparity of incomes, de-coupling of finance and real economy, and global economic crises. This article presents a framework of how to appraise the positive and negative contributions of the financial sector to sustainable development, from a systems perspective. On this base, the article proposes an approach for designing effective finance interventions to complex sustainability problems. Based on similar experiences from studies on water governance and technology development, the approach proposes a participatory procedure, first, to identify the role of the financial sector in complex sustainability problem constellations and, second, to develop intervention strategies for financial intermediaries interested in shifting their role and mitigating the identified problems. We discuss challenges of establishing causal links within the problem constellation, which is a prerequisite for successful intervention design, as well as in the cause–effect structure of the interventions themselves. The article concludes with outlining future research needs.

Keywords:

• sustainable investing
• sustainability challenges
• complexity
• impact investment

Acknowledgements

The author would like to thank two anonymous reviewers, as well as the participants of the International Workshop on “The Financial Sector's Impact on Sustainable Development” (Waterloo, Canada; October 4–5, 2012) for helpful comments on previous versions of this article.

Notes

1. The term “investment” is used here in the meaning of providing funds from one party to another with the expectation of gain; gain does often, but not always, mean monetary gain. We focus here on investments that are made through the financial sector, i.e. through intermediaries, including banks, credit unions, lenders, and insurance companies. The role of the financial sector is in this article focuses on investment decisions.