Sustainable Finance

Abstract

The financial ecosystem exists to channel societal savings efficiently to productive investments. What if those investments have the unfortunate side effect of polluting waterways, emitting toxic substances or disturbing fragile ecosystems? What if the products created by those investments hasten disease and death in customers, employees and communities? The efficiency of capital allocation and the persistence of financial return requires the long run sustainability of the natural and human ecosystems within which economic activity occurs. We revisit the old concept of the circular flow of savings and examine the nature of the financial ecosystem and its role in allocating capital, often beneficially owned by the citizen investor, to its highest-valued uses, matching savers and investors, and crucially, generating accurate signals of scarcity in the face of planetary boundaries. We discuss examples of unintended consequences in the circular flow of savings. We mine the suite of environmental valuation methods upon which social project appraisal depends to broaden the basis for decision-making beyond financial return in the context of impact measurement. We draw parallels between natural ecosystems and the financial one and use insights from the fields of ecology and cybernetics to propose appropriate nodes to identify risks and opportunities that the financial system might feasibly address.