1 - Introduction to sustainable finance

Sustainable finance refers to the set of financial practices that incorporate environmental, social, and governance (ESG) considerations into investment decisions. Its goal is to align financial flows with long-term sustainable development by assessing how ESG factors influence economic activity and how financial actors can influence firms and markets. The field is relatively young: its concepts, data, and regulations are still evolving, and many definitions remain contested.

1. Historical Development of Sustainable and Responsible Investment

1.1 Ethical origins

The roots of sustainable finance lie in values-based exclusion practices. Religious communities, such as the Quakers in the 18th century, avoided investments in activities considered harmful, including slavery or weapons. These early forms of ethical investing relied on moral principles rather than measurable ESG criteria. 

1.2 Socially responsible investment (1960s–1990s)

In the second half of the 20th century, social movements and civil society organizations pushed investors to consider corporate behavior. Campaigns against apartheid in South Africa and concerns about tobacco, environmental damage, or poor labor conditions drove the adoption of screening practices and shareholder activism. Investment funds began integrating non-financial criteria into their mandates, giving rise to the concept of socially responsible investment (SRI).

1.3 Rise of ESG and mainstream financial integration (2000s–today)

From the late 1990s onward, responsible investment transitioned from ethical values toward a more systematic and analytical framework. The term ESG emerged in the early 2000s and was formalized by the UN-backed Principles for Responsible Investment (PRI) in 2006. The ESG approach frames sustainability in three dimensions:

• Environmental: climate change, pollution, resource use, biodiversity

• Social: labor rights, human capital, community impact

• Governance: board structure, shareholder rights, corporate conduct

This shift marked the entry of sustainability into mainstream finance. Institutional investors, asset managers, and regulators progressively adopted ESG integration, supported by the expansion of data, ratings, and reporting standards.

Mark Carney's 2015 speech to the Lloyd's of London market introduced the idea of the "Tragedy of the Horizon", and emphasised that climate risks unfold over time horizons far longer than those used by financial institutions, regulators, or policymakers. Because these risks lie beyond the typical decision-making window, markets systematically underprice them, creating a structural gap between long-term climate impacts and short-term financial incentives. This argument profoundly influenced the development of climate-related disclosure frameworks and accelerated the integration of climate risk into prudential supervision.

2. Core Concepts in Sustainable Finance

2.1 ESG integration

ESG integration consists of incorporating ESG indicators into investment research and decision-making. The emphasis is not only on values but also on financial materiality—how sustainability factors affect risks, returns, and long-term value creation.

2.2 Double materiality

Emerging regulations, particularly in the EU, adopt a double materiality perspective:

• Financial materiality: how ESG issues affect the company

• Impact materiality: how the company affects society and the environment

This dual perspective is central to modern sustainability reporting.

2.3 ESG strategies

Investors use diverse strategies to express sustainability goals, including exclusions, best-in-class selection, thematic investments (e.g., climate solutions), integration into financial models, and impact-oriented approaches. The variety of strategies reflects the field's historical evolution and conceptual diversity.

3. The ESG Ecosystem: Key Actors and Their Roles

The sustainable finance landscape is structured around several categories of actors, each contributing to definitions, norms, data, and market practices.

The players of the industry gather investors such as asset managers, asset owners but also financing institutions such as banks. Data providers, NGOs and group's initiatives also evolve in the sustainable finance ecosystem. Finally, regulators and institutional bodies aim at regulating practices, increase transparency an avoid greenwashing.

3.1 Sustainable investment forums

Organizations such as Eurosif or the Global Sustainable Investment Alliance promote research, market studies, and dialogue among investors. They help shape market trends, develop common terminology, and advocate for stronger sustainability standards.

3.2 International initiatives

Multiple global initiatives have influenced the rise of sustainable finance:

• UN Principles for Responsible Investment (PRI), encouraging ESG integration

• UN Global Compact, promoting corporate sustainability principles

• Climate-focused coalitions, such as the Net-Zero Asset Owner Alliance
  These initiatives create voluntary commitments that help harmonize practices across countries and sectors.

3.3 Regulators

Regulatory bodies increasingly define the scope and obligations of sustainable finance.
In the European Union, key regulations include:

• The EU Taxonomy, establishing criteria for environmentally sustainable activities

• The Sustainable Finance Disclosure Regulation (SFDR), requiring asset managers to disclose ESG practices and sustainability impacts

• Climate benchmarks (CTB and PAB), guiding low-carbon index construction

• MiFID II sustainability preferences, embedding sustainability into investor suitability assessments

• The Corporate Sustainability Reporting Directive (CSRD), expanding mandatory ESG reporting standards through the ESRS framework
  These regulations seek to improve coherence, comparability, and market integrity.

3.4 Reporting frameworks

Several international frameworks guide corporate sustainability reporting, such as:

• Global Reporting Initiative (GRI)

• Task Force on Climate-Related Financial Disclosures (TCFD)

• Emerging International Sustainability Standards Board (ISSB) standards

Each framework offers guidelines on metrics, governance, risk management, and performance, contributing to global convergence.

3.5 Rating agencies and data providers

ESG ratings, scores, and datasets are produced by specialized agencies. They evaluate corporate performance on ESG criteria using heterogeneous methodologies. The rapid expansion of ESG data suppliers reflects strong investor demand, but also raises issues of inconsistency, data quality, and limited comparability between providers.

Conclusion

The introduction to sustainable finance presents a field still developing its conceptual foundations, data infrastructure, and regulatory framework. Its history spans ethical exclusions, socially responsible investing, and today's multifaceted ESG ecosystem. Modern sustainable finance relies on a wide range of actors— financials, global initiatives, regulators, reporting bodies, and rating agencies—working to create clearer standards and more transparent markets. 

The result is a fast-evolving domain that requires continuous learning as definitions, methods, and expectations continue to mature.