Abstract
Traditional financial theory is driven by a narrow set of values—namely that only financial risk and financial return matter. Quite clearly, investments—whether projects or companies—produce a much broader set of outcomes than this, while investors are in fact people with their own sets of broader concerns. This paper argues that the emerging field of sustainable finance—largely practitioner-driven until recently—provides an opportunity to build a more general theory of finance that incorporates these realities, demonstrating at the same time that traditional financial theory is only a special case of the more general theory. The paper discusses four important current trends contributing to the growth of sustainable finance—“blended value” investing; recognition that sustainability factors can be related to systematic risk; financial innovation to increase sustainability; and building infrastructure for sustainable finance. The paper then turns to a discussion of areas that will require further research—namely risk, diversification, and time, all within the context of sustainability—in order for sustainable finance to help build a more general theory of finance.
Keywords: impact investing, sustainable finance, social finance, ESG, socially responsible investing, ecological economics, ecosystem services, social rate of discount
JEL codes: Q5, D62, G11, G18, O35
