Relating financial systems to sustainability transitions: Challenges, demands and design features

Abstract

The Paris Climate Agreement, Sustainable Development Goals and Addis Ababa Action Agenda call for the financial system to be “consistent and integrated” in its response to the sustainability and climate breakdown. Sustainability transitions research (STR) and orthodox finance literature are failing to engage with these calls. This paper offers three contributions to address this issue. Firstly, it scopes the sustainability-related finance literature and finds broad but fragmented research strands with limited critical analysis and little cross-engagement with STR. Secondly, the paper draws on insights from STR and international climate and sustainable development agreements to propose a transition demand framework that characterises the explicit demands that sustainability transitions place on the financial system (understood as intermediaries, markets and infrastructure). Thirdly, the paper considers essential design features for financial systems to meet the specific demands of sustainability transitions and identifies critical questions for broadening research in this area.