Financial services

Author: Theresa Marie Garrecht, May, 2025

1      Introduction 

The financial services sector, as part of the financial sector, comprises financial entities dealing with the acquisition of financial goods. Due to the sector’s role in providing financial products and services and intermediating money between borrowers and savers, the sector significantly influences the allocation of financial flows.¹ Redirecting financial flows to industries and projects indirectly impacts society and the environment. While the sector contributes to economic development and stability, it also supports industries that harm the environment or society; in other words, it contributes to and counteracts sustainability through its financial flows.^2,3 In this work, sustainability or sustainable development is understood according to the Brundtland report from 1987 as development that fulfils the needs of current generations while ensuring that future generations can meet their needs.⁴ In order to protect the planet, its environment and people, and foster prosperity for all, the United Nations adopted the 2030 Agenda for Sustainable Development, including an action plan with 17 goals, known as the Sustainable Development Goals (SDGs).⁵ The majority of funding for the SDGs is allocated at the national level through public resources, while the greatest potential lies in the private sector businesses, finance, and investment.⁶ Access to private savings has been particularly challenging, so that only a small share has been directed to sustainable development.⁷ The financial services sector has the potential to support sustainable development by providing sustainable finance and investment products and redirecting financial flows towards sustainability. In the past years, research in sustainable banking, finance and investment increased, particularly with the introduction of the SDGs and the Paris Agreement.⁸

This work assesses the financial services sector from a sustainability perspective, its impact on sustainable development, supportive strategies and measures, and drivers and barriers. It aims to provide a comprehensive overview of sustainability in financial services with the help of a non-systematic literature review. Chapter 2 presents the methodology, followed by Chapter 3 with a broad introduction to the financial services sector and sustainable finance and investment. In Chapter 4, the direct and indirect impact of the financial services sector on sustainability is assessed, followed by Chapter 5 on practical strategies and financial products and services for financial firms to contribute to sustainable development. Chapter 6 presents drivers and barriers that accelerate or inhibit the transition towards sustainable development. This work closes with a short conclusion.  

2      Overview of the Financial and Financial Services Sectors and Sustainability Aspects Within the Sectors 

This chapter provides a comprehensive overview of the financial sector and the financial services sector, also in the context of sustainability. The first section provides basic information, including the composition, activities and economic importance of the sector, supplemented by relevant key figures. The second section focuses on sustainability basics in the financial sector by presenting the basics relating to finance and investment in combination with sustainability, commonly labelled sustainable finance and investment (SFI). It also outlines the importance and size of the sub-sector around SFI. 

2.1  Overview of the Financial Sector and the Financial Services Sector 

The financial sector, as part of the services sector, comprises a wide range of institutions in the fields of banking, insurance, investment services and mixed financial holding companies.¹³ Table 1 gives an overview of the most relevant types of entities and their characteristics, such as financial institutions, financial firms or credit institutions. However, in the following course of this work, the focus will mostly be on financial entities in general. The sector is embedded in the financial system, which serves to allocate capital, monitor investments, manage risks, pool savings, and facilitate trade.¹⁴ By transferring money between savers and borrowers, the financial sector acts as an intermediary.¹  

Due to its functions, the financial sector is characterised by a high systemic relevance and a high dependency on trust, and it is therefore highly regulated. These aspects distinguish the sector from other, less capital-intensive sectors and give it a central role in economic development.¹⁵

Table 1: Types of Entities in the Financial Sector, Own table, see table content for sources.  

Type of Entity	Explanation
Financial Institution	A financial institution is a non-credit and non-insurance undertaking primarily engaged in acquiring holdings or
	conducting other financial services like investment management, payment processing, and financial intermediation. This includes financial holding companies, mixed financial holding companies, payment institutions, and asset management firms.16
Financial Firm	A financial firms is a non-institutional entity that primarily engages in investment holding, acquiring monetary claims, leasing, proprietary trading, investment and corporate advisory services, and money brokerage.17
Credit Institution	A credit institution is an undertaking engaged in accepting deposits or other repayable funds from the public and providing loans for its own account.16
Investment Firm	An investment firm is a legal entity whose primary business involves providing investment services to third parties or carrying out investment activities on a professional basis.18
Ancillary Services Undertaking	An ancillary services undertaking is a business primarily engaged in property ownership or management, data-processing services, or similar activities that support the main operations of one or more institutions.16
Asset Management Company	An asset management company is a business that manages collective investment funds or provides similar investment management services, regardless of its location.13
Mixed Financial Holding Company	A mixed financial holding company is a parent entity that, while not itself regulated, controls a financial conglomerate that includes at least one regulated entity.13

The financial services sector, as part of the financial sector, provides financing products concerning banking, credit, insurance, personal pension, investment or payment.¹⁹ Financial services refer to the acquisition of a financial good.¹They are characterised by simultaneity, as the services are produced and consumed at the same time, and by intangibility, which also distinguishes them from other services. These two characteristics make them hard to evaluate before purchasing, requiring trust in the provider by the consumer.¹⁵ Moreover, financial services have a fiduciary responsibility, acting in the best interest of their clients. They depend on a two-way information flow, as providers and customers need to share and verify data to ensure the accuracy and benefit of financial decisions.²⁰  

Providers in the field of financial services trade, manage and take custody of financial instruments. Table 2 provides an overview of common financial services and their characteristics, as listed by the German Banking Act KWG. The underlying scope focuses on banking and investment and excludes insurance services, which also applies to the following work. 

Table 2: Overview of Common Financial Services , Own table, based on the German Banking Act (KWG), as promulgated on 9 September 1998 (BGBl. I p. 2776).¹⁷

Financial Service	Explanation
Investment Brokerage	The facilitation of transactions involving the purchase and sale of financial instruments
Contract Brokerage	The purchase and sale of financial instruments on the behalf of third parties for the account of third parties
Financial Portfolio Management	The administration of third-party assets invested in financial instruments, carried out with discretionary authority
Proprietary Trading	The process of buying and selling financial instruments for one’s account using equity capital, typically through quoting prices, executing client orders off-market, offering trading services, or using high-frequency algorithmic strategies.
Third-Country Deposit Brokerage	The arrangement or facilitation of deposit transactions with foreign-based companies.
Crypto Custody Business	The custody and administration of cryptographic instruments on behalf of others.
Foreign Currency Trading	The buying and selling of currencies to profit from exchange rate fluctuations.
Crypto Securities Register Management	Administration of a digital registry for electronic crypto assets.
Factoring	The continuous acquisition of receivables under framework agreements, either with or without recourse.
Finance Leasing	Execution of long-term lease arrangement as lessor and oversight of property companies not affiliated with an investment fund
Investment Management	Buying and selling financial instruments on behalf of a group of individual investors, where the product is designed to let them benefit from the performance of selected instruments, and they have discretionary input in the selection process.
Restricted Custody Business	The safekeeping and administration of securities solely on behalf of alternative investment funds.

The financial services sector is dominated by banking and investment services. The banking sector is the backbone of the financial services sector, primarily focusing on facilitating savings and providing loans.²¹ Banking activities include the acceptance of deposits, the granting of loans, trading in financial instruments and the management of securities, as well as other financial services.¹⁷ Investment services, as another significant segment in the financial services sector, refer to the management, purchase and sale of financial assets.²²  

A financial asset is a legal claim on the income or wealth of a business, household, or government, typically represented by a document or digital record and often linked to lending activities.²³ Financial assets can be distinguished into asset classes. However, there is no common understanding of the number and scope of different asset classes. Greer (1997) categorised investible assets into three super classes: capital assets, which generate income (e.g., stocks or real estate); consumable/transformable assets, which can be consumed or converted (e.g., oil or wheat); and store of value assets, which retain value over time (e.g., gold or art).²⁴ Table 3 presents a list of capital asset classes. 

Table 3: Overview of Capital Asset Classes , Own table, based on Hand et al. (2023).²⁵

Asset Class	Definition of Asset Class
Private Equity	A private investment into a company or fund in the form of an equity stake (not publicly traded stock)
Private Debt	Bonds and loans offered to a limited group of investors instead of being distributed widely through syndication
Real Assets	Investments in physical or tangible assets, like real estate or commodities
Public Debt	Bonds or loans that are traded publicly
Public Equity	Stocks or shares that are traded on public markets, also described as listed equities
Equity-Like Debt	Hybrid instruments combining features of both debt and equity, like convertible bonds or debt with profit-sharing options
Deposit and Cash Equivalents	Cash-focused investment strategies aimed at achieving a positive social or environmental impact
Other	Investments directed into outcome-based financial tools like social impact bonds or performance-based guarantees

Within the financial services sector, a wide range of financial products exists. Financial products are contracts or packages of contracts that are typically offered by financial entities. Among the most popular retail financial products are bank accounts, credit cards, mortgages, personal loans, and investment products. Investment products bundle financial instruments, which are assets for exchange or trade.²⁶ Table 4 summarises the most relevant financial instruments in the course of this work, which comprise equity and debt instruments and derivatives. 

Table 4: Overview of Financial Instruments, Own table, based on Parameswaran (2022).²² 

Financial Instrument	Explanation
Equity Instruments	Equity instruments represent ownership in a company and entitle shareholders to a share of the company’s profits through dividends and voting rights in major decisions. They are also known as ordinary shares and are typically traded on stock exchanges.
Debt Instruments	Debt instruments are financial claims that enable borrowers to raise funds by taking out loans with the promise to repay the capital together with interest at periodic intervals or a specific maturity date. Common examples are bonds, loans and promissory bills.
Derivatives	Derivatives are financial contracts that derive their value from an underlying asset or portfolio of assets. They grant certain rights or obligations to their holders based on the terms linked to the underlying market. The three major categories are forward and future contracts, option contract and swaps.

Financial services contribute to the functioning of an economy. Intact financial systems mobilise and pool savings, produce information on potential investments, allocate capital efficiently and monitor investments. They manage risks and facilitate payments and the exchange of goods and services. These factors promote economic growth and job creation, generating resources for social spending and expanding access to financial services. Hence, financial sector development also contributes to the reduction of poverty. Particularly in developing countries, financial development accelerated through financial services contributes to economic growth.² However, as some financial products allow speculation and lead to bubbles, the financial sector can harm economies by jeopardising financial stability, which in turn can harm economic stability.²⁷  

In 2023, the financial system intermediated United States dollars (USD) 410 trillion in assets globally. The most important sources of funding included personal deposits, bank liabilities, corporate and public deposits, and asset management, which are illustrated in Figure 1. The funds were used for various forms of investment, including private loans, corporate and public loans, government bonds, equities, and other investments. This resulted in a total revenue of USD 6.8 trillion in 2023, mainly through retail banking, corporate and commercial banking, wealth and asset management, and payment services. The global banking industry generated USD 1.15 trillion in net income in that year, which equals the combined net income of the energy and industrial industries.²¹  

Figure 1: Financial Intermediation Globally in 2023,Own illustration, based on Mehta et al. (2024).²¹ 

Besides the volume of financial services, its relevance can also be shown by the amount of customers acquiring financial services. According to the World Bank, 74% of the world population over the age of 14 had a bank account in 2021, an increase of nearly 25% compared to 2011. While 96.4% of individuals in the high-income group had a bank account in 2021, only 23.9% of those in the low-income group did, indicating that financial services are primarily accessed by higher-income earners. However, in 2011, only 10% of low-income earners had a bank account, so more and more low-income earners have been added to the customer base of the financial services sector.²⁸

2.2  Basics of Sustainable Finance and Investment (SFI) 

Within the sphere of sustainable finance and investment, which are the broadest terms to describe financial aspects and investments that consider sustainability-related issues, many terms exist. There is neither a common definition of sustainable finance or sustainable investment, nor a common understanding of a concept.^8,10,29,30 Before the 1970s, no specific terms in this context were commonly used, even though investors like churches considered ethical investments by restricting certain investments supporting businesses in the tobacco, gambling, or alcohol industries.^31,32 The first attempts at describing sustainability-related terms in the context of finance and investment began in the 1970s under the influence of social movements with terms like socially responsible investment or ethical investment. In the 1990s, the ecological perspective was taken into account for the first time with the term green finance. From the 2000s/2010s, other terms were added, such as responsible investment, climate finance, ESG investment, as well as sustainable finance and sustainable investment.³² The terms mentioned above are described in detail in sections 3.2.1 and 3.2.2, while in this context, they underline the evolution and range of terms. Today, countries like China or the European Union (EU) frame sustainable finance according to their national taxonomies.²⁹  

Conducting a review, Cunha et al. (2021) investigated commonly used keywords and built a universal definition including the features of measurability, social and environmental aspects, as well as a long-term perspective. In their understanding, SFI refers to the management of financial means that focus on positive social and environmental impacts in the long term and that are measurable.³² They differ from the definition of conventional finance and investment in that they include ecological and social perspectives and take a cross-generational time perspective into account. This definition is consistent with the definition of sustainable finance by the International Capital Market Association (ICMA) from 2020, except that it also considers the stability of the financial system: 

“Sustainable Finance incorporates climate, green and social finance while also adding wider considerations concerning the longer-term economic sustainability of the organisations that are being funded, as well as the role and stability of the overall financial system in which they operate.”^{33, p.5}  

The former definition by Cunha et al. (2021) is also consistent with other definitions of sustainable investment, e.g. the one by Eurosif (2022), where it is defined as “investments that have at least a low ambition to contribute to a sustainable transition.”^{34, p.7}

While sustainable finance broadly encompasses activities in the field of sustainability and sustainable investment refers to a spectrum of sustainability-linked investment approaches, both terms serve as overarching terms, summarising a range of subcategories and terms.³² The next subchapters introduce and explain key terms and concepts under these two umbrella terms, providing a comprehensive overview.  

2.2.1      Basics of Sustainable Finance 

In the context of sustainable finance, several commonly used terms have emerged. Terms like environmental finance, green finance, and SDG finance each refer to a specific dimension or subcategory within the broader field.^12,32 The most common terms are illustrated in Figure 2. 

Figure 2: Clustering of Terms in the Context of Sustainable Finance, Modified illustration, based on Singhania et al. (2024).¹²

Table 5 shows the corresponding scope of the terms illustrated in Figure 2, in addition to other less common terms, such as blue finance, or terms that cannot be clearly assigned in Figure 2, such as microfinance. Another frequently used term in the context of sustainable finance, especially in the context of transition and green finance, is brown finance. It refers to financial flows that promote carbon-intensive projects, neglecting climate-related risks.³⁵

Table 5: Overview of Terms in the Context of Sustainable Finance, Own table, based on Singhania et al. (2023) and Cunha et al. (2021).^12,32

Term	Scope
Blue finance	Blue finance aims to finance marine conservation.36
Carbon finance / lowcarbon finance	Carbon finance or low-carbon finance targets financing in the field of greenhouse gas (GHG) emissions mitigation, including mechanisms such as carbon credits and emissions trading.37,38
Climate finance	Climate finance as part of green finance focuses on financial activities supporting climate change mitigation and adaption.39,40
Environmental finance	Environmental finance covers financial matters that consider the planetary boundaries and environmental impacts in financial decision-making.41
Green finance	Green finance focuses on financing for pollution reduction and GHG emissions reduction among other environmental benefits besides economic growth.42
Microfinance	Microfinance describes the provision of financial services like microcredit, micro-insurance and micro-savings to people with low income, predominately in developing and transition countries with the aim to alleviate poverty though financial inclusion.43,44
SDG finance	SDG finance aims to support the achievement of the SDGs by means of inclusive and SDG targeted finance.45
Social finance	Social finance targets social issues such as social innovations or banking, microfinance and impact investing.46,47
Transition finance	Transition finance is part of green finance and attempts to support the transition from carbon-intensive projects to green finance by managing physical and transition risks linked to climate change.35

Schoenmaker (2018) identified three approaches to sustainable finance that differ from traditional finance. Sustainable Finance 1.0 considers sustainability-related risks, focusing on maximum shareholder value in the short term. Sustainable Finance 2.0 deals with stakeholder value creation, optimising the integrated value of the environmental, social and financial value with a focus on the medium term. Sustainable Finance 3.0 aims at creating long-term value for the common good, prioritising social and environmental impacts over financial value.⁴⁸

2.2.2      Basics of Sustainable Investment 

To integrate sustainable finance, a spectrum of sustainable investment approaches exists. They vary in the degree of market force and deliberate impact on sustainable development and range from pure grants to investment opportunities yielding competitive returns, as illustrated in Figure 3. On one end is traditional or conventional investment, which is focused solely on financial gains, while philanthropy represents the other end.^49,50 Traditional philanthropy refers to the voluntary commitment of individuals or organisations through donations or charitable activities to address social, cultural or environmental challenges. While traditional philanthropy focuses primarily on donations without direct influence, venture philanthropy, as a subsection, combines strategic investment and active management to maximise social impact.⁵¹ Within the remaining spectrum, some sources distinguish between impact investing, sustainable and responsible investment (SRI), and ESG investing, which are defined below.^10,49,50 Other sources refer to SRI as the comprehensive term to describe a classification of subsequent approaches containing impact investing or ESG investing.⁵² Figure 3 gives an overview of the gradations of sustainable investment approaches. In the following, ESG investment, SRI, and impact investment are described in more detail. 

Figure 3: Spectrum of Approaches for Sustainable Investment, Modified illustration, based on Singh (2020) and Swedroe & Adams (2022).^49,50 

ESG Investing 

ESG investing refers to integrating environmental, social and governance (ESG) factors in an investment process, particularly during the investment analysis, aiming to optimise risk-adjusted returns. ESG investing is mainly connected to equity investment, although it can be applied to investment decision processes across asset classes. In comparison to SRI, ESG integration describes an approach of investment which focuses on riskreduction and optimal financial returns, regardless of positive impacts on sustainable development.⁵³ However, there is no common process to integrate ESG factors into investment processes, as it refers to a wide range of strategies and practices.^49,54 In practice, a wide range of techniques exists. Scenario analysis, sensitivity analysis, or benchmark-relative weighting are common techniques in asset allocation and portfolio construction. In equity security analysis, ESG investing can be applied by refining forecasted financial data, adjusting valuation model assumptions, and creating valuation multiples. In fixed-income analysis, it focuses on modifying financial forecasts and ratios, while also evaluating credit quality and credit spreads.⁵³

Sustainable and Responsible Investment (SRI) 

The term SRI stands for sustainable and responsible investment or less commonly for sustainable responsible investment or socially responsible investment and is used to refer to the use of positive and negative ESG criteria additional to financial criteria to achieve financial returns in investments, taking long-term sustainability aspects and risks into account.^10,52,55 Unlike traditional investing, SRI considers ESG criteria to at least some extent to identify investments and risks.¹⁰ While some refer to ESG investing and SRI as synonyms not distinguishing the scope of intention, others differentiate the two by their focus on financial return.^49,50 To those differentiating, ESG investing does not compromise financial profit at all, while SRI has a balanced focus on financial return and impact outcome.⁴⁹Other sources refer to SRI as the comprehensive term to describe a classification of subsequent approaches as impact investing or sustainability-themed investing.⁵² Besides allocating financial flows by means of screening, SRI refers to shareholder advocacy and community investment.^56,57 These instruments are further elaborated on in Chapter 5.2.1. 

SRI intends to be built upon the six Principles of Responsible Investment, which offer guidance and a network for an investor base. According to the principles, SRI comprises the incorporation of ESG factors into the investment process, ownership policies and practices, the support of ESG disclosure of invested entities, the promotion of the effective implementation of the principles within the investment industry, and the reporting on SRI activities and progress.⁵⁸

Impact Investing 

Impact investing is closely related to SRI but extends the concept in terms of societal nonfinancial value creation by focusing on investments that strive for a positive environmental or social impact creation alongside a financial return.^53,59 It is regarded as the most effective tool to finance the SDG investment gap.⁶⁰ Originating from philanthropy¹⁰, financial capital is directed to people, communities, businesses or nongovernmental organisations (NGOs), that are often underserved by traditional finance.^10,53 According to Weber (2018), the main characteristic of impact investing is that it is carried out off-market and therefore does not target listed companies, but instead focuses on specific projects, often with a small number of individuals.¹⁰ The definition by the International Finance Corporation (IFC), however emphasises the focus across classes. According to them, the decisive factor is not the affiliation to an asset class, but the investor’s intention to achieve a positive social or environmental impact.⁶¹ Hence, impact investing is characterised by its intentionality of impact creation, its use of evidence and data in investment design, its management of impact performance and its contribution to the growth of the industry.⁵⁹

Figure 4: Share of Sustainable Investment Assets Across Regions in 2022, Source: Own illustration, based on Global Sustainable Investment Alliance (2023).⁶² 

According to the Global Sustainable Investment Alliance (GSIA), in 2022, sustainable investment reached USD 30.3 trillion in assets across Australia, Canada, Europe, Japan, New Zealand and the United States, an increase of 20% in comparison to 2020. As displayed in Figure 4, almost half of the assets can be traced back to Europe and almost a third to the United States.⁶²  

Taking an isolated look at impact investing, numbers by the Global Impact Investing Network (GIIN) show USD 1.571 trillion in impact investing under management by almost 4,000 organisations in 2024.⁶³ In comparison to 2020, when USD 715 billion in assets were under management by around 1,700 organisations, this is a significant increase.⁶⁴ The allocation across asset classes can be derived from Figure 5, with private equity as largest asset class for impact investing in terms of proportion of investors and proportion of assets under management (AUM) allocated to impact investing.²⁵  

Figure 5: Asset Allocation in Impact Investing Across Asset Classes in 2020, Own table, based on Hand et al. (2023).²⁵

3      Sustainability Impact and Measurement  

The following part assesses the impact of the financial sector on sustainable development, starting with the direct impact of banking operations, followed by the indirect impact, which can be attributed to the financial services through capital allocation. The second part explores measurement approaches to assess the sustainability performance of financial entities and the capital they allocate. 

Jo et al. (2015) identified two perspectives on the sustainability-related impact of the financial sector. The first perspective focuses on the operational sustainability of financial entities, referred to as the direct impact. The second perspective examines the impact generated by the financial flows that pass through the financial sector, which can be described as indirect impact.⁶⁵ In SFI, impacts are oftentimes assessed based on the 17 Sustainable Development Goals (SDGs) by the United Nations (UN), evaluating whether financial services and capital streams contribute positively, neutrally or negatively to sustainable development.^10,12,66 In comparison to other sectors, the financial services sector has the highest rate of SDG reporting, underlining the relevance of the SDGs in this sector.⁶⁷

In this chapter, positive and negative impacts are presented based on the SDGs. For this purpose, they are categorised according to the concept of the triple bottom line into the three pillars for sustainable development: ecological, social, and economic.⁶⁸ Since many SDGs span multiple dimensions, such as SDG 7 (Affordable and Clean Energy) or SDG 11 (Sustainable Cities and Communities), mainly referring to environmental and social aspects, various categorisations exist.⁶⁹ This work categorises the SDGs in alignment with Schoenmaker (2017), except that it assigns SDG 11 to the ecological dimension, following the approach of Sardianou et al. (2021).^69,70 Moreover, due to its relevance, SDG 7 (Affordable and Clean Energy) is listed under both the ecological and social dimensions. The classification used in this work is displayed in Table 6.  

Table 6: Matching the SDGs with the Three Pillars of Sustainability, Own table, based on Schoenmaker (2017), Sardianou et al. (2021), Klapper, El-Zoghbi & Hess (2016) and United Nations (2015).^5,69-71  

Pillar	UN Sustainable Development Goals (SDGs)
Ecological	7: Affordable and Clean Energy 11: Sustainable Cities and Communities 13: Climate Action 14: Life Below Water 15: Life On Land
Social	1: No Poverty 2: Zero Hunger 3: Good Health and Well-Being 4: Quality Education 5: Gender Equity 6: Clean Water and Sanitation (7: Affordable and Clean Energy) 16: Peace, Justice, and Strong Institutions
Economic	8: Decent Work and Economic Growth 9: Industry, Innovation, and Infrastructure 10: Reduced inequalities
	12: Responsible Consumption and Production
Other/Overarching	17: Partnerships for the Goals

Regarding sustainability reports, financial entities mostly disclose information on SDG 8 (Decent Work and Economic Growth), SDG 13 (Climate Action), SDG 4 (Quality Education), SDG 5 (Gender Equality), and SDG 9 (Industry, Innovation and 

Infrastructure), covering the direct and indirect impact perspective. This aligns with other sectors, commonly disclosing SDGs 8, 9, and 13. Furthermore, from a sector-agnostic perspective, SDG 3 (Good Health and Well-Being) and SDG 12 (Responsible Consumption and Production) are also relevant, although they are comparatively less reported on by the financial sector.⁶⁷  

3.1  Direct Impact 

The direct impact of financial entities consists of impacts on the environment and society that are directly connected to the institution’s operations.⁷² Compared to industrial sectors with high resource usage and processing activities, the direct sustainability-related impact of the financial sector is relatively small.⁷³ Financial entities put more emphasis on economic growth and good working conditions, as well as on governance aspects, such as the fight against corruption and financial crime, than on environmental concerns.⁶⁹ Furthermore, direct impacts by the financial sector on social and human capital cover employee engagement, diversity and inclusion, customer privacy, data security, affordability, as well as selling practices and product labelling.^72,74 Additionally, operational activities of banks have, such as those of other service-oriented sectors, an impact on climate change, land, water and natural resources due to energy, water and paper consumption, buildings, and employee travel.^65,72 Nevertheless, the direct impact only represents a small fraction of the overall impact that is exerted by a financial entity. For example, in terms of CO₂ equivalents (CO₂-eq) emissions, those directly attributable to financial entities through their operations often make up less than 1% of the emissions associated with financial entities, while more than 99% are caused by financed projects.^75,76  

Table 7 summarises the relevant topics and displays common indicators disclosed by financial entities on their direct impact. In the following sub-chapters, these aspects are explained in more detail, starting with the environmental and social perspective. In addition, the governance perspective is assessed. 

Table 7: Environmental, Social and Governance Issues for the Direct Operational Footprint of Financial Entities, Own table, based on Weber & Feltmate (2016), SASB (2018) and Commerzbank AG (2023).^72,74,77 

	Issues	Key Performance Indictors
Environment	Operational emissions (if not divided according to the other environmental issues)	CO2-eq emissions
	Paper consumption	Paper consumption in tonnes or in CO2-eq emissions
	Buildings	CO2-eq emissions from heating and energy use
	Employee travel	CO2-eq emissions from employee travel
	Electronic equipment	Electronic waste, energy efficiency of electronic equipment
	Solid waste management	Waste in tonnes or in CO2-eq
Social	Employee engagement	Fluctuation
	Diversity and inclusion	Gender pay gap, Proportion of gender, race and ethnicity
Governance	Corruption, bribery issues, and financial crime	Confirmed incidents of corruption or bribery

3.1.1      Environmental Perspective 

Operations of financial services cause environmental impacts, such as operational emissions or other impacts due to energy consumption, telecommunication, paper consumption, electronic equipment, buildings, solid waste management, and employee business travel.⁷² These impacts are evaluated in the following. Given the limited literature on the ecological operational footprint of financial entities, the following section presents exemplary figures disclosed by Commerzbank AG, a commercial German bank recognised for its transparency in sustainability-related disclosures.^78,79

Operational Emissions 

Financial entities contribute to air emissions, even though they have significantly reduced their direct emissions over the last decades.⁸⁰ These emissions are generally disclosed as CO₂-eq of Scope 1, 2 and 3 emissions.⁷² For Scope 1 emissions, Commerzbank AG refers to emissions directly caused by its operations, through heating oil or gas, for example. Scope 2 emissions represent emissions from purchased energy, which can be calculated using the market-based technique, considering the purchased energy mix, and the location-based techniques, using the statistical country mix. Scope 3 emissions of the operational footprint represent emissions caused along the value chain of the operations. They are disclosed separately from financed emissions.⁷⁸ Financed emissions represent the emissions from an institution’s portfolio, e.g. through loans and investments. They are further explained in chapter 4.2.1. In general, Scope 3 operational emissions only make up a small share in relation to financed emissions.⁸⁰ For Commerzbank AG, operational Scope 3 emissions are emissions caused by paper and water consumption, business travel and employee commuting.⁷⁸ They are shown in Table 8. 

Table 8: Operational Emissions Reported by Commerzbank AG in 2023, Own table, based on Commerzbank AG (2024).⁷⁸ 

Emission Category	Tonnes CO2-eq
Scope 1	17,418 (0.414 per employee)
Scope 2 location-based	59,367 (1.410 per employee)
Scope 2 market-based	12,867 (0.306 per employee)
Scope 3	46,306 (1.100 per employee)
Total (excluding Scope 2 location-based)	76,591 (1.819 per employee)

Paper Consumption 

In literature and practice, direct environmental impacts in the financial sector are often linked to factors such as paper consumption.^72,81 Resources such as wood and energy are used in the production, processing and disposal of paper. The origin of the raw materials can be particularly problematic, for example, if the wood is sourced from poorly managed forests or if social standards are disregarded during extraction. This can have a negative impact on the environment and society. Hence, paper consumption contributes to the depletion of resources, deforestation, air, water and land pollution.⁸² Financial players such as Commerzbank AG disclose their paper consumption, e.g. the total consumption in tons, consumption per employee or the CO₂-eq emissions of paper consumption. In 2009, Commerzbank reported that around 1% of total operational GHG emissions were attributed to paper consumption, which indicates its low relevance.⁸³ Still, in 2013, it accounted as one of the most relevant environmental indicators that Commerzbank disclosed with regard to its operational footprint.⁸⁴ Between 2020 and 2022, the paper consumption of Commerzbank AG was between 2.623 and 3.646 t of CO₂-eq per year, resulting in 0.083 to 0.110 t of CO₂-eq per employee.⁷⁷

Buildings 

Buildings like bank branches, data centres or office buildings cause GHG emissions and contribute to resource, water and land use and solid waste generation.⁸⁵ Regarding the environmental footprint of buildings, financial entities disclose relevant CO₂-eq emissions. Scope 1 building emissions refer to polluting sources within the buildings, like furnaces, boilers and back-up diesel power generators. Scope 2 represents consumed purchased electricity, heat and steam. Scope 3 includes emissions associated with product or material usage and manufacture along the supply chain.^65,72 Commerzbank AG disclosed the following information on electricity consumption and heating in its operations, as presented in Table 9. Fluctuations in the numbers can be attributed to the COVID-19 pandemic, among other things.⁷⁷

Table 9: Energy Consumption Reported by Commerzbank AG from 2020 to 2022, Own table, based on Commerzbank AG (2023).⁷⁷ 

Energy consumption (in megawatt hours)	2020	2021	2022
Electricity	169,529	151,534	131,944
District heating	49,972	74,271	44,654
Natural gas	97,755	61,670	68,802
Heating oil	2,299	2,767	1,532
Diesel for back-up power	246	311	407

Employee Business Travel 

Business travel of employees contributes to Scope 1 emissions, which result from employees travelling with company-owned fleet, and Scope 3 emissions, referring to employee travel with other transportation modes, both contributing to climate change. Emissions from the travel industry account for 15 to 20% of global CO₂ emissions.⁸⁶ Due to crises, stabilisation efforts, and advancing digitalisation, the extent of business travel by banks has fluctuated multiple times in recent decades.⁷² Commerzbank AG published the following figures for 2020 to 2022, displayed in Table 10, though they also fall into the COVID-19 pandemic, where business-as-usual was restricted.⁷⁷

Table 10: Emissions from Business Travel Reported by Commerzbank AG from 2020 to 2022, Own table, based on Commerzbank AG.⁷⁷ 

Emissions from business travel (in t CO2eq)	2020	2021	2022
Air travel	951	369	8,159
Rail travel	79	77	150
Road traffic	3,870	2,143	4,468
Other Emissions from business travel	1,445	1,299	1,591
Total	6,345	3,888	14,368

Electronic Equipment 

The use of IT equipment, which forms the basis for efficient operations in companies, particularly in service-oriented industries such as banks and financial entities, has become indispensable in today’s working world, contributing to environmental pollution and resource depletion.^87,88 The manufacture of IT equipment, its energy consumption and increased productivity have a wide range of effects on the environment and society. Data centres require considerable amounts of energy for operation and cooling, which causes additional emissions. Hardware production requires resources and energy, while disposal generates waste and electronic scrap.⁸⁸ As a service-oriented firm, Commerzbank AG relies on electronic equipment, which contributes to its environmental footprint. However, no specific data has been disclosed. Instead, the energy consumption of technical equipment is included within the Scope 2 emissions, as shown earlier in Table 8.⁷⁷  

Solid Waste Management 

Like other firms, financial banks contribute to waste through the disposal of paper, outdated IT equipment, old furniture, and construction waste. The use and disposal of these resources contribute to environmental pollution and resource depletion.⁷² As part of its operational footprint, Commerzbank AG has published its amount of waste disposal, ranging from 201-241 tonnes CO₂-eq between 2020 and 2022.⁷⁷

3.1.2      Social Perspective 

Financial entities are labour-intensive organisations and depend heavily on their workforce. By providing employment, skills development, and an inclusive corporate culture, banks play a crucial role in fostering economic and social well-being. These aspects can be attributed to several SDGs related to the social dimension, including decent work and economic growth (SDG 8), reduced inequalities (SDG 10), and gender equality (SDG 5). In terms of sustainability and financial materiality, banks further consider SDG 3 (Good Health & Well-Being) and 4 (Quality Education) as relevant, emphasising the importance of their workforce.⁶⁹  

Compared to other industries, financial entities report above average on SDGs 3, 4, 10 and 16. As employers, they report on their contribution to employability, upholding decent working conditions and learning opportunities, the implementation of occupational health and safety programs, and adherence to standards such as data privacy. These actions support several socially-focused SDGs, including ensuring healthy lives and promoting well-being (SDG 3), quality education and lifelong learning opportunities (SDG 4), promoting decent work (SDG 8), and strengthening peaceful, just, and strong institutions (SDG 16).⁶⁹ While Northern American and Western European focus on gender diversity when disclosing social sustainability information, East Asian, Latin American, Caribbean and Sub-Saharan African countries focus on employee engagement, such as learning initiatives.⁸⁹ On the other hand, banks are being criticised for their compensation practices that contradict the principles of intragenerational equity, with chief executive officers and top management receiving multimillion-dollar salaries, while the banks suffered significant losses.⁷²  

Sustainability reports from banks frequently emphasise diversity and equal opportunity within their own workforce, which support SDGs 5 and 10. Moreover, unlike other social topics, diverse workforces in financial entities have been extensively researched by academia.⁷² For this reason, the following part assesses diversity in financial entities in more detail. 

Diversity 

Diversity plays a central role in banks’ social sustainability strategies, especially in terms of gender diversity.⁷² The Bloomberg Gender-Equality Index 2023, which analyses data from nearly 500 companies across 45 countries and various sectors, revealed that the financial sector lags behind the cross-industry average. Only 24.5% of management positions in the financial sector are held by women, compared to 38% in middle management and 30% in senior management roles across other industries.^90,91 Looking at the board level, numbers from United States (U.S.) banks show that 30% of board members were female in 2018.⁹² In 2006, only 7% of board members in European banks were female. This issue is relevant because, according to a paper by Mateos de Cabo, Gimeno and Nieto (2012), which confirms the findings of former studies, women on boards take on a monitoring role, increasing overall risk management and sustainability performance.⁹³ In light of the global gender pay gap of 17.6% in 2023 compared to 19% the year before, highlighting the income inequality between men and women in the financial sector, the gap has decreased slightly.⁹⁰  

While the focus remains on gender studies, other diversity indicators such as age, education, experience, nationality and type of employment should also be taken into consideration when looking at diversity and equal opportunity.⁹⁴The Committee on Financial Services of the US House of Representatives investigated diversity in terms of gender, ethnicity and race of the largest U.S. banks. The left side of Figure 6 compares the workforce of U.S. banks by gender to the overall gender composition of the U.S. labour force in 2018, indicating an unequal distribution at higher positions, with men dominating and a balanced distribution of men and women in the total distribution. The right side of the Figure 6 highlights that diversity in terms of race and ethnicity within U.S. banks is even lower.⁹²

Figure 6: Gender, Race and Ethnicity of the U.S. Workforce and the U.S. Banking Sector in % in 2018, Own figure, based on U.S. House of Representatives (2020).⁹² 

3.1.3      Governance Perspective 

Like other firms, financial entities impact the environment, society and economy by adopting responsible governance practices.⁷² While sound financial firms contribute to economic development by creating jobs, paying taxes and wages, investing in infrastructure such as commercial real estate for banking operations and fostering innovation, they can also harm financial stability. In the absence of adequate governance structures, banks endanger financial stability, which can have consequences for an entire economy. This was evident during the 2008 financial crisis, where large financial institutions were proven to be too big to fail, which also underlines their relevance.⁹⁵ Since the cause was not only in the governance structure but also in the nature of the products and services, more information on the role of the financial sector in the crisis is shared in 4.2.3. Still, due to the focus on the short-term perspective and incentives, as well as high-risk behaviour, financial entities were key contributors to the crisis, as many institutions prioritised immediate gains over long-term sustainability.⁷²

Furthermore, the management of corruption, bribery issues, and financial crime is among the most important aspects for banks in terms of ESG issues.⁶⁹ High levels of corruption have a negative impact on bank stability, which in turn adversely affects economic stability and development.⁹⁶ Bank corruption particularly affects small firms.⁹⁷ Also, events of fraud have the greatest impact on financial entities’ reputation.⁹⁸ Banks that do not implement corporate governance practices jeopardise financial stability, particularly in countries with higher levels of corruption.⁹⁶  

The importance of governance mechanisms can also be shown by corporate scandals, such as the 2020 Wirecard scandal. In 2020, the German provider of electronic payment processing services filed for insolvency after it was discovered that around USD 2 billion in cash was unaccounted for on its balance sheet, revealing one decade of organised fraud by top management. Institutional and private investors suffered major financial losses and lost confidence in the sector. This fraud was supported by inadequate governance structures, preventing internal supervisory mechanisms from working properly.⁹⁹ As a result, while financial entities play a central role in economic development, their business models and governance structures can also pose significant risk. 

3.2  Indirect Impact

The following sub-chapters present the indirect impact of the financial services sector, which describes the impact caused in the supply chain or by the clients, the ones providing or receiving financial resources.⁷² It can also be defined as the impact created through financial flows.⁶⁵ Even though it accounts as the most relevant impact of banks, both negatively and positively, it is difficult to assess, as it has hardly definable system boundaries and for a long time, these kinds of impact were rarely disclosed by financial entities.⁷² According to Sabbaghi (2021), positive sustainability-related indirect impacts within one project, product or strategy arise when the impacts from a social and environmental perspective are greater than from an economic perspective.¹⁰⁰ Though it is arguable to what extent the indirect impact can be attributed to the financial sector, and where it exceeds its scope. Nevertheless, great importance is attached to it due to the sector’s role as an intermediary of financial resources and its effects.⁷²  

Overall, four areas in which financial flows create impact on society have been characterised in literature. Large parts of literature focus on indirect impacts created by granting or denying people access to financial products and services, namely financial inclusion. Indirect impacts are also created through investments either in infrastructure and projects hindering or contributing to sustainable development. Furthermore, impacts can be influenced by assessing sustainability-related risks and by encouraging firms to apply ESG criteria.¹⁰¹ In the following, those four areas are briefly described. These four fields can also be used as strategies to support sustainable development or its transition, so they are taken up again in chapter 5.1. 

Access to Finance: Access to finance refers to the extent to which firms and individuals can directly access financial services.¹⁰² Since financial exclusion is associated with economic challenges and social exclusion, it is fundamental.¹⁵More concretely, access to finance is linked to the elimination of poverty (SDG 1) and hunger (SDG 2), better health (SDG 3), education (SDG 4), gender equality (SDG 5), access to clean water (SDG 6) and affordable energy (SDG 7) as well as economic impacts (SDGs 8 and 9), and reduced inequalities (SDG 10), which improves the individual’s life.¹⁰³ According to a study by Yap, Lee & Liew (2023), financial inclusion correlates particularly positively with the financially-focused SDGs 2, 5, and 8, while for SDGs 1, 3, 9, and 10, the correlation was less significant. Unlike the earlier study, this paper did not include SDGs 6 and 7 in the analysis regarding financial inclusion.¹⁰⁴ Financial services can also constrain or counteract the achievement of several SDGs by denying access to financial services. This happens when individuals have insufficient income and are not considered bankable, which poses risks to lending for financial entities. Involuntary financial exclusion also occurs under discrimination, particularly through insufficient contract or product features, inadequate informational frameworks, and pricing.¹⁰² Individuals with lower income and wealth, women in emerging markets, as well as ethnic minorities, people of colour or with disabilities and immigrants are more likely to be excluded from financial services.¹⁰³ 

Investments in Sustainable Infrastructure and Projects: Financial services play a role in financing essential infrastructure, such as roads and energy, as well as other projects, such as those related to climate protection, contributing to economic and social development and to mitigating environmental pollution. These investments are primarily linked to water and sanitation (SDGs 6), energy (SDG 7), industry, innovation and infrastructure (SDG 9), and climate action (SDG 13), although other SDGs are influenced by financing projects as well.¹⁰¹ While investments have enhanced social welfare and economic development, a large part of historical investments also contributed to the acceleration of climate change and environmental destruction. This indicates the role of financial services in supporting and constraining or counteracting the achievement of sustainable development and the SDGs.³

Sustainability-related Risks: The financial services sector can enhance sustainable development and address sustainability-related challenges by managing sustainabilityrelated risks. By leveraging its capacity as a risk manager by effectively identifying, assessing and managing such risks, they contribute to a more resilient economic system, thereby particularly addressing responsible consumption and production (SDG 12).¹⁰¹

Encouragement of ESG Practices: Acting as an intermediary between capital providers and the real economy, the financial sector has an influence on the ESG practices of its corporate clients. It can shape corporate behaviour and encourage the adoption of sustainable business models. This, in turn, can enhance several, if not all, SDGs, but particularly climate action (SDG 13), marine and terrestrial ecosystems (SDGs 14 and 

15), and peace, justice and strong institutions (SDG 16).¹⁰¹

Unlike the first 16 SDGs, for which the impact is explained in the following, SDG 17, Partnerships for the Goals, plays an overarching role in achieving sustainable development, with the role of the financial sector to provide additional financial resources.^5,10 In order to reach the SDGs by 2030, USD four trillions are needed annually, with a growing share required to be directed to developing countries.¹⁰⁵ The role of the financial sector is central to financing the gap, as domestic governments only provide 50 to 80% of the funding.¹⁰⁶ By forging partnerships, e.g. between companies, financial entities and NGOs, the other goals can also be advanced.¹⁰¹ A large part of banks already enhance SDG 17 by entering partnerships with global financial technology, startups, global institutions, climate experts and organisations to influence policies and regulations and promote sustainability.⁸⁹

The following part assesses actual and potential positive and negative indirect impacts from an environmental, social and economic perspective. Since in academia and in reports by financial entities, indirect impacts are commonly disclosed and assessed based on the SDGs, the following part assesses the impact per SDG, allocated to the environmental (7 & 11, 13-15), social (1- 7 & 16) and economic (8-10 & 12) dimension.⁶⁹ A list of the SDGs and their corresponding topics was provided earlier in Table 6. 

3.2.1      Environmental Perspective 

Financial services contribute indirectly to climate change, its mitigation and adaptation, pollution, and other environmental aspects through intermediating financial flows. Adaptation efforts by global banks include governance structures, climate-finance initiatives, and risk models to identify climate risks and opportunities, while mitigation focuses on measuring emissions, restricting high-emission financing, and supporting green investments, even though these objectives sometimes conflict.⁸⁰ Taking in their perspective, banks identified SDGs 7, 11 and 13 as most relevant in terms of environmental SDGs for their business and impact.⁶⁹ However, positive and negative impacts associated with the financial sector appear for all environmentally targeted SDGs (SDGs 7, 11, 13, 14 and 15), which is shown in the following. 

SDG 7 – Affordable and Clean Energy 

The International Energy Agency estimates that USD 1 trillion needs to be raised annually for the transition to a low-carbon economy by 2050, showing the potential of the financial sector to support these efforts, contributing to SDG 7. Financial entities are raising investment for low-carbon transitions by developing portfolios, including carbon markets and renewable energy projects, applying financial expertise to energy pricing for universal access, underwriting large-scale renewable projects, and promoting responsible investment practice.¹⁰⁷  

Green financing plays a crucial role in promoting sustainable energy projects, but despite growing investment, fossil fuel financing remains dominant on a global scale, which is shown in the section on SDG 13. From 2008 to 2021, the Global Bank issued over USD 16.4 billion in Green Bonds, 63% of which were designed for renewable energy projects, energy efficiency, and low-carbon transportation. The funding was used for the construction of hydroelectric and geothermal power plants, among others.¹⁰⁸ Xiong & Dai (2023) examined the impact of green finance on SDG 7 in China and showed that investment in sustainable energy promotes sustainable development by influencing the energy use structure, reducing pollution and promoting innovation. The authors showed that this influence was particularly evident in economically more developed regions, while the potential remained untapped in less developed areas.¹⁰⁹ In 2022, international public financial flows for clean energy in developing countries rose by 25% to USD 15.4 billion, though still significantly below the 2016 peak of USD 28.5 billion.¹¹⁰ At the same time, financing fossil fuel remains significant, which is also discussed in the part on SDG 13.^80,111 Beltran & Uysal (2023) looked at 60 financial entities that invested between USD 600 and 800 billion annually from 2016 to 2021 in fossil fuel production. Around threequarters was funded by 27 of the 60 firms alone.⁸⁰  

SDG 11 – Sustainable Cities and Communities 

Financial services contribute to SDG 11 by enhancing urban resilience and safety through collaboration, data sharing, and education. This is done, for example, by evaluating the resilience of transport infrastructure with different stakeholders or by offering education about weather-resilient building materials and techniques, as financial entities manage risks and account for climate-related physical and transition risks.¹⁰¹ Finance Norway conducted a study on leveraging disaster loss insurance data to help municipalities prevent climate-related hazards and urban flooding. Funded as a public-private partnership, the project shared geo-coded data with universities and municipalities for improved spatial and land-use planning. Initial results indicated that this kind of data sharing enhances disaster resilience.¹¹²

SDG 13 – Climate Action 

Financial entities contribute to combating climate change and its impacts by financing climate mitigation and adaptation. This includes issuing green bonds, integrating climaterelated risks into underwriting practices, investment analysis and decision making, divestment or exclusion in case of non-alignment with ESG practices, and publicly disclosing the carbon footprint of portfolio investments.^72,101 Regarding indirect emissions in the financial services sector, financial entities have been increasing the share of green finance, lowering financed emissions. The year 2022 marked the first time that developed countries mobilised USD 100 billion for climate finance, which they committed to do annually from 2020 to 2025. This represents an increase of 30% compared to 2021. 60% of that sum was allocated to mitigating and 40% to adapting to climate change.¹¹⁰

Still, financing fossil fuel and other emissions remains significant.⁸⁰ According to the SDG report 2020, in 2016, climate finance was USD 681 billion, lower than finance in fossil fuel with USD 781 billion.¹¹¹ A study by Manych et. al. (2021) compared territorial and financed emissions by commercial banks from coal power plants that were commissioned after 2014 and found that except for China, which financed approximately the same amount of emissions as it produced, the U.S., some European countries and Japan financed more emissions than they produced, due to emissions financed abroad. In contrast, countries like Vietnam, Indonesia or partly India produced emissions within their countries that were financed by foreign countries.¹¹³ This aligns with a study by Greenpeace in collaboration with WWF, stating that, in 2019, the financial sector of the United Kingdom was associated with 805 million tonnes of CO₂-eq, which was 1.8 times the territorial emissions.¹¹⁴ However, given the various methods used to assess financed emissions and the challenges in quantifying them, figures on financed emissions need to be considered with caution.¹¹⁵

On the other hand, between 2014 and 2018, the proportion of loans granted by European banks to polluting companies fell by around three percentage points compared to less polluting companies, following the announcement of the Paris Agreement in 2015.¹¹⁶ Moreover, some of the globally systemically most important banks announced that they will direct USD 9 trillion to sustainable financing for low-emission and social causes by 2030. However, of the 30 banks that did commit to achieve net-zero by 2050, only eight measured Scope 3 emissions to at least some extent, underwriting a misalignment between committing and taking actions. From those partially measuring Scope 3 emissions, many only measured Scope 3 emissions from business travel, excluding financed emissions, while others only measured financed emissions for some sectors.⁸⁰

SDG 14 – Life Below Water 

Even though SDG 14 belongs to the least mentioned goals in connection with the financial services sector, the sector can contribute through guidelines, policies and rating systems to enhance SFI mechanisms and prohibit polluting investments in order to conserve water and maritime resources and their sustainable use, engaging in blue finance.^36,100,101 Standard Chartered has established a Fisheries Position Statement that guides its debt, equity, and advisory services. It sets good practice principles and standards to assess clients’ ability to manage environmental and social risks. The bank also outlines exclusionary practices, prohibiting engagement with companies involved in drift net fishing and deep-sea bottom trawling.¹¹⁷  

SDG 15 – Life on Land 

Financial services can both hinder and support life on land by contributing to its destruction or promoting the sustainable use of terrestrial ecosystems and forests. By raising capital, applying criteria to investments in certain sectors and valuing ecosystem services, negative impacts are prevented.^10,72 Several large banks, covering 50% of global trade finance, have adopted the Banking Environment Initiative’s ‘Soft Commodities’ 

Compact, aligning with the Consumer Goods Forum’s goal of zero net deforestation by 2020. This collaboration led to the creation of the Sustainable Shipment Letter of Credit, a trade finance product that lowers the cost of importing sustainably certified palm oil into emerging markets and aims to prevent deforestation. Moreover, some banks have adopted policies for forestry, forest products, agriculture and fisheries, among others.¹¹⁸ For instance, Standard Chartered has a position statement on sustainable agricultural practices, denying financial services to the biofuels industry, growing their crops in highwater stress areas.¹¹⁹ On the other hand, as of 2021, less than half of the 150 most destructive financial entities in terms of tropical deforestation have deforestation policies. Furthermore, only one-fifth of existing deforestation policies cover all four risk commodities: palm oil, soy, timber and cattle products.¹²⁰  

3.2.2      Social Perspective 

The financial sector has a significant impact on the social sphere of sustainability, particularly in poverty reduction and improved living standards through access to financial services.^27,71 Besides poverty reduction (SDG 1), the impacts of inclusive finance support the achievement of other SDGs, such as SDG 2 (Zero Hunger), SDG 4 (Quality Education) and SDG 10 (Reduced Inequalities) or SDG 5 (Gender 

Equality).^71,104 Less discussed in literature but still of relevance in light of the social sphere are indirect impacts on SDGs 3 (Good Health and Well-Being), SDG 6 (Clean Water and Sanitation), SDG 7 (Affordable and Clean Energy) as they are part of essential infrastructure, and SDG 16 (Peace, Justice and Strong Institutions).¹⁰⁴

Social impact creation is often connected to microfinance and financial technology (FinTech), as they enable opportunities for inclusive finance.^44,71 In 2023, the estimated total market size of microfinance was USD 195.3 billion by gross loan portfolio, with an increase of 10% compared to 2022. Furthermore, 142 million individuals received microloans that year. The median of the average loan balance as a proportion of gross national income per capita improved to 44.6% due to microfinance, compared to 43.7% in 2022.¹²¹

On the other hand, progress on sub-goals particularly addressing inclusive finance lags behind, inefficiencies prevent the achievement of progress on the SDGs, and certain activities counteract their achievement, such as conflicts or wars are being financed, increasing humanitarian costs. Moreover, financial development has been linked to increased inequality and discrimination.^122,123 The following part assesses these impacts in more detail by presenting supporting and counteracting activities in relation to the SDGs. 

SDG 1 – No Poverty 

In academia, a large field of research deals with the link between financial inclusion and poverty reduction, mainly through enhancing access to financial services through basic financial services or microfinance.^27,71 As sub-goal 1.4 of SDG 1 calls for improved access to basic services, such as financial services, to all men and women by 2030, and evidence suggests that economies with developed financial systems can eradicate poverty on a larger scale, the role of financial services in poverty reduction becomes clear.^5,102 The Global Impact Investing Network analysed the progress towards SDG 1.4. It showed that as of 2022, for South Asia, Southeast Asia and Sub-Saharan Africa, the percentage increase in clients that actively use financial services outperformed the necessary threshold needed to achieve SDG 1.4 by 2030. For Latin America and the Caribbean, however, the threshold was not achieved.¹²²  

The multinational development bank World Bank has aligned its mission to end extreme poverty with most of its projects, contributing to SDG 1.¹⁰⁰ In Central America, the World Bank supported a social protection project, which enabled Honduras to set up a program for conditional cash transfers and a social register for targeted poverty reduction. Through this program, 234,000 extremely poor households in rural areas received financial support.¹²⁴Further examples with a focus on other social SDGs, which are presented in the following, also contribute to poverty reduction. 

SDG 2 – Zero Hunger 

Besides providing financing and payment products to smallholder farmers, investments in sustainable agriculture contribute to progress towards SDG 2 to end hunger. As the development of sustainable agriculture is central to combat hunger, and access to financial services for small-scale farmers leads to better yields, improving stable food supply worldwide, access to finance has a significant impact on SDG 2.¹⁰⁴ A study by Brune et al. (2015) came to the result that Malawian cash crop farmers with a savings account increased investments by 13%, which resulted in increased crop yields by 21%.¹²⁵ Moreover, the provision of short-term credits to farmers in Zambia increased the revenue by an additional yield output of 10%.¹²⁶ Improved access to finance for farmers is also achieved through the application of FinTech, as farmers often live in rural areas and would have additional travel costs when travelling to banks to acquire financial products.¹²⁷ For instance, by connecting financial entities with customers, the World Food Programme, in partnership with MasterCard, has been able to finance 150 million school meals around the world since 2012.¹²⁸ Furthermore, banks link investments to conditions regarding sustainable development. For example, Standard Chartered reported that it allocated capital to key economic sectors, including agriculture, financing USD 31 billion through its Commodity Traders and Agribusiness portfolio in 2014, while enforcing agribusiness standards to assess clients’ social and environmental risk management and restricting services to those failing to meet certain standards or guidelines.¹¹⁹   

SDG 3 – Good Health and Well-Being 

By raising or providing capital for investment in the healthcare sector, financial services contribute to SDG 3, ensuring healthy lives and promoting well-being. Additionally, financial inclusion contributes to better health, as increased healthcare coverage leads to better accessibility to medical services.⁷¹ However, evidence suggests that there is only a weak correlation between financial inclusion and improved health.¹⁰⁴ There is a variety of financial instruments applicable for healthcare, which support the financing gap of SDG 3, particularly through impact investing, pooled investment funds, and different kinds of bonds.¹²⁹

SDG 4 – Quality Education 

Innovative finance approaches such as education bonds or other forms of investment in education, as well as access to savings and loan products and financial literacy, contribute to quality education and learning opportunities for all, as a lack of education in countries where private education dominates is often linked to financial barriers. In sub-Saharan Africa, for instance, a third of pre-primary students attend private institutions, putting children from the poorest households at a disadvantage.¹¹⁰ The Inter-American Development Bank issued a USD 500 million Education, Youth and Employment Bond for Latin America and the Caribbean to finance early childhood care, primary and secondary education, and vocational training, with proceeds placed in a segregated subaccount for projects focused solely on education and youth employment. From 2023 to 2027, the programme expects to benefit over 2.5 million students and approximately 100,000 children, and provide employment for 46,000 people.¹³⁰

Access to savings accounts increases spending on education, as shown by a study in Nepal, where spending on education increased by 20% after households had opened a free bank account.¹³¹ Researchers introduced a remittance product for Salvadoran migrants in the U.S., allowing them to send money directly for students’ education in El Salvador, with matching funds provided. This led to higher educational spending, increased private school attendance, and lowered dropout rates. Additionally, for every dollar received in remittances, students invested nearly four dollars of their own money in education.¹³²

The impact on SDG 4 is also connected to enhancing financial literacy, which means the ability of individuals to make informed decisions about financial issues like saving, investing, and borrowing. In 2014, the World Bank estimated that only 33% of adults worldwide were financially literate, including 38% of those with bank accounts. Among account holders, financial literacy rates stood at 57% in major advanced economies and 30% in major emerging economies.¹³³

SDG 5 – Gender Equality 

By adapting credit processes and designing inclusive financial products, financial entities have successfully reached out to women, providing them with access to services from which they were previously excluded or disadvantaged.^101,134 Providing women with access to financial resources improves their power in decision-making, traditional gender expectations are slowly dissolved, and women have better opportunities to participate in modern society.¹⁰⁴ Particularly through microfinance, women have been impacted over the last decades.¹³⁵ By lending to women, women gain decision-making power in their families, access to society, to information or training, which can reduce their vulnerability. Moreover, women have the choice to use contraceptives as they depend less on having children as life insurance, infant mortality is decreased, and children of women with access to credit are more likely to go to school.¹³⁴  

However, the impact of microfinance is controversial, as some doubt its effectiveness.^135,136 For example, domestic violence decreased in some cases due to access to financial services, as, as women were participating more frequently in social events and therefore moved closer to the centre of society. In other cases, domestic violence increased as tensions between husband and wife increased. Sometimes, women were forced to give up their loaned funds to their husbands, leaving the women unable to pay off their loans and fulfil their financial obligations.^134,135 From the 142 million individuals reached by the end of 2023 through microfinance, around 60% were female.¹²¹

SDG 6 – Clean Water and Sanitation 

Even though the literature on the impact of financial services on SDG 6 is scarce, there has been evidence that innovative payment products can enhance access to clean water and sanitation. Since many households in developing countries lack access to essential infrastructure, such as clean water and sanitation, financial services can contribute to better access through innovative financial products. With the help of pay-as-you-go (PAYGO), which refers to services that are triggered automatically the moment the payment is received, access to clean water services can be improved among low-income individuals, as payments are directly linked to usage. Customers pay via smartphone for the volume or time purchased. Besides the benefits for users, businesses offering the services increase revenue, as more customers actually pay the costs for water and more customers can be reached. However, this FinTech solution also presents shortcomings in social development, as it can lead to job losses at local water providers and make water access more expensive due to additional fees.¹³⁷  

SDG 7 – Affordable and Clean Energy 

SDG 7 also refers to social issues, as energy is part of essential infrastructure, and improved access contributes to the achievement of many other socially focused SDGs.⁷¹ Similar to water utility, access to energy can be improved through PAYGO systems. PAYGO models for energy supply are available in over 30 countries, offering off-grid energy services through recurring payments. Companies operating in Kenya, Tanzania, Namibia, Ghana, Somaliland, and Peru have created portable solar lights that off-grid consumers can purchase over 3 to 12 months using mobile payment services and PAYGO pricing.¹³⁸  

SDG 16 – Peace, Justice and Strong Institutions 

Financial entities are working with global stakeholders like the World Bank and Financial Stability Board to enhance transparency and security in financial flows, e.g. by leveraging financial technologies. They promote responsible business conduct in high-risk areas by linking capital access to ethical practices and engaging with local communities to understand risks. Additionally, they support social enterprises and impact investments, particularly in post-conflict regions, ensuring that marginalised groups are included. Through data-sharing to combat crime, offering financial products for victims of violence, or ensuring that indigenous rights are respected in financing decisions, financial entities contribute to SDG 16.¹⁰¹ For instance, in 2014, MasterCard, in collaboration with the Nigerian government, launched a biometric National electronic ID Card with integrated electronic payment services. The initiative aimed to provide financial services to over 100 million people, enhancing accessibility and inclusion. However, the program was stopped in 2019 due to concerns over illegal competition and violation of data protection.¹³⁹

On the other hand, there is a linkage between the financial sector and conflict issues, as the financial sector plays a role in generating narrow development that intensifies existing tensions or creates new ones and in financing conflicts, such as wars. When financial systems fail to alleviate poverty and inequality, conflicts can emerge, often influenced by financial resources. During conflicts, both domestic and foreign finance play a role in determining the duration and outcome, affecting humanitarian costs. In post-conflict situations, rebuilding the financial system is essential for social well-being and economic recovery, as it encourages private investment and enables public spending on reconstruction. Additionally, currency reforms in conflict-affected countries are challenging due to weak institutions. Ultimately, strong financial regulation and supervision, supported by democratisation, are essential to prevent financial systems from fuelling instability.¹²³

3.2.3      Economic Perspective 

Financial products and services serve as both a key driver of sustainable economic development and a potential source of risk and economic instability, contributing to and constraining or counteracting several economically focused SDGs, such as SDG 8 (Decent Work and Economic Growth), SDG 9 (Industry, Innovation and Infrastructure), 

SDG 10 (Reduced Inequalities), and SDG 12 (Responsible Consumption and Production). 

In general, financial development has a positive effect on economic growth. While this effect varies over time, as it was weaker in the 1990s compared to the 1980s and the 2000s, there are also differences across regions. The finance-growth nexus is particularly strong in Europe and Latin America and weak in sub-Saharan Africa. Regarding the financial structure, stock markets strongly contribute to economic development in comparison to other financial intermediaries.¹⁴⁰ Furthermore, sustainability-linked investments, such as clean energy investments, can be positively associated with financial growth. Nevertheless, financial development is also positively associated with energy consumption and CO₂ emissions.^141,142 A study showed that in China from the 1970s to the mid-2010s, financial development led to environmental development, competing with economic development and vice versa.¹⁴²

On the other hand, financial products and services can be designed, or, in the absence of regulation, may evolve, in ways that pose a threat to economic development. As mentioned earlier, the 2008 financial crisis serves as a strong example of how financial services can have severe consequences for economies. The introduction of financial derivatives and asset-backed securities in the mortgage market in the U.S. allowed risky subprime loans to be granted and sold on financial markets, creating a housing bubble. When borrowers defaulted, the market collapsed, leading to widespread foreclosures, massive financial losses for investors, and a global economic downturn that severely impacted jobs, savings, and overall economic stability. As a result, while financial products and services play a central role in economic development, high-risk financial products can destabilise markets and lead to economic downturns.⁷²

Linked to financial development, financial services influence economic stability and development. The following part shows more concrete examples of the impacts of financial services on sustainable economic development.  

SDG 8 – Decent Work and Economic Growth 

Financial entities contribute to a large share of the gross domestic product (GDP) and support local, regional and overall economic development.^72,143 As stated earlier, in 2023, the global banking industry generated USD 6.8 trillion in revenue with net income of USD 1.15 trillion, matching the combined net income of the energy and industrial sectors.²¹ Besides, financial entities influence economic development indirectly. For instance, the existence of bank branches improves access to financial services, particularly to previously excluded population groups, which in turn increases entrepreneurship, employment and income, and thereby has a positive impact on economic development. An example of this is the opening of Banco Azteca in Mexico in 2002, where the strategic integration into the existing branches of the parent company Grupo Elektra enabled the bank to open over 800 new branches within a very short time, providing millions of people, particularly from low- and middle-income groups, with access to financial services for the first time. This target group often consisted of informal entrepreneurs who previously had no access to bank loans. Even though the number of formal businesses remained unchanged, the opening of Banco Azteca led to a 7.6% increase in informal businesses. In addition, overall employment rose by 1.4%, as informal business owners were able to continue their businesses instead of transitioning into unemployment or insecure employment. The decrease in unemployment and the increase in income in this population group were particularly significant. This example shows that banks support sustainable economic development through financial inclusion by creating new economic opportunities and promoting financial stability for disadvantaged groups.¹⁴³

The financial services sector can also contribute to SDG 8 by its investment protection measures to promote direct investment in emerging markets and by expanding microfinance and financing for small businesses. In addition, capital models such as impact investing are being used to raise capital.¹⁰¹ Moreover, financial inclusion contributes to economic growth, as people are able to gain higher returns on their capital, increasing their income and thereby affecting economic growth.^104,144

Regarding progress towards SDG 8, there are mixed results. Sub-goal 8.10 of SDG 8 directly refers to access to financial services. According to the SDG Report 2024, progress is on track, indicating the positive impact the financial sector has had on SDG 8 in recent years.¹¹⁰ Sub-goal 8.3 refers to the role of financial inclusion to promote developmentoriented policies and support the growth of micro-, small- and medium-sized enterprises (MSMEs), e.g. through access to financial services.⁵ While Latin America, the Caribbean, and South Asia are on track regarding the annual progress needed to achieve the goal by 2030, as of 2020, Southeast Asia and Sub-Saharan Africa lag behind, as the number of financed MSMEs and the annual growth rate are too low.¹²² The picture looks different for progress towards SDG 8.5, which targets productive employment, decent work and equal pay for work of equal value for men and women by 2030.⁵ Looking at the annual growth rate of jobs supported by investments, as of 2022, only Latin America and the Caribbean lag slightly behind the progress needed annually to achieve SDG 8.5 by 2040.¹²²

SDG 9 – Industry, Innovation and Infrastructure 

As part of building resilient infrastructure, promoting inclusive and sustainable industrialisation and fostering innovation, the financial service industry plays a central role in long-term financing. Moreover, financial inclusion enhances innovation by providing firms with financial constraints better access to essential financial resources, enabling them to invest in technological, organisational, and business advancements.¹⁴⁵ Several studies suggest that providing credit to business start-ups enhances their expansion.⁷¹ For instance, in Mongolia, women were able to expand their business when provided with credit. This was linked to an 8.5% higher probability of entrepreneurship.¹⁴⁶ However, in comparison to other SDGs, the correlation between financial inclusion and SDG 9 is relatively weak.¹⁰⁴

SDG 10 – Reduced Inequalities 

Financial services, in particular sustainable banking and financial inclusion, contribute to reducing inequalities by promoting income growth for the poorest population groups and social and economic benefits. Financial development generally leads to increasing incomes of the poorest at a faster pace than average per capita GDP growth.¹⁴⁷ Moreover, sustainable banking, which refers to banking practices that deliver social and economic benefits by considering ESG practices, contributes to the reduction of inequalities in countries with weak rules of law.¹⁴⁸ Turégano and García-Herrero (2018) analysed the impact of financial inclusion on income inequality while controlling for macroeconomic factors, such as economic growth and fiscal policy. Their findings supported the Kuznets curve hypothesis, showing that financial inclusion’s effectiveness in reducing inequality depends on a country’s development level.¹⁴⁹ In June 2020, almost half of the funds distributed by the World Bank went to China, India and Turkey, countries with environmental challenges and transformation intents, which contributed to the reduction of inequalities.¹⁰⁸

On the other hand, financial services foster inequalities by discriminating against marginalised groups, including women in emerging countries, ethnic minorities, disabled individuals and immigrants, who face higher rejection rates and costs in formal credit markets. Both in developed and developing countries, excluded groups often turn to highcost fringe finance providers, which are unsuitable for long-term investments, and therefore exacerbate the inequalities in the long term. Access to finance also depends on the level of wealth, education and financial literacy, leaving poor and less-educated individuals disadvantaged.¹⁰³  

SDG 12 – Responsible Consumption and Production 

Through pricing models and innovative finance products, financial services can incentivise sustainable consumption and production patterns, contributing to SDG 12.¹¹⁰ As SDG 12 can be seen as an instrument to achieve progress towards other SDGs, such as SDG 13 (to combat climate change), investments into sustainable infrastructure, such as energy, which were discussed earlier, translate to sustainable production and consumption.⁴⁸ According to a study on the impact of finance on SDG 12 in the Indian city Chennai, SRI or ESG investment has a positive impact on corporate sustainability when accompanied by stakeholder awareness and engagement. However, due to difficulties accessing SFI products, traditional finance and investment, which also finance unsustainable production and consumption, still dominate.¹⁵⁰ Position statements such as those by Standard Chartered, mentioned before, set good practice principles and describe exclusionary practices, denying funds for unsustainable business activities.^117,119

On the other hand, there are financial services that promote payment innovations that counteract responsible consumption. One example is the payment model buy-now-paylater, which can motivate customers to engage in irresponsible consumption. A study by Powell et al. (2023) found that such financial innovations can lead to higher levels of purchase and have an adverse effect on the well-being of customers.¹⁵¹

3.3  Measurement of Sustainability-Related Impacts in the Financial Services Sector 

While the measurement of the direct impact of financial entities is consistent with that of other sectors, where energy consumption in buildings, emissions by employee commuting or waste is monitored, the indirect impact measurement of financial services and financial flows is distinctive.^8,72 Regarding direct impact assessment, in addition to common reporting frameworks like the GRI Standards by the Global Reporting Initiative (GRI) or the Carbon Disclosure Project, industry-specific frameworks such as the Vfu Tool or GRI supplements for financial services exist.⁷² The VfU Indicators 2010 were introduced by the Association for Environmental Protection in Banks (VfU) to assess the environmental footprint of financial services organisations.¹⁵² Before being integrated into the GRI Financial Services Sector Supplement to improve standardisation and comparability, they were the most relevant framework of their kind. However, the standards are limited by the assessment of the direct impact of financial services organisations.⁷² In March 2025, the Global Reporting Initiative released a draft for the GRI Sector Standards for Banking, Capital Markets and Insurance, which they plan to publish in the second quarter of 2026. They will be the first comprehensive reporting framework for financial services organisations to assess the organisation’s impact, including both direct and indirect impact.¹⁵³

Regarding the indirect impact, Weber & Feltmate (2016) propose three steps to calculate the sustainability-related indirect impact of financial flows. First, the financier’s capital ratio needs to be identified by dividing the financed capital by the total capital employed. Second, the sustainability-related impact needs to be assessed, using approaches like life cycle assessments. Results of the second step can be stated in terms of the overall impact of a project or company or in relation to a benchmark, for example, to the average emission of conventional energy production. In the last step, the first and second steps are linked to each other, allocating the impact to the financier, which also prevents doublecounting. This approach can be transferred to different financing institutions and products, assessing the positive and negative impacts of finance and taking into account double-counting.⁷²  

In practice, a wide range of assessment methods exists to assess the impact of financial flows, including the Equator Principles and IRIS+, the Impact Weighted Accounts Report by Harvard Business School or the social return on investment (SROI), differing in their impact or thematically.^72,154 These selected approaches are described in Table 11.

Table 11: Assessment Methods for SFI, Own table, based on Weber & Feltmate (2016) and Liang & Renneboog (2020).^72,154 

Assessment methods	Description
Equator Principles	The Equator Principles consist of ten principles and apply to financial products around project finance. By providing minimum standards for due diligence and monitoring, the principles aim for responsible decision-making in risk management.155
Impact Reporting and Investment Standards (IRIS+)	IRIS+ is a widely adopted system for impact measurement that helps investors consistently assess, manage, and compare impact performance, improving the reliability and usefulness of impact data for decision-making.156
Impact Weighted Accounts	Impact-weighted accounts are additional entries included in financial statements that provide a more complete picture of a company’s performance. They capture the positive and negative effects a company has on its employees, customers, the environment, and society at large, enhancing the traditional assessment of financial health.157
Social return on investment (SROI)	The SROI is a framework that translates social, environmental, and economic impacts into monetary value, assessing the overall impact of an investment.158

According to Bengo, Boni & Sancino (2022), acknowledging existing tools, strategic frameworks for maximum impact creation are still missing. The authors identified three main approaches in the field of impact assessment. The first is the passive approach, which focuses on ESG risk integration in order to account for risks such as climate-related or transition risks, e.g. through the Equator Principles (see Table 11). The second approach is more active and relies on the application of ESG criteria for investment opportunities to identify the investment with the highest impact potential. The authors reference the application of the GRI standards for this proactive approach. The third approach uses ESG criteria to identify investments with mostly positive impacts by applying a theory of change for investment opportunities.¹⁵⁹ A theory of change explains how and why an investment leads to desired social or environmental outcomes by linking activities to measurable impacts within a specific context. This approach can be pursued with the Impact Reporting and Investment Standards (IRIS+), which are also explained in Table 11.¹⁶⁰

Popescu, Hitaj & Benetto (2021) distinguished between five categories of industryspecific measurement tools to assess the sustainability-related performance of investment funds, the first two of them with exclusive focus on climate change: Carbon footprint and exposure metrics, alignment with low-carbon pathways, ESG ratings, sustainability labels and sustainability-based impact assessments. The latter includes SDG- and life cyclebased assessments. According to the authors, tools within one approach differ significantly in their performance, making it difficult to compare the different approaches, as they have different focuses. While there are some underperformers for every approach, no high scores were reached for ESG ratings and sustainability labels. At the same time, no specific tool meets all the criteria proposed by the authors, especially in terms of life cycle assessment and opportunities for positive impact creation. This can also be traced back to limited data availability.¹⁶¹ Due to these challenges and inconsistencies, the score of the same fund can vary depending on the specific tool.¹⁶² The following table shows the different assessment approaches and best-practice tools identified by Popescu, Hitaj & Benetto (2021). 

Table 12: Best-Practice Tools to Measure the Sustainability of Investment Funds, Own table, based on Popescu et. al. (2021)¹⁶¹ 

Category	Best-Practice Tool	Tool Description
Alignment with LowCarbon Pathways	Paris Agreement Capital Transition Assessment Tool (PACTA)	PACTA is a forward-looking tool that assesses climate impact by analysing investment plans over a five-year period, considering both financial risk and contributions to mitigating global warming.
Sustainability-Based Impact Assessment	Net Environmental Contribution (NEC)	NEC uses life cycle-based metrics that evaluate the overall environmental impact of a company, asset, or investment by assessing both its positive and negative contributions to sustainability.
	Cambridge Institute for	The CISL framework measures impact across the SDGs by proposing ideal and possible
	Sustainability Leadership Investment Impact Framework (CISL)	metrics across six key themes, including basic needs, wellbeing, and healthy ecosystems. It provides a transparent methodology to assess sustainability impact comprehensively.

Additionally, there are several indicators that measure the performance of SFI. There are common financial key performance indicators (KPIs) like the volume of SFI products, the share of sustainable investments concerning the overall investment portfolio, or the Green Asset Ratio, indicating the EU-Taxonomy-aligned expenditures in the overall expenditures.⁷⁸ Moreover, the performance of financial flows can be measured with nonmonetary KPIs, like the amount of financed emissions, the number of persons reached, the share of female persons or, in the case of microfinance for poverty alleviation through agricultural support, the amount of cultivated land.^78,136 Also, as of 2019, the financial services sector has the highest rate of SDG reporting in comparison to other sectors, with almost 75% reporting on progress towards the achievement of the SDGs.⁶⁷  

General challenges for the impact measurement of financial resources include defining system boundaries between financiers and their clients, allocating impacts without double-counting, and clarifying the financial sector’s responsibility for clients’ environmental impacts. Additionally, critics address the role of the financial sector as a provider of capital to all industries while avoiding a policing role in environmental compliance.⁷²  

4      Measures and Strategies Towards SFI 

Financial entities and individual investors have started to adopt sustainability-oriented strategies and measures to foster sustainable development and are committed to doing so in the future.^32,80 Chapter 5.1 presents strategies for financing to support the SDGs, followed by Chapter 5.2 on SFI products and services. Figure 7 shows the corresponding strategies, products and services. In Chapter 5.3, the strategies are linked to the corresponding services and products. Moreover, the financial products and services are linked to different players and are presented. 

Figure 7: Overview of Strategies, Financial Products and Services Supporting SFI , Own illustration, based on Chapter 5.

4.1  SFI Strategies and Practices 

There are four fields of potential for financial services to contribute to SFI and sustainable development, which are presented in the following.¹⁰¹ While their importance due to their impact on society and environment was already underlined in chapter four, this chapter explains them in more detail: 

1. Access to Finance 
2. Investments in Sustainable Infrastructure and Projects 
3. Sustainability-Related Risk Management 
4. Encouragement of Corporate ESG Adoption 

Access to Finance 

As discussed in the impact chapter, much of the impact regarding the social dimension is linked to making financial services accessible, which drives inclusive development.⁷¹ This includes finance for unbanked or underbanked individuals on the one hand, particularly in developing countries and financial resources for MSMEs on the other hand.^101,103 In Southeast Asia, where in some countries less than 30% of adults have access to formal financial services or in sub-Saharan Africa, where over half of MSMEs are partially or completely excluded from formal funding, financial inclusion can be enhanced by reaching out to new customers.¹²² As shown in earlier-mentioned case studies, households that were able to open a savings account or access remittance services increased their savings for educational purposes, or, in the case of farmers, their revenues by 20%.^125,131 Inclusive finance also refers to facilitated and secure payment products, financial protection, a more efficient capital allocation and enabling smooth cash flows over time.¹⁰¹ Therefore, making financial services accessible both bears opportunities to expand the customer base and contributes to sustainable development. 

Investments in Sustainable Infrastructure and Projects 

Raising capital and directing it to sustainable projects or infrastructure is another central strategy in order to contribute to sustainable development.¹⁰¹ In the shift towards sustainable energy and the development of fossil-fuel-free infrastructure, there is a high demand for capital to fund new projects.¹⁶³ In 2023, developing countries faced an annual shortfall of approximately USD 4 trillion in SDG investments, with around USD 2.2 trillion required specifically for the energy transition.¹¹⁰ Investments in sustainable infrastructure and projects comprise raising capital through debt and equity markets and directing it into projects with positive societal outcomes. It can also be supported by efficient risk management, as investments in infrastructure often concern longer-term investments.¹⁰¹  

Sustainability-Related Risk Management  

The financial sector can leverage its capacity as a risk manager to address sustainabilityrelated challenges. Besides managing sustainability-related risks within the sector, on the one hand, the sector can share risk data with public policy makers and incorporate risk data in pricing models to promote the transition towards sustainable development, and on the other hand, incentivise SFI. For instance, by sharing trends on risks, harm to communities and properties can be prevented.¹⁰¹ Assessing climate-related risks mitigates the overall credit risk, as risk-managed investments are more resilient to climate change.^80,164 A large part of banks already addresses climate change-related and other ESG risks to some extent.^165,166 However, risks need to be addressed within the whole process of banking and investment activities, which far fewer banks have already achieved.¹⁶⁶

Encouragement of Corporate ESG Adoption 

Financial entities can encourage businesses to adopt ESG practices. This can be achieved through incentives such as more favourable financing conditions for sustainable companies, the integration of ESG criteria into lending decisions and advisory services for sustainable transformation. In addition, banks and investors can contribute to improving ESG standards through active engagement and dialogue with companies and thus promote stable, responsible business models in the long term.^101,167,168 Also, active engagement by shareholders or stakeholders drives the adoption of SFI tools.¹⁵⁰

4.2  Sustainability-Related Financial Products and Services 

There is a wide range of financial products and services that function as measurers for more sustainability in the financial sector by striving for positive social and environmental impact, thereby supporting the achievement of the SDGs.¹⁰ They can be classified into the following three categories, as shown in Table 13. In Chapters 5.2.1 on equity instruments and Chapter 5.2.2 on debt instruments, they are explained in more detail. Chapter 5.2.3 assesses additional instruments outside of equity and debt.  

Table 13: Overview of Financial Products and Services for SFI, Own table, based on Chapter 5.2.

Equity Instruments	Debt Instruments	Other Instruments
Screening Stewardship and shareholder activism Community investment	-Sustainabilityrelated bonds – Green credits	Microfinance Project finance Sustainable credit risk management (SCRM) Weather derivatives

 

4.2.1      Equity Instruments 

In equity markets, sustainability-related instruments can enhance sustainable development.¹⁰ Equity financing involves the issuance of company shares to external investors in exchange for funds, making these investors partial owners of the business.¹⁶⁹ Equity finance enables firms to access capital without incurring debt in the landscape of corporate finance and is therefore an important financing tool. In addition to providing capital, it also facilitates strategic partnerships, as investors offer not only funding but also industry knowledge, valuable connections, and strategic advice.¹⁷⁰  

The concepts of ESG investing, sustainable and responsible investing (SRI), and impact investing, which take place in equity markets, refer to approaches that include the following tools: screening, stewardship and shareholder activism, and community investment.^56,57,72 While the overarching investment approaches were explained in chapter 3.2, the following part presents the tools used for these approaches. 

4.2.1.1 Screening 

Screening describes the process of assessing ESG criteria in order to evaluate the admissibility of the underlying investment. There are several types of screening, applying rules based on certain criteria, which are displayed in Table 14. The first two focus on positive or negative criteria, avoiding or exclusively committing to a list of criteria, such as certain activities or products made by a firm. Regarding excluding criteria, the most common criteria are businesses in relation to tobacco, weapons, or animal testing. On the contrary, positive screening criteria select firms with affirmative activities, like firms adopting ESG practices, implementing environmental or socially focused management systems, or supporting community development.⁵³ In addition, there is Best-in-Class screening and norm-based screening. Best-in-Class screening refers to the selection of investments in sectors, firms or projects with better ESG performance in relation to their peers or that reach a certain threshold with their ESG rating. Norms-based screening assesses the compliance with minimum standards of practices with widely recognised norms like international conventions.⁵³ Thompson (2023) scales the formerly mentioned criteria according to their potential in sustainable impact creation, starting with exclusionary and negative screening, followed by positive screening as types with the lowest potential.¹⁷¹ Researchers and practitioners mainly refer to the five mentioned screening criteria, while some add thematic approaches or theme-based screening, which screen potential investments for specific products or services, sectors or industries offering sustainable innovations.⁷²  

In practice, sustainability rating systems like the Dow Jones Sustainability Index or accounting standards like SASB serve as a base for SRI criteria or screening.^10,172 A study by Vilas, Andreu & Sarto (2022) on sustainability stock indices finds that sustainability levels of firms affect the inclusion process more than the exclusion process, but similar patterns are observed in conventional indices. Business size plays a stronger role than sustainability in both types of indices. The analysis shows that the inclusion and exclusion processes for four of the five sustainability indices, which are FTSE4Good indices, aiming for strong ESG practices, differ from those of conventional indices. This supports the use of the “sustainability” label for those four indices. However, the results also suggest a need for greater distinction between sustainability and conventional indices.¹⁷²

Table 14: Types of Screening, Own table, based on CFA (2023) & Weber & Feltmate (2016).^53,72 

Type of Screening	Definition
Exclusionary Screening	Screening according to ESG criteria to exclude investments that do not meet minimum standards.
Negative Screening	Screening out investments based on ESG factors considered undesirable.
Positive Screening	Screening in investments based on ESG criteria, considered desirable.
Best-in-Class Screening	Screening investments that perform favourably on ESG criteria compared to industry peers.
Norms-Based Screening	Screening to exclude investments that violate established ESG norms or globally accepted standards.
Thematic Approach	Screening focused on specific products/services, sectors, or industries that offer solutions for sustainabilityrelated challenges.

4.2.1.2 Stewardship and Shareholder Activism 

Stewardship describes the general engagement of investing institutions in protecting and enhancing the overall value for clients and beneficiaries in the long term. It can be practised by nominating or serving on a firm’s board, submitting shareholder resolutions or declarations, using voting rights, engaging with current or potential investees, or initiating litigation. In this way, shareholders’ non-financial assets, such as environmental assets like a stable climate or social assets like health, can be addressed.⁵³ 

Shareholder activism or advocacy as part of stewardship refers to actions taken by shareholders to intentionally influence corporate policy and practices, e.g. by means of salience, alignment or transparency.¹⁶⁷ It can be exercised through direct engagement with the board or management of the firm, or by making use of a voting right at annual shareholder meetings.¹⁵⁴ Shareholder activism is effective when activists own a substantial share of the firm and can have a positive impact on its value and performance, whereas without a substantial share, it is considered ineffectual.¹⁷³ Activist investors are particularly beneficial for companies with previously low ESG performance, as they improve both ESG and financial performance. They help companies to achieve better results for all stakeholders.¹⁶⁸ Furthermore, studies show that sustainability stewardship and shareholder activism are more effective in improving the sustainability performance of a firm by exercising rights of control to change corporate policy, rather than divesting financial resources from a firm with low sustainability performance.¹⁷⁴

4.2.1.3 Community Investment 

From a United Kingdom or North American perspective, community investment is considered part of SRI and describes the process of investing in local communities, disadvantaged groups and underinvested markets, like small and micro businesses, community services and affordable housing. It is mainly practised in developed or transition countries.¹⁷⁵ Investment in communities is selected mainly upon positive screening criteria, which makes it an affirmative investment.¹⁷⁶ Community investment is sometimes used interchangeably with donations to the local communities, a form of corporate philanthropy, although it can take other forms, both being beneficial for the communities and the financial entities. For instance, banks can tailor products to local communities that can be risk-adjusted with the means of the bank’s local knowledge, e.g. through employees who are part of the local community.⁷²

4.2.2      Debt Instruments 

Sustainability within the financial sector and sustainable development can also be enhanced through sustainability-focused debt instruments, such as sustainability-related bonds or green credits.¹⁰ In the following, they are explained in more detail. 

4.2.2.1 Sustainability-Related Bonds 

Green, Social and Sustainability (GSS) bonds represent use-of-proceeds bonds that specify the types of expenditure that can be financed with the bond proceeds. If used by the investor with the intention to create a positive sustainability-related impact, accompanied by impact measurement and reporting by the issuer, GSS bonds can serve as a means of impact investing. Another type of bond is sustainability-linked bonds (SLB), which differ from the GSS bonds because they are not bound to a specific use of proceeds.¹⁷⁷ Many bonds follow voluntarily adopted frameworks, such as the Green, Social or Sustainability-Linked Principles or Sustainability Bond Guidelines, which were established by the ICMA.¹⁷⁸  

The Climate Bonds Initiative estimated a total volume of USD 5.7 trillion GSS bonds and SLB by the end of 2024 globally. USD 3.5 trillion was captured by green bonds, USD 2.1 trillion by socially focused bonds and USD 56.4 billion by sustainability-linked bonds.¹⁷⁹ Regarding their non-financial impact, IFC published a report on the anticipated impact of USD 12.6 billion through 198 green bonds from 2010 to 2023 and USD 6.1 billion through 88 social bonds from 2017 to 2023, supporting a wide range of SDGs. Regarding the environmental performance, a reduction of GHG emissions by 28.4 million metric tons of CO₂-eq per year and 36.1 million megawatt-hours in renewable energy was expected, among other impacts. From a social perspective, the social bonds issued by the IFC have reached more than three million farmers, 238,000 students, 621 million patients and seven million women who received loans.¹⁸⁰

Social Impact Bonds 

Social Impact Bonds (SIBs), also known as Pay-for-success or Social Benefit Bonds, are payment-by-results contracts that leverage socially driven private investment and collaboration with social organisations to deliver outsourced public services.^181,182 They are characterised by a Public Private Partnership, an initial monetary investment and an action program.¹⁸¹ In comparison to other payment-by-results contracts, SIBs are characterised by the intention of the investor to create a social impact. Whether the investor is rewarded for its funding depends on the success of the service, transferring the risk of failure to the investor. In this way, social organisations are enabled to manage the financial risks with these types of contracts, which otherwise would not be obtainable.¹⁸²

SIBs are mainly used in developed or transition economies and enable the testing of innovative approaches to solve social problems or support the upscaling of existing successful models. The majority of SIBs fund activities in the fields of employment, homelessness or child welfare, while less common funding tackles education, health and criminal justice. An advantage of SIBs is that they enable funding for services that might not otherwise receive sufficient government support, providing a way for social organisations to secure resources in areas where alternative funding models are not being pursued.¹⁸² 

Regarding the outcome of SIBs, one study by Wang & Xu (2022) examining 32 SIBs in the field of homelessness, showed mixed results with only 14 successfully meeting their target outcome. Even though the underlying SIBs lacked transparency and methodology, the latter identified common features for the success of tackling homelessness with SIBs, like using a Special Purpose Vehicle or working on a partnership with the landlord and the local authority.¹⁸³ 

Green Bonds 

Green bonds represent bonds where the proceeds are used to finance environmental or climate projects. For alignment with the Green Bond Principles by the IMCA, disclosure regarding the bonds needs to include the use of the proceeds, the process for project evaluation and selection, the management of the proceeds, and further quantitative and qualitative reporting. There are several types of green bonds: Standard Green Use of Proceeds Bonds are unsecured with full recourse to the issuer; Green Revenue Bonds are backed by specific revenue streams; Green Project Bonds expose investors directly to project risks; and Secured Green Bonds are asset-backed, either tied to specific projects or part of a broader financing framework.¹⁸⁴ Renewable energy, energy efficiency and clean transportation are the issues mostly addressed by green bonds issued by the World Bank and the European Bank for Reconstruction and Development. As almost half of the issued green bonds go to countries like China, India and Turkey, they show effectiveness in reaching countries with environmental challenges and a transition intention.¹⁰⁸ Fatica & Panzica (2021) investigated the effectiveness of green bonds and found that issuers have a decrease in carbon intensity of their assets through green bonds in comparison to traditional funds, especially for new projects instead of refinancing purposes and if the bonds are reviewed externally.¹⁸⁵

Sustainability-Linked Bonds 

In contrast to green, social and sustainability bonds, funds from sustainability-linked bonds (SLBs) are not limited to a specific purpose but can be used for general corporate purposes and are mainly issued by private firms. ESG KPIs are decisive for SLBs, and financial incentives or sanctions are linked to their achievement, such as a reduction in interest rates if the target is achieved or an increase in the event of a failure. Although SLBs are seen as a promising tool for directly linking capital to sustainable corporate performance, they have also been criticised for being too low in order to incentivise ambitious action by corporates and for setting low KPIs thresholds. Nevertheless, they potentially offer better protection against greenwashing as they measure a firm’s overall ESG performance. The first SLB was issued by the Italian ENEL Group in 2019, and since then, the market segment has grown significantly.¹⁷⁷  

4.2.2.2 Green Credits 

Green credits represent a financial instrument first issued by the Chinese government in 2012 to incentivise financial entities to steer financial capital into environmentally friendly industries, especially in terms of energy efficiency and emissions reduction. With the Green Credit Policy, Chinese banks are obligated to increase lending to sustainable industries, while investment in polluting firms is disincentivised. Furthermore, financial entities are obligated to disclose KPIs on the share of green lending.^186,187 The idea of green credit was first proposed by the IFC with the Equator Principles in 2020, which present corporate loan guidelines to assess and manage sustainability-related risks in project financing, and since then, have been established in many countries.^186,188  

The changing finance behaviour as a result of the Green Credit Policy contributes to a positive environmental performance. In the long term, the policy leads to cuts in investments for highly polluting firms, contributing to the reduction of sulphur dioxide emissions and wastewater pollution, for instance. While large firms are especially influenced by the policy, there is a small impact on small firms, also in the long term.^186,189 According to the Chinese State Council, in 2021, green loans reached about USD 2.5 trillion, an increase of 33 % compared with the previous year.¹⁹⁰

In the Western hemisphere, green credits are referred to as green loans, even though there is still no universally accepted definition. Also, the available data on green credits remains insufficient.^10,191 Neagu et al. (2024) examined the characteristics of firms in Romania that have obtained green loans from 2010 to 2020. Firms that take green loans generally show stronger financial health, invest more, and have fewer payment issues, although they are not less indebted. Still, companies in sectors with high transition risks are less likely to use green loans, raising concerns about banks’ incentives to support decarbonisation. While green loan portfolios show lower non-performing loan rates overall, loan-level analysis does not confirm significantly lower credit risk compared to regular loans.¹⁹¹

4.2.3      Alternative Financial Products and Services 

Besides debt and equity instruments, there are additional financial products and services supporting the transition towards sustainable development, such as microfinance, project finance, sustainable credit risk assessment and weather derivatives. They are explained in the following. 

4.2.3.1 Microfinance 

As stated in chapter 3.2.1, microfinance refers to the provision of financial services to people with low income and can be applied through microcredit, micro-insurance and micro-savings.⁴³ It provides finance to developing and transition countries with the aim of alleviating poverty, improving development and financial inclusion.⁴⁴ Well-known examples of microfinance programs are ones by NGO-turned microfinance institutions in Bangladesh like BRAC, ASA and Proshika, where the concept has its roots. There is evidence that microloans granted by the latter microfinance institutions contribute to poverty alleviation by increasing the levels of income in Bangladesh and improving the living standards. On the other hand, microfinance clients faced challenges such as highinterest rates, frequent weekly instalments instead of more manageable monthly payments, service charges, and insufficient loan amounts.¹³⁶

Besides expanding the offer of traditional banking products to unbanked or underbanked households, providing credits or funds directly to individuals through microfinance bears further opportunities for inclusive financial development. Even though empirical evidence is inconclusive regarding the effectiveness of microfinance in improving financial access, some microfinance models have been successful in reducing poverty.^8,103 Research indicates that microfinance programs are more efficient in contexts with higher levels of social, economic, and institutional development, while programs in less developed contexts require special design. This is due to microfinance institutions facing a trade-off between outreach and profitability due to market costs. To improve profitability, they increase loan sizes, charge higher interest rates, seek subsidies, and adopt new technologies. In deprived areas, microcredit supports entrepreneurship but faces challenges like low profitability and a lack of management skills.¹⁹² Other studies, such as one by Kara et al. (2021), doubt the effectiveness of profit-driven finance models in general.¹⁰³ Hence, crowdfunding has emerged as an alternative, connecting entrepreneurs with small-scale investors. Although there has been little research in this field, it is seen as an alternative instrument to reach the vulnerable population, which has traditionally been targeted by microfinance.¹⁹²  

4.2.3.2 Project Finance  

Project finance describes the finance of capital-intensive projects like infrastructure, energy or tourism projects.¹⁰While financing is mainly secured through future cash flows, the risks are allocated among the stakeholders, like sponsors, governments, contractors or lenders. Oftentimes utilising public-private partnership, governments have been funding national infrastructure, such as schools, streetlights and hospitals. Unlike venture capital, project finance relies on a long-term and highly predictable financial model of forecast cash flows. Gardner & Wright (2012) name four pre-requisites in order to achieve project finance: sustainable economics in terms of due diligence and modelling; identifiable risks; accessible financing; and political stability.¹⁹³ Some of the largest projects with this regard are represented by the South North Water Transfer in China, the most expensive and expansive infrastructure project in China and the Three Gorges Dam, the largest hydroelectric dam globally in terms of power production.¹⁹⁴  

Project finance addresses SDG 9, contributing to industry, innovation and infrastructure, while indirectly enhancing or counteracting the achievement of other SDGs like renewable energy, sustainable cities or life on land.¹⁰ Originally, the Equator Principles, which were introduced in chapter 4.3, were established by project financiers to serve as guidance for social and environmental risk management.¹⁹⁵  

4.2.3.3 Sustainable Credit Risk Management (SCRM) 

SCRM refers to the application of social and environmental risk indicators in order to account for sustainability-related risks.¹⁰ Credit risk refers to the potential economic loss arising when a counterparty fails to meet its contractual obligations.¹⁹⁶ Sustainabilityrelated credit risks can arise directly from legal liabilities, for example, indirectly from a borrower’s financial penalties reducing repayment ability, or reputationally if a bank is associated with environmentally harmful projects. Hence, sustainability-related factors should be embedded in a financial entity’s risk management.¹⁶⁴  

Financial entities identify physical and transition risks as key climate-related financial risks. Physical risks include acute events like hurricanes and chronic issues like warming, while transition risks arise from policy, technology, and market shifts. Regarding transition risks, power and utilities, metals and mining, automotive, chemicals and construction account as sectors with high transition risks. These risks are transmitted through financial and economic channels, affecting credit, market, and other financial risks.⁸⁰  

Among the benefits of SCRM are an improved rate of correct credit default predictions by around 8%, improved access to capital and opportunities by financing borrowers committed to environmental responsibility and pollution abatement equipment.^197-199 Furthermore, investments are less likely to undermine the achievement of (other) SDGs.²⁰⁰ In fact, there is a negative correlation between the environmental performance of borrowers and their credit risk.²⁰¹ However, as a study on European Banks showed, sustainability-related risks need to be included in all stages of credit risk management to predict the risk of the borrower rather than just in the rating phase.¹⁶⁶ Furthermore, riskmitigating measures bear the risk of neglecting MSMEs from potential investments, hence inhibiting financial inclusion.¹⁰¹  

4.2.3.4 Weather Derivatives 

Due to the convergence of the insurance and capital markets, weather derivatives have emerged as another tool of financial products, which serve to hedge weather risks. They allow companies and individuals vulnerable to unexpected weather changes to protect themselves financially, much like traditional financial derivatives are used to hedge against risks in interest rates, stocks, or currencies.²⁰² While they were originally introduced in the utilities market, they have found their way to the agriculture sector, where they bear potential to reach farmers who are most vulnerable to weather changes. However, the potential benefits of weather derivatives for specific crops and areas have not been fully investigated yet.²⁰³  

4.3  Matching SFI Strategies with Products and Services 

In order to support the main strategies of financial services for sustainable development and implement financial products and services in the context of sustainability effectively, strategies can be linked to specific financial services and actors within the financial sector.³² The following table provides an overview of how strategies can be aligned with financial products and services. It also outlines the main actors involved in the context of SFI, including their role and measures. However, this is not an exhaustive mapping but aims to provide a broad overview. 

Table 15: Matching SFI Strategies with Products, Services, and Main Actors, Own table based on Cunha, Meira & Orsato (2021), da Silva Inácio & Delai (2022), Weber (2018) and United Nations Global Compact & KPMG (2015).^8,10,32,101

Strategy	Financial Services & Products		Main Actors and Supporting Measures
	Microfinance Community investment		Investors (community investment; provision of training and support, particularly by institutional investors) Financial entities (by developing innovative SFI products and services; provision of differentiated interest rates and contractual conditions on sustainability criteria; provision of programs and loans, particularly by development banks)
	—-	Project Finance GSS bonds Green credits and loans Screening	—	Investors (screening as part of SRI) Financial entities (by endorsing sustainability screens, providing differentiated interest rates and contractual conditions on sustainability criteria, by developing innovative SFI products and services, bond issuance, loan provision) Companies (bond issuance, by participating in sustainability stock indices and project-related finance)
	—	Sustainable Credit Risk Management Weather derivatives Screening	—	Financial entities (ESG risks management; provision of differentiate interest rates and contractual conditions on sustainability criteria) Institutional investors (by measuring and reporting on socioenvironmental outcomes of investments) Companies (by reporting; stock index participation)
	—-	Screening Stewardship & Shareholder activism Green bonds Green credits and loans	—	Investors (by screening, shareholder activism, ESG integration) Institutional investors (by managerial incentives, initiatives and commitments) Companies (bond issuance; stock index participation, ESG reporting)

5      Sustainability Drivers and Barriers in the Financial Services Sector 

Besides more general issues, there are numerous drivers and barriers that influence the integration of sustainability practices, products and services within the financial services sector. These regard internal factors, which can be leveraged within the firm, and external factors, which are influenced by the macro-environment.⁸ The following text is structured according to internal and external drivers and barriers, starting with the internal factors. 

Table 16: Drivers and Barriers for SFI, Own table, based on Chapter 6. 

		Drivers		Barriers
		Strategic alignment Risk management Responsible customer service and marketing Reporting FinTech & innovative products and services Corporation and partnership		Short-term perspective and focus on economic returns Lack of transparency, standardisation and understanding
	Political	Signalling, guidance and incentives through regulation Corporation, networks and initiatives		Regulatory complexity and uncertainty Lack of standardisation
	Economic	Financial performance of SFI Customer demand ESG standards and competition		– Perceived lack of customer demand
	Socio-Cultural	–	Societal pressure	–	Lack of understanding of relevance and potential of SFI
	Technological	–	Digitalisation
		–	FinTech infrastructure
	Environmental	–	Increasing risk awareness due to natural disasters, loss of biodiversity, etc.

5.1  Internal Drivers and Barriers 

Internal drivers and barriers play a central role in shaping the contribution of financial services to promote sustainable development. In addition to common corporate social responsibility (CSR) practices, there are industry-specific practices, which are presented in the following.^3,10,204-206 On the other hand, the transition of the financial services sector has been relatively slow and can be traced back to internal barriers that keep financial entities from adopting SFI, which are also explained in Chapter 6.1.2.⁸ 

5.1.1      Internal Drivers 

In the past, the financial sector has been criticised due to irresponsible marketing practices, inadequate risk management, inappropriate product conditions and costs and excessive commissions.^207,208 Hence, the adoption of risk management, responsible marketing, customer service, and reporting, can drive sustainable development within and by the financial services sector.^{10,72,209,210}

Strategic Alignment 

Integrating sustainability into their strategy, governance and processes, financial entities are a prerequisite for achieving substantial impact on sustainable development.^3,10,204-206 This can be achieved by integrating sustainability into the core business and aligning existing SFI strategies with the SDGs.^3,10,204,205 It must also be supported by the commitments of the senior management.^204,211 Moreover, trust and transparency pose central values within the financial sector.²¹² This is particularly essential in the financial sector due to the sector’s role in managing information, fiduciary responsibility, and twoway information flows between banks and customers.^15,20 Since its services are characterised by their intangible nature and information asymmetry between providers and consumers, trust and transparency are central.²¹² A study by Singh, Misra, & Yadav (2021) finds a strong positive link between perceived CSR and financial inclusion, highlighting the role of financial entities in addressing social needs, particularly for disadvantaged people.²¹³

The Malaysian bank Maybank serves as an example of sustainable banking, as it has aligned its activities with sustainable practices. Over the last years, the bank has improved its energy efficiency, reduced paper consumption, offered online banking and installed ATMs in uncovered areas, in order to improve the sustainability performance of its operations and services. Regarding financial flows, Maybank implemented SRI practices for its lending activities, such as negative and positive screening practices. It has started to invest its profits according to impact investing, striving for positive impact creation. In addition, the bank supports sustainable innovations for SFI and sustainable development, thereby aligning sustainability with its strategies and operations.²¹⁴

Risk Management 

Practitioners from financial service firms have identified sustainability-related risk management as a driver for implementing sustainable business practices, as they perceive pressure from internal stakeholders.^8,48,204 Due to those risks, such as physical or transition risks due to climate change, financial entities started to avoid companies with low sustainability performance. This led to increasing investment in sustainable companies, driving the change from traditional finance towards SFI. According to Schoenmaker (2018), sustainability risks have been driving the two SFI approaches, Sustainable Finance 1.0 and Sustainable Finance 2.0, striving for maximum shareholder value (1.0) and stakeholder value (2.0). However, adequate risk management is limited in leveraging Sustainable Finance 3.0, which aims to create value for the common good.⁴⁸ Thus, adequate risk management that considers sustainability issues can enhance sustainability within the financial services sector and sustainable development to some extent.  

Maybank has integrated ESG risks into its risk management framework, policies and processes. Risk management for potential lending activities is divided into five phases, covering the rating, costing, pricing, monitoring and implementation phases. In this way, a holistic view of the impacts of financial flows is created. The bank denies business with high-risk industries, such as tobacco or gambling.²¹⁴

Customer Service and Marketing 

Due to the prerequisite of financial services, which requires trust by customers, CSR practices such as responsible marketing and customer service are essential to improve the sustainability performance in the sector and increase financial inclusion.^8,15,215,216 By optimising the user experience of financial services and improving awareness in relation to financial issues, the financial services sector can attract more customers and improve their well-being.^15,209In the past, the financial services sector has been lacking trust, one cause being the financial crisis.²¹⁷ Garbinsky et al. (2021) argued that people perceive financial responsibility, which leads to insufficient savings. The study found that making people recognise their unnecessary spending reduced their inflated self-view of financial responsibility, motivating them to save more.²⁰⁹ Not only for this reason, but also because financial services are used in daily life, they therefore influence the well-being of individuals.^215,216 Furthermore, certain customer groups exist that are unserved or underserved due to their ethnicity, and small company owners experience discrimination and difficulties in accessing finance from financial entities.²¹⁶ Adapting selling practices, marketing and improving customer service can lead to a more inclusive usage of financial services and enhance people’s financial well-being globally.²¹⁵

Managers should pay attention to the effects that services can have on an individual’s well-being. For example, guidance for customers on personalised benefits and time propositions should be communicated. Managers should establish value delivery, fair customer treatment, provide interaction space and support customers with new technologies. Rather than solely maximising financial profits for the customer, banks and other firms should consider all kinds of consequences that can arise for customers. More personalised services can also be achieved with the use of artificial intelligence, among other digital techniques. Transforming services by the formerly mentioned means can improve financial literacy, fairness and equality. Spreading financial literacy and being perceived as responsible can create value for firms and enhance inclusive finance.²¹⁵  

In order to overcome asymmetries between perceived and actual customer expectations and driving the acceptance of sustainable banking practices and products, Maybank improved its customer feedback channel by engaging with customers through active and regular involvement. In this way, customer expectations and needs became clear and could be used to tailor sustainability-related financial products and services.²¹⁴

Reporting 

Reporting is another relevant internal driver of sustainability in the financial sector, as it can support transparency, risk management, regulatory compliance and a tool to present positive impacts.^72,100,218 By transparently presenting direct and indirect impacts, financial entities can strengthen stakeholder confidence, proactively address regulatory requirements and improve their risk management processes. Disclosure of sustainabilityrelated information, such as climate and environmental risks, deepens the understanding of the financial risks associated with environmental and social challenges. In addition, reporting provides a platform for making positive contributions to sustainable development visible and hence, reducing negative impacts. A data basis from reporting enables companies to identify high-impact and low-effort measures and prioritise them accordingly. It can also serve as a steering tool by motivating borrowers to improve their sustainability practices, which in turn reduces risk on the part of financial entities.⁷² In addition, the idea of an SDG data repository, as proposed by Sabbaghi (2024), underlines the strategic relevance of sustainability reporting. A systematic and accessible presentation of SDG initiatives, including timeframes, degree of impact and target reference, can increase the credibility and impact of SFI strategies.¹⁰⁰

Innovative Products and Services, and FinTech 

Financial entities can enhance sustainable development by developing financial products and services that address sustainability issues.^205,219 Developing innovative SFI products and services is seen as an efficient mechanism to bridge the gap between sustainability strategy formulation and implementation.²⁰⁵ The impact of innovations on sustainable development and pollution reduction is already evident through financial instruments such as green bonds, green loans, and other innovative finance tools. For instance, in order to enhance financial inclusion, flexible financial products or a combination of products, such as savings and insurance, could be offered in order to increase their impact in poverty reduction.¹⁰³ Additionally, opportunities for financial firms are in altering credit conditions and providing digital banking and payment solutions, as 260 million adults in developing countries receive their income in cash, and around 440 million farmers are paid for farm goods in cash.⁷¹

Financial technology (FinTech) poses a central driver of financial innovation, bearing multiple opportunities for SFI and development.^127,219,220 FinTech, like digital banking and mobile payment applications, describes the integration of technology into the provision of financial services.²²⁰ It covers a wide range of applications such as digital banking, mobile payments, digital currencies, blockchain, and artificial intelligence.²²⁰ There are three fields in which FinTech can drive the achievement of the SDGs. First, by reallocating existing financial resources, e.g. through ESG investment, increasing the share of SFI. In fact, technology and innovation in general are the most critical factors to reduce the cost of financial services in developing countries. Second, by expanding overall financial resources via inclusion and sector growth.¹²⁷ With technological infrastructure, individuals from informal economies can access financial services from formal markets, reducing unequal opportunities.²²¹ By being able to access these services online, individuals can complete financial obligations efficiently without additional travel costs. Since developing countries have a higher share of underbanked or unbanked people, enhancing infrastructure for FinTech applications has a high potential in these countries to support access to finance.¹²⁷ It can also support financial access for small businesses and entrepreneurs, contributing to local economic development.²²² This is due to reduced costs of financial services through FinTech, making it more affordable to a wider range of individuals. Third, by directly enabling SDG achievement through innovative technologies supporting policy achievements.¹²⁷ For instance, FinTech can assist financial entities in identifying greenwashing behaviours, which can lead to a reduced supply of finance to these firms.²²³ Platforms for data collection can counteract information asymmetries for risk evaluation and can improve credit opportunities or access to insurance.²²⁴ FinTech can improve transparency and contribute to responsible banking practices and anti-corruption. Furthermore, if not abused to achieve the opposite, it can be used to educate customers and contribute to financial literacy by equipping users with more information to improve their decision-making.²²² However, FinTech also enables brown firms with no bank connection to access more financial resources.²²³  

If not used properly, FinTech can turn into a barrier to inclusive finance. Financial inclusion via FinTech can only be achieved when consumers are skilled in using technology. When banks shift their service to the internet and close local bank branches, which is occurring more frequently in poor quarters, a lack of technological skills can lead to financial exclusion, transforming FinTech into a barrier to inclusive finance.^127,225

PAYGO instruments, introduced in chapter 4.2.2, are an innovative payment instrument linked to direct consumption, such as energy or water utilities. According to Waldron et al. (2019), before the implementation of PAYGO, only a minor share of water bills was paid by customers in West Africa, while a large share of monthly bills remained unpaid. This put households in danger of losing access to sanitation. These households did not lack financial means, keeping them from paying their bills, but a safe and convenient payment option. With the help of PAYGO, customers were able to pay for their water consumption via smartphone, ensuring secure access to sanitation. Moreover, the digital payment system increased the utility provider’s revenue and reduced the collection costs by more than 50%.¹³⁷

Corporation and Partnership 

Financial entities can embed sustainability practices and enhance sustainable development through multi-stakeholder partnerships and collaborations, as they will become increasingly important to create shared value.^101,226,227 For instance, blended finance, which describes a combination of public and private finance, bears opportunities in allocating capital, sharing risks and returns, and striving for common goals, such as the SDGs.⁷ In the context of SFI, there are numerous initiatives and standards that financial entities can participate in or commit to that stimulate participation in SFI strategies.²²⁷ A comprehensive overview of global initiatives is given in Chapter 6.2.1 on external drivers, since many of them have been motivated or initiated by political actors. 

5.1.2      Internal Barriers 

The following part presents internal barriers that inhibit the adoption and growth of SFI strategies from within financial entities. They include the focus on the short-term perspective and economic performance of organisations and the lack of transparency, standardisation and understanding with regard to SFI strategies and sustainability.⁸

Short-Term Perspective 

While integrating sustainability into the core business strategy, processes, and governance structure enhances sustainability within its activities and impacts, its negligence and the desire for short-term incentives inhibit potential positive societal impacts.^{8,163,204,206} Practitioners refer to the tragedy of the horizon, which describes the discrepancy between short-term financial decisions and long-term effects of climate change.²⁰⁴ For instance, although the focus of central banks is on ensuring financial stability, many have not integrated sustainability into their objectives. A study by Dikau & Volz (2021) analysed the mandates of 135 central banks and found that only 12% had explicit sustainability mandates as of 2021. Almost half of the banks did not consider climate-related physical and transition risks as influencing factors for financial stability.¹⁶⁵ Moreover, the financial services sector is seen to be rather conservative, hence lacking openness to financing innovation due to associated risks.³ Also, the acceptance of potentially lower returns due to incorporating sustainability issues remains limited, mitigating the motivation of financial entities for change. To overcome these barriers, national institutions actively need to alter their focus on the long-term in order to achieve financial stability and increased shared value in the long term.¹⁶³  

Lack of Transparency, Standardisation and Understanding 

A lack of standards, intransparency and lack of understanding of the sustainability of institutions pose an additional barrier to implementing sustainability within financial services organisations effectively.^8,228,229 Since many stakeholders lack understanding of how to operationalise the SDGs and incorporate sustainability practices into the core business, and CSR practices focus on improving direct impacts, instead of indirect impacts, inconsistencies mitigate the quality of data and information.^228,229 This is supported by missing definitions and different calculation methods, e.g. the inclusion of financed emissions.⁸⁰ Hence, financial entities and practitioners depend on improved guidance and harmonisation of standards and practices by external initiatives. Organisations such as the CFA Institute, the Global Sustainable Investment Alliance and the PRI have jointly published a guide on common definitions, which is a first step to overcoming this barrier.⁵³ In chapter 6.2 on external drivers, established initiatives and standards are presented that provide practitioners with guidance for sustainable practices. Moreover, transparency can be increased by disclosing information on indirect impacts rather than focusing on direct impacts. In this way, firms may improve access to alternative finance due to disclosed ESG information.⁸ Disclosure by banks also empowers private monitoring of banks, which lowers the risk of corruption.²³⁰

Greenwashing 

Greenwashing inhibits the growth of SFI products. This concerns the fear of investors of being accused of greenwashing, which results in hesitation regarding SFI products and services. This is also connected to the lack of transparency, standardisation and understanding mentioned before.^205,231 On the other hand, the sector has been associated with greenwashing practices. Financial services organisations have been criticised for implementing sustainability policies and commitments without taking action. Hence, financial service organisations need to align their sustainability policies and commitments with their actions, ending the actual greenwashing practices.²³² In addition, besides overcoming the former barrier of a lack of transparency and understanding, greenwashing should be addressed by stricter regulation and more guidance.^231,232

5.2  External Drivers and Barriers 

The following part assesses the external drivers and barriers that influence the sustainability performance of the financial services sector, hence contributing to or inhibiting sustainable development. For this purpose, the drivers and barriers are organised according to five macro-environmental influencing factors of an organisation: political, economic, social-cultural, technological, and environmental aspects. With the help of these factors, the conditions for financial entities to enhance sustainability within the firm and sustainable development are described.²³³ The most relevant external drivers and barriers will be explained in the following.  

5.2.1      External Drivers 

SFI is promoted by various aspects that drive the sector by changing the environment in which the sector is embedded. They include political drivers such as regulatory frameworks and voluntary initiatives, the economic benefits of SFI, societal pressure, digitalisation and FinTech, and increasing awareness of risks due to the effects of climate change. These are presented in the following. 

External Political Drivers 

As mentioned before, clear signals by policymakers and sector-specific interventions through regulatory frameworks count as the most important drivers.^{10,163,218,226,234} Due to its systemic relevance and existing market failures, the financial sector is highly regulated.¹⁵ Many actors within the sector emphasise the importance of political will to increase SFI, following a top-down approach.^201,218,234 Nationally determined contributions as a response to the Paris Agreement account as the most effective factors to drive green bond market growth, also because they lead to lower costs of sustainability investments.²³⁴ The effectiveness of policies can also be seen in the example of the green credit market in China, which the country’s Green Credit Policy initiated.²⁰¹ Due to the accompanying emissions reduction, green loan subsidies improve the environmental quality. Hence, policies for SFI can be connected to improving environmental quality.²³⁵ In their study, Nykvist & Maltais (2022) find that the role of the financial sector as change agent for the transition towards sustainable development is limited, as successful transitions in the past, such as the expansion of renewable energy or electric vehicles, have been dominantly driven by cost reduction, market conditions and policies and not by financial actors.¹⁶³ On the other hand, existing regulations are criticised for not transferring a clear understanding of SFI, being too broad in terms of sustainability, setting mixed incentives and bearing the risk of greenwashing, which will be further elaborated on in the chapter on external barriers.^236-238

Effective SFI policy implementation should integrate the SDGs.^10,219 Also, financial mechanisms should be designed in a way to mitigate financial risks when addressing the SDGs.¹⁰ These requirements can also be addressed by the development of bond markets, which require incentives through policy, paired with market-based actions. Regarding the market development, the Sustainable Banking Network proposes the application of criteria, such as alignment, quality, flexibility and harmonisation.²²⁶ Moreover, political action can enhance the prerequisites by supporting financial infrastructure and financial literacy in order to increase financial inclusion.¹⁰⁴  

In many regions around the world, regulations regarding SFI have been implemented over the last years.^236,238Besides the formerly mentioned Green Credit Policy in China, in March 2018, the European Commission introduced a Sustainable Finance Action Plan, followed by a set of measures in order to reallocate capital flows to sustainable investments across the EU, manage climate-related risks and enhance transparency. These measures proposed the introduction of a taxonomy classifying sustainable investments and enhancing disclosure of non-financial information in the financial sector, among others.²³⁶ Taking the EU as an example, the following part presents the most relevant policy frameworks in the context of sustainable finance: 

Taxonomy Regulation: In July 2020, the Taxonomy Regulation came into force, assessing investments according to the four criteria: (i) contribution to at least one of the existing environmental objective; (ii) no significant harm to any of the environmental objectives; (iii) compliance with minimum safeguards, e.g. with regard to human rights and labour standards; and (iv) compliance with technical screening criteria defined for each economic activity by the EU. However, in February 2025, a legislative package called Omnibus was introduced to simplify existing regulations, such as the taxonomy, aiming to boost international competitiveness.²³⁹  

Sustainable Finance Disclosure Regulation (SFDR): In addition to the EU taxonomy and to general corporate sustainability reporting, in March 2021, the SFDR entered into force, aiming to enhance transparency and attract private funding towards sustainable development by standardising non-financial disclosure in the financial sector. Disclosures under the SFDR refer to the company-level data and product-based data. Currently, the European Commission is evaluating the framework, focusing on aspects like legal certainty, practical application and how the regulation can help combat greenwashing.²⁴⁰    

European Green Bond Standard (EUGB) Regulation: In November 2023, the European Union published the EUGB Regulation, a voluntary framework to enhance the transparency, credibility, and comparability of green bonds issued in the EU. It sets criteria for the use of proceeds, requiring that funds raised are allocated to economic activities aligned with the EU Taxonomy for sustainable activities. Issuers must also provide detailed reporting and undergo external verification by accredited reviewers.²⁴¹  

Legislation on ESG Rating activities: In February 2024, the European Council and Parliament reached a provisional agreement on a regulation governing ESG rating activities. The regulation aims to improve the comparability and reliability of ESG ratings by enhancing standardisation among rating providers. Under the new rules, ESG rating providers in the EU will be required to obtain authorisation and supervision from the European Securities and Markets Authority and comply with transparency requirements, particularly regarding their methodologies and information sources.²⁴²

These regulatory frameworks address several aspects that have been taken up by research to drive SFI, like harmonising and standardising reporting, as well as improving the understanding of SFI by classifying sustainable investment.^10,218,231

In addition to regulatory incentives and pressure, there is a wide range of initiatives that drive sustainability in the financial sector. Weber (2018) emphasises the role of the SDGs, which have already found their way into the financial services sector. By aligning regulation with the SDGs and by offering financial mechanisms consistent with the SDGs, funding for the SDGs can be improved.¹⁰ Assessing a review based on existing literature reviews, Cunha et al. (2021) collected the most relevant global initiatives in the field of SFI with the corresponding players that primarily support it, which are displayed in Table 17.³² Even though not all of the following initiatives are the result of state or supranational regulation, political objectives or multinational agreements, as some are primary market-driven, they are all listed under political drivers for a convenient overview. 

Table 17: Global Initiatives for SFI, Own table based on Cunha et al., 2021.³² 

Relevant Actors	Initiatives
Initiatives for Investors	UN Principles for Responsible Investment (PRI) Global Impact Investing Network (GIIN) Climate Bonds Initiative The Investor Agenda Net Zero Asset Managers Initiative
Initiatives for Financial Institutions and Firms	The Equator Principles UNEP FI Principles for Responsible Banking and Sustainable Insurance
Initiatives Primarily for Governments	Network of Central Banks and Supervisors for Greening the Financial System UN Addis Ababa Action Agenda G20 Sustainable Finance Working Group
Initiatives by NGOs	–     Finance Watch
Initiatives for Academia	– Global Research Alliance for Sustainable Finance and Investment (GRASFI)
Multi-Stakeholder Initiatives	Sustainable Banking Network (SBN) Global Sustainable Investment Alliance (GSIA) International Network of Financial Centres for Sustainability (FC4S)

Taking a look at the PRIs, Figure 8 illustrates the scope and relevance of such a voluntary and independent initiative. The figure shows that there has been constant growth in the number of signatories and assets under management, applying the principles for SRI. In

2021, the number of signatories reached 3,800 with USD 121.3 trillion in AUM.⁵⁸ The numbers deviate significantly from those by the GSIA, where AUM in SRI reached USD 30.3 trillion in 2022, questioning the effect of PRI signatories.⁶²

Figure 8: Growth of PRI Signatories and Assets under Management from 2006 to 2021, Own figure, based on Principles for Responsible Investment (2025).⁵⁸

External Economic Drivers 

Besides macroeconomic factors, increased financial performance of SFI or customer demand can drive the share of sustainable financial products and services in comparison to traditional financial products.^32,163,234 Tolliver et al. (2020) analysed factors driving the green bond market and concluded that, next to political factors, which were mentioned before, macroeconomic latent factors are more likely to drive market growth in comparison to institutional factors. In particular, the factors driving the growth of conventional capital markets, such as the size of the economy, trade openness and stock market capitalisation, also have an impact on the growth of green bond markets.²³⁴

A large stream of literature assesses the ways in which SFI strategies are linked to the corporate financial performance (CFP). In their review, Cunha et al. (2021) identify different theoretical streams. Literature from before 2000 indicates a negative relationship between SFI and CFP, which may be traced back to reduced diversification and additional operational, transaction and opportunity costs. More recent streams of literature identify factors such as asset type, investment horizon, performance measures, investors’ skills and non-financial performance targets that influence the outcome of CFP, therefore identifying a hybrid relationship. A third stream of literature argues that SFI strategies positively contribute to the CFP due to improved portfolio performance.³² Hence, being associated with improving the financial performance drives the growth of SFI. 

Additionally, customer demand is cited as a major incentive to foster SFI within the organisation, as both retail customers and financial entities demand financial products with a sustainable image.¹⁶³ Meanwhile, other actors within the sector see a lack of customer demand, disagreeing with the incentive, which is evaluated in the part on external barriers.^163,204 Competition is another driver for financial entities to adopt SFI strategies.²²⁷

External Socio-Cultural Drivers 

External pressure on the financial sector is also driven by society due to increasing awareness of potential impacts related to finance and investment.¹⁶³ For instance, media and NGOS conduct research on unethical bank lending activities, drawing attention to the financial sector.^163,243 Their presence provides additional forces to support SFI regulations.²³⁸ However, according to Nykvist (2022), this pressure is relatively low, as attention is mainly drawn to the polluting firms directly instead of the financial organisations.¹⁶³

External Technological Drivers 

Besides being a tool to drive sustainable development from inside-out, which was evaluated in the Chapter 6.1.1 on internal drivers, FinTech also functions as an external driver by providing SFI infrastructure. For instance, FinTech can advance the efficient utilisation of SFI tools such as green bonds by providing the required infrastructure, which enhances market growth.²⁴⁴ With a digital financial ecosystem, several, if not all, SDGs can be promoted.^127,219,224Different technologies within such an ecosystem can support the enhancement of financial stability, reducing hunger and poverty, and the provision of health insurance to increase health and financial planning and saving to fund education. It can also assist in developing and investing in sustainable technology and transformation.¹²⁷ For instance, in the agriculture sector, digital marketplaces connect farmers with retailers.²²⁴ Among the most important technologies for the improvement of financial access is the smartphone with access to the internet, and more generally, digital identification.¹²⁷ However, the risks associated with digitising financial services include shortages of human capital and the digital divide, which, for instance, pose risks of divergences across the agricultural sector in both industrialised and developing countries.²²⁴

External Environmental Drivers 

SFI is also influenced by environmental factors, with climate change presenting physical risks such as bushfires, floods, storms, extreme heat, and rising sea levels. As a result of climate change impacts, climate-related risks are more and more considered in decisionmaking when acquiring financial products and services.²⁰⁴

5.2.2      External Barriers 

Within the financial services sector, external barriers exist that inhibit the growth of SFI. These barriers include the insufficient design of regulatory frameworks, a perceived lack of customer demand, and a general lack of understanding regarding the interconnection between the financial sector and the SDGs. In the following, these external barriers are presented. 

External Political Barriers 

While regulatory frameworks for SFI drive the transition towards SFI, complexity, uncertainty or a lack of regulatory guidance and standardisation pose barriers. Missing guidance and definitions of SFI terms and standards not only signal a low priority or importance of sustainability aspects in finance but also lead to a lack of quality in SFI products.^{80,234,245,246} This is partly because the lack of standardisation of performance measurement or calculations leads to vague outcomes, which are hardly comparable to stakeholders or set the wrong incentives.⁸⁰ For instance, parts of the SFDR are ambiguous and partly self-discriminate against the SDGs.²³⁷ Regarding the development of the green bond market, bankable projects are challenging to identify or rate properly due to missing standards, discouraging the engagement of investors.²⁴⁵ These issues also drive the accusations of greenwashing, as SFI instruments are partly incorrectly labelled as sustainable.²³⁶  

In order to overcome these barriers, SFI needs to be promoted on a national and international level and move away from voluntary commitments. Regulations, as presented in the chapter on political external drivers, are one step in that direction.^8,231,234 Besides policy reforms, Clark et al. (2018) propose the development of an international convening informational body to synchronise evidence and join resources, projects and investors. In addition, they recommend enhancing the cost-effectiveness by addressing the lack of information.²⁴⁶

External Economic Barriers 

While customer demand and competition are seen as drivers for SFI, they have also been acknowledged as barriers to other market participants.^8,204,245 Due to imperfect information and information asymmetry, financial actors lack confidence to engage with customers regarding SFI topics because financial market participants do not recognise the opportunities.²⁰⁴ Instead, customers focus on potential risks.²⁴⁵ Also, the market offers sufficient competitive products that neglect sustainability aspects.⁸ In order to overcome that barrier, Cheung et al. (2022) propose to improve communication on SFI matters to improve financial literacy and an understanding of sustainability aspects, thereby reducing information asymmetries.²⁰⁴  

External Socio-cultural Barriers 

The lack of understanding of SFI relevance and potential poses another barrier to SFI.²³⁸ On the one hand, customers of financial products do not connect the environmental threats posed by climate change to potential personal economic losses. Hence, climate-related issues are not considered in economic valuation.²⁰⁴ On the other hand, policymakers struggle with differentiating sustainability-related norms, values and features from those that are not.²³⁷ Moreover, many people are not aware of the benefits that are linked to SFI products and services.²⁴⁷ Again, communication on SFI strategies and their potential needs to be improved. For instance, international organisations can communicate the SFI benefits to market participants, such as regulators, issuers of SFI instruments, and investors.^204,247

6      Conclusion 

This work sheds light on sustainability in the financial services sector by assessing its direct and indirect impact on sustainable development, presenting strategies and measures that support sustainability, and the drivers and barriers that enhance or inhibit it. It results from a non-systematic literature review, screening literature on sustainable banking, finance and investment, aiming to provide a comprehensive overview. It shows that sustainability considerations have made their way into the sector, as green finance, SDG finance, and other sustainable finance approaches have gained relevance. In addition, SRI, ESG integration and impact investing have emerged as alternative investment approaches. The sector’s contribution to sustainable development is concentrated on providing financial products and services and allocating financial streams. In contrast, the potential to improve the sustainability impact through its direct operations is limited.  

In SFI, four strategies can be distinguished: access to financial services, investments in sustainable infrastructure and projects, sustainability-related risk management, and the encouragement of ESG adoption. They can be complemented with sustainable financial products and services, such as screening, stewardship and shareholder advocacy, and community investment, which are part of SRI. In addition, green, social impact, sustainability or sustainability-related bonds, green credits and loans are central instruments. Other products and services include microfinance, project finance, sustainable credit risk management and weather derivatives. 

SFI within the sector can also be advanced through drivers and the overcoming of specific barriers. Financial entities can advance sustainability by adopting sustainable practices, including risk management, responsible marketing, and engaging in partnerships. At the same time, they need to overcome the focus on economic returns and short-term success and improve their understanding and transparency of SFI. Externally, financial entities are influenced by regulatory frameworks, competition, societal pressure, customers, partners, and the adverse effects of climate change, demanding sustainable practices. Additionally, FinTech has emerged as a potential bearing multiple opportunities to enhance SFI. However, regulatory complexity and uncertainty, a lack of standardisation and a perceived lack of customer demand inhibit the transition towards SFI.

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