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The central question in this paper is whether a market economy can theoretically and empirically deal with sustainability. A system analysis of the current neoclassical theory shows that the system components (goal function, interaction mechanisms, actors and outcomes) are predominantly defined in terms of economic growth and facilitated by market exchange. This fosters (over)production and consumption of private goods, crowding out public goods and preservation of the commons. The one size fits all 'economic mechanism design' cannot deliver social outcomes regarding sustainability. The explicit recognition that an economy has different domains (ecological, social, economic) broadens the options for incorporating sustainability within the economic system. This richer framework allows us to analyse the economic problem at hand: an efficient economic system in an inclusive society within biophysical boundaries. We show that the alternative for market economics does not only have to be government intervention but can also include private forms of collective decision-making.

Measuring Corporate Sustainability (CS) has been identified as an important enabler for integrating sustainability into corporate practices. Different methodologies and frameworks for measuring CS have been developed in the literature with limited success, as reflected by the lack of application in the real world. Among practitioners, the effort has been on developing frameworks that provide useful indicators of the different items that need to be considered for integrating sustainability. Notwithstanding the increasing attention and progress on the subject, a cohesive and applicable measure of CS across firms, industries and geographies is still missing. This paper provides an examination of the different methodologies for measuring CS, with an analysis of their merits and limitations, as well as guidance for future research focus. The findings show a failure to coherently link the mathematical measurement and data aggregation methodologies to a well-constructed concept where the linkage between the defining features and causal relations are appropriately identified. The proposed models and mathematical techniques are not able to inform on the extent to which a corporation acts sustainably because sustainability is not being measured in its highest extension, making the results narrow, non-referential and non-comparable. Furthermore, there is confusion between developing the indicators of CS, providing their measurement and enabling their integration.

Changes in climate policies, new technologies and growing physical risks will prompt reassessments of the values of virtually every financial asset.”. Mark Carney, Governor of the Bank of England1.. There is increasing interest in assessing the impact of climate policies on the value of financial sector assets, and consequently on financial stability. Prior studies either take a “black box” macro-financial approach or focus solely on equity instruments – though banks’ exposures predominantly consist of debt. We develop a more tractable finance (valuation) approach at the industry-level and use a Merton contingent claims model to assess the impact of a carbon tax shock on the market value of equity and debt instruments. We calibrate our model using detailed firm level vulnerability data and apply the model to 2-digit sectoral exposures of Dutch banks. We find declines in the market value of banks’ assets of 2–13% of core capital for a €100 carbon tax shock, increasing to 6–29% for a €200 carbon tax shock.

De Nederlandse woningmarkt is slecht toegankelijk, creëert vermogensongelijkheid en is grillig. Dat laatste is schadelijk voor onze economie. Bovendien is het huidige woonbeleid duur. Een grondige renovatie van het woonbeleid biedt een structurele oplossing.

Measuring biodiversity impact is attracting corporate attention as firms face increasing scrutiny over the ongoing sixth mass extinction of animals. Extant approaches to measurement are relatively nascent and do not directly address the dynamic complexity that can cause abrupt ecosystem change. Measurement approaches largely overlook when transformational change may occur and how changes to biodiversity may influence its likelihood. We posit that corporate biodiversity impact measurement can be advanced by incorporating resilience thinking from the natural sciences. Resilience thinking can refocus measurement on how biodiversity contributes to an ecosystem's capacity to adapt to disturbances and avoid sudden, transformative change. We propose a set of seven key mechanisms that can inform measurement development across three biodiversity attributes: abundance, composition and distribution. To conclude, we discuss opportunities for accounting researchers to advance corporate biodiversity measurement approaches connected to ecosystem resilience.

Four major Australian banks span the Australian and New Zealand banking system. Applying the financial trilemma model, this article investigates possible approaches for cooperation in the supervision and resolution of these cross-border banks. The article first reviews the current arrangement in the Trans-Tasman Council of Banking Supervision, which is based on a soft law approach. Next, this article explores a trans-Tasman banking union, which would encompass joint supervision and joint resolution based on burden sharing. The challenge is political. Are the two countries willing to join forces in banking policies and thus give up part of their sovereignty in this field? And can New Zealand, as the smaller one of the two, ensure an effective voice in joint arrangements?

An important policy discussion on joining the banking union is currently taking place in Denmark and Sweden. In this article we review the pros and cons of joining. The main rationale for joining the banking union is the importance of cross-border banking in the EU internal market. Reviewing the banking systems, we find that banks in Denmark and Sweden have the same cross-border characteristics as those in the euro area countries, suggesting a similar rationale for joining the banking union. Moreover, both countries have large banks which may be too big to save at country level, but not at the banking union level. Nevertheless, there are some governance concerns. While euro area countries have an automatic and full say in all banking union arrangements, the non-euro area countries (the ‘out’ countries) lack certain formal powers in ultimate decision-making; however, we find that this may be less of a problem in practice. If necessary, the ‘out’ countries would have the ‘nuclear option’ of leaving the banking union.

Central banks should not be excluded from the list of responsible institutions to address climate change. They already have a bias in their balance sheets toward polluting industries, which should be reduced. Next, the government should design green policies that do not overburden middle class households.

In the transition to a sustainable economy, companies are increasingly adopting the goal of long-term value creation, which integrates financial, social and environmental value. However, institutional investors struggle to invest for long-term value creation and perform the social function of finance. Traditional investment approaches, based on the neo-classical paradigm of efficient markets and portfolio theory, only capture financial value in their financial risk and return space. Attempts at ESG integration are typically too shallow to overcome this problem. In this paper, we examine the set of issues that make this problem so stubborn and we outline the contours of an alternative paradigm, based on adaptive markets, that is better able to pursue long-term value creation. This long-term investment approach includes short investment chains, active management that assesses companies’ transition preparedness, concentrated portfolios, and deep engagement.

Companies need to rethink the way they create value and grow their business to thrive in tomorrow’s volatile and uncertain business environment. Companies in virtually every industry are being impacted by new disruptive and complex societal trends, such as climate change, energy transition and social inequality. At the same time, companies are increasingly evaluated on their non-financial performance and they ever more compete on speed and sustainability. Still, only a few companies have begun to invent new strategic directions, pioneering strategies focused on creating long-term value, not just for shareholders but for all stakeholders. A playbook on how to create long-term value is currently lacking, making it difficult for companies to capture the opportunities and mitigate the risks created by these societal trends. This paper develops a model of long-term value creation that supports companies in creating long-term value and setting their strategies accordingly. Financial institutions can draw on the model to assess how future proof their investment and/or lending portfolios are.

Central banks have already started to look at climate-related risks in the context of financial stability. Should they also take the carbon intensity of assets into account in the context of monetary policy? The guiding principle in the implementation of monetary policy has been 'market neutrality', whereby the central bank buys a proportion of the market portfolio of available corporate and bank bonds (in addition to government bonds). But this implies a carbon bias, because capital-intensive companies tend to be more carbon intensive. The author first reviews the legal mandate of the Eurosystem. While the primary objective is price stability, the Treaty on European Union allows the greening of monetary policy as a secondary objective. He proposes a tilting approach to steer or tilt the allocation of the Eurosystem's assets and collateral towards low-carbon sectors, which would reduce the cost of capital for these sectors relative to high-carbon sectors. This allocation policy must be designed so it does not affect the effective implementation of monetary policy. The working of the tilting approach is calibrated with data on European corporate and bank bonds. We find that a modest tilting approach could reduce carbon emissions in the corporate and bank bond portfolio by 44 per cent and lower the cost of capital of low carbon companies by 4 basis points. Our findings also suggest that such a low carbon allocation can be done without undue interference with the transmission mechanism of monetary policy. Price stability, the primary objective, is, and should remain, the priority of the Eurosystem.

Despite widespread concern about global climate change, the overwhelming majority of publicly listed companies around the world still do not disclose their carbon emissions. Even fewer privately held companies do. Making carbon disclosures mandatory for both public and private companies is an elementary but essential step in the drive towards a net zero carbon economy. Firms should be required to report their annual direct greenhouse gas emissions, called Scope 1 emissions, as measured in CO2 equivalents, with possible deductions for high quality offsets. Going forward, firms should also be required to report the history of their annual carbon emissions. Such a disclosure mandate is simple, transparent, and readily implemented. It will aid policy makers and asset managers alike in managing the risks of carbon transition and accelerate the pace of future carbon emission reductions.

Banks that straddle borders may not only do so via foreign subsidiaries; they can also conduct their cross-border banking activities via a branch or directly to customers. Existing studies on the impact of cross-border banking often focus on the cross-border activities via foreign subsidiaries. We use a unique hand-collected dataset with cross-border activities for the 61 largest European banks to study the impact cross-border banking has on the risk-return profile of an individual bank. Our results show that cross-border banking decreases banks’ risk, by lowering the insolvency risk and generating a more stable income profile.

Organizations are under mounting pressure to adapt to and to adopt corporate sustainability (CS) practices. Notwithstanding the increasing research attention given to the subject and the meaningful theoretical contributions, it is claimed that a definition, and a commonly accepted understanding of the concept of corporate sustainability, is still missing. Alignment on the meaning of CS is of critical importance for enabling coherent and effective practices. The lack of a sound theoretical foundation and of conceptual clarity of corporate sustainability has been identified as an important cause of unsatisfactory and fruitless actions by organizations. To address the questions “What is Corporate Sustainability?” and “Is it true there is a lack of convergence and clarity of the concept?”, we perform an ontological analysis of the different and interrelated concepts, and a necessary condition analysis on the key constitutive features of corporate sustainability within the academic literature. We demonstrate that the concept of corporate sustainability is clearer than most authors claim and can be well defined around its environmental, social and economic constitutive pillars with the purpose to provide equal opportunities to future generations.

Sustainable finance, also called green or environmental finance, refers to allocating investment and lending to sustainable governmental institutions, corporations, and projects. This accelerates the transition to a low-carbon, circular, and inclusive economy. The financial system moves from a traditional investment and lending approach that maximizes financial value subject to risk, often in a narrow and short-term way, toward investing and lending for long-term value creation that optimizes financial, social, and environmental value subject to risk. Sustainable finance thus involves considering environmental and social value, alongside financial value. Traditional finance assumes efficient markets, which means that all available information is incorporated in (stock) market prices. Finance can thus help in making production more sustainable, accelerating ecological modernization. By contrast, a business-as-usual scenario may lead to stranded assets.

Written for undergraduate and graduate students of finance, economics and business, the third edition of Financial Markets and Institutions provides a fresh analysis of the European financial system. Combining theory, data and policy, this successful textbook examines and explains financial markets, financial infrastructures, financial institutions and the challenges of financial supervision and competition policy. The third edition features greater discussion of the financial and euro crises, including extensive analysis of their causes and impact, as well as their remedies. New material covers unconventional monetary policies, the Banking Union, the Basel 3 capital adequacy framework for banking supervision, macroprudential policies and state aid control applied to banks. The new edition also features wider international coverage, with greater emphasis on comparisons with countries outside the European Union. Visit the companion website at www.cambridge.org/de_Haan3e for password-protected PowerPoint lecture slides, solutions, figures and tables for instructors, and exercises for students.

The severe economic impact of the COVID-19 pandemic could threaten financial stability. However, assessing the gravity of this threat is challenging, since banks' accounting-based loan loss provisions are sluggish. We use a Merton contingent claims model to provide a real-time, market valuation-based assessment of the impact of COVID-19 on euro area banks' corporate loan portfolios. We calibrate the model based on observed stock price responses and use different scenarios for future volatility and incurred losses in case of default. Based on stock prices as of April 20, 2020, we estimate that the market-implied losses for euro area banks could reach over €1 trillion, or 4 to 25% of corporate credits' book value (7 to 43% of available capital and reserves). Our analysis can be viewed as an early warning indicator of potential accounting losses to follow.

How can governments and companies be jointly empowered to have a positive impact on the sustainable development goals? The current economic system is largely geared towards increasing economic growth. But this could come at the expense of rising social inequality and environmental degradation. This paper examines the link between economic system outcomes and corporate sustainability outcomes. We provide evidence that governments and companies can reinforce each other in their pursuit of sustainable development. Sustainable development is based on three pillars: economic, social and environmental. These pillars should be assessed and balanced in an integrated way. An impact economy, in which governments and companies balance profit and impact, is best placed to achieve the sustainable development goals.

In the transition to a sustainable economy, companies are increasingly adopting the goal of long-term value creation, which integrates financial, social and environmental value. However, investors struggle to invest for long-term value creation and perform the social function of finance. Conventional investment approaches, based on the neo-classical paradigm of portfolio theory and efficient markets, only capture financial value in their financial risk and return space. Attempts at sustainability integration through environmental, social and governance (ESG) ratings are typically too shallow to overcome this problem. This teaching note presents an alternative investment paradigm, based on adaptive markets and fundamental analysis, that is better able to pursue long-term value creation. This long-term investment approach includes active management that assesses companies’ transition preparedness, concentrated portfolios, and deep engagement. This teaching note can be used in courses on asset pricing. It complements asset pricing textbooks, which usually adopt the capital asset pricing model.

Written for undergraduate and graduate students of finance, economics and business, the fourth edition of Financial Markets and Institutions provides a fresh analysis of the European financial system. Combining theory, data and policy, this successful textbook examines and explains financial markets, financial infrastructures, financial institutions and the challenges of monetary policy, financial supervision and competition policy. The fourth edition features not only greater discussion of the financial and euro crises and post-crisis reforms, but also new market developments like FinTech, block-chain, cryptocurrencies and shadow banking. On the policy side, new material covers unconventional monetary policies, the Banking Union, the Capital Markets Union, Brexit, the Basel 3 capital adequacy framework for banking supervision and macro-prudential policies. The new edition also features wider international coverage, with greater emphasis on comparisons with countries outside the European Union, including the United States, China and Japan.

Purpose Large global banks were at the heart of the global financial crisis. In response to the crisis, the Financial Stability Board published an integrated set of policy measures, such as capital surcharges, to address the systemic and moral hazard risks associated with global systemically important banks (G-SIBs). Almost 10 years later, it is time to take stock of the impact of these measures. This paper answers three questions on what happened to the G-SIBs. First, have they shrunk in size? Second, are they better capitalised? Third, have they reduced their global reach? Design/methodology/approach This paper looks at the individual G-SIBs and compares the situation before the crisis with the current situation. In this methodology, the differences because of changes at individual banks and changes in the ranking within the group (composition effect) are disentangled. Data have been collected on these banks from SNL Financial (banking database) and annual reports. Findings First, a substantial increase in capital levels is seen, though the distribution is uneven. China and USA are leading the pact with leverage ratios (Tier 1 capital divided by total assets) of around 7 per cent for their large banks, whereas Europe and Japan are trailing behind with ratios between 4 and 5 per cent. Second, a strong composition effect is identified: a shift of business from the global European banks to the more domestic Asian banks, which are gradually increasing their global reach. The US banks keep their strong position. So, the decline in cross-border banking is largely because of a composition effect (i.e. a reshuffle of the global banking champions league) and far less due to a reduced global reach of individual banks. Research limitations/implications From the results on capital, recommendations are made on capital requirements (see below at social implications). Social implications It is noted that the euro area, Japan, Sweden and Switzerland trail behind with a leverage ratio between 4 and 5 per cent. It is recommended these countries bring the leverage ratio of their largest banks more in line with international practice. Originality/value The effects of the reform after the global financial crisis on the large global banks have not been researched in detail. This paper split the results by country of incorporation (home country). This gives interesting differences, which the paper relates to specific policies (or lack of policies) in these countries.

Apres la crise, il semblerait que les banques europeennes se retirent du systeme bancaire international. Elles delaissent par ailleurs le marche des activites de banque d'investissement au profit des grandes banques d'investissement americaines. Mais ce constat est-il juste ? Nos resultats montrent que les banques asiatiques ne subissent pas les effets des crises tandis que les activites des grandes banques americaines ont repris apres une recapitalisation rapide et decisive en mars 2009. En Europe, la situation est contrastee. Les banques britanniques et suisses ont subi d'importantes restructurations et une diminution de leurs activites internationales. Les banques de la zone euro sont dans une position intermediaire : elles ont subi de legeres restructurations tout en preservant leur presence a l'international.Les responsables politiques doivent faire un choix. Nous preconisons d'achever l'Union bancaire et de confier la surveillance prudentielle a la BCE et le mecanisme de soutien budgetaire au MES. Cela placerait la zone euro sur un pied d'egalite avec les Etats-Unis et la Chine qui disposent d'un mecanisme de soutien budgetaire credible pour leur systeme bancaire. A la suite du Brexit, nous suggerons que l'Autorite europeenne des marches financiers assume la fonction de superviseur central des marches pour soutenir la creation de marches de capitaux dynamiques sur lesquels les banques d'investissement americaines mais egalement europeennes pourraient jouer un role.Classification JEL : F36, F38, G21, G23, G28.

In the aftermath of the Great Financial Crisis, regulators have rushed to strengthen banking supervision and implement bank resolution regimes. While such resolution regimes are welcome as a means to reintroduce market discipline and reduce the reliance on taxpayer-funded bailouts, the effects on the wider banking system have not been properly considered. A macro approach to resolution is also needed, which should consider the contagion effects of bail-in and the continuing need for a fiscal backstop to the financial system. For bail-in to work, it is important that bail-inable bank bonds are largely held outside the banking sector, which is currently not the case. Stricter capital requirements could push them out of the banking system. The organisation of the fiscal backstop is crucial for the stability of the global banking system. Single-point-of-entry resolution of international banks is only possible for the very largest countries or for countries working together, including in terms of sharing the burden of a potential bank bailout. The euro area has adopted the burden-sharing approach in its banking union. This Policy Contribution recommends completing banking union. Other countries have taken a stand-alone approach, which leads to multiple-point-of-entry resolution of international banks headquartered in those countries and contributes to fragmentation of the global banking system.

Rapidly rising house prices are a well-known source of financial instability. This chapter examines whether there are regional differences in house price growth within European countries and, whether this warrants more targeted measures to address vulnerabilities. The focus is on the division in terms of house prices between the capital cities and the rest of the territories of six EU countries. There is evidence of a decoupling between capitals and the rest of the country. House prices in capitals seem to have a stronger cyclical component which would indicate a clear rationale for regional-level tools. An instrument that could be used locally is tax. But adjusting taxes to dampen house prices would be very difficult. Structural measures to adjust the housing supply, such as relaxing planning restrictions typically have a long lead time. An alternative is to use macroprudential measures at a regional level, in particular loan-to-value and debt-to-income limits. In that way, the housing boom-bust cycle might be dampened.

In recent years, green bonds have gained popularity as the investment industry is looking for environmentally friendly instruments. Yet, green bonds fragment bond issues, which reduces liquidity and thereby increases financing costs. Moreover, most green bonds are used to refinance existing activities. As a result, the growth in environmentally-friendly initiatives is limited. Finally, the product and market design of green bonds is such that prices are unlikely to reflect environmental performance accurately. This makes it hard for investors to differentiate among green bonds and allows firms to get away with window-dressing (greenwashing). We propose to split green bonds into regular bonds and green certificates. We show that this design 1. makes market prices more informative about environmental performance, 2. leads to more liquid securities and therefore lower financing costs, and 3. provides incentives to start new environmentally friendly projects rather than refinance existing ones.

In the transition to a sustainable economy, companies are increasingly adopting the goal of In the transition to a sustainable economy, companies are increasingly adopting the goal of long-term value creation, which integrates financial, social and environmental value. That raises the fundamental question in corporate finance about the objective of the corporation. The current objective is maximising profit, which boils down to maximising shareholder value. But the shareholder model is holding companies back from sustainable business practices. An enhanced shareholder view recognises that it is instrumental to treat the other stakeholders well in order to preserve long-term shareholder value. An alternative view is to broaden the objective of the corporate to optimising the integrated value, which combines the financial, social and environmental value. In that way, the interests of stakeholders are ranked equally. Such a move to the stakeholder model requires new rules for corporate governance and decision-making on corporate investments to deal with the various interests of current and future stakeholders. This Teaching Note can be used in courses on corporate finance. It complements corporate finance textbooks, which usually adopt the shareholder model.

To meet the Paris climate goals, we need serious environmental and energy transitions. Financing those transitions will require both the financial and the public sector to transcend business-as-usual and take on new roles and structures in this system change. Current financial practice lacks the structures to deal with local initiatives, and has a narrow focus on financial return calculations. For their part, subnational governments often lack the knowledge to take that role. This gap can be filled by adopting investment criteria based on integrated value, by educating students and practitioners on transitions and systems thinking, and by creating new structures that are adapted to local conditions, with active roles for city and regional governments.

Commonland had the ambition to restore 100 million hectares of degraded land worldwide by 2040 – 5% of the then 2 billion hectares of degraded land on the planet. Encompassing 1 million hectares, Altiplano Estepario in Southern Spain was one of its successful restoration initiatives. However, in order to scale up the existing projects in Spain and in other parts of the world, Commonland first needed to convince local farmers that it was financially attractive for them to switch from conventional farming to sustainable farming combined with reforestation. Only after analysing the farmers’ financials could Commonland approach public and private investors with a concrete proposal for long-term funding. What should the financials for the farmers look like? What proposal could Commonland make to investors? This case is part of the Sustainable Development Goals (SDGs) case series, developed by Rotterdam School of Management (RSM), Erasmus University. With a focus on SDG 15 (Life on Land), the case is also related to SDG 8 (Decent Work and Economic Growth), SDG 11 (Sustainable Cities and Communities), SDG 12 (Responsible Consumption and Production), SDG 13 (Climate Action), SDG 16 (Peace, Justice and Strong Institutions) and SDG 17 (Partnerships for the Goals). Video learning materials and other resources about these SDGs are available at .

At the start of Solvency II in January 2016, there is no overview of the insurance market in Europe. This paper develops a methodology to link various data sets on foreign branches and subsidiaries. The result is a new and comprehensive data set of cross-border insurance in Europe. We find that cross-border business in insurance is higher than in banking. We also find that the share of cross-border insurance has increased over the last decade, notwithstanding the global financial crisis. EIOPA, the European supervisory authority, plays a coordinating role among the national supervisors in the approval of internal models under Solvency II. Game theory suggests that there are limits to the coordination model. The increasing share of cross-border insurance, documented in this paper, may tilt the supervisory balance from coordination towards centralisation in an Insurance Union.

In the aftermath of the global financial crisis, the market share of US investment banks is rising, while that of their European counterparts is declining. We present evidence that US investment banks are on the verge of taking over pole position in European investment banking. While the US players have thus become dominant in Europe, China has taken matters into its own hands. Since 2015, Chinese investment banks have overtaken the position of American and European investment banks in the Asian-Pacific market. Credit rating agencies and investment banks are the gatekeepers of the Capital Markets Union. The supervisory agencies in Europe can effectively supervise the European operations of these US managed players. We discuss the consequences of Brexit. On the political side, we suggest that the European Commission should keep on viewing its, albeit declining, banking industry as a strategic sector. The Commission, the European Central Bank and the Bank of England should jointly develop a strategic agenda for the EU–US Regulatory Dialogue. Finally, corporates rely on investment banks to issue new securities. We recommend that the big European corporates should cherish the (few) remaining European investment banks, by giving them at least one place in a further US dominated banking syndicate. That could help to avoid complete dependence on US investment banks.

This article introduces a unique and hand-collected dataset on cross-border exposures of 61 European banks. Getting a complete overview of the cross-border positions of European banks is challenging, as there are no regular reporting standards for banks’ foreign exposures split by country. Most studies therefore rely on data on banks’ foreign subsidiaries. This however leads to a significant underestimation of banks’ cross-border positions. We collect data from annual reports and other public sources for the period 2010-2017 in order to construct a dataset covering the complete cross-border exposures by banks. The dataset is valuable to academic researchers in finance and economics as well as central banks interested in financial globalization. The data are collected at the individual bank-level, and this provides opportunities for researchers aiming to analyse the impact of banks’ strategic decisions [1]. Lastly, since the cross-border exposures are split by host country the data can be used in gravity models, since it provides a measure of connectedness between banks and/or countries.

textabstractDeposit insurance, like any insurance scheme, raises moral hazard concerns. Such concerns arising from European deposit insurance can be alleviated through a country-specific component in the risk-based premium for deposit insurance and limits on sovereign bond exposures on bank balance sheets. This paper, which forms part of the Euro Area Reform debate, argues, however, that proposals to maintain national compartments in a new European Deposit Insurance Scheme are self-defeating, as such compartments can be destabilising in times of crisis.

Four major Australian banks span the Australian and New Zealand banking system. Applying the financial trilemma model, this article investigates possible approaches for cooperation in the supervision and resolution of these cross-border banks. The article first reviews the current arrangement in the Trans-Tasman Council of Banking Supervision, which is based on a soft law approach. Next, this article explores a trans-Tasman banking union, which would encompass joint supervision and joint resolution based on burden sharing. The challenge is political. Are the two countries willing to join forces in banking policies and thus give up part of their sovereignty in this field? And can New Zealand, as the smaller one of the two, ensure an effective voice in joint arrangements?

While there is increasing interest in decarbonising or greening monetary policy, central banks are keen to maintain market neutrality. However, there is evidence that the market has a bias towards carbon-intensive companies. The paper develops a method to tilt the European Central Bank’s (ECB) asset and collateral framework towards low-carbon assets. We find that a medium tilting approach reduces carbon emissions in the ECB’s corporate and bank bond portfolio by over 50%. We show that a low carbon allocation can be done without undue interference with the transmission mechanism of monetary policy.

markdownabstractTo guide the transformation towards a sustainable and inclusive economy, the United Nations has developed the Sustainable Development Goals (SDGs). Sustainable development is an integrated concept with three aspects: economic, social and environmental. This paper starts by reviewing the environmental and social challenges that society is facing. Why should finance contribute to sustainable development? The main task of the financial system is to allocate funding to its most productive use. Financial institutions have started to avoid unsustainable companies from a risk perspective, which we label as Sustainable Finance 1.0 and 2.0 in our new framework. The frontrunners are now increasingly investing in sustainable companies and projects to create long-term value for the wider community (Sustainable Finance 3.0).