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This chapter analyses how financial innovations and financial engineering can contribute to sustainability. The topic is discussed using the lens (and the examples) of finance. While different solutions can be used, we focus on green bonds (GBs) and social impact bonds (SIBs). The unique feature of GBs is the issuer’s statement to raise capital to fund investments with a specific environmental impact, whereas SIBs are innovative financial instruments which require the use of sophisticated techniques to fund social investments by reallocating risks and responsibilities among interested (private and public) parties. Our analysis rationale is that the increase of the understanding of the market (GBs) and of the instruments’ functioning (SIBs), also from a financial perspective – the one used in the chapter – can improve their use. We create a conceptual framework within which it is possible to analyse the financial instruments available for financing sustainability. Successively we analyse GBs, presenting both the main standards and the sources of guidelines for these instruments and market stakeholders; next, we focus on the so-called labelled green bond market. We analyse the social impact bonds clarifying their dynamics, structure and participants, after which we discuss the case study of Newpin SBB. GBs and the SIBs enable the achievement of different economic goals, which are separately discussed. They also pose risks and challenges, which we analyse by using a common framework.

In recent years, the socially responsible investing (SRI) industry has become an important segment of international capital markets by incorporating ESG (environmental, social and governance) factors into investment selection processes. This study analyses whether SRI mutual funds are conventional funds in disguise or invest in line with their ESG objectives. In contrast to other studies, the analysis exclusively focuses on the non-financial performance of SRI vis-à-vis conventional funds and applies ESG corporate ratings of three rating agencies (Oekom, Sustainalytics and ASSET4) for a European and a global fund universe. The SRI and non-SRI funds are analyzed with respect to differences in their Top fund holdings, the average ESG values and the distribution of ESG performance, as well as the significance of rating differences by utilizing cross-sectional regressions. At a first glance, the top holdings of both fund types seem to be very similar, but SRI funds have on average higher ESG rankings. The cross-sectional regressions show that the ESG rating differences between SRI funds and conventional funds are significantly positive, i.e. SRI funds exhibit significantly higher ESG ratings than conventional funds.

The chapter reviews the development of the green bond market and discusses the investment implications. The supranational organizations were the first issuers of green bonds. The introduction of Green Bond Principles and strong policy support in developing countries contributed to an increase in the issuance of green bonds. Corporations, banks and municipalities have become active issuers. Demand has increased as well, as investors with environmental focus raised allocation in this asset category. The common motive to invest in green bonds is to support the climate. The chapter discusses an additional financial incentive. Adding green bonds to a portfolio produces benefits from diversification if correlations are not perfectly positive. Furthermore, the chapter examines the performance and correlations of the four green bond indices. The best performance was in the first quarter of 2016 and losses were seen in 2013 and 2015. The results also showed that, within the green bond market, it is not efficient to invest in both S & P and BoA Merrill Lynch index-based funds, as those two indices are highly correlated and the diversification benefits are limited.

SME (small and medium enterprise) engagement in corporate social responsibility (CSR) has recently emerged in mainstream academic research. Researchers are now beginning to recognize that CSR in SMEs may not be assessed on the basis of our understanding of CSR in large organizations. The unique characteristics of SMEs render it far from applicable for them to employ CSR theories and practices of large corporations. One important gap in this literature involves the lack of CSR implementation tools that are tailored to SMEs. The purpose of this chapter is to contribute to the literature by proposing a framework for effective CSR implementation in the specific environment and conditions of SMEs. Our recommendations are drawn from two projects for developing CSR implementation procedure for SMEs in France: the Global Performance procedure and the SD21000 implementation guideline.

This chapter addresses the potential and challenges of green bonds to finance ecologically sustainable investments. Governments, investors and the media have hailed green bonds as a key instrument of climate finance because of their prospects for tapping the trillions of dollars held in global bonds markets and by institutional investors. Does the explosive issuance of green bonds mean that bonds markets are ‘greening’? This chapter details the growth of the green bonds market, the appeal of green bonds to investors and challenges to the market’s development. One major conclusion is that a weak governance framework limits how much green bonds can contribute to sustainable development. In order to ensure that the green bonds market matures with integrity, weaknesses in governance structures must be addressed. The chapter concludes by providing policy recommendations for developing the green bonds market.

In this chapter we examine inter-industry and intra-industry (country-level) differences to firm-level returns from engaging in environmentally sustainable practices. Differences in environmental impact and public attention suggest market rewards for undertaking environmentally sustainable practices may differ by industry. An uneven global distribution of activity by industry, and country concentration of industry sectors, imply country-level differences may influence rewards from and incentives to engage in these practices. Using a fixed-effects panel data regression model, we analyze firm-level environmental performance indices constructed from environmental indicators in Thomson Reuters’ Asset4 CSR dataset. Data cover 45 countries from 2002 to 2013. We find statistically significant negative relationships between firm-level environmental performance and stock returns in the consumer services, financials, oil and gas, and utilities sectors. At the country level we identify a statistically significant negative relationship between high levels of institutional quality – i.e. government effectiveness, regulatory quality, rule of law, corruption control, and accountability – and stock returns in the consumer goods and oil and gas sectors. For the highly regulated financial and utilities sectors, we find a statistically significant negative relationship between low levels of institutional quality for a sub-set of institutional quality factors and stock returns. For other sectors effects are limited or statistically insignificant.