SDGs and Public Banks: What Additionality Should Development Finance Aim For?

This article examines the positive role that public banking systems can play in advancing Sustainable Development Goals (SDGs) from a European public policy perspective, given the persistent difficulties of the international financial system in sustaining capital formation under a logic of sustainability. Although public banks are often cited as key institutional actors, their contribution to SDG financing remains conceptually underexplored. The prevailing policy narrative assigns them a complementary role in supporting private investment but rarely clarifies how public and private finance interact once their respective balance sheets are properly defined and consolidated. Building on Griffith-Jones et al. (2023), the article develops a framework for assessing the additionality and impact of public banks that: (a) adopts the endogenous money approach, distinguishing initial from final finance; (b) incorporates a sequential time structure derived from the monetary circuit, making initial finance the causal driver of subsequent flows; and (c) employs a stock–flow consistent (SFC) accounting representation based on gross rather than net flows, consistent with financial accounting practice and suitable for conditions of fundamental uncertainty. Within this framework, comparative-dynamics exercises in logical time yield conclusions applicable to historical time, thereby retaining policy relevance. Four illustrative cases—three domestic and one cross-border—demonstrate how public and private banks finance investment and how sectoral consolidation reveals their differing capacities to bear uncertainty. The resulting hierarchy of liquidity and risk-bearing implies that only first-rank public liquidity can socialize investment risk ex ante, reframing the concept of public banks’ additionality in financing sustainable development.