Setting the Stage: The Why and What of Sustainable Finance

This chapter introduces sustainable finance, defining its core concepts and outlining the necessity for integrating environmental, social, and governance (ESG) factors into a financial system facing urgent climate and societal challenges. Critiquing the traditional system’s limitations in handling externalities and information gaps, it explores the key drivers for change, emphasizing the economic imperatives of climate action (“E”) and social stability (“S”). The chapter examines the distinction between ESG perspectives focused on financial “value” versus ethical “values,” while also addressing the challenge of greenwashing and the regulatory efforts to ensure authenticity in sustainability claims. Contrasting the rules-based EU regulatory approach with the norms-based US model, the chapter analyzes their differing philosophies and implications for global market fragmentation. Finally, it introduces the “Sustainable Finance Operating System” as a conceptual framework that structures the exploration of how capital is guided toward sustainability goals.