Sustainable Finance and the Reallocation of Capital for Ecological Transition
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Abstract
This paper examines the role of sustainable finance in supporting green investment and financing the ecological transition. It reviews three interconnected dimensions: the integration of environmental, social and governance criteria into investment decisions and asset pricing; the development of green financial instruments and financial intermediation; and the financing mechanisms supporting renewable energy, public green investment and corporate transition. The literature indicates that sustainability considerations increasingly affect investor behavior, capital allocation, risk assessment and financing costs, although their financial consequences remain heterogeneous across markets and institutional settings. ESG information can redirect investment flows, but disagreements among rating providers and differences in materiality limit the reliability of sustainability signals. Green bonds, green credit and sustainable banking mechanisms can facilitate environmental investment, yet their effectiveness depends on certification, disclosure quality, liquidity, policy credibility and borrower characteristics. Public financial institutions also play an important role in absorbing early-stage risks, creating markets and mobilizing private capital for low-carbon technologies. The reviewed evidence further shows that climate transition requires more than specialized green instruments. Financial-system structure, corporate investment decisions, regulatory frameworks and coordinated public policies influence whether capital is effectively redirected toward environmentally sustainable activities. Sustainable finance therefore represents an evolving institutional framework through which environmental objectives, financial risk and long-term investment are progressively integrated.
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