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Environmental Innovation and Societal Transitions 42 (2022) 219–231
Contents lists available at ScienceDirect
Environmental Innovation and Societal Transitions

journal homepage: www.elsevier.com/locate/eist
Too risky – The role of finance as a driver of

sustainability transitions
Björn Nykvist *, Aaron Maltais
Stockholm Environment Institute, Linnégatan 87D, 115 23 Stockholm, Sweden
A R T I C L E I N F O A B S T R A C T
Keywords: The finance sector has a long track record of engaging with sustainability issues, and policy
Finance makers and sector representatives agree that a transition to sustainability needs to be mirrored by
Sustainability transitions rapidly expanding financing. Based on in-depth interviews with a broad range of actors in the
Regime change
Swedish finance sector, we show that despite a strong recognition of the challenges, the sector
Risk-sharing
Public and private actors
remains cautious towards risk. We explore what motivates the sector and how to govern a faster
transition and find that informants strongly believe that the sector cannot move any faster
without further government intervention. The preferred policy is the use of generic tools such as
CO2 taxes, or for the government to step in and mitigate the risk. We conclude that a more
ambitious narrative on how the private and public sector can collaborate to share risk is needed,
as it is unlikely that the finance sector will lead the way.
1. Introduction
Originating from research in the 1970s, the notion of sustainable and ethical investing has played a large role in the finance sector
for decades (Friede et al., 2015; Naidoo, 2020). The development of mutual funds dedicated to ethical or environmental investments
traces back to the early 1990s (O’Rourke, 2003; Weber, 2005). It has also long been argued that the intermediary role that banks play
in society makes them fundamental in achieving sustainability (Jeucken, 2001). Corporate social responsibility (CSR), sustainable and
responsible investing (SRI) and the integration of so-called ‘environmental, social, and governance’ (ESG) factors into portfolio
management are established and a well-studied phenomena (Friede et al., 2015; O’Rourke, 2003; Waddock and Graves, 1997), and
many approaches share a common core of positive and negative screening, using social and/or environmental criteria (O’Rourke,
2003).
Recently, it has been increasingly argued that the finance sector is centrally placed and can be a driver in transforming our
economies to become more sustainable per se (Naidoo, 2020). Prominent private and political initiatives, such as the United Nations’
Principles for Responsible Investment,1 the Financial Stability Board’s Task Force on Climate-related Financial Disclosures,2 and a
range of initiatives in the European Union are all grounded in the potential of finance as a driver of sustainability. The European
Commission frames it such that the finance sector can (1) “re-orient investments towards more sustainable technologies and busi
nesses,” (2) “finance growth in a sustainable manner over the long-term,” and “contribute to the creation of a low-carbon, climate
* Corresponding author.
E-mail address: bjorn.nykvist@sei.org (B. Nykvist).
1
https://www.unpri.org/
2
https://www.fsb-tcfd.org/
https://doi.org/10.1016/j.eist.2022.01.001
Received 4 December 2020; Received in revised form 21 November 2021; Accepted 7 January 2022
Available online 13 January 2022
2210-4224/© 2022 The Authors. Published by Elsevier B.V. This is an open access article under the CC BY-NC-ND license
(http://creativecommons.org/licenses/by-nc-nd/4.0/).
B. Nykvist and A. Maltais Environmental Innovation and Societal Transitions 42 (2022) 219–231
resilient and circular economy.”3 In concrete terms, a call for a stronger taxonomy defining what economic activity should be
considered sustainable was a key recommendation from the EU High-Level Expert Group on Sustainable Finance (HLEG, 2018), and
forms the centrepiece of the EU’s legislative package coming out of its Action Plan on sustainable finance. Given the enormous levels of
investment required to meet the global climate and sustainability targets of the Paris Agreement and Agenda 2030, a better under
standing of what role the financial sector can play in accelerating the pace of transition towards sustainable economies is clearly
needed.
Increasing the flow of capital to investments in sustainable technologies and production methods and directing capital away from
environmentally or socially destructive practices implicates the financial sector. However, what is needed is a deeper understanding of
the role financial actors can be expected to play in shifting capital. The financial sector is embracing sustainable finance as core to its
practices, with Bloomberg reporting in 2021 that 37 trillion USD of assets under management have been invested with consideration of
ESG factors. Total global ESG assets under management are expected to rise to over 50 trillion USD by 2025, which will amount to over
a third of all assets under management (Bloomberg, 2021). But what kind of internalization of sustainability are financial actors
actually engaged in? Clearly the real economy is not shifting fast enough to meet global climate and sustainability targets despite the
rise of sustainable finance as a narrative and practices such as considering ESG factors becoming mainstream. What do the dominating
sustainable finance practices and the incentives to engage with them tell us about the role of financial actors in pushing forward
transitions in a wider range of economic activities?
Much of the existing business and finance literature addressing the relationship between finance and sustainability is concerned
with three issues. The first is the financial performance of investors who adopt SRI tools such as ESG screening or active ownership
(Capelle-Blancard and Monjon, 2012; Ravelli and Viviani, 2015). It is well established that there is a correlation between compara
tively better sustainability performance (i.e., ESG indicators) and financial performance at the corporate level (Friede et al., 2015;
Orlitzky et al., 2003; Waddock and Graves, 1997). However, this does not necessarily translate into positive impacts on returns in
broader portfolio-based strategies, e.g., as applied in mutual funds (Friede et al., 2015; Ravelli and Viviani, 2015). The second issue
comprises the questions of why financial actors have increasingly adopted the praxes of sustainable/socially responsible investing
(Revelli, 2017; Scholtens and Sievänen, 2013; Sievänen et al., 2013). Finally, there is some research into the impacts of common
sustainable finance practices such as active engagement and sustainability screening and weighting of investments on the sustain
ability performance of firms. A recent survey of the literature finds strong evidence for coordinated active engagement having the
potential to impact company performance, but the causal link between common capital allocation strategies and firm sustainability
performance was weaker (Kölbel et al., 2020).
More recently, influential topics in sustainable finance are climate finance for adaptation (Smith et al., 2011), and the role of green
bonds (Bracking, 2015; OECD, 2015), but, overall, the literature does not adequately address what the barriers are to scaling finance at
the breakneck pace that sustainability transitions entail. There is a need to go beyond analysis focused on why financial actors adopt
the language of sustainability and associated practices and whether these practices are leading to incremental changes in corporate
activities, and instead focus on the extent to which the finance sector is or could be a powerful driver for transitioning economies and
societies to sustainability. For example, the emerging literature on green bonds finds that the additionality in terms of more capital
becoming available for green investments is questionable (Maltais and Nykvist, 2020). The literature on sustainable financing has yet
to explore sufficiently how the finance sector is expected to bring about large system-wide transformations of how our economies
function, and what governance is needed to scale investments faster. The uncertainty is high, because financial actors can equally well
continue in their central mediating role of allocating capital efficiently, which is not inherently focused on the long-term sustainability
of societies, given the shorter time horizons investors operate with.
To understand the role of sustainable finance in sustainability transitions, we need to clarify our view of transitions as socio-
technical change unfolding through interactions between users, producers, suppliers, researchers, public authorities, social groups
and investors (Geels, 2005, 2002; Geels et al., 2017). Transitions thus entail studying the relationships and dynamics between these
core components and in particular the process of regime change (Geels, 2005; Kemp et al., 1998). In this paper, our aim is to go beyond
the specific modalities of sustainable finance (e.g., ESG investing, green bonds, and climate risk management) to assess what role
financial actors, clearly integral to current socio-technical regimes, can play in advancing transitions in the real economy.
The focus of this study is thus not the transition of the finance sector itself but rather to further study the role of finance as one core
component of sustainability transitions in broader economic activities. Financial actors are typically understood as mediating the
allocation of capital efficiently, and the question is whether sustainable finance changes this role and thus the way transitioning
economies are financed. Questions about the role of finance in sustainability transitions have historically received comparatively
limited attention, but there is now a growing literature (Falcone et al., 2018; Naidoo, 2020; Polzin, 2017; Polzin and Sanders, 2020;
Seyfang and Gilbert-Squires, 2019). Detailed studies, using the common multi-level perspective (MLP) framework, of the role of
finance in transitions have only recently been published, by Geddes and Schmidt (2020), who focused on niche-regime dynamics,
tracing patterns of fit-and-conform and stretch-and-transform (Smith and Raven, 2012), and Seyfang and Gilbert-Squires (2019),
focusing on potential upscaling of niche practices and reconfigurations of regimes (Geels and Schot, 2008). Both Geddes and Schmidt
(2020) and Seyfang and Gilbert-Squires (2019) clearly find incremental regime change, and that balancing risk and reward is the
overarching determinant for investments to take place. Falcone et al. (2018) find that the national Italian narrative on green finance is
dominated by landscape pressure and global actors. Despite the fact that investment needs in energy infrastructure (no matter their
3
https://ec.europa.eu/info/business-economy-euro/banking-and-finance/sustainable-finance/overview-sustainable-finance_en
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carbon performance) are estimated to be USD 93 trillion between 2015 and 2030 (OECD, 2015), studies of energy transitions generally
find that availability of capital is not the main problem (Naidoo, 2020; Polzin and Sanders, 2020). Hence, while research on the
financial regime actors finds that learning and innovation do take place (Geddes and Schmidt, 2020; Seyfang and Gilbert-Squires,
2019), the degree to which financial regime actors can actually change their practices to become drivers of sustainability transitions
remains unclear, or whether the main determinant of the pace of change can rather be attributed to landscape factors, combined with
succinct sectoral policy.
With this paper, we aim to contribute to the emerging literature on how finance regime actors are situated in socio-technical
systems and to further explore the role of the finance sector in sustainability transitions. We study the motives, drivers and gover
nance conditions that impact both the form and extent of financial actors’ engagement with sustainable finance. As a case study, we
have selected the Swedish finance sector, which is from a comparative perspective advanced in terms of engagement with sustainable
finance. If sustainable finance practices are an important dynamic in understanding how transitions are happening in our economies,
then Sweden is a likely case for being able to identify these effects, given its status as a forerunner in sustainable finance. We explore
the progress of sustainable finance, broadly defined as the ways that financial actors engage in efforts to channel investments and
provide capital for more sustainable practices and solutions. Our aim has been to understand how the central actors in the current
financial system act as regime players in sustainability transitions (Fuenfschilling and Truffer, 2014; Geddes and Schmidt, 2020; Geels,
2014); discuss the role of financial actors and investment through different type of assets across the transitions phase (Rotmans et al.,
2001); and finally, discuss how the finance sector can be governed to contribute more proactively to sustainability transitions.
This study addresses three central research questions:
• What motivates the sector to engage in sustainable finance today?

• What do the incentives among financial actors to engage with sustainable finance tell us about the extent to which the finance
sector can act as a driver or accelerator of sustainability transitions in our economies?
• What policy or governance interventions could facilitate a faster reallocation of capital from unsustainable economic activities to
sustainable investments?
The rest of the paper is organized as follows. We first describe both our theoretical understanding of sustainability transitions and
our empirical methods for gathering material through in-depth interviews with financial actors in Sweden (Section 2). Secondly, we
report findings that focus on the ever-present challenge of assessing risk-reward (Section 3). Our main finding is that the financial
regime cannot be expected to be a major driver of sustainability transitions without significant policy interventions or active gover
nance from the public to create new partnerships and risk-sharing mechanisms that alleviate the inherently higher risk associated with
more rapid deployment of sustainable finance. Finally, we discuss the central risk-reward premise and the regime and niche dynamics
that characterise existing financial systems, as well as how this relates to ongoing sustainability transitions (Section 4), and draw
conclusions on the importance of public leadership (Section 5).
2. Multi-level perspective and finance in sustainability transitions
In this paper we discuss and analyse sustainability transitions through the lens of the Multi-Level Perspective (MLP). MLP theorises
that transitions arise from the interaction between different levels of societal structuration, focusing analysis on the niche, regime and
landscape levels (Geels, 2005, 2002). The regime represents the status quo, with its established rules, power dynamics, actors, and
institutions, while the niche represents the site of disruptive or pathbreaking innovation that may challenge the existing regime (Kemp
et al., 1998). The landscape level represents the very large-scale conditions or trends that impact on multiple regimes (Geels, 2002).
Geels (2002) included the financial network in his original works on MLP, but finance has historically received rather limited
attention in the literature, with very limited conceptualisations of the role of finance and how it is situated in MLP (Geddes and
Schmidt, 2020). It is only recently that a growing set of contributions have started to review the literature more systematically
(Naidoo, 2020), deploy MLP for empirical case studies on finance and transitions (Falcone et al., 2018; Geddes and Schmidt, 2020),
and thus explore the role of finance in socio-technical transitions more systematically (Falcone et al., 2018; Geddes and Schmidt, 2020;
Naidoo, 2020; Polzin, 2017; Polzin and Sanders, 2020).
However, for some authors, financing and funding have been core to the analysis of socio-technical regimes (Bolton et al., 2016;
Fuenfschilling and Truffer, 2014) and the importance of studying finance for the transformation of capital intensive sectors is generally
well known (Schmidt, 2014). Barriers related to sunk investments and the elevated investment risks of new technology were already
addressed in foundational work on transitions by scholars such as Kemp et al. (1998). Broadly speaking, the transitions field is heavily
influenced by evolutionary and interpretive theories that aim to expand beyond a narrow economic view on regime change that is
limited to the gradual turnover and renewal of capital stock (Geddes and Schmidt, 2020; Geels, 2010).
The global financial crisis 2007–2008 also spurred publication in the transitions literature with some dedicated analysis of the role
of finance (Geels, 2013; van den Bergh, 2013). But despite being that finance is a critical component of current regimes (Geddes and
Schmidt, 2020; Geels, 2013), and argued to be a potential drivers of transition, it is only in recent works that these dynamics of finance
have been addressed explicitly. Naidoo recently conducted some critical analysis exploring the demands that can be placed on the
financial system, given a transition lens, if the current climate crisis is viewed as necessitating a qualitatively different financial system
per se (Naidoo, 2020). Similarly, Seyfang and Gilbert-Squires (2019) argue that the finance sector must undergo fundamental change,
such as by adopting much longer investment time horizons, if it is to become a strong driver of sustainability. However, to date the
finance sector has remained relatively resistant to large landscape changes such as climate change, and we agree that it remains
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important to study the finance sector in order to further understand how sustainability transitions unfold (Geddes and Schmidt, 2020).
The limited number of in-depth studies of finance in the sustainability transitions literature may be due to the largely sector-
agnostic nature of finance. Although there are certainly variations, the same basic financing sources and mechanisms of private
and public capital, through debt and equity, are applied no matter what sectors or activities are financed. In particular, as illustrated in
recently developed frameworks by (Polzin, 2017; Polzin and Sanders, 2020), low carbon innovation follows a generic technology life
cycle, which requires a changing financing mix, due to the natural progression in risk profile of the investments. More fundamentally,
however, venture capital, angel investors, banks, and mutual and pension funds alike generally invest in a portfolio of companies and
assets in order to diversify their investment and manage risk (Markowitz, 1952). This natural progression of types of actors with
varying risk profiles, and central risk mitigation strategies through diversification, makes having many types of financial actors critical
to the financing of a given transition, and results in the same financial regime’s engaging with a range of sectoral transition processes.
It is important to note that there are other themes of relevance across socio-technical transitions, such as the role of public policy
(Kivimaa and Kern, 2016; Smith et al., 2010) and, more broadly, governance, in sustainability transitions (Shove and Walker, 2010;
Turnheim et al., 2015; Turnheim and Nykvist, 2019). A point of departure in this study is that finance similarly constitutes such a
sector-agnostic role. We agree with Geddens and Schmidt (2020, p. 4) who argue that finance actors should be studied as regime actors,
or as a regime in their own right, being a central component with a common functioning across sustainability transition cases, and
influencing how a broad range of socio-technical niches and regimes develop.
In our view, it is precisely the sector-agnostic character of the finance sector that explains the increasing attention paid to its
potential role in achieving climate and other sustainability targets. If finance can become sustainable, the thought goes, it will impact
all sectors that have a de facto governing function that incentivises sustainable economic transition across regional and economic
spheres. This vision for the role of sustainable finance, in pushing forward a multiplicity of transitions, is clearly directly relevant to
MLP theory-building. It raises the important question of whether and how certain levels of social structuration can be targeted to bring
about deep socio-technological transitions across societies. Our aim is to provide a further empirical basis for updates to MLP theory on
sustainability transitions (Geddes and Schmidt, 2020) through a dedicated study of financial regime actors, and by exploring the
validity of the argument that the current push for sustainable finance will have the type of transition impacts its proponents regularly
posit for it.
3. Method and case study
3.1. Interviews with Swedish financial system regime actors
Sweden is considered a leading country in the area of sustainability, corporate social responsibility, and sustainable finance and
was among the first countries to develop a market for green bonds (Maltais and Nykvist, 2020). In 2018, Sweden was the sixth top
issuer of green bonds globally (Climate Bonds Initiative, 2018), when over 10% of bonds issued in SEK were labelled green (Danske
Bank, 2019). Our premise is that actors in the Swedish financial system have experience and insights on the motivations and barriers to
further engaging with sustainability and offer a good case to assess the current and potential role of the finance sector in driving
sustainability transitions. Since the aim of the case study is to understand how actors in the current financial system act as regime
players in sustainability transitions, our study is thus focused on understanding large private and public financial actors who manage
large amounts of capital and how these actors are governed and incentivised to work on sustainable finance. We include a particular
focus on green bonds, as this is arguably one of the most important examples of a new instrument that has been developed by the
Table A1
List of actors interviewed.
Actor Type of actor
AMF Private pension fund and mutual funds

KPA Private pension fund
Storebrand Private insurance
Folksam Private insurance
Öhmans Private mutual funds
SOU 2017:115 Public inquiry on green bonds Policy actor
Financial Supervisory Authority Policy actor
Ministry of Finance Policy actor
Anonymous Hedge fund
Anonymous Hedge fund
AP2 – Second Swedish public pension fund Public pension fund
AP7 – Seventh Swedish public pension fund Public pension fund
NIB – Nordic Investment Bank Public investment bank
SHB – Svenska Handelsbanken Private bank
Anonymous Private equity
Anonymous Private equity
Nasdaq Intermediaries
GES Consultant, ESG data provider
Kommuninvest Green bond issuer
Volvo Finance Green bond issuer
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finance sector in a bottom-up manner and aimed at directing investments to more sustainable projects, which therefore makes it an
important regime innovation to understand (Maltais and Nykvist, 2020).
Informants were selected to cover a range of major types of financial actors in the Swedish finance system. The aim of our informant
selection was to identify representative actors of the major holders of capital globally, such as banks, pension funds, insurance
companies, asset managers, and private equity firms. An initial set of informants was approached and further informants within these
main financial actors and institutions were identified based on continued scoping of the sector and use ofthe snowball method, asking
informants to indicate additional actors to include in the study (Noy, 2008). Interviews were sought until at least one actor within each
category was interviewed, and additional interviews yielded diminishing returns (Bowen, 2008). The criteria for judging data satu
ration consisted of recognize when information from additional interviews on the central topics regarding the motives of engaging with
sustainability, and steering of the sector toward a more rapid transformation kept repeating existing and well-grounded patterns in the
data.
In total, we conducted twenty in-depth interviews with actors from banks, mutual funds, hedge funds, asset managers, public and
private pension funds, and private equity. In addition, we interviewed one intermediary (stock exchange), a consultant specialised in
ESG data, issuers and investors in green bonds, and policymakers, in Sweden (see Appendix, Table A1). For both private and public
actors, informants were the sustainability managers in their respective organizations, in a few cases joined by chief financial officers.
For policymakers, the informants were the designated experts of sustainable finance issues or responsible managers.
Interviews were conducted between September 2017 and April 2018 and followed a semi-structured interview protocol (see Ap
pendix, Table A2), with headings that brought together main categories of questions aimed at illuminating our main research questions
on the role of the finance sector and how to steer it. The guide included (I) an openended first part in which the role of the sector was
probed; and the ways that sustainability is important for the sector explored, including separate headings on the (IIa) economic and
(IIb) non-economic incentives to engage in sustainable finance; and a section on (III) green bonds. A dedicated block addressed (IV)
Table A2
Interview guide.
Theme Question
Preliminaries What is your title and role?

Category I – Sustainability and the finance sector Q1 – In what ways is a transition to sustainability important for the finance sector?
Q2 – What are the most important ways in which your organization engages in sustainable investing today?
Q3 – In general, to what extent do responsible investing practices (ESG, active ownership, GBs) help to
make the economy more sustainable?
Category II a, b – Benefits of engagement with Q4 – What are the benefits for your organization from integrating sustainability into your investment
‘sustainable finance’ strategy?
Q5 – Are there benefits for your organization in working with sustainable investments that are not directly
financial?
Q6 – What do you see as the investment opportunities for your organization in the transition to a low-
carbon economy?
Q7 – Do your organization’s financial stakeholders exert any pressure that limits your engagement with
sustainable investing?
Q8 – Has pressure from NGOs, government, or other non-financial stakeholders to ‘go green’ influenced
your decisions about sustainable investing?
Category III – Why green bonds (when relevant)? Q9 – Why are green bonds a good way for your organization to engage with sustainable investing?
Q10 – Do you accept lower returns on green bonds compared to similar regular bonds?
Q11 – When you shift your investments into green bonds, what are you shifting out of?
Q12 – Are green bonds creating additional capital for sustainable infrastructure, given that most issuers
could have raised the capital without the green label?
Q13 – Has investing in green bonds had an impact on your organization’s internal work with sustainability?
Q14 – Do you see green bonds as a way of managing the climate risk in your investment portfolio?
Q15 – Would more standardization increase your willingness to invest in green bonds?
Q16 – What would it take for green bonds to be a way to provide more financing for new infrastructure
development or for SMEs?
Category IV - Barriers Q17 – What in your view would be of most help to increase the financing available for investments in
sustainable infrastructure?
Q18 – What are the main barriers to your organization’s increasing its engagement with green investing?
Category V - Regulatory environment Q19 – How does the regulatory environment affect your engagement with green investing?
Q20 – Many financial regulations aim to ensure financial stability. How do these regulations affect your
ability to invest in green investments?
Q21 – Are there any financial policies, regulations, or initiatives from the government that would enable
you to scale up your engagement with green investing?
Category VI – Risks Q22 – To what extent does your organization see climate change as representing a risk for your
investments?
Q23 – Do you see any financial risks for your organization that are associated with a rapid scaling-up of
green investments?
Category VIII – summarising, scaling-up financing Question 24 – What will be most important in enabling your organization to increase its engagement with
for green infrastructure. green investing?
Question 25 – Are there any issues we have not brought up that you feel we should have covered in our
conversation?
Question 26 – Is there anyone you could recommend whom we could interview?
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barriers; (V) the regulatory environment; and (VI) risks, in order to address the question of what policy incentives could foster faster
development. Finally, the concluding section of each interview asked informants to summarise the most important enabling factors to
achieve more sustainable finance (VIII). Not all questions were used in each interview, but questions were asked until all categories of
questions were accounted for.
Although informants were sustainability managers, and not necessarily directly engaged in the daily asset management, the actors
interviewed in general manage large sums of capital. Reputational risks and a generally careful approach to interviews by outsiders led
us to the decision to promise informants anonymity. In two cases, one private equity firm and one hedge firm, actors asked to remain
anonymous at organizational level. So as to not reveal participants, we therefore kept the list of informants anonymized for these two
categories of actors. Furthermore, in order to yield a more open and trusting conversation, interviews were not recorded. Interviews
were performed by both authors, who took turns asking questions, while both took handwritten notes. Notes were transcribed to digital
form directly after each conversation and compared for consistency and completeness of results.
3.2. Coding and analysing data
Data was assessed by analysing the most grounded patterns reflected in the interviews, using open coding (Coffey and Atkinson,
1996). Coding was first conducted through simultaneous reading of the material by both authors. A first set of codes on overarching
categories was identified and included three categories related to the first and second research question about what motivates the
sector to engage in sustainable finance, identified as follows: a) the Incentive structure; b) the underlying Premise of risk, reward and what
has principal priority; and c) Barriers to enhance sustainable finance. The second set of codes relates more to the third question, of how
more sustainable finance can be fostered and included, as follows: d) the Tools used; d) Policy and regulation to foster sustainable
finance; and e) tangible Impacts of sustainable finance activities. Each transcribed statement by an informant that related to each of
these codes was transferred to a database in Excel, where subsequently the strongest pattern relating to each research question was
identified by noting both the prevalence and consistency in answers on each code. The results section focuses on the strongest patterns
from the interview data, combined with insights from the literature on sustainable finance and sustainable transitions.
4. Results
4.1. The motive to engage in sustainable finance
We find that the most commonly cited incentive to engage in sustainable finance is customer demand; two processes are
discernible. First, institutional investors are putting pressure on both asset managers in private equity and mutual funds to increase
their ESG work and show progress on sustainable finance. Secondly, for actors with a direct relationship to retail investors, such as
pension funds and mutual funds, it is becoming increasingly important to be able to market funds and solutions that are labelled as
green or ethical. It has become important to show a high profile on sustainability, to gain market share, broaden the investor base, and
to attract new collaborations and partnerships. But the incentive does not necessarily have a strong impact, and some informants
expressed that they wished customer demand was higher, to enable the organisation to push further. There are, however, strong
indications that actors are responding to trends among peers, and most respondents indicated involvement with numerous sector-level
sustainable finance initiatives. Respondents also expected that sustainability will have an increasing impact on access to financing
going forward, implying a strategic value in engaging with sustainable finance.
Using a typology introduced by Weber (2005) we find evidence of three models of motives for financial institutions to engage with
sustainability: as a new strategy; as a value driver; and as a response to the requirements of clients. Implicitly, a fourth motive follows
from the types of mandates governments can provide to large institutional investors who manage public money (i.e., pension funds and
sovereign wealth funds) to advance sustainability (Weber, 2005). In relation to the notion of strategy, it is worth pointing out that it is
known that investors who are interested in sustainable finance not only show multiple utility functions (valuing both financial per
formance and sustainability), but are also less prone to withdraw capital when the performance of the investment is low (Bollen, 2007).
Going beyond these modes, and indicative of the broader turn in society towards recognizing and valuing sustainability since the
time of the study by Weber (2005), a common response across actor types is that engagement is driven by a positive impact on the
identity of the organization through realizing valued institutional learning. A sustainability profile attracts staff and contributes to
creating a sense of purpose and creates opportunities for new partnerships with actors who hold similar values. Concrete examples
include the high value placed upon the learning processes, such as dialogues on what counts as good sustainability performance, both
within organisations and between financial counterparts, and initiated by tools such as green bonds. This is also in line with research
by Geddes and Schmidt (2020), who highlighted the importance of learning by co-investing, leading to a stretch and conform patterns
among evolving financial regime actors, and Seyfang and Gilbert-Squires (2019), who highlight how learning takes place in financial
niches. We argue that, in general, these types of incentives and the strong peer dynamics point to legitimacy-seeking incentives among
financial actors, leading them to internalize shared sector-level understandings of the importance of sustainability (DiMaggio and
Powell, 1983, pp. 68–77).
Finally, and somewhat surprisingly, there is no evidence in our study of a direct link between non-governmental organizations (e.g.,
environmental or consumer groups) to exert pressure on financial actors to become more sustainable. One explanation discussed by
some of our informants is that such organizations focus their efforts on influencing the companies directly responsible for, e.g.,
production systems that have adverse environmental or social impacts. Actors who provide financing are one step removed from
production systems, and do not receive as much attention. The outcome in transition terms is quite clear in the responses from our
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informants. While informants agreed that the landscape pressure on the established regime actors to become more active on sus
tainability to increase legitimacy is growing, this process is limited by what is requested by peers and tier one interactions, such as
when institutional investors ask for sustainability, or retail customers ask for products with a sustainability or ethical investment label.
The societal shift in norms towards sustainability impacts the sector very gradually. The primary mechanism described by our in
formants is that large institutional players have started applying pressure on for example asset managers or banks to provide better
reporting on ESG. Beyond this, incremental initiatives, such as green bonds spearheaded by Swedish banks, assert only light pressure
on the sector to create incentives to mobilize more work on sustainability.
4.2. Engaging with sustainability transitions
Informants clearly expressed that the awareness and perceived importance of sustainability issues have grown fast in the past two to
five years. The sector clearly recognizes the societal challenges that sustainability transitions entail, but the degree to which this is
internalized or influences the incentive structures for the finance sector and its actors is limited. A strong premise on risk-adjusted
returns colours all results, and fundamentally, actors see few sector-specific incentives or regulations that would increase the pace
of change.
4.2.1. Still the same risk-reward calculations

Fundamentally, there is no shift away from the fact that risk-adjusted returns on investments have principal priority over envi
ronmental or social considerations. Informants clearly expressed that clients are interested in sustainable finance, but investors want to
know that this approach does better, or at least on par, with the benchmark. As long as returns are not forgone, the vast majority of
actors find it very important and strategic to engage in sustainable finance. This pattern is grounded not only in expressions of the
importance of customer demand – investors, whether retail or institutional, want to see good risk-adjusted returns – but is also related
to regulation and formal requirements on both the state, municipalities, and public and private pension funds to lend at as low cost as
possible. Among our informants, there was very limited willingness regarding acceptance of lower returns. This goes for products such
as green bonds or ethical funds alike, and the core motivation thus remains the maximizing of risk-adjusted returns.
Our informants, however, expressed that there is an important role for tools and methods in sustainable finance with regard to risk
reduction, especially the widespread use of ESG analysis. A number of hedge funds, private equity and some other assets managers
expressed that there is evidence of higher returns, in line with findings by Friede et al. (2015) and many others who have shown that
use of ESG positively impacts performance at firm level. But when applied to broad portfolios, the relationship weakens (ibid.).
Consistent with this result, informants who are broadly exposed to markets – such as private and public pension funds – said that they
do not necessarily see improved returns. Rather, the core benefit that many respondents tend to identify is that ESG is an important
indicator of good corporate governance, which mitigates risks. The types of risks that were explicitly mentioned are related to climate
change and future stranded assets, but also regulatory risks.
Returning to the issue of returns on investments, we find that the role of green bonds is a clear case in point of the absence of a
fundamental shift in the principal priority of prioritizing predictable and often short-term returns. Our informants viewed green bonds
as very interesting, explaining that they are a genuine financial innovation, often described as designed to enable investment in green
projects (OECD, 2015). Green bonds are normally issued against the issuer’s entire balance sheet, like a regular bond, but, unlike a
regular bond, the funds raised typically cannot be used for general purposes. Instead, the funds must be linked to a specific project or
asset that is determined to be green according to a set of industry-determined criteria. These “use of proceeds” clauses within green
bonds provide investors with a labelled product that allows them to show a specific investment in sustainable finance (OECD, 2015).
However, the vast majority of issuances are low risk and investment-grade, and the investors among our informants were not
willing to accept any significant difference in return from comparable unlabelled bonds. Respondents did think that the returns on
green bonds were currently a few basis points lower than for comparable bonds, due to the high demands for green bonds, an
observation that demonstrated some willingness to accept lower returns. However, respondents were nearly unanimous in their view
that the returns gap between green and comparable bonds could not increase from current levels without significantly reducing
investor demand.
As such, green bonds represent a conservative financial innovation that reflects status quo industry expectations on risk-reward
ratios (Maltais and Nykvist, 2020). Although green bonds is a significant innovation in the sector, they at the same time have
limited potential to fund riskier projects, effectively putting a cap on this asset’s use in fostering transitions. As emerges below, when
we discuss the role of the finance sector and the behavior to expect from financial actors in sustainability transitions, this illustrates
important implications of risk aversion.
4.2.2. Barriers to scaling-up investments are centred on risk

Financial analysis is by and large quantitatively driven. While several strategic and qualitative motivations for engaging in sus
tainable finance are described above, when it comes to tangible investments, the informants stated that hard numbers are what
matters. Throughout our interviews, actors cited a lack of data, methods, tools, and scenario approaches with which to systematically
assess long-term risks, such as climate change and political risk, or to assess the rewards that can be incurred from investments in novel
technology. This lack was presented as an explanation for why we see limited further shifts of capital.
Most respondents said that they felt that incentives, if any, to take on higher risk than what they already do today were weak; they
unanimously agreed that rather than there being a lack of willing capital to deploy in sustainable investments, too few projects meet
the risk-reward profile required. This is a critical observation and not least true for green bonds, which our informants said were in
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constant high demand, but the problem was a clear lack of suitable projects. However, it should be noted that our respondents had low-
risk profiles. We selected informants to capture the most important type of financial actors and institutions in the sense that they
manage the large sums of capital that need to be transformed in order to finance a faster transition to sustainability, and it follows that
their risk aversion is generally high compared to more agile and risk-willing capital allocated by for example angle investors.
It is against this backdrop that green bonds emerge as inherently attractive. Our informants agreed that the direct link between
invested capital and concrete projects helps actors signal that they engage tangibly in sustainable finance, at the same time as it
provides the same limited risk as regular ‘vanilla’ bonds. And, according to us, herein lies the whole problem. In the transition to more
sustainable energy use and production, and the new fossil-fuel-free infrastructure required, there is an enormous need of capital to
create more projects, but the investments are too risky for the financial system. Among our informants, only a limited set of actors,
found in the banking, private equity and insurance sectors, commands a clear long-term perspective that can alleviate some of this
pressure.
4.2.3. Reflecting on the phase of progress

The perceived importance of sustainable finance is rather recent. One of our informants phrased it as follows: “The finance sector
has changed in a drastic way. Three years ago, there were two persons sitting in the sustainability corner at an event. Today, everybody
sits there, and there is a competition to take on leadership.” This perfectly mirrors global trends, recently captured by the executive
secretary of UNFCCC, Patricia Espinosa, when summing up progress during UNEP’s recent multi-year assessment of sustainable
finance: “At the outset of the Inquiry, it would have been a challenge to find a small handful of financial regulators or central bank
governors willing to go on record that ‘sustainable development was part of their business.’ Today, four years later, it would be hard to
find one who would go on record to say that their work had nothing to do with sustainable development, although there is much to be
done in converting such developments into practice” (UNEP 2018, p. 10). But it is important to remember that this notion of a recent
change is in contrast to the clear evidence of high awareness of sustainability issues and ethically labelled products, e.g., among banks
already seen in the early 1990s (Jeucken, 2001; O’Rourke, 2003; Weber, 2005). Some scholars even conclude that screening is
arguably as old as finance itself, with several religions expressing strong norms, historically, and banning investments in shady or
immoral activities (Falcone et al., 2018).
The reconciliation of these observations comes when noting that sustainable finance as a rhetoric and strategy is becoming
mainstreamed to a new level in the industry, and this influences the amount of capital undergoing screening, for example. Drawing on
both modelling (Heinkel et al., 2001) and empirical evidence, in 2006 Scholtens (2006, p. 25) concluded that socially responsible or
green investors at that time were only halfway to reaching levels of around 25% of the invested capital that would be needed to put
significant pressure on polluting firms to reform. Today, at the time of writing, we have surpassed this level by some metrics
(Bloomberg, 2021; Kell, 2018). The existence of informants who place greater importance on sustainable finance reflects not only a
broader turn towards the importance of sustainability for societies at the landscape level, but also the gradual spread of capital that is
undergoing different forms of ESG screening.
Importantly, though, scaling up finance for the hardest sustainability transitions is something different than increasing the share of
capital undergoing screening. We think our results point out that expectations must be tempered, given the more strongly grounded
results that indicates that risk reward is still the dominant principle. But it is possible that the level of attention sustainable finance now
receives is reaching a critical level. So, what would make sustainable finance increase faster, tipping the system further to contribute
more actively to sustainability transitions?
4.3. Policy for sustainable finance
Throughout the interviews, there was a very strong consensus that increasing the pace of sustainability transitions is best governed
by generic policies such as taxation, subsidies and incentives on CO2 mitigation. Regulators and pension funds, public and private,
alike, all assert that the most important driver to lower risk and create more projects is to further national policy, or even better in
ternational commitments.
Somewhat surprisingly, this focus on regulation of emissions versus what can be achieved by fostering further adoption of the tools
available in the finance sector can also be seen clearly in reports on, e.g., green bonds (OECD, 2015, p. 2): “It bears noting, however,
that bond financing is not a means to an end; while it can facilitate the flow of capital to LCR [low-carbon and climate-resilient]
infrastructure investments, the demand for such investment is driven by other factors, most notably low-carbon policy mandates,
such as clean energy standards or deployment targets.” This position on stating what green bonds are, and broadly what the finance
sector should be expected to do, was common in our interviews. That is, as investors in the real economy, the finance sector does have a
role to play in shifting our economies towards sustainability, but the mandates of financial actors are limited by the imperative to
deliver risk-adjusted returns consistent with existing market opportunities. And, as a consequence, financial actors should not be
expected to be the main driver in transforming systems of production and consumption to sustainability.
Moving beyond this observation, and disregarding that development on CO2 emission policy is still slow around the globe and that
an international agreement on a price on CO2 is not in sight, we ask: What can then be done to foster sustainable finance? We find that
the actors in the Swedish financial system whom we studied agreed that what is most important is to renew a discussion of how private
and public actors can form partnerships to lower or share the risk on long-term or uncertain investments in sustainability. The desire
for such a dialogue has been brought up by a range of actors across the system, and the common denominator is an urge for the
government to concretely step in and facilitate and lead in creating the conditions for more sustainable solutions.
This is an important result, as it clearly signals an openness and even desire for harder environmental regulation, but from our
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interviews we find few tangible suggestions on how to progress on this collaboration. We found little indication that private financial
actors were actively engaged in developing new innovative solutions for private/public partnerships. Notably, while risk is naturally a
core theme of the final report by the EU High-Level Expert Group on Sustainable Finance (HLEG, 2018), discussion is scarce on what
types of collaborations between public and private actors are needed to make “[s]ustainable finance is a question of core strategy for
the EU” (ibid., p. 9).
4.3.1. Sector-specific polices

In general, among our informants there was a significant resistance toward, or highly varying views of, finance sector-specific
policies that engage in directly changing the conditions for investments. The expression of views on changing regulations on capi
tal requirements to make ‘green’ investments more attractive is the most important example in our study of opposition to such sector-
specific regulation and the challenges involved in trying to foster more capital for investments in sustainability. It was viewed as risky
to apply different capital requirement rules based simply on the aim of incentivizing investments in projects and assets classified as
green. The financial risk of an investment is not necessarily comparatively lower simply because an investment is considered as moving
sustainability forward.
As some of our informants point out, a green investment could equally well have high exposure to regulatory risks or face new
competition as technology further evolves (e.g., an even newer battery or solar PV technology that challenges first movers) and thus
have the same or even higher risk than non-green investments, even if physical climate impact risk or climate policy regulatory risk
might be lower for green investments. Furthermore, while investment decisions built on an assessment of long-term potential of a more
sustainable future, for instance comparing the outlook for fossil fuel assets with that for renewable energy or electric vehicles, seem
clear to many observers, long-term outlooks are heavily discounted by most financial actors.
Green investments have intrinsically higher uncertainty, stemming from the fact that we are witnessing a very disruptive phase of
socio-technical transitions unfolding over large time scales and in several systems, such as transport, industry and energy. The message
from the majority of our informants is that any difference in capital requirements should reflect the actual risk of the investments. As
risk assessment is quantitatively driven and there is a perceived fundamental lack of tools and data to assess risk, this becomes a show-
stopper for changing finance sector policy, such as capital requirements. If it is not possible to prove that sustainable investments have
lower risks, capital requirements simply cannot be lower, according to most of our respondents. Some actors acknowledged that
existing rules act as a barrier, but by and large, few wanted to change the rule set.
5. Discussion
5.1. Risk-taking and types of financial assets in different phases of sustainably transitions
In sustainability transitions, novelty is often introduced in niches, and new solutions are developed by smaller firms, financed by
founders, business angels and venture capital. When moving through pilot projects, to larger scale demonstration, and finally com
mercial phases, the types of finance change to those of lower risk. Private equity, public markets as well as ordinary bonds and asset-
backed debt thus become gradually more important (Bürer and Wüstenhagen, 2009; Geels, 2013; Polzin, 2017). The questions about
how to raise more capital to foster new solutions are thus related to well-known principles of how the growth cycle of companies works
as the risk profile changes in the different phases of a transition (Berger and Udell, 1998). And scaling-up financing at the level required
to meet climate goals is thus inherently linked to asset classes with lower risk tolerance.
Polzin (2017) notes that as a progression from niche to regime takes place, financial barriers to low-carbon transitions become
relatively more important, as larger sums of capital nominally require a low-risk profile. Critical financial market actors such as banks
and institutional investors also finance both new entrants and established actors, naturally leading these actors to compare risk be
tween new entrants and established players, which favors the latter. Hence, investors in the later stage of the capital cycle are naturally
prone to lock-ins and regime inertia (Polzin, 2017, p. 530).
This is in line with Scholtens (2006, pp. 28–29) who finds rather weak evidence of linkages between finance and sustainability
through the stock market, e.g., through socially responsible investments or shareholder activism. Scholtens argues that banks and
venture capitalists are more successful in “greening” business, essentially due to the barrier that fiduciary duty introduces for large
asset managers. The scope to increase sustainable finance lies with direct providers of finance. From a transitions point of view, this is
natural, given the discussion above on how the early stages of transitions are financed primarily by VC, private equity, and founders.
In light of this, previous research (Geddes and Schmidt, 2020; Seyfang and Gilbert-Squires, 2019) makes sense, as do our obser
vations of the strong core of risk-reward evaluation as the foundation of capital allocation, and how this limits the number of projects
that can gain financing, for example through the principal example of green bonds. Green bonds are an asset class in the later stage of
transitions; we know that these fundamentally exhibit the same risk profile as ordinary bonds (Maltaais, Nykvist, 2020). The lack of
supply of projects simply mirrors the strict list of criteria needed to make green bonds attractive. Investors do not demand riskier
projects, but that is what would be required in order to grow the capital that goes to sustainable investments faster. In general, whether
via green bonds or other mechanisms, investing larger amounts would lead to investments in projects and assets with too high
(perceived or real) risk. In other words, given the way green bonds or other existing dedicated sustainable finance mechanisms
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function today, it can be questioned whether they can scale up sustainable finance faster than other types of bonds and debt.
Comparison with how one of the most important ongoing sustainability transitions – that to renewable energy – has been de facto
financed is illustrative. Annually installed capacity in renewable energy (excluding the mature and slowly growing technology of
hydropower) has increased 10-fold globally from 2004 to 2017 and even more so since.4 Using the often referred to four phases of a
transition – (1) predevelopment, (2) take-off, (3) acceleration and (4) stabilization (Rotmans et al., 2001) – characterized by different
phases of regime niche dynamics (Geels et al., 2017), the rapid pace of progress was discernible in the early 2010s, which led Geels
(2013) to suggest that renewable energy had moved from the pre-development of the early 2000s (Rotmans et al., 2001) to take-off.
Today, this pattern is even clearer, with rapid progress in many countries into the third phase of acceleration on renewable electricity
(Geels et al., 2017). Although replacement of all existing assets will be a multi-decade process, there is ample financing available to
decarbonize if the risk reward is right (Polzin and Sanders, 2020).
Despite the monumental change in renewable energy generation, the type of financing that has made this possible has thus not
changed. A series of publications by UNEP (2018, 2012) shows that the same type of finance (asset-backed finance through ordinary
project debt and aggregated facilities for small-scale distributed solar PV capacity) has not changed and provided financing throughout
this period. Facilitated by public support, such as subsidies through tax credits or feed-in tariffs lowering the risks, essentially the same
financial setup has dominated the renewable energy space since 2004 (UNEP, 2018). Instead of changing patterns of investment and
finance, the most critical factors behind the unfolding successful sustainability transition, such as renewable energy and electric ve
hicles, are rather initial niche protection (Smith and Raven, 2012). Critically, the host and mixes of policies applied, such as feed-in
tariffs, CO2 taxes, or tax deductions, enable continued innovation and cost reductions, and create market conditions where ordinary
finance mechanisms can be accessed (Kivimaa and Kern, 2016). This has pushed solar PV and wind energy to continuously increasing
commercially competitive conditions in a number of markets (Schleicher-Tappeser, 2012), while battery-powered electric vehicles are
on the brink of competitiveness (Nykvist et al., 2019). The insights on the importance of niche support, rapid growth through con
ventional means of finance, and evidence of very incremental regime change among financial actors (Geddes and Schmidt, 2020;
Seyfang and Gilbert-Squires, 2019) point at limited opportunity for the finance regime to be a driver. Rather, landscape conditions
indeed outweigh the narrative of sustainable finance (Falcone et al., 2018).
The example of renewable energy also tells us that the type of financing had by and large stabilized on a given arrangement well
before transition scholars could conclude that the transformation in question was unfolding. This is conceptually interesting from a
transition science point of view, as it shows that financing of key energy technologies in practice does not change throughout the early
phases of a transition. The known difference in funding sources in the growth cycles of companies that is argued to change in transition
phases, from predevelopment and on through the later stages (Bürer and Wüstenhagen, 2009; Geels, 2013; Polzin, 2017), is not clearly
confirmed by key ongoing sustainability transitions. What is clear, however, from our informants and the literature, is that innovations
such as green bonds are just typical bonds but for green solutions. This is thus mirrored by the de facto type of capital used in the
roll-out of renewable energy. To us, it is not evident that the recent realization of the importance of sustainable finance, which is
mainly hinged on approaches such as screening and the application of ESG factors, – needed to accelerate the important transformation
of renewable electricity investments that has now taken place.
5.2. Red herrings; it all boils down to risk-sharing
Who and what should transform in sustainability transitions, and how do the answers to those questions involve and impact the
financial system? In general, our informants shared the view that it is simply difficult for investors to change strategies further on the
basis of sustainability criteria. It is thus questionable whether a better sustainable taxonomy, the highest-priority action proposed by
the High-Level Expert Group on Sustainable Finance (HLEG, 2018), can more than marginally accelerate investments in key sus
tainability transitions. The existing patterns of risk assessment in the industry, which by and large remains centered on maximizing
risk-adjusted reward in all types of activities, do not change with better taxonomies. But also important is the fact that a large amount
of capital is managed based on strategies of broad exposure to the market, through indexes, to reduce risk. This inherently limits the
amount of capital that is risk tolerant, agile, and available for select investments with specific impact.
The prevalent patterns of risk reward are also intimately linked to our results’ well-grounded pattern of demands for better data and
scenarios; this is heard from actors across the board and presented as being necessary to increase engagement in sustainable finance.
First, it is notable that being able to quantify uncertain processes related to climate change does not necessarily lead to lower risk and
thereby better risk reward and more investments. This relates to a well-known distinction between risk and uncertainty (see Polzin,
2017 for a recent description in relation to low-carbon investments). It might very well be that improved data and quantification
narrow the range of uncertainty on a given parameter, but that the effect is higher certainty that an investment is risky. Furthermore,
when our informants ask for more data and tools, they are asking for “hard evidence” that shows that the elevated risk for new
sustainable investment opportunity has been incorrectly judged. That is, they are asking for the risk-reward profile to be better, which
would change the sentiment and increase the willingness to shift more capital.
Of course, the fundamental problem is that higher risk, or an overall poorer risk-reward profile, is simply inherent to new solutions
and in early phases of transitions (Kemp et al., 1998). It is precisely this difference between novelty and higher risk-taking in niches,
contrasted by stability and lower risk-taking in well-known socio-technical processes among regimes, that partly demarcates the niche
4
IRENA dashboard database available at http://resourceirena.irena.org/gateway/dashboard/.
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and regime level in MLP at the regime level (Geels et al., 2017). Lower risk-taking and institutional inertia are intrinsically linked. In
many cases, asking for more data on the performance of new solutions, or to ask for more certainty on future climate change and its
associated risk, is to ask for track records and data that it clearly do not yet exist. Arguably, financial actors are de facto experts at
judging risk, so the discussion is actually not about an inability to judge risk. The risk is simply elevated, given the current status of
knowledge.
An alternative explanation as to why our informants are pushing this narrative for more data makes sense when we view this as a
way to communicate what it would take for them to start shifting capital. If more data show that the investments make good business
sense, thus countering the current risk-reward assessments that emerge, the problem is solved. Alternatively, this quest for data to
reduce risk embodies why government has to step forward and lead on partnerships or policy aimed at reducing the risk. The responses
we received about the necessity of the policymaker’s to taking the lead, and the call for data are thus interconnected.
Better data is indeed necessary, but in our view not a sufficient condition to make progress on more sustainable finance. The
corollary is that either the emergence of higher risk-tolerance in the finance sector, or new methods of risk-sharing, are needed. Based
on our study, the former is highly unlikely, and we find no appetite for policies designed to actually induce a greater appetite for risk in
sustainable investments. We share the view in the recent literature that financial regime actors can and should be studied as regime
actors using the MPL framework (Geddes and Schmidt, 2020; Seyfang and Gilbert-Squires, 2019). But the mediating and
sector-agnostic nature of finance, combined with strong risk aversion makes these regime actors less likely to, e.g., stretch and
transform. From this follows that the most central discussion relating to shifting more capital is risk-sharing between different actors.
5.3. Risk-sharing between the public and private sector
We find that developing models of risk-sharing between private and public actors is extremely important to build the expectation
that the pace of investment from the finance sector is to increase considerably (Bolton et al., 2016). Our informants explicitly
mentioned the challenges in the most difficult sectors facing a transformation from a CO2-emission perspective: transportation and
industry. Their conclusion was that the state just has to take leadership, and that the range of finance mechanisms available will then
follow. We note that more debate, and research, on how future benefits that have, e.g., lowered climate risks should be valued on
shorter timescales is also central in the specific case of understanding the role of the financial system.
There are essentially two alternative paths to take in terms of policy to foster more capital for sustainable finance. The first does not
regard the finance sector, per se, but consists of a continued effort along well-known paths in environmental policymaking, to influence
the conditions and competitiveness for sustainable alternatives in each sector, through a combination of technology-neutral policy
instruments (e.g., CO2 tax) and specific policies that foster innovation and niche protection, e.g., feed-in tariffs (Azar and Sandén,
2011). The second is to embark on a much more ambitious narrative on private-public partnerships, and the need for political
leadership in initiating the large-scale projects needed to lead the way in transforming the most difficult elements of unsustainability,
such as road-based transport and the steel and cement industries, to name a few. The finance sector and the industrial challenges of
low-carbon transitions are thus intertwined, while both the de-risking and significantly ramping-up of the pace of innovation in order
to progress faster in sustainability transition to a large degree hinge on more active public engagement (Mazzucato, 2016).
6. Conclusions
We find that the finance sector in Sweden is past a point of no return: sustainability is valued and clearly on the agenda. In the wake
of plummeting values for coal assets, there is a steadily growing awareness of climate risks, a rapidly growing renewable energy sector
financed primarily by private capital, and a large share of capital that today is undergoing screening or the use of ESG factors. Almost
unanimously, our informants agreed that sustainable investment is both desirable and inevitable and that the finance sector is arguably
starting to take on the challenge of enabling the vast amount of capital needed. The finance sector will be fundamental in facilitating
sustainability transitions in the coming decades, but fulfilling its traditional role as mediator is not the same as being a driver.
Our study clearly shows that financial actors remain firmly locked into a mandate to maximize risk-adjusted returns and are thereby
locked into a pattern of gradual change. While this has been noted in recent research on the finance sector in sustainability transitions
(Geddes and Schmidt, 2020; Seyfang and Gilbert-Squires, 2019) previous research emphasized the opportunities that exist for
reconfiguration and transformation of the financial regimes. Our findings and interpretation of previous research, however, is that the
inertia of the financial regimes outweighs opportunities to spearhead sustainability transitions. This inertia comes from regulations – e.
g., to reduce risk and maximize returns in public pension funds – informal institutional patterns of risk aversion and appraisal, and
institutions, such as fiduciary duty to shareholders, which are both formal and informally upheld. To increase the pace of change,
financial actors do see some benefits in clearer taxonomies and more standards, especially in terms of being better able to evaluate
what sustainable investment is and, subsequently, their financial performance. However, our informants indicated that it is much more
important to have clear market signals and strong interventions by the public, especially through the adoption of credible long-term
climate policies and the work of policymakers who plan for transforming economies to sustainability. In other words, the main driver
of change would be clearer landscape signals and concrete sectoral policy.
Despite the inherent role of finance in often capital-intensive sustainability transitions, this case study supports the view that there
is a limited role for the finance sector in acting as an agent for initiating take-off and acceleration of sustainability transitions. Evidence
from the historical expansion of renewable energy implies that by and large mainstream financial solutions are locked in early, in the
predevelopment stage. Arguably, progression through the earliest phases of sustainability transitions, for example in the case of
renewable energy and electric vehicles, has been driven primarily by policy support, cost reductions and market conditions, and not by
229
a shift in sentiment among financial actors towards engaging in more sustainable finance or financial innovation. However, when a
tipping point in cost and market conditions is reached, and risk reward improves, finance actors are ready to scale finance throughout
the transition.
The finance sector seems to be increasingly embracing the importance of sustainability; it is today better placed to push for sus
tainability in the economic activities they are exposed to, and to withdraw financing from increasingly risky brown assets, but for less-
proven solutions the problem of risk aversion remains. If unsustainable economic activity becomes increasingly hard to finance, this
will clearly have a large impact on sustainability transitions, but at the same time the finance sector will find it very difficult to adopt
definitions of sustainability that exclude the lion’s share of today’s economic activity. Our core conclusion is thus that in order to
accelerate sustainable finance further, policymakers must answer the very common call from our respondents to point out the plan
ahead, as well as the rules of the game, for how the most challenging sustainability transitions of our time are to be executed. A more
ambitious narrative on how the private and public sector can collaborate in sharing risk is needed, and it is unlikely that the finance
sector will lead the way until well-established methods of evaluating risk and reward indicate a positive signal for scaling-up in
vestments in sustainability.
Declaration of Competing Interest
The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.
Appendix A
Tables A1, Table A2
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Environmental Innovation and Societal Transitions 42 (2022) 219–231

Contents lists available at ScienceDirect

Environmental Innovation and Societal Transitions

Too risky – The role of finance as a driver of

• What motivates the sector to engage in sustainable finance today?

2. Multi-level perspective and finance in sustainability transitions

3. Method and case study

3.1. Interviews with Swedish financial system regime actors

AMF Private pension fund and mutual funds

Preliminaries What is your title and role?

3.2. Coding and analysing data

4.1. The motive to engage in sustainable finance

4.2. Engaging with sustainability transitions

4.2.1. Still the same risk-reward calculations

4.2.2. Barriers to scaling-up investments are centred on risk

4.2.3. Reflecting on the phase of progress

4.3. Policy for sustainable finance

4.3.1. Sector-specific polices

5.2. Red herrings; it all boils down to risk-sharing

5.3. Risk-sharing between the public and private sector

Declaration of Competing Interest

Tables A1, Table A2

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