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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.