sustainability Article Dirty Banking: Probing the Gap in Sustainable Finance Michael A. Urban * and Dariusz Wójcik School of Geography and the Environment, Oxford University Centre for the Environment, University of Oxford, South Parks Road, Oxford OX1 3Q, UK; [email protected] * Correspondence: [email protected]; Tel.: +44-(0)7817-166860 Received: 24 December 2018; Accepted: 25 February 2019; Published: 22 March 2019 Abstract: In 2016, the Global Sustainable Investment Alliance estimated the market for sustainable investments to have reached 22.89 trillion USD of assets under management. While financial institutions have embraced the idea of sustainable finance as a business opportunity, they have arguably done little, but to piggy-back on investors’ demand. Today, it is not unusual for a single firm to retail fossil free investment funds and concomitantly offer commercial loans towards fracking, coal, and Arctic drilling. This paradox is underpinned by a major gap in the way sustainability has permeated primary and secondary markets which, we argue, calls for a serious rethinking of the sustainability transition in finance. This article proposes two contributions in this direction. First, we develop an original conceptualisation of finance as a socio-technical system to discuss the dynamics that both hinder and promote a transition from mainstream to sustainable finance. Second, we propose to study how investment banks integrate sustainability in their underwriting services. To do so, we filter through close to half a million of debt and equity underwriting deals (2005–2017) using the Government Pension Fund Global of Norway’s list of 153 excluded companies. Our results suggest that investment banks do not shy away from underwriting companies that have been flagged for major environmental, social, and governance misconduct, neither do they restrain from underwriting companies providing contentious products, such as tobacco, coal, and nuclear weapons. Moving forward, we suggest ways to address this problem and call for further research on the responsibility and agency of finance and advanced business services firms in sustainability transitions. Keywords: sustainable finance; primary markets; investment banking 1. Introduction Investment banks connect issuers of debt and equity securities with investors [1]. Investment bank syndicates function as centralized agents that promote and guarantee the transmission of newly issued securities from issuers to asset managers. As such, they provide a crucial transactional function in capital markets. They have considerable informational advantages, including access to insider information about their clients, as well as a privileged network of sizable investors and other investment banks participating in syndication. Although individual banks would have the capability to underwrite deals on their own, they prefer syndication in order to pool investor networks and improve the pricing of newly issued securities [2,3]. Every year, investment banks help corporations and governments raise trillions of USD of new finance in global capital markets. Therefore, they constitute a powerful segment of the financial industry [4]. According to Scholtens, “Finance is grease to the economy. As such, it can also affect the sustainability and social responsibility of the firm” [5]. Given their informational advantages, investment banks are in a unique position to evaluate the environmental, social, and governance performance of their clients and could be instrumental agents in pushing for higher standards. Despite Sustainability 2019, 11, 1745; doi:10.3390/su11061745 www.mdpi.com/journal/sustainability Sustainability 2019, 11, 1745 2 of 23 their fundamental importance in promoting a transition towards a more sustainable form of economic development, the underwriting activities of investment banks have, to this day, received little to no attention from sustainable finance scholars. This paper addresses this gap. In light of systematic empirical evidence, we show that investment banks provide underwriting services to companies that have and/or will, to a high degree of certainty, cause environmental, social, and governance harm. Although banks do develop corporate social responsibility (CSR) programs [6–9] and contribute to philanthropic activities [10,11], our results suggest that underwriting is a banking activity that has entirely missed the sustainability transition in finance. Hereafter, we define sustainable finance in the spirit of the Brundtland Commission (1987)—that is, finance that protects the fundamental right of “all human beings” to “an environment adequate for their health and well-being” and safeguards inter-generational equity [12]. We further use the environmental, social, and governance (ESG) nomenclature to refer to specific dimensions of sustainable finance when needed. Traces of sustainable finance date back to at least the 16th century [13]. However, developments only really accelerated in the second half of the 20th century [14]. While finance-led activism predominantly stemmed from civil society and rallied ethically motivated investors [15,16], its founding principles have gradually permeated mainstream finance. During the 1970s, while Milton Friedman was notoriously arguing that the sole responsibility of the firm is to make a profit for its shareholders [17], a serious scientific debate on whether corporate social and environmental responsibility translates into better profits picked up steam [18,19]. Overall, the evidence collected over the last 50 years suggests that superior ESG performance on material issues (issues deemed strategically relevant to corporate context [6]) is good for business (for detailed literature reviews on the topic see [20,21]). This scientific and business-minded approach to sustainability has had a profound impact on the expansion of sustainable finance. Today, sustainable finance is a booming market segment dominated by profit-seeking firms. The United Nations Principles for Responsible Investments (UN PRI), a prominent non-profit and non-governmental organisation in sustainable investment worldwide, has over 1800 signatories, including leading financial institutions, such as BlackRock, the Vanguard Group, and Goldman Sachs Asset Management. In 2016, the Global Sustainable Investment Alliance estimated the market for sustainable investment strategies to have reached 22.89 trillion of USD of assets under management [22]. While numbers suggest a significant shift in mentality, the growth of the market for sustainable finance has been met with a fair share of criticism. Richardson noted that the wide-spread adoption of sustainable finance by mainstream financial institutions has come at the cost of a significant loss in ethical substance [23]. In his seminal review entitled Finance as a Driver of Corporate Social Responsibility, Scholtens further highlighted the lack of engagement with sustainable finance by institutions active in primary markets [5]. Indeed, sustainable finance initiatives of incumbents tend to piggy-back on investors’ demand and largely focus on secondary markets. Instead of tackling the problem at the source—by promoting the issuance of new debt and equity finance that meets sustainable development goals—the sustainability transition in finance has largely consisted of a taxonomic exercise that aims at labelling old finance (debt and equity finance already emitted and exchanged on secondary markets) under various declinations of sustainability (socially and/or environmentally responsible, green, ethical, etc.) designed to match a variety of investors’ preferences. Although we acknowledge the merits of such advances, we contend with Scholtens that the sustainability transition in finance and beyond requires sustainable development goals to be embedded in the negotiation of new rather than old finance. In this article, we show systematic evidence of an alarming lack of integration of the most basic principles underpinning sustainable development goals in investment banks’ underwriting services. Given the central function investment banks occupy in the creation and circulation of new debt and equity finance, our findings call for an urgent engagement from both scholars and practitioners concerned with the promotion of sustainable development. Sustainability 2019, 11, 1745 3 of 23 The article is organised as follow: In Section2, we review key developments pertaining to primary markets in sustainable finance. While the evidence we present is by no means exhaustive, it shows that while the financial sector may be accelerating towards a sustainability transition, it does so in an extremely selective and fragmented way. In Section3, we propose to make sense of this fragmentation by proposing an original theoretical framework to conceptualise the sustainability transition in finance. This system-wide theoretical elaboration sets the stage to tackle a fundamentally important missing link: Sustainable investment banking. In Section4, we propose to study investment banks’ treatment of unsustainable corporations in the provision of underwriting services. To do so, we analyse close to half a million of investment banking underwriting deals over the period of 2005 and 2017 to flag deals that have and/or will, to a high degree of certainty, cause environmental, social, and governance harm. In Section5, we discuss limitations, propose pathways towards sustainable investment banking, and conclude with research implications for scholarship in sustainable finance. 2. Sustainable