The word “sustainability” entered our idiom first with the Brundtland Report (1987), which coined sustainable development as “meeting present needs without compromising future generations’ ability to meet their own needs.” Milestones such as the 1992 Rio Earth Summit, the Kyoto Protocol in 1997, and the Paris Agreement in 2015 followed. Progress was slow. Yet, we have clarity for action now in the form of The United Nations 2030 Agenda for Sustainable Development and its 17 Sustainable Development Goals (SDGs).
As the environmental movement gained ground since then and we finally had to admit (in Sting’s words) “how fragile we are” in nature’s hands, there’s scientific consensus now that this former way of doing business must turn into a thing of the past since it is simply unsustainable for humans to survive.
Classic economic models focus on profit, growth, cost, and resource allocation, whereas planetary welfare is treated as an externality and an afterthought except when legally bound, but this can no longer be our way of doing business. So what does it take to make the transition, and how significant is the role of finance?
The Science and The Commitment
The vast majority of climate scientists agree that recent global warming is primarily caused by human activities, particularly greenhouse gas emissions from burning fossil fuels. CO2 levels have risen sharply since the 19th century, far exceeding natural variations seen in ice core records going back 800,000 years. The rate of warming since the 1980s has been unprecedented in at least the last 800 years. Only human greenhouse gas emissions, not natural factors like solar activity, can explain the observed warming trend. (https://royalsociety.org/news-resources/projects/climate-change-evidence-causes/basics-of-climate-change/)
While Earth has experienced natural climate cycles in the past, the current warming is occurring much faster than previous natural changes. Earth was in a natural cooling period over the last 2,000 years based on orbital cycles. The warming observed since the 20th century is happening at a much faster rate than those natural cycles. 2020 was 1.2°C warmer than pre-industrial levels, a significant increase in a short period. (https://climate.mit.edu/ask-mit/todays-climate-change-similar-natural-warming-between-ice-ages)
The Paris Agreement is the landmark international treaty, the key global policy action for sustainable development. As of October 2024, 195 parties (194 countries plus the European Union) have joined the agreement. The treaty’s primary goal is to limit global temperature rise to well below 2°C above pre-industrial levels, to limit the increase to 1.5°C.
Nations regularly take stock globally of collective progress on the Paris Accord. Countries are required to submit nationally determined contributions (NDCs) outlining their efforts to reduce emissions and adapt to climate change impacts.
- The EU committed to reducing greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels.
- Climate finance for developing countries has become crucial. The UN Climate Conference COP28 in 2023 called for a global transition away from fossil fuels in the energy sector. In November 2024, COP 29 took place in Baku and achieved a breakthrough agreement by 200 countries for tripling finance to developing countries, from the previous goal of USD 100 billion to USD 300 billion annually by 2035.
- It also secured efforts to scale up finance to developing countries, from public and private sources, to the amount of USD 1.3 trillion per year by 2035.
- The Loss and Damage Fund (FRLD) has become fully operational at COP29. It will begin financing projects starting in 2025. The World Bank serves as the interim host for 4 years. Philippines will host the fund’s board. $720 million from various countries were pledged. The fund will help vulnerable developing countries manage economic and other losses from climate change,both of extreme weather events and slow-onset climate impacts, and provide rapid response funding in natural disasters.
The Economics of Sustainability
The transition to a sustainable economy requires massive investment. The UN estimates that achieving the SDGs by 2030 will require annual investments of USD 5-7 trillion. Traditional financing methods are not enough to meet this demand; a severe funding gap exists. SDGs are hindered by geopolitical conflicts in Ukraine and the Middle East, which increase food and energy prices, threaten stability, and shroud SDG progress in uncertainty.
The very purpose and system of economic activity are now in flux as we try to mend our ways before irreversible climate consequences hit us and we reach a point of no return. We should be aware of alternative economic paradigms gaining traction in academic spheres:
- Circular Economy: A model that aims to minimise waste plus pollution by keeping resources in use for as long as possible with recycling, reuse, and remanufacturing
- Natural Capital Accounting: An approach that values natural resources as assets, allowing for more informed decision-making by quantifying economic activities’ environmental costs and benefits.
- Steady-State Economics: This theory argues for a stable population and consumption level to maintain a sustainable relationship with the environment.
As I understand, it is unclear if we can switch to a better-adapted economic model in time. The urgent economic goal now is to change the fossil-fuel basis of our economies. Net zero emission goals are at the centre of it. The World Business Council for Sustainable Development classifies emissions into three in its Greenhouse Gas Protocol:
- Scope 1 emissions are direct emissions from owned or controlled sources.
- Scope 2 emissions are indirect emissions from the generation of purchased energy.
- Scope 3 emissions are indirect emissions that occur in the company’s value chain.
Here’s the catch: Companies are addressing Scope 1, alright. When it comes to Scope 3 emissions, however, accounting for more than 70% of a business’s carbon footprint, those aren’t generally reported on the fashionable ESG (environmental and social governance) reports. Large companies bear a vast share of the responsibility. Nicolai Tangen, the CEO of Norges Bank Investment Management (NBIM), managing the Government Pension Fund Global commonly known as the Norwegian Oil Fund, noted that in its $1,3 trillion sovereign wealth fund portfolio of more than 9,000 companies, 70% of emissions came from only 174 companies.
The Role of People, Governments, Companies, and the Financial Sector
The pursuit of sustainability requires coordinated efforts of multiple segments of society: Individuals, governments, companies, and the financial industry. Each plays a unique, interconnected role in advancing environmental, social, and economic sustainability.
Individuals form the foundation of sustainability efforts through their daily choices and actions. People drive market demand for sustainable products and services, influencing company practices. Individuals can incentivise businesses to adopt more sustainable activities by making environmentally conscious buying decisions. Another aspect of individuals’ role is civic engagement to the extent allowed in their political system. They can shape policies and drive community efforts by voting, advocacy, and joining local initiatives.
Governments have a crucial role in setting the new framework for sustainable development. By implementing environmental regulations, emissions standards, and sustainability targets, governments create the legal foundation for sustainable practices. Financial incentives and tax structures can encourage businesses and individuals to adopt sustainable technologies and practices.
Government funding for research, infrastructure, and sustainable development projects is essential for driving innovation and large-scale change. While incentivising companies and individuals is a layered but effective way of funding small-scale change, bigger change strides do require public investment. Another advantage of government involvement is in international cooperation. The Paris Protocol and the EU’s actions and funding projects are good examples of such cooperation.
Businesses are key drivers of economic activity and have significant potential to impact sustainability. Companies can reduce their environmental impact by adopting energy-efficient practices, minimising their waste, and implementing green supply chain management.
Individuals, businesses and even governments all need convenience, though. The typical individual will go for the cheapest, most convenient alternative. So, when a more eco-friendly choice is readily available and financially viable, the individual can and will go for this option, especially in a society where caring about sustainability is deemed a virtue.
Companies need to turn a profit, and more prominent corporations track their stock price more closely than anything else. Politicians will want to be re-elected, which means they will prioritise the availability of jobs and the cost of goods and services above much else. The government can help the price incentive via lower taxes on sustainable products and companies that produce them or via state-funded discounts and loans. Companies will be incentivised to create eco-friendly products and services if they can sell them. But for many businesses, it also means stepping out of their comfort zone.
These sectors are deeply interconnected in their pursuit of sustainability.
Individual consumer choices influence business practices, which in turn affect government policies. Government regulations shape business operations and personal behaviours.
Financial sector decisions impact the availability of capital for sustainable initiatives across all sectors. Companies respond to consumer demands, government policies, and economic incentives in shaping their sustainability strategies.
Ultimately, achieving meaningful progress towards sustainability requires coordinated efforts and collaboration across all these segments. Individuals drive demand and grassroots change, governments provide the regulatory framework, companies implement sustainable practices at scale, and the financial sector allocates resources to enable these efforts. Working effectively together can make the sustainable future real.
The EV Industry Example
The evolution of the electric vehicle (EV) industry provides an excellent example of how individuals, governments, companies, and the financial sector are interconnected in driving sustainability. This interconnection has led to a rapid transformation of the automotive industry, with EVs gaining significant market share and technological advancements.
The initial growth of the EV industry was primarily driven by environmentally conscious consumers and supportive government policies. Early adopters of EVs were primarily motivated by environmental concerns and the desire for more sustainable transportation options. This growing consumer interest signalled to automakers that there was a potential market for electric vehicles.
Nonetheless, the EVs then had many flaws and were expensive, mainly due to battery costs and how the cars were manufactured. Furthermore, most consumers were inconvenienced by the limited availability of charging stations, driving ranges, and the uncertainty about the future of EVs.
However, recognising the environmental benefits of EVs, governments worldwide have implemented tax credits and other incentives to encourage EV adoption. For example, in the United States, federal tax credits of up to $7,500 for new EVs and $4,000 for used EVs were introduced, making them financially attractive to consumers. Many other countries applied similar practices. EV manufacturers would also receive government subsidies and tax cuts, especially in countries with a national strategy on EVs—whether to become leaders of new technology or to keep pace with the newcomers.
As consumer interest grew and government support increased, automotive companies began investing heavily in EV technology. Automakers and new EV-focused companies like Tesla invested in research and development, significantly improving battery technology, range, and charging speeds. For instance, companies like General Motors and Toyota are developing new battery technologies that promise ranges of up to 1,000 kilometres on a single charge. The success of early EV models encouraged more companies to enter the market. By 2023, traditional automakers like Volkswagen, Stellantis, and BMW accounted for 45% of European electric car sales, while new players like BYD emerged as global leaders.
Apart from the state-funded schemes mentioned above, the growing EV market attracted significant investment directly from the financial sector. As EVs gained traction, investors began to see them as a promising area for sustainable investments. This vibe shift increased funding for EV startups and established automakers’ EV divisions. The success of companies like Tesla led to high market valuations, further encouraging investment in the EV sector. In 2023, Tesla’s market value remained seven times higher than that of BYD despite BYD’s higher sales volume.
The interconnection of these factors created a positive feedback loop:
- Consumer demand and government incentives encouraged automakers to invest in EVs.
- Increased investment led to technological improvements and more affordable EVs.
- Better and cheaper EVs attracted more consumers, further boosting demand.
- Growing market share attracted more investment from the financial sector.
- Increased investment allowed for further innovation and expansion of the EV ecosystem.
The Takeaway
The EV industry has now reached a point where it’s becoming competitive without heavy reliance on government incentives.
- The global EV market is projected to grow from $396.4 billion in 2024 to $620.3 billion by 2030, at a CAGR of 7.7%1.
- Advancements in battery technology, charging infrastructure, and vehicle design have made EVs increasingly practical for everyday use.
- As production scales up and technology improves, EV prices become more competitive with traditional internal combustion engine vehicles.
- The growth of charging networks, smart charging solutions, and integration with renewable energy sources makes EV ownership more convenient and sustainable.
The interconnected efforts of consumers, governments, companies, and the financial sector have transformed EVs from a niche product to a mainstream option. As the industry continues to evolve, this collaboration will likely drive further innovations in sustainable transportation, potentially leading to a complete transformation of the automotive sector.
The EV story shows that sustainability can be economically viable and beneficial for people and nations across various income levels. If economies are able to move towards a circular model, we will preserve more resources as we build sustainable products and services. This efficiency can lead to cost savings for businesses and consumers alike. Renewable energy production is now cheaper than fossil fuels in many countries. This trend towards more affordable clean energy can reduce costs for businesses and households, making sustainable living more accessible to a broader range of income groups. The transition to a green economy is a significant driver of job growth. Job creation spans various sectors and skill levels, offering opportunities for workers across the economic spectrum.
While some sustainable products may have higher upfront costs, they often lead to significant long-term savings. For instance, investing in home insulation or solar panels can substantially reduce energy bills over time. The transition to EVs from cars with internal combustion engines tells a similar story for individuals and countries that are not fossil fuel exporters.
The concept of “green growth” demonstrates that economic development and environmental sustainability can go hand-in-hand. The sustainability shift opens up new investment opportunities across various sectors. A study by Gartner shows that 85% of banks and investors consider environmental, social, and governance (ESG) factors in their decision-making. The trend is making sustainable investments more mainstream and accessible. As major economies implement sustainability regulations, businesses worldwide adapt in order to meet the new standards, creating possibilities of trade and economic growth.
Sustainability is not a luxury reserved for the wealthy; it’s an economic necessity that offers developing nations a chance to catch up. While there may be some upfront costs associated with transitioning to more sustainable practices, the long-term financial benefits—including job creation, increased productivity, and cost savings—make it a viable and beneficial path for individuals, businesses, and nations across the economic spectrum.
Moreover, as sustainable technologies and practices become more widespread, their costs decrease, making them more accessible to a broader range of people and countries. By embracing sustainability, we can create a more resilient, efficient, and prosperous economy for all.
Sarp Demiray, CEO of EMBank
