Financial markets play a crucial role as either drivers or obstacles in undertaking development-friendly, environmentally and socially sustainable business activities and thereby contribute to or undermine Policy Coherence for Development.
It is not only important for sustainable business models to take into consideration the value chains of the productive firms, but also their financial models and financial stakeholders – how the costs and benefits of supply, production and distribution are divided across the whole business model among actors involved, and how they internalise the firm's environmental and societal externalities.
The financial markets and the way they are regulated play a crucial role when building an environmentally and socially sustainable market behaviour.
The nature of equity financing – being it public as with state-owned enterprises and national and sovereign wealth funds, hybrid or private – influences the behaviour of firms alongside stock exchanges. Sovereign wealth funds, such as the Norwegian Government Pension Fund, control an increasing part of the world's financial assets and their investment profiles, which may be guided by ethical guidelines, have huge implications for sustainability locally and globally.
Banking models and especially executive compensation at financial institutions have influenced the short-termism inherent in current banking business models. This has enhanced shareholder primacy models in the productive firms, as well as their capital structure and incentive mechanisms. Whilst global capital and liquidity standards have seen reforms over the last few years, significant concerns remain about the stability of the banking system – especially in the Eurozone in which state guarantees remain indispensable to financial stability.