Systemic change may sound radical, but clinging to outdated financial models while climate change and social inequality upend our world is far riskier, says Hans Stegeman of Triodos Bank
The financial industry stands at a crossroads. With every passing year, the reality of ecological overshoot and deepening social inequality becomes harder to ignore. Climate risks are now recognised in stress tests. Biodiversity is making its way onto balance sheets. Social factors are considered material. Yet, the deeper logic of finance remains largely unchanged. Capital still flows where short-term returns are highest. Risk is still modelled as backward-looking volatility. And value is still narrowly defined as monetary.
In my research, I’ve explored how economic thinking and institutions can be reimagined to better serve ecological and social sustainability. While the focus was broad, covering the history of economic thought, the role of growth, systemic tipping points and different varieties of capitalism, the financial sector has remained a core component to consider. After all, finance is not just a mirror of the economy. It is a powerful engine that shapes what is produced, who benefits, and how resilient our systems are. There are three interlinked themes:
■ The need to reduce our structural reliance on economic growth.
■ The importance of recognising ecological and social tipping points.
■ The role of institutional reform in realigning finance with long-term public value.
The growth imperative and financial stability
Finance, in its current form, is deeply intertwined with the imperative of growth. Economic expansion is not just desirable – it is baked into the logic of the system in at least two ways. First, money is created by commercial banks when loans are issued. These loans only make sense if the debtor can repay them with interest. In other words, lending assumes future profits. Second, return requirements of asset owners (from pension funds to individual shareholders) puts growth tensions in the economy. If a required return of 10% is needed, for instance, for pensions, ageing becomes a very strong growth imperative. Growth supports profits, fuels investment returns, secures tax revenues, and maintains social stability. Without it, budgets are squeezed, pension promises look shaky, and financial markets become jittery.
This dependency is not benign. It creates a structural pressure to keep expanding production and consumption, even as we exceed planetary boundaries. In financial markets, it reinforces the valuation of companies with high growth prospects, regardless of their social or ecological costs. It discourages investment in sufficiency, care, or conservation – areas with high social value but limited monetary yield.
More fundamentally, growth dependency makes economies and financial systems fragile. When growth stalls, debt burdens increase relative to income. Highly leveraged economies become trapped: they need growth to remain solvent. This dynamic increases the risk of social unrest, political instability, and institutional paralysis. And because most financial and policy frameworks assume growth as a constant, we are ill-prepared for the possibility that it may slow – or even reverse.
If the financial sector is serious about sustainability, it must begin to confront this structural bias. This includes supporting policies that reduce growth dependency, such as credit guidance aligned with public value, public investment in foundational services, and fiscal frameworks that account for ecological and social constraints. It also means rethinking how we define and manage risk, so that long-term thresholds and system boundaries are not ignored.
“Insurance costs are rising sharply in climate-exposed regions”
Tipping points and systemic risk
Sustainability is not only about improving practices. It is also about avoiding collapse. In ecological systems, tipping points represent thresholds beyond which change becomes abrupt and irreversible – ice sheet loss, ecosystem collapse, or climate feedback loops. Social systems have tipping points too: the breakdown of trust, the erosion of democracy, or the polarisation of societies.
Financial systems, however, are poorly equipped to deal with such non-linear risks. Standard models assume gradual change, normal distributions, and mean reversion based on historical patterns. They struggle to grasp cascading effects or runaway feedbacks. As a result, systemic risks are not only underestimated, they are often ignored altogether. Even now, while many financial institutions support green investments, few are willing to divest from activities that harm the planet or society. Why? Because those activities still generate short-term profits.
This is not a theoretical concern. The failure to internalise climate risks until they materialise – or to recognise the social consequences of extractive business models – is already playing out. Insurance costs are rising sharply in climate-exposed regions like Canada and Southern Europe, where wildfires and floods have made coverage sometimes unaffordable or unavailable. Fossil fuel infrastructure, such as LNG terminals or coal-fired plants, are increasingly at risk due of becoming stranded assets due to policy shifts and market transitions. And extractive business models in sectors like housing and agriculture have contributed to public backlash – from tenant protests against private equity landlords to farmers resisting nitrogen and land use reforms. These are not isolated incidents – they are signs of deeper fragilities emerging.
A sustainable financial system must develop tools and governance structures that integrate tipping point dynamics and precautionary approaches. This could include climate-adjusted capital requirements, mandatory scenario planning beyond standard stress tests, and more stringent oversight of systemic exposures to ecological thresholds. But technical measures are not enough. Institutions must also ask harder questions: What should be financed? What activities no longer belong in a resilient economy? These are normative choices – not just technical calculations.
Institutional reform for long-term value Finance is not a neutral machine. It is a social institution – composed of banks, pension funds, central banks, investors – governed by rules, norms, and expectations. These institutions do not merely respond to the economy; they actively shape it. What is considered creditworthy, what counts as collateral, what is a prudent investment, these are all socially constructed, not natural facts.
If we want finance to support long-term sustainability, we must redesign these institutions accordingly. That includes rethinking ownership structures, governance models, accounting frameworks, and incentive systems. Steward ownership, for instance, decouples profit extraction from control and could align financial decisions with mission-driven goals. Cooperative banks, grounded in place and purpose, support relationship-based lending over speculative arbitrage.
Pension funds and institutional investors could play a pivotal role by shifting their mandates from maximising returns to securing resilience. That includes investing in public goods, infrastructure, affordable housing, and energy transition projects – even if the returns are lower or slower. To do so credibly, they need new fiduciary standards that account for intergenerational equity and ecological viability.
Regulators, too, must evolve. Central banks can signal systemic priorities by greening their operations – adjusting collateral frameworks, asset purchases, and capital requirements. Supervisory bodies can assess not only individual risk exposure but also aggregate systemic risk. And governments can demand more public accountability from financial institutions that manage social assets. None of this is easy. But it is necessary. For too long, financial regulation has been portrayed as a neutral domain. In reality, it reflects political choices – about who benefits, who bears risk, and what kind of future we enable.
Guidance for the sector
What does all this mean for financial professionals, institutions and policymakers? First, acknowledge limits. The era of unconstrained resource use and externalised costs is over. Finance must learn to operate within planetary boundaries. This is quite a challenging task, because there is no clear link between what is financed and how many resources are used. A mortgage on an existing house doesn’t change resource use, but financing new developments, infrastructure, or retrofits does. This was also a crucial misunderstanding in the climate pledges financial institutions made in the beginning of the 2020s: if there is no clear relationship between real-world activity and finance, it is hard to steer on it. However, the answer is not to shy away from it; the answer should be to establish that relationship and take responsibility.
Second, we must redefine value. Long-term wellbeing, resilience and cohesion matter just as much as liquidity or returns. That requires different metrics, but also a different mindset. Because also here, it is relatively easy to ask difficult questions instead of looking for answers. Phrases like “we need better data”, “we don’t know how the weigh different forms of impact”, “our investment horizon is always five years”, often serve as excuses, not solutions.
And finally – reform from within. Financial institutions cannot wait for perfect regulation. They must experiment, collaborate, and lead. That includes aligning portfolios with transition pathways, supporting community finance, and backing innovations in governance and ownership. Fourth, engage in public dialogue. It is foundational. The financial sector shapes the direction of our economies. It must be part of the democratic conversation about the kind of future we want.
“And the good news? Change is already happening”
The task ahead is not to fine-tune finance. The transformation we need is not cosmetic. It is systemic. This means questioning defaults, redesigning incentives, and rebuilding legitimacy. It means asking: What kind of world is this financing? System change may sound radical. But the alternative clinging to outdated models while the world shifts beneath us – is far riskier. A financial system that supports sustainability is not a luxury. It is a precondition for long-term stability.
And the good news? Change is already happening. Experiments are underway. Ideas are emerging. Initiatives like the EU Green Bond Standard, transformative investments and steward-ownership models offer glimpses of how finance can be redirected toward long-term value creation. The challenge now is to scale what works, confront what doesn’t, and hold ourselves to a higher standard: finance not for finance’s sake, but for a flourishing future.
About the author
Hans Stegeman is Chief Economist at Triodos Bank and a Visiting Fellow at Rotterdam School of Management Erasmus University. The above ideas are explored in his dissertation: ‘Transforming Economics for Sustainability’.
Further reading
This article was first published in issue 2 of Business 4.0.