Sustainable finance is the set of practices, standards, norms, regulations and products that pursue financial returns alongside environmental and/or social objectives. It is sometimes used interchangeably with Environmental, Social & Governance (ESG) investing. However, many distinguish between ESG integration for better risk-adjusted returns and a broader field of sustainable finance that also includes impact investing, social finance and ethical investing.

A key idea is that sustainable finance allows the financial system to connect with the economy and its populations by financing its agents in seeking a growth objective. The long-standing concept was promoted with the adoption of the Paris Climate Agreement, which stipulates that parties must make "finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development." In addition, sustainable finance has a key role to play in the European Green Deal and in other EU International agreements, and its popularity continues to grow in financial markets.

In 2015, the United Nations adopted the 2030 Agenda to steer the transition towards a sustainable and inclusive economy. This commitment involves 193 member states and comprises 17 goals and 169 targets. The SDGs aim to tackle current global challenges, including protecting the planet. Sustainable finance has become a key cornerstone for the achievement of these goals.

Various government programs and incentives support green and sustainable initiatives. For instance, the U.S. Environmental Protection Agency (EPA) provides grants and low-interest loans through its Clean Water State Revolving Fund for projects that improve water quality or address water infrastructure needs. The Small Business Administration (SBA) also offers loans and grants for green businesses. Research and utilize these programs to secure necessary financing.

The terminology is essential to understand the different concepts around sustainable finance and the differences. The United Nations Environment Programme (UNEP) defines three concepts that are different but often used as synonyms, namely: climate, green and sustainable finance. First, climate finance is a subset of environmental finance, it mainly refers to funds which are addressing climate change adaptation and mitigation. Then, green finance has a broader scope because it also covers other environmental issues such as biodiversity protection. Lastly, sustainable finance includes Environmental, Social and Corporate Governance (ESG) factors in its scope. Sustainable finance extends its domain to the three components of ESG; it is therefore the broadest term, covering all financing activities that contribute to sustainable development.

Green bonds are loans issued in the market by a public or private organization to finance environmentally friendly activities. Their issuance is growing steadily with an average growth of over 50% per year over the last five years. They reached $170 billion in 2018 and $523 billion in 2021. The aim of this type of bond (finance) is to encourage the financing of green projects by attracting investors and therefore reducing the cost of borrowing. According to empirical studies, the high demand for this type of bond provides it with a lower yield than its standard equivalent. Scientists recommend including this climate factor in the risk assessment of bonds. The aim is, on the one hand, to increase the borrowing cost of brown bonds which can fund carbon-intensive projects and de-incentivise their investment by increasing the weight of climate risk. On the other hand, the goal is to reduce the weight of risk of green bonds in order to stimulate investment and potentially encourage banks to reduce the interest rate of these bonds.

From a legal point of view, green bonds are not really different from traditional bonds. The promises made to investors are not always included in the contract, and not often in a binding way. Issuers of green bonds usually follow standards and principles set by private-led organisations such as the International Capital Market Association (ICMA)'s Green Bond Principles or the label of the Climate bond initiative. The Paris agreement on climate change highlighted a desire to standardize reporting practices related to green bonds, in order to avoid greenwashing. To date, there are no regulations requiring the borrower to specify its "green" intentions in writing, however, the EU is currently developing a green bond standard which will force issuers to fund activities aligned with the EU taxonomy for sustainable activities. This standard is expected to be a voluntary standard, operating alongside other voluntary standards, with academics and practitioners raising the policymakers' awareness to the dangers of imposing it as a mandatory standard.

The European Union has already created its own "Next Generation EU Green bonds framework" to use green bonds to raise part of the funds for the Next Generation EU project. This project promises an investment of 750 billion euros in grants and loans (at 2018 prices), by the European Commission, aiming to revive the post-covid-19 economy in the 27 EU member states. Up to 30% of the budget will be raised by issuing green bonds, which results in up to 250 million, and a total of 14.5 million had already been raised by January 2022. This will make the European Commission the largest issuer of green bonds. On 21 December 2024, the European Union Green Bonds Regulation comes into force, allowing the issue of "European Green Bond" (or "EuGB") by companies, regional or local authorities and EEA supra-nationals.