SUSTAINABLE FINANCE UNDER VIABILITY CONSTRAINTS: AN ENTROPIC APPROACH

Abstract:

This paper develops three frameworks – a conceptual one, a theoretical one and an instrumental one – for sustainable finance. The academic literature reveals an insufficient conceptual distinction between sustainable finance, green finance and green financing. Their use as interchangeable terms leads to modelling issues and undermines the coherence of the paradigmatic framework. In this regard, the research proposes a taxonomic and structural differentiation between these concepts, based on a original methodology for conceptual definition and delimitation. On this basis, the Theory of Viable Sustainable Finance (TVSF) is formulated, which argues that viability is a necessary condition for persistence over time, and that persistence over time constitutes a necessary condition for sustainable finance. To operationalise the theoretical framework, a Model of Viable Sustainable Finance is presented and developed, built on an entropic approach to the ESG vector system. Within this model, the thermodynamic entropy generated (or, equivalently, the exergy destruction), social entropy operationalised via the Theil index, and informational entropy as defined by Shannon are associated with the three ESG pillars, whilst the ESG scores for each pillar are treated as empirical proxies for these entropies. The model captures the normative and structural interdependencies and trade-offs between the ESG pillars, establishes the analytical conditions for the existence of a steady state in the ESG entropic system, determines the critical threshold of the norm in relation to the viability frontier of each pillar, and establishes the viability frontiers for each individual ESG pillar.

Keywords: Sustainable Finance; Green Finance; Theory of Viable Sustainable Finance; Model of Viable Sustainable Finance; Entropy