5.1.1 Exclusive take: Why law still determines whether sustainable finance works

This article is part of the Sustainable Finance Guide, a new series by Globalfields in collaboration with illuminem. Together, we provide readers with clear, educational insights into where sustainable finance stands today and how it is evolving to support nature, regeneration, and long-term resilience.

Finance alone has never been enough

Sustainable finance is often framed as a question of capital over how much is mobilised, where it flows, and how efficiently it is deployed. 

However, finance alone has never been sufficient to deliver environmental protection. For decades, the effectiveness and legitimacy of environmental finance has depended on its interaction with environmental law.

Development finance has maintained close links with environmental law for several decades. At the international level, the early 1990s marked a decisive moment with the formalisation of a framework that remains central to environmental governance today. 

On the one hand, all countries generally agreed to take on similar commitments to protect the environment to maximise the positive impact in terms of sustainability.  On the other hand, policymakers acknowledged the deep structural inequalities between developed and developing countries and introduced mechanisms to support implementation and enhance legitimacy. The introduction of implementation aid in this respect was crucial to ensure the widespread acceptance of environmental regimes addressing global environmental issues.

How environmental law shaped the rise of sustainable finance

The principle that developing countries should receive financial assistance thus became a central part of environmental regimes. This approach is clearly reflected in the Convention on Biological Diversity, which makes the provision of aid by developed countries a precondition for the implementation of their commitments by developing countries. Environmental aid was subsequently institutionalised through the establishment of the Global Environment Facility (GEF) under a 1994 treaty. Today, the GEF still remains the largest multilateral environmental fund.

The development of environmental aid in international environmental regimes happened alongside the introduction of social and environmental safeguards in development finance. The World Bank started strengthening its safeguard policies in the 1980, a process that gained heightened visibility following its withdrawal from the unfinished Sardar Sarovar Project after the publication of the Morse Commission’s report in 1992. This coincided with the first Rio Conference 1992, in an era that saw environmental law grow exponentially in most parts of the world. 

​​From safeguards to sustainable development

Over the following decades, sustainable finance expanded significantly, in part in response to the changing policy context that started privileging ‘sustainable development’. In some cases, development finance, such as financing for dams found a new legitimacy in the 2000s following the report of the World Commission on Dams (WCD). The WCD was in part a long-term response to the Morse Commission report, which did not leave much space for justifying dams in the name of economic development, as had been the case earlier. Since then, the financing of dams has been centred on the contribution of hydropower as a form of renewable energy. 

However, this reframing only holds if such projects are subject to robust environmental and social safeguards. Without them, efforts to solve one problem (such as low-carbon energy generation) risks creating a compound problem. This can include land acquisition, forced displacement, and the erosion of Indigenous peoples’ rights. 

More broadly, finance has become a key element of the climate change regime with a plethora of different funding streams focused on specific activities, such as adaptation or specific groups of countries, such as least developed countries. 

Monetising nature within legal boundaries

In the context of the progressive commodification of the environment, finance has increasingly focused on ways to monetise nature to contribute to better environmental quality. This is the case of payments for ecosystems, including carbon markets, and REDD+ which aim to monetise environmental functions in order to improve environmental outcomes. In each case, however, these mechanisms rely fundamentally on national and international legal instruments, which determine how environmental value is defined, assessed, and used.

Viewing nature as capital transforms sustainability into a transaction, legitimising exploitation rather than preventing it. Development may be sustainable in name but exploitative in practice. Steering away from this framing would shift the focus from nature for finance to finance for nature. If  finance was driven by considerations of environmental justice and equity, it might generate long-term ecological regeneration, social resilience and shared prosperity. This would require legal boundaries that reflect ecological thresholds and public interest, preventing markets from defining environmental value solely through price and profit.

The rapid development of environmental finance has been accompanied by the progressive strengthening of environmental and social safeguards. This has been the case at international and national levels, with most countries adopting the model of environmental (and social) impact assessment, wherein the impacts of a specific developmental activity are examined before the implementation of the project.  

The limitations of a system based on a single point assessment have progressively led to the introduction of strategic environmental assessment, which offers an opportunity to undertake a policy assessment, for instance, of specific industrial sectors. Nevertheless, in many jurisdictions, recent decades have also seen increasing pressure to dilute existing safeguards, usually under the pretext that they impede ‘development’, an argument that policymakers are quite willing to hear, for instance, in periods of economic crisis.

The missing link: finance, safeguards, and rights

On the whole, finance and environmental law have developed a number of links over the past decades. This is all the more so given that avoiding polluting activities, remedying or restoring the environment often involve significant investment. In a context where states have had a tendency to withdraw from a number of development activities, private finance has become increasingly important and controversial where the state lacks capacity or chooses not to use its regulatory powers to ensure that finance effectively fosters sustainability. 

Despite these developments, significant gaps remain. One of the most notable is the weak integration between environmental finance and environmental rights. The current lack of integration is in part due to the fact that environmental law is often distinct from substantive and procedural rights. At the international level, after decades of efforts to bring the two closer, the UN General Assembly eventually adopted a resolution recognising the human right to a clean environment in 2022. This helps in bridging the gap between human rights and environmental law but the absence of reference to finance in the 2022 resolution confirms that environmental safeguards and environmental rights remain distinct discourses that do not yet overlap. 

Much more remains to be done to bring environmental rights, gender equality, Indigenous rights, and related frameworks into closer alignment with environmental finance. This integration is indispensable if finance is to contribute meaningfully to sustainability rather than operate as a parallel, largely technical domain.

Key takeaway

Environmental finance has grown rapidly, but its effectiveness continues to depend on the legal frameworks that shape it. Without strong links to environmental law, safeguards, and rights, finance risks becoming detached from the social and ecological realities it is meant to address. 

Strengthening these links is essential to maintaining the legitimacy and accountability of financial mechanisms, and to ensuring they deliver sustainability outcomes that endure.