Credit substitution in sustainable finance: an achilles heel?

Gozlugol, Alperen ORCID: 0000-0001-7104-7197 (2025) Credit substitution in sustainable finance: an achilles heel? Journal of Financial Regulation. ISSN 2053-4833

Text (fjaf011) - Published Version Available under License Creative Commons Attribution. Download (2MB)

Abstract

Sustainable finance has become mainstream, with governments and stakeholders relying on financial players/channels to prod real economy firms into addressing environmental and social issues. An overlooked, yet significant problem with this idea is credit substitution—where firms replace their ‘exiting’ creditors or investors. This significantly weakens the effect of ‘exit’ and results in the migration of problems or risks associated with lending and investment to new entrants. This article examines credit substitution in theory and practice, focusing on its implications for sustainable finance. It argues that the current regulatory framework and broader ecosystem for financial institutions worldwide create conditions highly conducive to credit substitution. Key factors include substantial cross-jurisdictional differences in approaches towards sustainable finance among major financial centres and cross-sectoral differences within jurisdictions—particularly in the EU—where sustainable finance regulations vary between bank-based and market-based financing. These conditions undermine the effectiveness of sustainable finance policies. If the aim is to address environmental and social impacts in the real economy, such policies are diluted; alternatively, if focused on managing financial risks associated with lending to and investing in firms causing these impacts, the result is only migration, rather than mitigation, of risks. The article concludes with policy implications.

Item Type:	Article
Additional Information:	© 2025 The Author(s)
Divisions:	Law School
Subjects:	K Law H Social Sciences > HG Finance
Date Deposited:	23 Sep 2025 11:39
Last Modified:	01 Nov 2025 04:03
URI:	http://eprints.lse.ac.uk/id/eprint/129581

Actions (login required)

View Item