Bridging Market Logic and Environmental Impact in Armenia’s Finance System

Over the past semester, my understanding of sustainable investing has evolved from a relatively intuitive idea - 'investing with impact' - into a multi-layered system of incentives, market expectations, and real-economy effects. This shift came largely from applying theoretical frameworks to my practicum experience working on Armenia’s sustainable finance landscape.

Two readings shaped this reflection in fundamental but contrasting ways. Dissecting Green Returns (Pastor, Stambaugh, and Taylor, 2022) challenges the common assumption that strong historical returns on green assets indicate strong future performance. Instead, the authors show that the impressive performance of green securities over the past decade was largely unexpected - driven by surprises in climate concerns that temporarily increased investor demand for green assets. Their finding that green assets tend to have lower expected returns than brown assets reframed for me what “sustainable investing” means in the context of a developing market like Armenia. Meanwhile, The Real Effects of Environmental Activist Investing (Naaraayanan, Sachdeva, and Sharma, 2021) provides evidence that when investors actively monitor and engage firms, environmental outcomes improve meaningfully—through reduced toxic releases, lower GHG emissions, and increased abatement investment. Together, these pieces encouraged me to think more critically about whether sustainability efforts in emerging markets should prioritize financing incentives, regulatory structure, or investor engagement as the true levers of change.

Working on the Armenia project made these debates especially tangible. Armenia is a small, bank-dominated financial system where international financial institutions (IFIs) such as the EBRD, ADB, IFC, and EIB are the central drivers of 'green finance. As our team mapped hundreds of IFI-backed credit lines, concessional facilities, and technical assistance programs, I initially assumed these inflows would naturally accelerate Armenia’s transition to a more climate-aligned economy. However, Pastor et al. (2022) prompted me to interrogate this assumption more deeply. Their key insight - that green asset outperformance should not be mistaken for high expected returns - suggests that emerging markets with limited domestic savings and higher risk premiums may struggle to attract purely return-motivated green capital. Without policy clarity, transparent taxonomies, and a predictable pipeline of green projects, investors will not simply 'follow the returns.' This reinforced the importance of the regulatory and institutional gaps we identified during the practicum: the lack of a unified sustainable finance taxonomy, inconsistent environmental data, and fragmented reporting expectations across banks. From the perspective of the PST model, Armenia cannot rely on market forces alone; it needs institutional architecture that reduces uncertainty and aligns incentives so that increased climate concerns translate into sustained - not temporary - investment.

If Pastor et al. helped me rethink the financial logic of sustainable investing, Naaraayanan et al. (2021) helped me reconsider mechanisms of impact. Their study documents that shareholder activism, when credible, coordinated, and targeted, can generate substantial real-world environmental improvements. What struck me was not only that pollution decreased, but that reductions came through increased abatement investment rather than production cuts. This resonates with what we observed during interviews with Armenian commercial banks: institutions were not opposed to green lending; they simply lacked the tools to evaluate climate-related risks, measure environmental performance, or track the real outcomes of financed projects. Many banks relied heavily on IFIs to supply frameworks, monitoring templates, and project eligibility criteria. This parallels the dynamic described in the activism study: external pressure and guidance can prompt firms to adopt more environmentally responsible practices, especially when domestic governance systems are still maturing. Although Armenia’s banks are not being 'engaged' in the activist sense, the role IFIs play - setting standards, monitoring compliance, and conditioning financing on environmental improvements - resembles a form of institutional activism. This suggests that meaningful environmental change in developing financial systems is likely to come from capable, persistent external actors who can provide both oversight and capacity building.

Bringing these two articles together helped me think more holistically about sustainable finance in Armenia. If green assets may carry lower expected returns (Pastor et al., 2022), then Armenia’s strategy cannot rely solely on private investors to scale climate finance. If real environmental improvements require credible, engaged oversight (Naaraayanan et al., 2021), then IFIs and regulators must establish mechanisms that replicate this monitoring and accountability function.

My key takeaway is that sustainable finance in emerging markets is less about identifying 'green winners' and more about designing systems that make sustainable investment structurally viable - through taxonomy development, standardized disclosures, data infrastructure, supervisory capacity, and long-term partnerships between domestic institutions and external stakeholders. This realization shifted how I interpret the value of our practicum work: we were not simply cataloging projects; we were helping construct foundational knowledge for an ecosystem that must be coherent, transparent, and trustworthy before green capital can flow sustainably.

Overall, this practicum and the accompanying academic literature deepened my appreciation for the complexity of sustainable investing. The future of the field, especially in developing economies, lies not in chasing historical green returns but in building credible governance structures that reduce information asymmetries, support investor engagement, and create long-term incentives for environmental improvement. In this sense, the project with Armenia strengthened my conviction that sustainable finance is ultimately a policy challenge as much as a financial one, and that aligning markets with environmental goals requires both institutional design and thoughtful engagement from investors, regulators, and international partners.

References

Pástor, L., Stambaugh, R. F., & Taylor, L. A. (2022). Dissecting green returns.

Naaraayanan, S. L., Sachdeva, K., & Sharma, V. (2021). The real effects of environmental activist investing (Finance Working Paper No. 743/2021).