Rethinking Why Sustainable Projects Fail

Sustainable development is often treated as a financing problem. In this space, project finance is framed as a capital allocation problem, centered around the idea that investors reallocate toward ESG-aligned assets. The core thesis is that more capital drives better outcomes (Hartzmark & Sussman, 2019), despite evidence that allocation decisions remain shaped by structural and informational constraints in practice (Krueger, Sautner & Starks, 2020). However, this relies on the critical assumption that projects are already viable, both financially and operationally. 

In practice, projects often fail before financing becomes relevant. Capital tends to follow projects that have already demonstrated some degree of feasibility and viability, suggesting that the relationship between capital and feasibility may be inverted and that existing sustainable finance frameworks may overemphasize capital mobilization. In this context, capital does not generate feasibility; it responds to it.

Evidence from this Practicum

In this Practicum, my team developed a feasibility model for a timber-to-affordable-housing supply chain in Pará, Brazil. Initially, there was a strong focus on blended finance to unlock scale through improved capital structuring and risk sharing, grounded in the premise financial instruments translate capital to real-world outcomes. 

However, as our analysis developed, my team found that the constraint wasn’t access to capital: the project was supported by public financing and subsidy mechanisms with a fully funded pilot. The money existed. The challenge was establishing viability. 

This shifted my understanding of the role of finance in development projects. Outcomes were driven by structural constraints within the system, such as cost structures, institutional and regulatory alignment, and execution feasibility, rather than capital availability. Rather than enabling feasibility, financing mechanisms operate within constraints that are often determined upstream. 

Feasibility Constraint

Under this Brazilian program, a unit revenue cap effectively established a hard ceiling on unit economics. Costs, however, remain variable. Within this structure, taxes are not neutral. While some are partially recoverable during processing, they become embedded and non-recoverable at the housing development stage under this financial policy regime. As a result, they accumulate across the value chain and act as a real cost. In a rural, export-oriented extractive context, this was particularly salient. For example, limited processing capacity in sawmilling and engineered wood restricts throughput and increases costs, which are then carried through and compounded across the value chain.  

This results in a narrow and fragile margin structure. With no pricing flexibility and variable cumulative costs, feasibility became a function of cost containment. Even small cost increases can push total unit costs above the threshold for financial viability.

Bankability Constraint

Yet, financial feasibility alone is not sufficient for bankable outcomes. In this case, the targeted population is traditionally excluded from conventional housing finance markets. While the social housing subsidy-structure addresses this, previous projects within this program faced persistent implementation and adoption challenges (Inter-American Development Bank, n.d.). Conventional, concrete housing was not environmentally or culturally adaptable, resulting in low adoption. As such, demand was not realized, and projected cash flows did not materialize. This undermines bankability. 

Conclusion and Implication

This reframes how sustainable development should be approached. Blended finance and other innovative mechanisms expand access to capital and revenue streams but remain constrained by underlying feasibility conditions rather than resolving them. 

For practitioners, viability and bankability must come first, built in as upstream constraints that need to be addressed upfront. The question isn’t how to mobilize more capital. It’s whether projects are viable to begin with, given the cost structures and institutional constraints that shape outcomes in practice—and whether they actually hold up in local contexts.

References

Hartzmark, S. M., & Sussman, A. B. (2019). Do investors value sustainability? A natural experiment examining ranking and fund flows. Journal of Finance, 74(6), 2789–2837. https://doi.org/10.1111/jofi.12710 

Krueger, P., Sautner, Z., & Starks, L. (2020). The importance of climate risks for institutional investors. Review of Financial Studies, 33(3), 1067–1111. https://doi.org/10.1093/rfs/hhz137

UN-Habitat. (n.d.). Scaling up affordable housing supply in Brazil. United Nations Human Settlements Programme. https://unhabitat.org/sites/default/files/download-manager-files/Scaling-up%20Affordable%20Housing%20Supply%20in%20Brazil.pdf

Inter-American Development Bank. (n.d.). Slum upgrading: Lessons learned from Brazil. https://publications.iadb.org/en/publications/english/viewer/Slum-Upgrading-Lessons-Learned-from-Brazil.pdf