IEMed Mediterranean Yearbook 2022



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Tackling the Sustainability Crisis with a New Mediterranean Institute for Ecological Finance

Thomas Lagoarde-Segot

KEDGE Business School
and Sustainable Development Solutions Network France

This short article proposes an innovative financing mechanism to achieve the SDGs in the Mediterranean. The objective is to rapidly increase the amount of bank deposits available to SMEs and have an impact on businesses in the most vulnerable Mediterranean regions, while ensuring that the impact of these deposits on the SDGs is maximized. Transparent, assessable and based on “top down” and “bottom up” logics, the proposed strategy is neutral in terms of public finance, presents no risk for banking stability and could strengthen the economy of the most marginalized Mediterranean territories. 

The remainder of this article describes the broad outlines of the proposed strategy using double-entry balance sheets. The first section describes the status, role and missions envisaged for the Mediterranean Institute of Ecological Finance. The second section describes the functioning of an ecological risk-free asset. The third section details its issuance process and its effects on the territories. The fourth section describes the settlement of the transaction from the perspective of the financial sector. The fifth section describes the effects on the banking sector. Finally, the sixth section presents the convertibility mechanisms of the ecological risk-free asset.


Climate change poses a serious threat to economic and financial stability and has now triggered an irreversible decline in biological well-being. The challenges of the 2030 Agenda are more prevalent in the Mediterranean than in other regions of the world. The Report on the State of the Environment and Development in the Mediterranean (Plan Bleu, 2020) indeed indicates that climate change affects the Mediterranean much more than the global average, in particular with warmer air and sea surface temperatures throughout the year (+1.5 versus 1.1 degrees). In addition, the economic and social effects of climate events are amplified by an economic model based on urbanization and land artificialization in coastal regions. They hit countries marked by strong social and territorial inequalities, high youth unemployment, and rampant political instability. As elsewhere in the world, radical changes in consumption and production models, and therefore in the financing and evaluation of activities, are therefore required in the Mediterranean.[1]

Accordingly, the 17 Sustainable Development Goals outline a desirable future in which the economy would be embedded within ecosystem constraints, while ensuring shared prosperity that limits inequalities in standards of living. However, while it has now been accepted that the structure, tools and culture of the financial system need to be changed if the SDGs are to  be achieved (HLEG, 2018), to date there is no consensus on the appropriate macroeconomic strategies and tools to be adopted. 

This short article proposes a mechanism aligned with the so-called “reformist green finance” agenda, in which public finance structures provide a key driver for transforming the financial sector and aligning financial flows with climate and societal imperatives. The outlined strategy proposed in this policy brief is in line with the report coordinated by FEMISE and the European Investment Bank (2014), which highlighted the challenges of territorial development, proximity and the measurement of social impacts. Said report recommended the creation of coordination platforms to accelerate the implementation of development projects, while measuring progress through microeconomic monitoring indicators. In what follows, we propose a social innovation that could strengthen the social and solidarity economy (SSE) sector and contribute to inclusive and sustainable development in the Mediterranean.

Status, Role and Missions of the Mediterranean Institute of Ecological Finance

The proposed mechanism consists of the issuance by a new Mediterranean Institute for Ecological Finance (MIEF) of “ecological risk-free assets” focused on the SDGs, in partnership with civil society and the central banks of Mediterranean countries.

This institute would be attached to various institutional actors such as the World Bank, the European Investment Bank and the United Nations, and connected to actors in the socially responsible investment (SRI) market, in close partnership with actors from the southern countries, in first place the central banks. Its first role would be to identify a set of territorial projects with a strong SDG impact. It would then certify the predictive and retrospective social return on investment (SROI) of these projects in partnership with the territorial authorities. Finally, it would organize the financing of these projects, in partnership with the SRI market and the central banks concerned. The MIEF would, therefore, have four main missions:

– Identify promising SDG-compatible territorial projects

– Issue ecological risk-free assets to finance such projects

– Measure the social and ecological impact of these projects

– Manage the ecological stock exchange

In what follows we discuss this in more detail.

Presentation of the Ecological Risk-Free Asset

Unlike a traditional bond, the ecological risk-free asset (ERFA) does not give the right to a monetary coupon, but to ecological and social impact units. These impact units are digital impact certificates issued by the Central Bank via a digital clearing house. They measure social impact, at parity with the national currency (for instance 1 impact unit = 1 Tunisian dinar). However, impact units cannot be converted into bank deposits.

The ERFA would take the form of a zero-coupon bond calibrated to the predictive SROI of the financed project. This SROI would be calculated by the MIEF, in partnership with the stakeholders and local authorities, according to the guidelines recommended by the UK Office of the Third Sector (2015).

The selling price of the ERFA is equal to the amount to be financed (denominated in local currency, for example the Tunisian dinar DT). Its face value is equal to the monetized value of the externalities (SROI). Its maturity corresponds to the time horizon of the project. For example, issuing an ERFA asset could finance investments of 9,000 Tunisian dinars to support very small businesses in Kabbarya, the working-class district south of the “poverty belt” surrounding Tunis. Such a project directly benefits SDGs 8, 10 and 11 and is likely to have a strong positive impact on society and the environment.

Let’s imagine that the value of the externalities (i.e. the monetization of the impact felt by the project’s stakeholders), calculated in the form of a Social Return on Investment (SROI), has been evaluated by the extra-financial experts of the MIEF to be 10,000 dinars. The prospectus for the ERFA would therefore state:

“The Mediterranean Institute of Ecological Finance undertakes to deliver 10,000 impact units to the purchaser of this asset, to organize the financing of the project described in the specifications, and to evaluate the retrospective SROI.

For the purchaser, the extra-financial return, measured in impact units (IU), is therefore :

Issuing Process of Ecological Risk-Free Assets

From the point of view of banks (for example, in the northern Mediterranean) wishing to increase their extra-financial performance, and to value it on the SRI markets, ERFAs would be very attractive. First, these assets are denominated in Tunisian dinars, and therefore inexpensive given the exchange rate. Secondly, ERFAs allow (thanks to the informational intermediary role played by the MIEF) the targeting of marginalized populations and territories. Their ecological and social impact is guaranteed by public institutions, and calculated according to a transparent and objective methodology.

Let’s review the issuing process. Imagine an SRI fund attached to Bank A acquires an ERFA. Bank A would thus finance very small businesses in Kabbarya, and in return accumulate a new ecological risk-free asset on its balance sheet. As shown in Chart 1, this transaction would involve four actors: the MIEF, Bank A, the Central Bank of Tunisia and the targeted very small business.

CHART 1 Descriptive Diagram of the Funding Scheme

The transaction goes like this. First, the MIEF transfers the ERFA to Bank A in exchange for a bank deposit of 9,000 dinars. Simultaneously, the Central Bank of Tunisia authorizes the MIEF to credit Bank A’s account with 10,000 impact units in a digital recording platform.

These impact units are recorded as a liability for the MIEF, which thus undertakes, via the calculation of the retrospective SROI, to provide proof of impact at the maturity of the asset without ecological risk.  These four accounting entries are described in Table 1 below. For greater readability, the impact units appear in italics.

TABLE 1 Issuing Process of ERFA

At this stage, the beneficiary has not yet been impacted by the transaction. But as soon as the funds are received, the MIEF executes the specifications of the ERFA’s prospectus, and transfers the 9,000 DT bank deposit to the targeted very small business.

The impact of this transaction on the relevant balance sheets is described in Table 2. Bank A’s balance sheet is therefore unchanged, but its liabilities (bank deposits) are now held by the beneficiary (and no longer by the MIEF).

TABLE 2 ERFA Issuing Process

At the end of this process, the net financial wealth of the very small business has thus increased by 9,000 dinars. This money is immediately put to use for investments and jobs in the specifications of the ERFA’s prospectus.

Given the high propensity to consume of the low-income populations that benefit from it, these 9,000 dinars (about 3,000 euros), which account for nearly two years’ minimum Tunisian salary (400 dinars/month), will probably circulate rapidly, thus triggering spending, income, new spending… and a dynamic local multiplier effect, which will also generate tax revenues for the Tunisian government. This territorial expansion, in addition to benefitting the poorest populations, initiates a qualitative transformation of the economy, in that it is based on projects targeted by the MIEF and supported by all its stakeholders.

Settlement of the Transaction

In accordance with the terms of reference, the MIEF accompanies the very small business in the deployment of the project and monitors the calculation of the retrospective SROI. If the objective is reached, the Central Bank of Tunisia credits the MIEF’s account with a corresponding amount of impact units. As shown in Table 3, the MIEF’s balance sheet then returns to its original position.

TABLE 3 Settlement of the Transaction

Note that in the above balance sheet, the impact units appear as liabilities of the Central Bank of Tunisia. This simply means that the Central Bank of Tunisia is the guarantor of the tangibility of the impact achieved. However, the amount of impact units issued in this way has no impact on monetary policy, interest rates or prices. Indeed, the impact units are only digital impulses and cannot be converted into bank deposits or fiduciary money.

Implications for the Banking Sector

When measured in non-convertible impact units, Bank A’s net wealth is +10,000; however, in euros, Bank A’s net wealth is -9,000 TD. So, why would Bank A accept the transaction?

First, the impact units can be exchanged for euros with another bank wishing to acquire a “proof of social impact.” Bank A can thus make a capital gain in the transaction. Let’s imagine for instance that the impact units are resold to Bank B, this time in euros, for an amount of 3,500 euros. Assuming an exchange rate of 1 TD = 0.3 euros, the impact on the balance sheets of banks A and B is described in Table 4.

TABLE 4 Resale of Impact Units

An alternative strategic choice for Bank A would be to keep the ERFA on its balance sheet, which can help increase the value of its equity. Indeed, a large body of financial literature indicates that “green” investments can benefit from a reputational signalling effect (Friede, 2015).

Finally, it is possible that the impact beneficiary fails to achieve the targeted SROI. In this case, the risk to financial stability is zero, since Bank A can liquidate its investment at any time using the Central Bank’s balance sheet.[1] The liquidity of the system relies in fact on the convertibility of the ecological risk-free asset into reserve money, realizable on demand from the Central Bank, up to the issue price.  Such an exchange is described in Table 5.

TABLE 5 Impact Unit Convertibility

Convertibility into reserves constitutes a strong signal that would increase the market’s appetite for ERFAs. However, Bank A has no real interest in choosing this option insofar as these bank reserves are not remunerated, or, if so, at very low rates.

Note that the targeting of bank deposits to marginalized territories and businesses helps the SROI target to be met. Moreover, the increase in financial wealth of impact beneficiaries has a strong expansionary effect on the territorial economy, contributing strongly to SDGs 8 and 10.

But in the event of a series of non-performing ERFAs, which would undermine the credibility of the mechanism, the Central Bank can react by devaluing the theoretical value of impact units against the dinar. This would be done by applying a discount rate (equal to the devaluation) in the above convertibility operations. As shown in Table 6, this decision would mean that Bank A would incur a financial loss equal to the rate of devaluation (in this case 5%). This announcement would decrease the monetary value of the impact units and thus the value of the ecological risk-free assets.

TABLE 6 Convertibility of Impact Units with 5% Devaluation

This mechanism would therefore encourage the MIEF to carefully select financed ventures, and monitor the SROI.  However, it would have no impact on financial stability, as the value of the ecological risk-free asset remains under the control of the Central Bank. 

In previous work we have simulated the impact of ERFA strategies on SDGs using Philia 1.0, a new ecological macroeconomic stock-flow consistent model with 321 equations (Lagoarde-Segot, 2022; Lagoarde-Segot and Revelli, 2022). As shown below, simulations suggest that, compared to a baseline “business as usual” scenario, this strategy has the potential to reduce income and wealth inequalities, while increasing growth and potentially reducing energy and material footprints. The impact on the ecosystem, however, appears to depend upon the stringency of the taxonomy adopted by policymakers to identify “green projects” and sources of energy (Chart 2).

CHART 2 ERFAs and the Economy

Source: Lagoarde-Segot and Revelli (2022).

CHART 3 ERFAs and the Ecosystem

Source: Lagoarde-Segot and Revelli (2022).

Conclusion and Recommendations

The urgency of climate change and inclusive development in the Mediterranean call for social and financial innovations that “count where it really matters.” This proposal contributes to tracing the paths for inflexing modes of production and consumption in the Mediterranean, in response to the rise of systemic perils. However, when it comes to economic policies and strategies, the “map is not the territory.” The strategy presented will thus need to be refined and adjusted through stakeholder dialogue. We therefore call for the creation of a task force, composed of about thirty extra-financial rating practitioners, experts and grassroots economic actors, in order to carry out an initial small-scale experiment in a given territory.

Appendix: The SROI Method

Social return on investment (SROI) is a metric that allows the overall performance of a company or a specific project to be assessed, taking into account all stakeholders. The SROI can be evaluative, i.e. conducted retrospectively on the basis of past results, or predictive, seeking to anticipate the value created by a given action. The calculation of a predictive SROI is particularly useful in the constitution of a strategic plan or a business plan. The SROI calculation should document how much value has been destroyed or created, and for whom. The SROI calculation involves the following steps:

Identifying Stakeholders

Stakeholders are defined as people or organizations that experience a change, either positive or negative, as a result of the activity being analysed.  They may include employees, customers, other businesses, local residents, government agencies, taxpayers, etc.

Developing a “Theory of Change”

The purpose of this step is to detail and then document how the project under review uses resources (inputs) to carry out activities that lead to various outcomes for each of the stakeholders included. Measuring outcomes is the only way to ensure that changes for stakeholders are real.

Monetizing the Results

The next step is to monetize the results of the activity. Monetization thus requires “inventing prices” through the use of various methods. Some methods frequently used by economists are summarized in Table 4. In the case of SROI, the most frequently used methods include:

  1. The calculation of savings (e.g., medical expenses avoided) or monetary gains to stakeholders (e.g., income for a person obtaining employment);
  2. Contingent valuation, which involves assessing the implicit price of an outcome (e.g., how much additional income would you demand to continue living in your neighbourhood in the event of a persistent noise nuisance? );
  3. The revealed preference technique, which consists in deriving the price of a non-market good from the price of market goods. The economic value of good air quality can be estimated by observing the average property price differential between polluted and unpolluted areas;
  4. The travel cost technique, which asks people how far they would be willing to travel to access the service. The total transport cost can be used to monetize access to the service.

Establishing the Impact

The purpose of this step is to determine the extent to which the observed outcomes are actually caused by the project. Two concepts are important:

  • The calculation of the dead weight, i.e. the measurement of the result that would have been observed even if the activity had not taken place.

For example, suppose that an urban regeneration programme has resulted in a 5% increase in economic activity in the area in question. However, national GDP growth is 2%. Therefore, part of the observed increase in economic activity is due to macroeconomic trends rather than the programme itself.

  • The calculation of the attribution bias, i.e. the part of the result that is due to actions taken by other institutions. 

Calculation of the SROI

The SROI is equal to the ratio of the discounted monetized value of externalities divided by the value of inputs. The SROI is therefore based on the discounting of annual impacts over the entire study period. It is therefore generally recommended, in the spirit of the Stern Review on Climate Change, that a low discount rate of around 3% be used for the calculation of the SROI. Table 6 gives a fictitious and simplified example of a predictive SROI calculation, using a breakeven point of 10% and an attribution rate of 35%.

TABLE 1 Calculation of Social Return on Investment


[1] According to the same report, “To ensure the necessary transition to an inclusive and sustainable future, governments and businesses in the Mediterranean region should rely on: I) a mix of regulatory and economic instruments, ensuring adequate pricing, taxation and subsidies; II) technological and social innovations; III) multiple sources of financing (in line with the 2015 Addis Ababa agreement) that target sustainable investments and the abandonment of financing of polluting activities: domestic and international, public and private, conventional and non-conventional, micro-credit; and IV) monitoring of the progress actually made, through tools such as indicators and data.” (p.6)

[2] Note that in the event that requests for conversion of the ecological risk-free asset into reserves threaten to deviate its base rate from its target, the Central Bank can react by selling other assets on the open market in order to drain reserves back onto its balance sheet.


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FEMISE, Social and solidarity economy: vector of inclusiveness and job creation in the Mediterranean partner countries. Report prepared for the European Investment Bank (EIB), 2014.

Friede, G., Busch, T., Bassen, A. “ESG and financial performance: aggregated evidence from more than 2000 empirical studies.” Journal of Sustainable Finance & Investment, 5:4, 2015, 210-233.

Lagoarde-Segot, T. “Towards a reformist green finance consensus for the SDGs? Analytical insight using Philia 1.0, a new ecological macroeconomic model.” PoCfiN WP 2022/02. Available at

Lagoarde-Segot, T.; Martinez, E. “Ecological Finance Theory: New Foundations.” PoCfiN Working Paper 03/2020. Available at

Lagoarde-Segot, T.; Revelli, C. “The Ecological Risk-Free Asset. Analytical insight using Philia 1.0.” PoCfiN Working Paper 03/2022. Available at

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