If the 2008 financial crisis laid bare nearsightedness in global financial markets, then the way to prevent future shocks is to give participants “wider and better quality lenses,” according to a new report published by the International Institute for Sustainable Development (IISD).
The report, titled Financial Stability and Systemic Risk: Lenses and Clocks, applies the principles of sustainable finance and responsible investment to post-2008 debates about the stability of the global financial system. The authors emphasize the importance of grounding market behavior with an understanding of modern risks to financial markets -- everything from inadequate capital requirements to climate change.
Former British Prime Minister Gordon Brown writes in the Forward: “History tells us that communities, companies and markets only flourish in the long term when they are underpinned by shared values that promote stability.”
The report identifies six areas of the global financial system that will remain "a destabilizing threat to markets" without updated concepts of risk. The six areas highlighted in the report are:
* Over-the-counter trading: Opaque, lightly regulated markets enabled risk to build up in the financial system.
* Institutional investors & accountability: Asset owners failed to sufficiently question “the governance, policy and operational practices and innovative products of financial institutions.”
* Stock exchange listing requirements: Corporate reporting overemphasizes short-term events, such as quarterly earnings, and lacks universal disclosure practices for a company’s environmental and social impacts.
* Banking risks: Banks are looking at how to recalibrate the needs to set aside capital and lend it out.
* Rating agencies: The three major credit rating agencies “have come under an intense spotlight in terms of their transparency, independence and potential conflicts of interest.”
* Insurer stability and solvency: Policymakers are looking at ways to modernize the European insurance industry, with updated capital requirements and risk management standards.
The report, written by Paul Clements-Hunt of the Blended Capital Group, is a collaboration of the United Nations Environment Program Finance Initiative, the IISD and Blended Capital.
It will take time for the world of finance to accept these evolving 21st-century values, says Jonas Kron, an investment adviser at Trillium Asset Management LLC, which has been advising clients on environmental, social and governance investing since 1982. "I think the investment community as a whole has a long way to go."