Why sustainability is crucial to risk management

Policymakers and financiers seeking to bring equilibrium back to the markets should heed the thinking of financial sustainability advocates, a new report says.

Post-financial crisis efforts to shield the economy from volatility must be extended to include emerging sources of instability in the environmental, social, and governance realms if markets are to achieve robust growth and create wealth for all, according to Lenses and Clocks: Financial stability and systemic risks, a joint report released Monday by the UNEP Finance Initiative, the International Institute for Sustainable Development, and the Blended Capital Group. 

"You cannot have a stable financial system that accounts for classical economic considerations while ignoring climate change, resource depletion, ecosystems destruction and other new and emerging risk," said Paul Clements-Hunt, report co-author and founder of The Blended Capital Group.

The imperative of detecting long-term financial risks -- a lesson of the recent financial crisis -- requires a heightened perception for unconventional, long-term risk which can be informed by the better lenses and more clocks that the sustainable finance grid of analysis provides, the report says.

Such long-term but steadily growing risks include climate change, resource depletion, social upheaval, and other risks stemming from environmental, social, and governance phenomena -- all of which are seldom identified and assessed by financial analysts, and therefore too rarely managed by financial institutions. 

"Understanding these threats will inform the choices we make to benefit from the opportunities ahead of us and, in doing so, improve life of billions of our fellow human beings, rebuild the planet's natural capital and foster markets based on fairness and equality," said former British Prime Minister Gordon Brown, whose recent counsel on financial stability and sustainability to the UN Secretary General's High Level Panel on Global Sustainability informed the report. 

"This study will catalyze a new conversation about the role of finance and investment as a force for good in society and will build on the hard lessons of the recent past," he added. 

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