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Financial Dynamics of the Environment
Risks, Impacts, and Barriers to Resilience

Working Paper

Authors: Ben Caldecott    Jeremy McDaniels   

Published By: UNEP Inquiry    Smith School of Enterprise and the Environment   

Date: Jul 2014

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Financial Dynamics of the Environment

This Working Paper was an early mapping study for the Inquiry and  is based on a literature review (of available literature mainly from OECD countries). It summarises the arguments for why the environment and environment-related risks are relevant to the financial system and reviews the main structural barriers preventing the financial system from managing such issues.

Key findings include that:

  • Natural capital underpins the health of global economic and financial systems, however, these contributions remain largely unpriced  and are largely absent from the balance sheets of financial institutions.
  • Environmental change, natural capital depletion and degradation could potentially pose systemic risks to financial stability; however, the processes through which this may happen are currently unclear and may be remote. Public policy responses to environment-related risks may also impact the financial system and financial stability.
  •  Short-termism in financial markets undermines the ability to invest and manage risk with due consideration for environmental-related risks. It is driven in part by the practices and regulations that govern financial institutons. These include short-term benchmarks for performance measurement, risk management, reporting and compensation.

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