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.