Taming Unsustainable Finance: The Perils of Modern Risk Management
In Beate Sjåfjell and Christopher M. Bruner (eds), Cambridge Handbook of Corporate Law, Corporate Governance and Sustainability (Cambridge University Press, 2019), Chapter 8.
Posted: 8 May 2019 Last revised: 15 Jun 2020
Date Written: May 6, 2019
A traditional response to information asymmetries in financial markets has been to require disclosure and heightened transparency in investment chains. We argue in this chapter that the trust placed in such regulatory techniques will fail to deliver sustainable investment for two reasons. The first is the structure of equity markets, which are focused on shareholder returns and excessive turnover of portfolios, preventing meaningful engagement with companies. The second is that both investors and intermediaries make a category error in placing trust in modern risk management to quantify the financial risks from climate change and other environmental changes. Our analysis leads us logically to three micro- and macroprudential policy prescriptions, namely: increasing the capital requirements on assets with so-called ‘brown’ credentials; reforming bank stress tests to reflect the uncertain financial implications of environmental damage; and pivoting central bank bond buying programmes toward green financial assets.
Keywords: uncertainty, risk, climate change, banks, financial markets
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