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, Forthcoming).

University of Oslo Faculty of Law Research Paper No. 2019-13

Posted: 8 May 2019

See all articles by Jay Cullen

Jay Cullen

University of York; University of Oslo

Jukka Mähönen

University of Oslo, Department of Private Law

Date Written: May 6, 2019

Abstract

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

Suggested Citation

Cullen, Jay and Mähönen, Jukka T, Taming Unsustainable Finance: The Perils of Modern Risk Management (May 6, 2019). In Beate Sjåfjell and Christopher M. Bruner (eds), Cambridge Handbook of Corporate Law, Corporate Governance and Sustainability (Cambridge University Press, Forthcoming).; University of Oslo Faculty of Law Research Paper No. 2019-13. Available at SSRN: https://ssrn.com/abstract=3383419

Jay Cullen (Contact Author)

University of York ( email )

Heslington
University of York
York, YO10 5DD
United Kingdom

University of Oslo ( email )

PO Box 6706 St Olavs plass
Oslo, N-0317
Norway

Jukka T Mähönen

University of Oslo, Department of Private Law ( email )

Karl Johansgt 47
N-0162, Oslo
Norway
+4722859534 (Phone)

HOME PAGE: http://www.jus.uio.no/ifp/english/people/aca/jukkam/index.html

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