THE FINANCIAL SECTOR: A LINCHPIN TO ADVANCE SUSTAINABLE DEVELOPMENT (cont.)
The underlying but influential role of the financial sector in environmental sustainability
Banks, pension funds, insurance companies, and other financial institutions provide a range of services that are an essential part of our daily lives such as offering cash, credit, and other forms of capital; saving and investment accounts; and insurance policies. Credit and liquidity provision as well as other risk management tools and services are core activities of the financial sector.[8]
Engaging the financial sector to advance environmental sustainability is justified by the value it adds to the global economy and the role it plays in our economy. At present, the industry contributes roughly 15 per cent to global GDP.[9] In terms of managed assets, banks, pension funds, insurance firms and others control around US$300 trillion.[10] The financial sector has an essential role in advancing environmental sustainability. Ultimately, the challenge is to shift capital away from unsustainable companies, projects and other assets that negatively affect the environmental and towards ‘sustainable assets’ that operate with minimal environmental costs or even with environmental benefits.
Definitions
Credit
Credit is defined as a contractual agreement in which a borrower receives something of value now and agrees to repay the lender at some date in the future, generally with interest. The term also refers to the borrowing capacity of an individual or company[7]
Liquidity
Liquidity describes “the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset’s price. Market liquidity refers to the extent to which a market, such as a country’s stock market or a city’s real estate market, allows assets to be bought and sold at stable prices. Cash is the most liquid asset, while real estate, fine art and collectibles are all relatively illiquid”[7]
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