THE FINANCIAL SECTOR: A LINCHPIN TO ADVANCE SUSTAINABLE DEVELOPMENT (cont.)
A rising number of financial institutions have developed environmental policies on a voluntary basis. However, the way the financial system is currently designed, and the way financial institutions currently allocate capital, discourages change – particularly the transformational change to a low-carbon, resource-efficient economy. The inclinations that create this inertia include short-termism and excessive leverage. These tendencies produce fast turnover of profit to pay off debt; and they emerge as significant drivers of instability throughout the economy. In this investment context, longer-term sustainability-related options are ignored in financial decision-making.[11]
Without changes in regulations and in costs, it is unlikely that the financial industry as whole will transform into a responsible mode. Concerted public-private sector initiatives are needed to encourage financial institutions to shift investments into low carbon, resource efficient, and environmentally sound assets. Pricing environmental risk and regulatory changes are two important levers to motivate banks, pension funds, and other actors in the financial system to accelerate towards environmental sustainability. Both supply and demand drivers need to be applied to enable a global transition to a low carbon, resource efficient and equitable economy.
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