THE FINANCIAL SECTOR: A LINCHPIN TO ADVANCE SUSTAINABLE DEVELOPMENT
The complex relationship between the private sector and the environment
According to the economic theory of the “tragedy of the commons”, the earth’s natural resources become overexploited when they are considered free, whereby individuals behave against to the common good. Business as usual expects government will create a suite of laws and regulations to manage the free-for-all. However, a growing number of private sector enterprises are moving ahead of government regulation because they understand their own self-interest is realized through efforts to reduce environmental damage and even to encourage tougher environmental regulation.
Climate change, ecosystem degradation, water scarcity, waste management, and other environmental challenges increasingly force the private sector to consider how are damaging the environment, for example through deforestation or greenhouse gas emissions as they and their suppliers conduct business; or how they are dependent on the environment, for example by using water for agricultural production or mineral extraction and processing. These activities can expose companies to a variety of risks including market, regulatory, and reputational risks as well as the physical risks from climate-related threats. A growing number of industries and individual companies acknowledge that diminishing exposure to these material risks is in their collective self-interest and requires them to reduce environmental damage.[1]
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