Key Panel Session @ FINEXUS Conference

Time and Venue: Thu, 18 Jan 2018, 17:00 – 19:00. Aula KOL-G-201, Univ. of Zurich
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Summary. In this session, the main theme of the conference, i.e. how to narrow the gap between finance and sustainability, is discussed for the broader audience by five world-renowned experts, representing a balance of perspectives from academia and think tanks, as well as from public and private financial institutions. Questions examined include: Can we reconcile economic growth with sustainability and what kind of financial instruments and institutions do we need? Where does public and private finance stand in measuring their progress towards sustainability? What are the main obstacles they face in order to go further? How can academic research in sustainable finance facilitate the alignment of investors’ portfolios to the Paris Agreement targets and to the Sustainable Development Goals (SDGs) targets?

Panelclick here for speaker biographies:

Stefano Battiston (Professor at UZH; Director of FINEXUS Center) Moderator
  Joseph Stiglitz (Professor at Columbia University) Speaker
  Graeme Maxton (Secretary General of Club of Rome) Speaker
  Mafalda Duarte (Head of Climate Investment Funds) Speaker
  Christopher Steane (Global Head of Lending Services at ING) Speaker
  Urban Angehrn (Group Chief Investment Officer and Member of the Executive Committee at Zurich Insurance Group) Speaker


Background information and policy discussion. Sustainability and Financial Stability. While sustainability and climate action have recently taken center stage in the media and the policy discussions, the majority of financial capital remains allocated into economic activities that are misaligned with the objectives of the UN Sustainable Development Goals (SDG)[1] and the Paris Agreement’s 2 degrees C target[2]. At the same time, for the financial system to be aligned with sustainability and climate objectives it has to be aligned, in the very first place, with financial stability objectives. Remarkably, the financial crisis of 2008 has exposed the critical weaknesses arising when interconnectedness and complexity in the financial system go too far. Ten years after, several scholars warn that these weaknesses have been patched but not addressed at their root[3]. Today, financial stability is regarded by many experts and policy making bodies as deeply connected to sustainability objective. In the words of Christian Thimann (Axa, and Chair of the EU Commission HLEG Sustainable Finance) in the HLEG 2017 Interim Report “Sustainable finance is about two imperatives. The first is to improve the contribution of finance to sustainable and inclusive growth, and accelerating the shift to a low-carbon and resource-efficient economy. The second is to strengthen financial stability and asset pricing, notably by improving the assessment and management of long-term material risks … including those related to environmental, social and governance (ESG) factors”[4]. The HLEG report makes also a very important clarification about sustainable finance: “Progress on sustainable finance starts not with finance itself; the first step is to describe the desired economic model of sustainability. The European Union has developed this model: a low-carbon, resource-efficient and increasingly circular economy characterized by high employment, technological innovation and sustainable growth. The second step is to see how finance needs to change to move the economy towards the desired model… [in terms of] … policy, financial regulation, … financial market practices, norms and behavior.” The role of finance.  The position taken by the EU Commission in this regard is very encouraging and Switzerland has similar ambitions. However, the pace of the progress towards this objective may not be sufficient to achieve the 2C target and the SDGs. Finance could play a role in the following two ways: 1) by assessing to what extent are financial institutions exposed to risks and the opportunities from the transition to a low carbon economy, 2) by understanding under which conditions could financial instruments and institutions help to better align capital allocation with sustainability. There is an important aspect to clarify here. On the one hand, increasing the disclosure of climate related financial risk[5] is considered by some experts to be sufficient to tilt the playing field towards more sustainable economic activities (Bloomberg and Carney 2016[6]). On the other hand, a stable policy framework (e.g. including for electricity tariffs) is considered by others as a precondition to allows investors to forecast cash flows of financial products associated with green technologies (Stern 2016[7], Stern and Stiglitz 2017[8]). In this latter argument, disclosure is necessary but not sufficient. In other words, finance can fuel the low-carbon transition if there is the ground for it, but it cannot drive the transition by itself. One element that may reconcile these two arguments is the fact that, due its influence on policy, finance is in the position to support the political momentum towards sustainability and climate action. It would add financial credibility to the policy credibility of the pathway towards a low-carbon transition. Addressing climate change: from cost to opportunity. Addressing climate change is usually considered as a cost for the economy and a source of risk for the financial system. Certainly, the notions of carbon budget, carbon stranded assets and carbon bubble (see the reports by Carbon Tracker have the great merit to have brought the issue to the attention of the media and the broader public. Recently, a complementary narrative has emerged around the concept of green growth as a win-win solution that could, at the same time, promote stable growth path and increase employment while decreasing the ecological footprint (see e.g. initiatives of UNEP[9], OECD[10], World Bank[11], UNIDO[12], European Commission’s Circular Economy Package[13], European Investment Bank[14]. see the UNEP, EU). To give an idea of the diversity of the debate, only few weeks ago, Jean Tirole, Nobel prize for economics in 2014 has criticized the idea of green growth in an interview for the WEF with the argument that if green growth would be possible, “we would have already done it, unless we are completely stupid”[15]. One important aspect to settle this debate is to clarify what do we mean more precisely by “green growth” and the need to distinguish between short/long-term, avoidable/unavoidable costs and investments. During this conference, one entire research session has been devoted to present recent results of quantitative models to understand the conditions for the onset of green and inclusive growth. Geopolitical dynamics adds complexity. On the geopolitical landscape, the response of political leaders to the discontents from globalization, and in particular the middle-class in high-income countries (World Inequality Report 2018[16]), often relies on promising public support to carbon-intensive economic activities. For instance, countries such as US, Russia, and Turkey currently do not seem to be as seriously committed to a low-carbon transition as other countries. Could developments in such countries’ internal political and socio-economic situation jeopardise the achievement of the 2C target? At the same time, at a smaller scale, regional governments and municipalities have been progressing towards low-carbon targets, sometimes independently of their national politics (see e.g. the coalition of US states). Increase the public awareness on the role of financial institutions and on the role of research. Against this backdrop, a relevant share of global citizens is still unaware of the fact that public and private financial institutions play a crucial role in whether we manage to address climate change. Many people are also unware of the role that research plays in our understanding of how to reshape the financial system to enable sustainable and inclusive growth while preserving financial stability, as advocated by the EU HLEG Sustainable Finance. Independent research, in particular research going beyond mainstream economic models and approaches, as well the dissemination of its results within the civic society and the policy community, is crucial for keeping the financial system healthy and avoid the kind of distortions that we have seen in the run-up of the Great Recession of the 2008. This session aims to raise awareness of the broader audience to all these major issues related to sustainability and finance, and their interconnectedness.


Footnotes:[1] [2] [3] See the stream of work on financial interconnectedness e.g. Battiston et al. 2016, Bardoscia et al. 2017 [4], preface. [5] See the Guidelines of the Task Force on Climate Related Financial Disclosure of the Financial Stability Board ) [6] [7] [8] [9] [10] [11] [12] [13] [14] [15] [16]