Greening the Financial Sector

Introduction and Executive Summary

This background paper for the international conference 'Greening the Financial Sector - A Conference for Banks and Insurance Companies' introduces a variety of themes that will be discussed during the conference. The aim is to give a common platform for all participants of the conference. The themes range from the general consideration of the role of financial institutions in achieving sustainable development over more specific risks and opportunities for the financial sector dealing with environmental aspects of their business to a discussion of the national and international frameworks concerning financial markets and the environment.

The concepts of environmental space, eco-efficiency, Factor Four and Ten are seen as possible solutions for the growing conflict between social, economic and environmental requirements of a sustainable development.

Financial institutions that have for a long time refused to contribute actively to sustainable development have begun in recent years to take environmental issues into consideration on the one hand for sound business reasons and on the other because of a growing responsibility towards the society linked to their actual and potential influence.

The perspective of financial institutions concerning environmental issues moved from a reactive risk avoiding attitude to a proactive looking for opportunities. For both, financial institutions and their customers, environmental awareness and management is seen as a possible source of business success.

The environmental rating of companies is becoming more and more common among financial institutions in order to assess environmental risks properly and to identify investment opportunities. But the lack of standardized criteria for rating and environmental reporting is still a major obstacle for the applicability and comparability of environmental information. Thus a standardization is required.

The question whether environmental and financial performance are correlated positively is crucial for financial markets. Several studies that have been carried out in order to prove evidence for this correlation come to the conclusion that good environmental performance does at least not have a negative effect on financial performance and that a positive effect is probable.

A small but growing number of ecologically oriented financial products has emerged on the financial markets. Most important to date are environmentally oriented investment funds, some of them managed according to criteria of eco-efficiency. They demonstrate that ecological leaders can also be economic winners.

Influence of shareholders on the companies they own is seen as an important field for financial institutions where they can play an active role to encourage change towards sustainable business behavior.

Financial institutions act in a given framework of taxes, laws, regulations and agreements. As long as large environmental and other externalities exist, the almost perfect financial markets will lead to an 'efficient' misallocation of resources instead of increasing resource productivity. Therefore states and international organization have to create a new framework of taxes, laws, regulations, standards and agreements in order to contribute to an internalization of external environmental costs.

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