Financial Stability and Systemic Risk: Lenses and Clocks, June 2012
This paper, a collaborative effort of IISD, the United Nations Environment Programme Finance Initiative, and The Blended Capital Group, seeks to apply sustainable finance and responsible investment principles to inform the financial stability debate.
The paper urges financial policy-makers to integrate measures that promote the values of transparency, accountability, responsibility and trust as they seek to formulate and refine policies that deliver a more stable and resilient financial system to support globalized markets. The importance of a deeper understanding of broader systemic risk issues, improved governance and clearer fiduciary responsibility—all central to both the overhaul of our financial systems and to the principles and practices of sustainable finance and investment—is a focus of the paper.
For a more stable and resilient financial system, all public and private actors involved in the investment and financial intermediation chains will benefit from the use of wider and better quality "lenses" that give greater depth, breadth and granularity to our vision and understanding of a wider range of risks. Also, those same market actors should employ "clocks" that heighten their appreciation of the temporal nature of risk by neither over-emphasizing those short-term and apparently more easily quantifiable risks nor under-emphasizing the slow, creeping risks that destroy value over the long term.
After briefly detailing the context of the financial and economic crisis of 2007-2012 and the ongoing response to that crisis, the paper highlights six areas related to the re-engineering of our financial system and outlines the relevance of sustainable finance and investment thinking to these areas. The six areas are:
- Dark Pools and the Shadow Side: Stability and Over-the-Counter Markets
- Ownership That Counts: Institutional Investors and Accountability
- Listing for Stability: Stock Exchanges and Listing Requirements
- Banking Risk for the Long Term: Systemic Risk and the Basel Committee
- Rating Right: The Role of Rating Agencies within the Financial System
- Insuring the Future: Stability and Solvency II
Essentially, the paper seeks to foster ongoing and informed discussions between policy-makers and those financial services and investment institutions that are working with the United Nations and IISD to promote the idea that markets need resilient institutions, strong business cases and robust values to flourish. The Rt. Hon. Gordon Brown MP, building on his work in 2011-2012 for United Nations Secretary-General (UNSG) Ban Ki-moon, contributed a Foreword to the document. The paper also draws on policy recommendations on financial stability and sustainability made by Mr. Brown to the UNSG's High Level Panel on Global Sustainability in September 2011.
This report updates and expands upon the 2010 zero draft of Financial Stability and Systemic Risk: Lenses and Clocks, which contained a preliminary discussion on how the global financial system could be re-engineered to reduce systemic risks and deliver on sustainable development. Similar to the June 2012 Lenses and Clocks, the 2010 version focused on the following six reform areas: over-the-counter markets, the role of institutional investors, stock exchanges and listing requirements, global banking rules, the role of rating agencies and lessons from the insurance industry.