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The Financial Sector’s Climate Imperative

Summary:
It is impossible to say when the next financial crisis will erupt, let alone how long it will last or how damaging it will be. But there is no doubt that the risks the world faces merit a more holistic approach – one that accounts for the serious and escalating threats posed by climate change. PARIS – In the decade since the global financial crisis, mechanisms to boost the financial system’s resilience have been widely discussed. But while some progress has been made, the largely piecemeal approach that has been pursued may yet prove inadequate to support long-term financial stability. And a waning bull market means that the day of reckoning may not be far off. Cynthia Johnson/Liaison/Getty Images

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It is impossible to say when the next financial crisis will erupt, let alone how long it will last or how damaging it will be. But there is no doubt that the risks the world faces merit a more holistic approach – one that accounts for the serious and escalating threats posed by climate change.

PARIS – In the decade since the global financial crisis, mechanisms to boost the financial system’s resilience have been widely discussed. But while some progress has been made, the largely piecemeal approach that has been pursued may yet prove inadequate to support long-term financial stability. And a waning bull market means that the day of reckoning may not be far off.

It is impossible to say when the next crisis will erupt, let alone how long it will last or how damaging it will be. But there is no doubt that the risks we face merit a more holistic approach, much like what was called for immediately after the 2008 crisis (though those calls lost steam as markets recovered). This means agreeing on and implementing a new vision for governing the global economy; assessing it rigorously and adjusting it as needed; and ensuring full accountability for every stakeholder.

This vision must comprehend profound and ongoing changes, from increasingly concentrated market power to increasingly automated decision-making. It must also consider China’s rise, which demands that China be incorporated more fully into governance bodies, which will have far-reaching implications, especially as the country emerges as a less benevolent global actor.

Furthermore, this vision must contend with rising nationalism and isolationism, exemplified by US President Donald Trump’s “America First” approach and his trade war with China. And it must recognize that the effectiveness of macroeconomic tools – both monetary and fiscal – is more limited today than in 2008.

Finally, this new vision must reflect a clear decision about the extent to which we are committed to addressing climate and sustainability challenges. Despite the 2015 Paris climate agreement, which changed the paradigm in which we talk about climate change, world leaders have remained reluctant to do what is needed to make a real difference. We cannot continue to deceive ourselves by touting lofty goals while working only at the margins.

If we are serious about building resilience, we need to press ahead with tough systemic changes that address how we produce and consume energy and finance our economies. This will require effective leadership. But, while collaboration among governments has helped drive some climate action, growing fragmentation within the...

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