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Developing a precautionary approach to financial policy: from climate to biodiversity

Chenet, Hugues, Kedward, Katie, Ryan-Collins, Josh and van Lerven, Frank (2022) Developing a precautionary approach to financial policy: from climate to biodiversity. The Inspire Sustainable Central Banking Toolbox Policy Briefing Papers (2). Grantham Research Institute on Climate Change and the Environment, London School of Economics and Political Science, London, UK.

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Climate change and biodiversity loss have primarily been approached by financial authorities (central banks and supervisors) from the perspective of financial risk. The prevailing view is that there is insufficient information and understanding of environment-related financial risks within financial institutions. If such financial risks can be discovered, measured and disclosed, they can be priced into financial markets to support a smooth environmental transition and this market failure can be addressed. However, environment-related financial risks have particular features that make them less amenable than other types of risk to standard financial risk management approaches. In particular, the ‘radical uncertainty’ characterising the long time horizons and the endogenous and non-linear dynamics involved with environmental change make quantitative calculations of financial risk challenging, if not impossible. The authors propose in this paper an alternative, precautionary approach to financial policy, incorporating both prudential and monetary policies. As a framework it draws on the ‘precautionary principle’ and modern macroprudential policy traditions. A precautionary financial policy mindset acknowledges the importance of measurement practices and price discovery but justifies bolder policy action to shift the allocation of capital to shorter time frames better aligned with the uncertain and potentially catastrophic nature of environment-related threats, including the risks to, and posed by, financial institutions. The paper considers financial authorities’ tentative steps and possible tools in such a precautionary policy direction – and how these could be scaled up and mainstreamed.

Item Type: Monograph (Report)
Official URL:
Additional Information: © 2022 The Authors
Divisions: LSE
Subjects: G Geography. Anthropology. Recreation > GE Environmental Sciences
H Social Sciences > HG Finance
Q Science > QH Natural history > QH301 Biology
Date Deposited: 11 Jul 2022 14:00
Last Modified: 11 Jul 2022 23:21

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