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Earth Calling the Financial Sector

Jeffrey D. Sachs and Hendrik J. du Toit

 

Financial markets serve two crucial purposes: to channel savings toward productive investments, and to enable individuals and businesses to manage risks through diversification and insurance. As a result, the sector is essential to sustainable development, which represents unprecedented global-scale investment opportunities and risk-management challenges.

That is why, when world leaders meet this July in Addis Ababa, Ethiopia, at the Conference on Financing for Development, the financial industry should be ready to offer practical, global solutions to the challenges associated with financing economic growth, poverty reduction, and environmental sustainability.

We have now entered the Year of Sustainable Development. At three back-to-back global summits – the conference in Addis Ababa, September's meeting at the United Nations to adopt Sustainable Development Goals (SDGs), and the UN Climate Change Conference in Paris in December – 193 governments will attempt to ensure that global growth and poverty reduction continue within a safe natural environment.

It will be a close call. The global economy, despite all of the huge bumps in the road, is delivering aggregate annual growth of 3-4%, leading to a doubling of output every generation. Yet the global economy is not delivering sustainable growth in two basic senses. In many parts of the world, growth has been deeply skewed in favor of the rich; and it has been environmentally destructive – indeed, life-threatening when viewed on a century-long time scale, rather than according to quarterly reports or two-year election cycles.

Climate change is the greatest of these environmental threats (though by far not the only one). Given the current trajectory of global fossil-fuel use, the planet's temperature is likely to rise by 4-6 degrees Celsius above its pre-industrial level, an increase that would be catastrophic for food production, human health, and biodiversity; indeed, in many parts of the world, it would threaten communities' survival. Governments have already agreed to keep warming below 2º Celsius but have yet to take decisive action toward creating a low-carbon energy system.

The financial industry has a central role to play in catalyzing the global transition to inclusive, sustainable growth. After all, effective financial markets should convey accurate long-term information to savers and investors, thereby enabling businesses, pension funds, insurance pools, sovereign wealth funds, and others to allocate their resources to projects that provide solid long-term payoffs, and protect their savings from financial calamities. Given climate change, that means accounting for whether, say, entire low-lying coastal areas or agricultural regions will be able to cope.

 

The article’s full-text is available on the website of Project Syndicate

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