The Anthropocene reality of financial risk

Crona et al. (2021) investigate the intersection of financial services and the imperative for sustainability in the Anthropocene era. The study emphasises the crucial role of the financial sector in fostering sustainable futures, particularly by supporting corporate endeavours that contribute to biosphere resilience. The study also attempts to contribute robustly to the discourse on sustainable finance and the need for transformative change in the Anthropocene. The current financial risk frameworks are scrutinised for their focus on financial materiality and risks to the financial sector, potentially overlooking the broader impact of investment externalities. The article argues that this oversight may exacerbate climate and environmental changes, derailing existing sustainable finance initiatives. Utilising analyses of environmental, social, and governance ratings, along with estimates of global green investments, the study highlights a cognitive disconnect within financial risk frameworks concerning ecological considerations. The article aims to shed light on the practical implications of this disconnect and its potential ramifications for society’s ability to meet sustainability goals and global ambitions, especially within the financial domain.

The paper discusses the need to close the cognitive risk loop in sustainable finance frameworks, focusing on the existing risk frameworks and their limitations. It identifies two primary types of risks considered in sustainable finance: those arising from social constructs and those from physical risks to economic activities. The Taskforce on Nature-Related Financial Disclosures is introduced as a model inspired by the widely adopted TCFD, emphasising the importance of shifting finance towards nature-based solutions. The article critiques current frameworks for predominantly relying on financial materiality and conceptualising risk solely in terms of risks to the financial sector, neglecting investment externalities. Through the example of the Brazilian beef and soy industry, the study illustrates how externalities can contribute to large-scale environmental changes, terming it ‘aggravation risk’. On the other hand, the study mentions the vulnerability of consumer-facing brands to reputational risk and the importance of a strong institutional environment. However, there is still a gap in providing solutions or frameworks that consider both reputational risk and the actual environmental impact to provide a more comprehensive approach to risk assessment. Further, a more explicit integration of stakeholder perspectives, such as consumers, local communities, or NGOs, may enrich the discussion on mitigating environmental externalities. Therefore, it will enhance the broader point of view of the various parties.

The article argues that existing sustainability frameworks, such as TCFD, may capture some environmental impacts but lack a nuanced assessment of the nature and magnitude of these risks. It proposes the concept of ‘absolute sustainability’ and advocates for closing the cognitive risk loop to better assess and mitigate systemic risks. The study concludes by outlining three key actions: recognising a more comprehensive set of Earth system processes, acknowledging risks associated with investments, and developing impact accounting systems grounded in social and environmental sustainability science. Additionally, the paper makes a compelling case for the critical role of financial services in addressing the challenges of the Anthropocene. It effectively underscores the need for a paradigm shift in financial risk frameworks to encompass environmental considerations and investment externalities. It involves evaluating the long-term sustainability and resilience of investments, considering their impacts on ecosystems, communities, and future generations. The analysis of environmental, social, and governance ratings and global green investments adds depth to the argument. Therefore, the Anthropocene demands a reevaluation of these frameworks. The integration of environmental considerations and investment externalities into risk assessment is essential for accurately reflecting the true risks associated with economic activities. Climate change, resource depletion, and social instability are now recognised as systemic risks that can profoundly impact financial stability.

Some gaps and areas for further exploration arise in the discussion. For example, there is a notable absence of specific strategies or roadmaps for financial institutions to adopt the proposed changes. Moreover, there is a gap in the analysis regarding the role of regulations and policies in shaping sustainable finance practices, where understanding regulatory frameworks and compliance requirements is crucial for financial institutions navigating the transition to sustainable finance. On the other hand, the study paves the way for future researchers to craft improved risk management instruments that effectively confront the challenges of the Anthropocene era. However, researchers need to consider a comprehensive assessment of the status of these investments within existing frameworks and whether they need to be more adequate in capturing their full impact on sustainability. In addition, further research exploration could involve a detailed examination of how current frameworks fail to comprehensively incorporate environmental factors and their associated risks. Moreover, a more in-depth analysis of the potential economic consequences of overlooking sustainability factors could strengthen the discussion. Finally, there is an urgent need to integrate the perspectives of various stakeholders, including investors, policymakers, and civil society organisations, to provide a more comprehensive understanding of the challenges and opportunities in sustainable finance. Such integration can drive financial institutions to make positive changes and contribute to a more sustainable and resilient global economy.