Research Handbook of Finance and Sustainability
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Research Handbook of Finance and Sustainability

Edited by Sabri Boubaker, Douglas Cumming and Duc K. Nguyen

The severe consequences of the global financial crisis 2008-2009 and numerous accounting frauds and financial scandals over the last fifteen years have let to calls for more ethical and responsible actions in all economic activities including consumption, investing, governance and regulation. Despite the fact that ethics in business and corporate social responsibility rules have been adopted in various countries, more efforts have to be devoted to motivate and empower more actors to integrate ethical behavior and rules in making business and managerial decisions. The Research Handbook of Finance and Sustainability will provide the readers but particularly investors, managers, and policymakers with comprehensive coverage of the issues at the crossroads of finance, ethics and sustainable development as well as proposed solutions, while focusing on three different levels: corporations, investment funds, and financial markets.
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Chapter 21: The low-carbon transition and financial system stability

Carolin Schellhorn

Abstract

The agreement of the climate-negotiating parties in Paris in December 2015 signaled the world’s intent to decarbonize over the coming decades to keep the earth’s average temperature increase below 2°C by mid-century. A timely and smooth transition to a low-carbon economy may be accomplished if businesses routinely disclose and manage carbon dioxide emissions subject to science-based targets along with climate-related financial risks and financial performance. Existing capital budgeting techniques can help create value sustainably by focusing on the opportunity costs of both financial capital and carbon dioxide, thus improving the allocations of both financial and atmospheric capital. Business efforts in this area will be most effective if guided by supportive government policy. If the voluntary responses from businesses, consumers, investors and local policy-makers fail to meet the science-based deadline for carbon dioxide emission reduction, aggressive and globally enforced carbon pricing mechanisms and emissions restrictions may become necessary. To the extent the business community is unprepared for broad-based climate policy intervention, individual firm balance sheets may become impaired. In this case, the greater likelihood of financial insolvencies in carbon-intensive and related industries will challenge the stability of the global financial system. It is therefore imperative that the problem of financial institutions that are ‘too big to fail’ be addressed expeditiously by reducing financial firms’ holdings of high-carbon assets.

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