Finance & Investment

Will We Soon See a More Sustainable Financial System?

It's now nearly 10 years since news broke of the Lehman Brothers collapse, which served as a precursor for this century's biggest-ever financial crisis. Underpinned by reckless borrowing and the untold dangers of the sub-prime mortgage sector, the Great Recession brought the world to its knees and altered the global economic landscape forever. While the global economy has largely enjoyed sustained (if slightly sluggish) growth since this time, the goal of creating a truly transparent financial market has yet to be fully realised. We've seen some progress in this respect, of course, but there is still much work to be done if we're to ensure that we fully heed the lessons of the Great Recession.

By Ralph Pontain | Published 6 years ago | About a 4 minute read

It's now nearly 10 years since news broke of the Lehman Brothers collapse, which served as a precursor for this century's biggest-ever financial crisis. Underpinned by reckless borrowing and the untold dangers of the sub-prime mortgage sector, the Great Recession brought the world to its knees and altered the global economic landscape forever.

While the global economy has largely enjoyed sustained (if slightly sluggish) growth since this time, the goal of creating a truly transparent financial market has yet to be fully realised. We've seen some progress in this respect, of course, but there is still much work to be done if we're to ensure that we fully heed the lessons of the Great Recession.

For now, it's fair to say that large segments of the financial and investment markets remain cloaked in mystery, particularly those pertaining to sustainability and “green” finance. In this article, we'll ask whether we're really moving towards a sustainable financial system and identify the key obstacles to achieving this goal.

Why transparency is inherent in sustainable finance

The vast majority of these reforms focused on the issues that already plagued the financial market, with Dodd-Frank imposing more robust regulatory measures on investors and increasing transparency surrounding derivatives such as currency.

However, this increasingly diverse marketplace is now facing a much wider range of challenges, which are once again creating opaque trading conditions and undermining the importance of social responsibility in the current climate.

In fact, according to the World Economic Forum's Global Risks Report from 2014, seven of the top 10 financial market risks are related to environmental, social and governance (ESG) practices. These include water crises, climate change (top of the list of Global Risks in 2016) and child labour, each of which are likely to worsen over the course of the next generation. Make no mistake; factors such as these are the most likely to trigger the next global financial crisis, and one that may be exacerbated by the prevailing lack of knowledge and awareness among investors.

More specifically, most publicly traded companies offer minimal transparency about how they identify and tackle core ESG risks, including greenhouse gas emissions and the use of child labour within a global supply chain. Companies in a range of sectors still don't fully understand or report their unique carbon footprint, making it almost impossible for investors to analyse their potential exposure to risk and minimise this accordingly.

Even allowing for the depth of historic and real-time analytical tools now available through virtual trading platforms such as Oanda and ESG2.0, investors will continue to encumber disproportionate risk if they're forced to operate without accurate company data.

The last word

Whether you consider the last fiscal crisis or the current challenges facing the financial markets, it's clear that an underlying lack of transparency can significantly undermine the global economy.

So, just as the world's governments reacted to the Great Recession by tightening financial market regulations and increasing the transparency surrounding highly liquid and margin-based derivatives, they must now appraise the impact of social and environmental issues while seeking out a viable solution.

This means creating transparency around environmental assets and new metrics that highlight a company’s approach to tacking ESG challenges, while finally triggering a definite shift towards a sustainable economic and financial system.