OMFIF Sustainable Policy Institute December Journal

Economists understand environmental degradation as an ‘externality’: those incurring the damage do not bear the full costs. There are tools to address the problem, but time-inconsistency issues often discourage their use. An economic and financial system structured around the pursuit of returns, with success based on GDP and profits, inherently suffers from short-term bias. These are flow measures that fail to take full account of the stock effects that matter for sustainability. For years, economic actors could ignore the long-term consequences of their actions. But the social and environmental price of such a structure, once a distant threat, is becoming increasingly visible through the rising frequency of natural disasters.

Environmentalists and economists can learn from each other. Economic systems and policies that overlook anything that cannot be directly proven to generate returns are inadequate. Environmental sustainability is compatible with economic growth. Defining nature as ‘priceless’ is simplistic – in a world of finite resources, conservation has a price. But it is misguided to view economic decisions as a series of independent trade-offs between, say, allocating public budgets to saving an insect species and building more hospitals. Covid-19 has sharpened awareness of the interconnectedness of non-financial risks and their potential to cascade through economic and financial systems to sectors previously considered relatively safe.

Key contributors to this inaugural edition of the SPI Journal include:
Ingrid van Wees, vice-president for finance and risk management at the Asian Development Bank
Frank Elderson, executive director of supervision at De Nederlandsche Bank
Simon Buckle, head of the climate change, biodiversity and water division, and Edward Perry, analyst at the Organisation for Economic Co-operation and Development
Katie Leach, senior programme officer at the UN Environment Programme World Conservation Monitoring Centre

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