Financial system in steering the economy towards planetary well-being

Abstract

This chapter discusses the possible roles that financial system may play in steering economic production towards planetary well-being. The costs associated with using natural resources are seldom equal to the actual environmental costs incurred. The present chapter proposes linking Sir Partha Dasgupta’s Impact Equation and the standard asset pricing framework and discusses the roles that financial institutions and central banks as well as debt and equity funding play in supporting production that preserve planetary well-being via the incentives of those in need for and those willing to supply funding. It is proposed that the increasing costs of capital and the financial exclusion of non-environmentally friendly investments will tilt financial flows towards less harmful production, thereby promoting planetary well-being. The chapter highlights the important roles that the public sector and central bank activities play in addressing the incompatibility between economic development and planetary well-being through the financial intermediation system.