Sustainability and Resilience in the Financial System
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The objective of this master thesis is to investigate the interaction between the environment and the financial system and to present a framework for pension funds which have a critical influence on the financial system. The framework shall help pension funds but also other institutional investors to manage environmental risk as well as to promote sustainable development. The master thesis can be divided into three parts. In the first part, it explores the environmental challenges of the 21st century that will have a high impact on society. It further examines how systems behave and interact by applying a system thinking approach. System thinking accommodates the complex structure and interaction of the socio-ecological systems we live in. In addition, the adaptive cycle and the panarchy concept is presented to illustrate the dynamic behaviour of coupled systems in a hierarchy. With this knowledge, a better understanding of sustainability in systems is established, in particular with regard to the interactions between human and environmental systems. In the second part, the financial system is analysed. This part reveals the central position and importance of the financial sector in the economy. The main risks originating from environmental impacts in the financial system are regulatory risks and the indirect physical risks that are inherent in the investments. It is necessary for pension funds and other institutional investors to manage the non-financial risks and avoid short term orientated behaviour. In the last part, the role of the financial system within a panarchy is discussed and a responsible investment (RI) framework for pension funds is presented. The panarchy suggests that subsystems such as the financial system need to integrate environmental issues in their decision making process and overall thinking. The RI framework suggests strategies to integrate environmental, social and governance (ESG) criteria with the goal to reduce the risk in investment portfolios and to improve the environmental performance of companies, sectors and governments, if challenges such as legal uncertainty are going to be addressed in the future. This master thesis concludes that the adaptive cycle and panarchy model are insightful concepts that offer a new perspective on system behaviour and interactions. However, the application to social systems proved to be challenging and resulted in rather vague conclusions and suggestions. Nevertheless, it emphasizes the need to pay more attention to system dynamics such as the critical dimensions in systems and critical connections between coupled systems.