Global Assessment Report on Disaster Risk Reduction 2013
From Shared Risk to Shared Value: the Business Case for Disaster Risk Reduction









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192 Part III - Chapter 12

Financial markets have expanded since the 1980s, but the right incentives to integrate disaster risk management into business investment decisions have not been provided.

Investing has become an increasingly short-term and speculative activity, losing sight of longer-term and systemic risks. At the same time, asset owners and beneficiaries of pension and sovereign wealth funds have become increasingly disconnected from how their money is being invested, weakening responsible and accountable investment behaviour.

Risks, including disaster risks, are rarely visible, hidden in complex and opaque financial instruments. And analytical reports, models and forecasts ignore disaster risk. This has a profound effect on the way investment markets operate, building up new hidden risks in private finance.

12.1
Deregulation and
expansion of financial capital
The inherent logic of expanding and increasingly fast-moving capital markets has created new risks that materialised with severe global effects in the financial crash of 2007–2008. Disaster risk is another hidden risk that financial markets are still ignoring.
The deregulation of financial markets since the 1980s has stimulated a staggering increase in the volume of financial capital linked to increasingly short-term investment behaviour and speculation (UNCTAD, 2011
x

UNCTAD (United Nations Conference on Trade and Development). 2011.,Trade and Development Report: 2011 Post-crisis Policy Challenges in the World Economy., New York and Geneva.,. .
). By the end of 2010, total value of financial assets across the globe had reached US$212 trillion (comprising equity market capitalisation and outstanding bonds and loans).
At the same time, financial capital has been concentrated in a limited number of large institutions and in a largely unregulated ‘shadow banking system’ (UNCTAD, 2011
x

UNCTAD (United Nations Conference on Trade and Development). 2011.,Trade and Development Report: 2011 Post-crisis Policy Challenges in the World Economy., New York and Geneva.,. .
). This shadow banking system is a complex value chain of intermediaries, including investment banks, hedge funds and equity funds and instruments that enable assets to be moved around the world through a large number of financial instruments that enable investment in physical assets as well as in production and services (Ibid.). The scale of this shadow banking system has become so vast that by early 2008, it was estimated that assets under its management in the
United States of America alone amounted to almost US$20 trillion (Ibid.).
The financial market has developed the ability to respond and adapt quickly to benefit from shortterm profit-making opportunities. However, markets are more challenged to account for longerterm risks and liabilities or for systemic risks, as has been demonstrated in the financial crisis that began in 2007 (GAR 13 paperClements-Hunt, 2012
x

GAR13 Reference Clements-Hunt, P. 2012.,Investment, Finance and Capital Market Perspectives. The Blended Capital Group., Background Paper prepared for the 2013 Global Assessment Report on Disaster Risk Reduction., Geneva,Switzerland: UNISDR..
Click here to view this GAR paper.
; Ritter 2004).
Recent surveys of investors’ perceptions and incentives for investments in low-income countries and emerging markets have revealed the following top catalysts—market size or access, human resources and domestic institutions, banking services, and political and economic forecasts (WEF, 2012
x

WEF (World Economic Forum). 2012.,The Global Competitiveness Report 2012-2013., World Economic Forum., Geneva,Switzerland.. .
; IIGCC, 2010
x

IIGCC (Institutional Investors Group on Climate Change). 2010.,Climate Impact Reporting for Property Investment Portfolios: A guide for Pension Funds and their Trustees and Fund Managers., Report of the Institutional Investors Group on Climate Change., London,UK. .
; Bhinda and Martin, 2009
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Bhinda, N. and Martin, M. 2009.,Private capital flows to low income countries: Dealing with boom and bust., Foreign Private Capital Capacity Building Programme. FPC CBP Series no 2. November 2009. Debt Relief International Ltd., London,UK. .
). Perceived risks do not include the likelihood of loss owing to disasters but rather electricity supply constraints, corruption, interest rates, inflation and tax-related issues (Bhinda and Martin, 2009
x

Bhinda, N. and Martin, M. 2009.,Private capital flows to low income countries: Dealing with boom and bust., Foreign Private Capital Capacity Building Programme. FPC CBP Series no 2. November 2009. Debt Relief International Ltd., London,UK. .
; UNCTAD, 2011
x

UNCTAD (United Nations Conference on Trade and Development). 2011.,Trade and Development Report: 2011 Post-crisis Policy Challenges in the World Economy., New York and Geneva.,. .
).
The number of investors who explicitly consider how investments produce disaster risks remains unknown, particularly in the case of large hedge funds, government bonds and commodities (IIGCC, 2010
x

IIGCC (Institutional Investors Group on Climate Change). 2010.,Climate Impact Reporting for Property Investment Portfolios: A guide for Pension Funds and their Trustees and Fund Managers., Report of the Institutional Investors Group on Climate Change., London,UK. .
). And the business case for risk-neutral investment is often undermined by uncertainties about public policy response (e.g. the price of carbon; land-use and zoning regulations; insurance legislation) and even, despite amassed evidence to the contrary










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