GAR 2013 Main Report

194 Part III - Chapter 12

As the volume of financial capital has ballooned, so have the hidden risks—as the financial crisis that began in 2007 manifested. The increasing sophistication, complexity and opaqueness of financial instruments means that securities and bonds for businesses with high levels of disaster risk are bought and sold without considering how these risks may affect asset values ( GAR 13 paper

Clements-Hunt, 2012

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.

Even where risks are recognized and their impact on a particular asset is considered, willingness to invest in the asset can prevail because part of the risk tends to be transferred to the public sector or to other sectors and countries, and thus becomes shared risk. In other words, the risk is considered an externality for the business and therefore to the investment. For example, global investment in emissions-heavy industrial activity, such as coal mining, continues to increase—in 2010, total investment by banks in coal mining was almost double the amount before the financial crisis (Petherick, 2012

Petherick, A. 2012.,Dirty Money., Nature Climate Change Vol 2, February 2012: 72-73.. .

Much of this investment is hidden within complex and aggregated corporate loans, funded by large funds or banks whose individual investors rarely know what specific activities are being financed

(Ibid.). Beneficiaries in high-income countries with well-established pension funds may unknowingly be benefiting through transferring disaster risk to countries most at risk or, as the example in Box 12.1 shows, by investing in agricultural practices that increase drought risk.

12.3

Eyes wide shut:

consistently discounting

disaster risk

Economic growth projections and business forecasts at different levels do not account for disaster risks. The implications of disasters on a country’s fiscal policy, infrastructure and utilities, and overall enabling business environment are not understood with potentially serious consequences for business investment decisions.

The global crisis that began in 2007 demonstrated that investment decisions that are rational from an individual perspective can generate correlated and systemic risks to the financial system as a whole (Castells et al., 2012

Castells, M., Caraca, J. and Cardoso, G. 2012.,Aftermath. The Cultures of the Economic Crisis., Oxford,UK: Oxford University Press.. .

). Because investment decisions tend to be based on broadly similar risk models, analyses and forecasts, markets tend to become increasingly correlated and concatenated and hence

(Source: UNISDR)

Box 12.1 European and US pension funds buy farmland in South America and Africa

Through TIAA-CREF, the leading US financial services company and the main provider of retirement services for US academic and research sectors, a number of pension funds, including from Sweden and Canada, have begun to invest heavily into farmland development across the globeⁱ . Direct investment into agricultural production on commercial farms in South America and Africa produces high returns. As Chapter 11 in this report highlighted, these investments may not only internalise risks to the business, but also by extension to the investor. They may also externalise risks, for example, to displaced smallholder farmers and pastoralists or through the overexploitation of land and water resources.

Another big institutional investor, TLG Capital, announced in October 2012 its investment in an agricultural fund—EmVest—which manages more than 10,000 hectares of land across sub-Saharan Africa. TLG and EmVest have invested about US$65 million across the region and are expecting to expandⁱⁱ .

Recently, however, TIAA-CREF joined a number of European institutional investors to launch the Farmland Principles—a commitment to not invest in deals with high environmental or social costs or rights violations (Grain, 2012

Grain. 2012.,Who’s behind the land Grabs? A look at some of the people pursuing or supporting large farmland grabs around the world., Grain factsheet, October 2012., Barcelona,Spain.. .

), suggesting that social demand—expressed in the United States of America and Europe through campaigns against investment strategies—can create disincentives.