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Firms that ignore social issues risk going out of business: IMF

“Environmental, social, and governance issues can have a material impact on firms’ performance and on the stability of the financial system more broadly,” it said.

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“Governance failures at banks and corporations contributed to the Asian and the global financial
crises.

“Social risks in the form of inequality may tempt policymakers to unduly facilitate household borrowing for consumption and could lead to financial instability over the medium-term.”

The fund said there was already clear evidence of climate change affecting business models, citing a four-fold increase in insurance losses from climate-related natural disasters such as droughts and floods since the 1980s.

There were also transition risks for firms from stranded assets that may lose their value, such as coal or oil deposits, as the climate changes or technology evolves.

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Asset prices may not yet take into account the risk of climate change and the shift to a cleaner economy.

“Delayed recognition of these risks could lead to a cliff-like moment when investors suddenly demand this risk be priced into asset values with potentially detrimental consequences for financial stability,” it said.

Qantas chief executive Alan Joyce has argued businesses need to focus both on traditional issues as well as social ones, saying customers and staff looked to a firm’s beliefs and actions.

The IMF research found there was a business case to engage in environmental and social issues.

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“Firms may choose to invest in environmental, social or governance projects in response to evolving investor or consumer preferences, a choice that could lower costs of capital or improve profit margins,” it found.

“Business investment may lead to a more motivated workforce, greater trust between firms and stakeholders, or less firm-level tail risk from carbon emissions.”

The IMF found despite growing demand from investors there were still large gaps in the way firms reported risks and compliance around social.

It noted that elements of environmental, social or governance issues had long been incorporated into portfolio business strategies with assets under management globally worth up to $US31 trillion.

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