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Sustainable Financial Risk Modelling Fitting the SDGs: Some Reflections

Christian Walter ()
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Christian Walter: Fondation Maison des sciences de l’homme (FMSH), 75006 Paris, France

Sustainability, 2020, vol. 12, issue 18, 1-28

Abstract: This article argues that any ecological finance theory devised to fit the Sustainable Development Goals (SDGs) needs a paradigm shift in the morphology of randomness underlying financial risk modelling, by integrating the characteristics of “nature” and sustainability into the modelling carried out. It extends the common diagnosis of the 2008 financial crisis with considerations on the morphology of randomness and the reasons why neoclassical finance theory is not sustainable from this perspective. It argues that the main problem with unsustainable neoclassical finance risk modelling is its underlying morphology of randomness that creates a dangerous risk culture. It presents Leibniz’s principle of continuity and Quetelet’s theory of average as cornerstones of classical risk culture in finance, acting as a mental model for financial experts and practitioners. It links the notion of sustainability with the morphology of randomness and presents a possible alternative approach to financial risk modelling defined by rough randomness. If morphology of randomness in nature is properly described by fractal and multifractal methods, hence ecological finance theory has to include fractal properties into financial risk models. The conclusion proposes a new agenda for future research.

Keywords: fractal; ecology; sustainable finance; green finance; responsible regulation; scaling laws; power laws; principle of continuity; risk modelling; stochastic processes (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2020
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