Former governor of the Bank of England and now UN Special Envoy on Climate Action and Finance Mark Carney has said covid-19 should remind corporates and investors about the importance of planning for a systemic risk, as he called on investment professionals to support companies in their net zero carbon ambitions
Speaking at the PIMFA Virtual Festival today (3 June), Carney, who is also UK Prime Minister Boris Johnson’s finance adviser for COP26, said the shift in the event’s timetable, which has been postponed to November 2021 due to the coronavirus pandemic, has allowed them time to reflect on how to “move climate change to the centre of all finance decisions.”
“Covid-19 is teaching us how to manage systemic risk,” he said.
“In retrospect, more could have been done by countries around the world – this pandemic was a risk foreseen by science. However, the biggest risk foreseen by science is climate change.”
He added the lesson to be learned for investment professionals is “if we invest in this upfront” we can limit the economical impact.
We should also be mindful “with our budgets and policy in rebuilding the economy coming out of the crisis” there is opportunity, he added.
Furthermore, he said, investors should be casting their net wide in terms of supporting those tackling climate change.
“This isn’t about niche products, buying a couple of renewable solutions and exiting fossil fuels; it is about every part of the economy adjusting.
“Your clients are increasing their focus on where their money is invested, and we need to provide as broad an answer as possible.”
He exacerbated this does not mean investors with an interest in ESG want a portfolio solely investing in renewables, they want exposure to an array of sectors but with a focus on the companies that are preparing or already transitioning into a place that will protect against and/or tackle climate change.
The decline in emissions we have seen this year would need to be globally compounded over the next decade in order to be net zero over by 2050, he added, highlighting the urgency for companies to adopt plans to transition to a more sustainable future.
He added the UN Climate Action and Finance arm has been using time in lockdown to make sure the importance of these issues remain in the spotlight and that companies are “making decisions to allow us to transition to a sustainable economy”.
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In further analysis of how society moves towards net zero carbons, Carney said it can be broken down into “three Rs”; reporting, risk management and returns.
There have been procedures in place over the last few years after the G20 called on the private sector to come up with climate disclosure standards, Carney explained.
“We are two cycles through that and around three quarters of the world’s top 1,000 companies are reporting.
“We are now in the process of refinement, taking feedback on what works, what is useful, what is less relevant. A lot of this is coming from the demand side – it is very high.”
He highlighted nine out of ten of the top asset management and pension companies, representing around $130trn in assets, want this reporting and disclosure.
One of the initiatives he is working on in the run-up to COP26 next year is to make final requirements comprehensive and manageable, but also put pressure on governments around the world to make reporting mandatory.
“There are a number of countries where they have made covid-19 support contingent on Task Force on Climate-related Financial Disclosures (TFCD),” he said.
Risk Management
Carney said this comes through banks and insurers that need to further develop capabilities to deal with climate-related risks.
There are two types of this risk, he said, including physical risk, which relates to physical elements of climate change such as extreme weather events, and transition risk, something Carney said we should be more concerned with.
“As climate policy adjusts and tightens, it will affect the business strategy of a company. They will have adjust too and anyone investing in them must think that through.”
He added the ideal scenario, in his role as a “financial supervisor” would be for the financial sector to see a “smooth transition to net zero aligned with a predictable set of climate policies.”
He added during this transition it will be up to investment professionals to identify those that will benefit from being the leaders in terms of tackling climate change, the companies that have been the most innovative – or the “Teslas” of the sectors – while avoiding the laggards, those that have made no changes.
“If there is a sharp adjustment in policy, or worse, no changes, that is also very bad news for companies,” Carney added.
“The Bank of England and other central banks have been stress testing banks and insurance companies against these different pathways.”
Return framework
Carney also highlighted the transition to net zero is not just about managing risk, but the opportunity.
“We need the whole economy to transition. Investment professionals are asking ‘who is ready’, ‘who will benefit’ and they need common information to compare them.”
He said there are a number of companies unveiling transition plans from very different sectors.
For example, Microsoft has pledged to be carbon negative by 2030 by offsetting all its historic emissions as well as those of its clients.
“This is a very extreme position to take,” Carney said, “but if we look at what BP are doing, it proves the point about it being something the whole economy needs to participate in.”
BP announced in February it aims to be net zero by 2050 by reducing the 55 million tonnes of carbon dioxide equivalent that it emits each year, and the 360 million tonnes associated with oil and gas it sells.
“Certain people look at climate change and think they need to divest from energy companies, but they are very much part of the solution,” he said.
