Carney lays out COP26 rulebook for finance as he prepares to take reins at UN

Making TCFD disclosure mandatory will be a top priority, says central banker

Mark Carney, the outgoing Governor of the Bank of England, has launched a “private finance strategy” for the COP26 climate summit in the UK later this year, focused on mobilising investors and making TCFD disclosure mandatory.

Carney will become UN Climate Envoy when his term ends at the Bank next month, and is advisor to UK Prime Minister Boris Johnson for the high-profile negotiations, which are viewed as the most important since the Paris Agreement was made in 2015.

Speaking at an event for the financial community at the Guildhall in London today, he said COP26's private finance strategy would focus on “reporting, risk management and return”.

“The objective for the private finance work for COP26 is simple,” he added. “Ensure that every financial decision takes climate change into account.”

More concretely, Carney said climate negotiators would work with global standard setters like the Financial Stability Board, the International Financial Reporting Standards and the International Organisation of Securities Commission, as well as national authorities, “to determine the best approaches to making climate disclosure mandatory”.

The European Commission recently announced that it was seeking to create a set of climate disclosure standards, alongside its review of the EU's Non-Financial Reporting Directive, which is expected to be updated to include the recommendations of the TCFD. Its International Platform on Sustainable Finance, which it launched at the end of last year, is working on “mapping” existing national and international climate standards and disclosures frameworks, in an exercise scheduled to be completed in the run-up to COP26.  

Carney urged the private sector to contribute to the current review of the TCFD framework, and to commit to producing a full set of TCFD disclosures for 2021/22 with scope 1, 2 and 3 emissions, a transition strategy, board-level climate risk oversight and pay packages linked to outcomes.

“Demand TCFD-consistent disclosures from your borrowers and the portfolio companies,” he continued, calling on lenders and investors to measure the level of Paris-aligned assets they manage, and build climate risk expertise within their own firms.

“For COP26, we intend to leverage the success of existing groups and coalitions like the Net Zero Asset Owner Alliance, Climate Action 100+ and the Principles for Responsible Investment to build a large coalition of asset owners and asset managers who expect their portfolio companies to become Net Zero aligned,” he said, although he acknowledged that current ESG metrics are inadequate, and “the impact of shareholder engagement is hard to measure”.

At the launch of the Strategy in London, Christine Lagarde, President of the European Central Bank reiterated her controversial plan to "reflect on how to address sustainability considerations within our monetary policy framework".

On private finance, she said: "The Eurosystem is now reviewing the extent to which climate-related risks are understood and priced by the market", paying "close attention" to credit ratings, the ECBs own collateral framework and the ways in which banks are approaching climate risk. On the latter, the ECB Banking Supervision is developing supervisory expectations.  

COP26, which the UK is hosting in partnership with Italy, faces a bumpy road over the next eight months. The axing of the summit’s President Claire Perry O’Neil recently threw the spotlight on the lack of preparation by the UK so far, and there have been questions over whether its current location, Glasgow, should change. O’Neil’s replacement, Alok Sharma, the former International Development Secretary for the UK, has been questioned over his poor voting record on issues relating to the environment and climate change.

However, the private sector is expected to play a much larger part in the discussions than it has done in previous years – reflected in the appointment of Carney, a well-regarded central banker, as Climate Envoy. At an event in London earlier this month, Steve Waygood, Chief Responsible Investment Officer at Aviva Investors, called for the creation of a private finance body to push the agenda at COP26.

Carney will leave his position as Governor of the Bank of England in mid-March, and will be replaced by Andrew Bailey, who acted as Deputy of the Bank until 2016, leaving to take the helm at the UK’s Financial Conduct Authority. This week, UK Green Party MP, Caroline Lucas, criticised the UK government for not clarifying the Bank’s climate obligations under the Paris Agreement despite committing to do so in its Green Finance Strategy launched last July. 

Lucas had written to the government on the matter after it made no mention of climate change or Paris in its letter of recommendations to the Bank of England’s Prudential Regulation Authority sent in November. 

In an answer to Lucas this week, City Minister John Glen said that as the letter was sent during an election period, the government decided to focus on the existing remit of the Bank of England. It said it would make the UK's responsibilities under the Paris Agreement clear in its next letter to the Bank of England, but did not clarify when this would be. The government has a statutory obligation to issue letters of recommendation to the Bank of England at least once a year. 

Additional reporting by Vibeka Mair