Carney on post-pandemic climate investment: “We need to win the peace”

Mark Carney has set out what is effectively a roadmap for climate investment in a post-coronavirus world, telling investors that sustainability must “win the peace”.

Picking up on UK Prime Minister Boris Johnson’s remarks that the struggle against Covid-19 is like a war, Carney told the Investor Network on Climate Risk event this week: “The challenge on our topic is that we need to win the peace and that may not be easy.”

“What we’re looking to do,” Carney said at the end of his prepared remarks, “is help build the foundations of a system that will be able to seize the opportunity to net zero.”

The event, held online, was co-hosted by Ceres, the United Nations Foundation and the United Nations Office for Partnerships.

Carney is the former Bank of England Governor who is now both the United Nations Special Envoy for Climate Action and Finance and the UK government’s Finance Adviser for COP26; his wide-ranging remarks included:

• COP26: It’s about execution

• Pathways to mandatory TCFD

• Investor engagement

• Working with investor groups

• Taxonomies

• ‘Open source’ stress test scenarios

• The 3Rs of sustainability

• How asset managers lag asset owners

• Engaging with the SEC

Describing the pandemic as an “enormous but ultimately temporary shock”, Carney said: “If we can come together to meet one of the biggest challenges in medical biology, so too can we come together to meet the biggest challenge in climate physics.”

Those not on the front-line of the crisis had to continue their work, he said, and “for us that means continuing to develop the necessary frameworks to finance the transition to a net zero economy”.

COP26: building on momentum

He noted the momentum that had built up behind the TCFD and sustainable investing before the crisis. “Our objective for the private finance work for COP26 is simple – we want to build on that momentum, build on what Ceres’ membership has been focused on, which is to ensure that every major financial decision, every major wholesale private financial decision, takes climate into account.

“So we want to work with you [i.e. the investors on the call] to put in place the right market frameworks so you can do what you do best, which is to allocate capital, to manage risk.

“But really [it’s] to seize the opportunities associated with the transition to net zero.”

He referred to the way this is organised around "the three Rs": reporting, risk management and returns.

On reporting, the aim at COP26 is to “refine and implement” the TCFD disclosures.

He called on institutional investors to input into the standards. “And then we want to work with authorities to create pathways to make this climate reporting mandatory so there’s a comprehensive coverage.”

The PRI asking its signatories to report against the TCFD was a help in this, Carney said.

“But you are the main users of this information and you have an opportunity to shape it, and in particular we’d encourage you to contribute to the current review of the TCFD framework.

“Tell them what’s important, what’s less so, what should be refined to ensure that those disclosures are as decision-useful as possible.

“Feed in, let’s focus on what’s decision-useful, let’s make this efficient – that’s this year’s job.” Investors should commit to disclosure “and them demand it, obviously, from your portfolio companies”.

Carney is working with countries and jurisdictions as well as standard setters such as the Financial Stability Board (FSB), International Accounting Standards Board (IASB) and the International Organization of Securities (IOSCO) on making the TCFD mandatory, he said.

Open source stress tests

Carney said stress test scenarios from the Bank of England would be shared with the central bank green group the Network for Greening the Financial System (NGFS).

“Those stress scenarios of the NGFS will be made public, made open source, so that any company, any investor, in any sector, can use them and adopt them to assess strategic resilience of either portfolio companies or their portfolio as a whole.” 

He also spoke about the importance of knowledge sharing, saying we should acknowledge that this is a “nascent field”.  He referred to the new Climate Financial Risk Forum at the Bank of England.

On returns, he said ESG metrics are “worthy” but “dominated by the S and the G” [social and governance].

“Carbon footprints per dollar invested, obviously, is not forward looking” and shareholder engagement was important “but it’s hard to measure”.

Taxonomies and portfolio alignment

Carney said categorising what’s green or not into taxonomies such as the EU taxonomy has “some attraction, but a whole economy transition is not about only funding deep green activities or black-listing dark brown ones”.

“We need 50 shades of green to catalyse and support all companies towards net zero.

“One of the big challenges we have in the run-up to COP is to figure out the best way of doing this, namely to disclose the extent to which your portfolios are well-aligned for the transition – or at least what progress is being made.

“We’re open to ideas on this. One could start with just the percentage of assets that have TCFD disclosure, [or] secondly the percentage of assets that you judge are net zero aligned.”

A third way could be to measure progress against industry specific transition pathways and identify leaders and laggards.

A fourth way, the most “ambitious and complex” approach, would be to assess the degree warming potential of the portfolio.

Supporting innovation, success of Climate Action 100+

Carney was supportive of innovations such as transition bonds and benchmarks, saying: “We will support efforts to scale them up as rapidly as possible. There’s a lot innovation out there, the importance is whether it’s really going to move the needle and – if your judgement is that it will – then we will get behind it.”

And he said: “We really do want to lever the success of Climate Action 100+.”

He applauded the “expertise and focus” of not just the CA100+, but the Asset Owners Alliance and the PRI, in building a coalition of asset managers and asset owners who “expect their portfolio companies to meet the requirements of Paris”.

COP26: What can investors do?

Carney was asked on the call about what investors could do in the run-up to the COP in Glasgow.

He said: “This will be a very high ambition COP, it’s about execution in the public sector [i.e. at the policy level]. It will be about stress tests or “pathways to mandatory” reporting and “we need private sector feed-in, we need to develop the competency”.

There are “legitimate demands from citizens” to understand which pools of capital are well positioned for this [the transition] and which are not.

“And being able to communicate that in as clear a way as possible is going to be essential:

a) It’s the right thing to do

b) It’s for the ‘small p’ political economy of this to show that things are moving.

c) It forces a series of questions at investors and ultimately at companies: who’s on the right side of history?”

He stressed he wanted to work with Ceres, the PRI, the Institutional Investors Group on Climate Change, the Asset Owner Alliance and their member firms to “come to consensus on how best to do that”.

Asset managers lag asset owners

Asked about the challenges for asset managers, he said: “Asset managers in general are behind, if I can put it that way, the asset owners. Partly, that’s a difference in horizon, the asset owners have been at the frontier here in developing the frameworks so there’s catching up for the asset managers to do. But they can do that quickly now that’s there’s a pathway and there’s commitment.

On the “passive side” of asset management he called for clarity “in terms of engagement that is consistent with the transition and consistent with the underlying values of the equity holders”.

“We’ve seen some welcome movement in that and this will be an important year, in the run-up to the COP, to see if that momentum is truly maintained.”

Engaging with the SEC

He was asked what investors should do about the Securities and Exchange Commission, some of whose senior officials are sceptical of sustainability.

Struggling to suppress a laugh, Carney answered: “Continuing to engage with the SEC: I fully encourage that … I’ve had a number of constructive conversations with Chair [Jay] Clayton. As you know, there’s a range of opinions amongst the commissioners.

“There’s a threshold, as there should be, on materiality – but that’s true for all of us. We wouldn’t be looking at it if we didn’t think it was material.

“The challenge in the US is, how can companies disclose strategic resilience, in other words forward-looking scenarios that would have an element of safe harbor, because they’re scenarios around certain climate pathways but not forecasts of business performance.

“Working on that issue with the SEC would be a productive way of getting the types of disclosure that is necessary to judge who has a strategy for net zero and who doesn’t, in a consistent manner.”