French Treasury the latest to warn of the ‘tragedy of the horizon’ for investors

The French Treasury department, hard on the heels of the country’s huge green bond, has become the latest global policymaking body to invoke the ‘tragedy of the horizon’ in relation to investment and climate change.

Just last week the Australian Prudential Regulation Authority (APRA) made a major intervention on climate change and prudential risk.

Now the French Treasury has entered the fray, in collaboration with the Banque de France central bank and the Autorité de Contrôle Prudentiel et de Résolution (the Prudential Supervision and Resolution Authority), the independent administrative authority which monitors the activities of banks and insurance companies in France.

Both the French and Australian comments draw on Bank of England Governor Mark Carney’s pivotal remarks about the ‘tragedy of the horizon’ that have helped to put climate change onto the policy agenda.

“Climate-related risks raise issues related to the ‘tragedy of horizon’,” says the French report, published in English.

“At first sight, the horizon usually believed to be relevant for the materialization of physical phenomena or transition-related adjustments seems to extend beyond the usual risk assessment horizon: future generations could be heavily impacted while current ones have no clear incentives to act.“However, these risks can also have immediate or short-term effects. Even though the bulk of the risks falls beyond the horizon of other risks and the exercise is to be considered from a forward-looking perspective, the assessment of climate-related vulnerabilities and their manifestation in terms of financial risk categories are already important issues as of today.”

“Financial assets related to fossils risk being depreciated and stranded”

The report – Assessing climate change-related risks in the banking sector – will now undergo a two-month consultation period. The report aims to “foster further cooperation” between banking, insurance, asset management and academia.

It comes in the context of the 2015 Energy Transition Act that has formalized the French low carbon strategy. In particular, the financial sector has been the focus of article 173 which introduced a set of new reporting requirements for non-financial corporates and financial institutions.

Articles V and VI aim to promote the integration of climate change in the capital allocation decisions of financial institutions.

The report spells out clearly that “financial assets related to or secured on the development of fossil fuel reserves risk being depreciated (and becoming ‘stranded’).