When Mark Carney, the Governor of the Bank of England, announced at the end of September that investors should be aware of the potential for losses due to climate change and stranded assets, it marked a conscious change in the acceptance and broadening of this fundamental problem that many in the responsible investment world have been highlighting for years.
Today’s launch of the UNEP Inquiry report, The Financial System We Need, does the same for a sustainable economy.
Carney’s remit is to maintain monetary and financial stability. To argue, as some commentators have, that he overstepped his central bank remit, is to mock the world’s pre-eminent scientists, economists and governments that have already made the clear link between environmental (and human) degradation and financial risk. The problem is almost universally accepted. What to do about it is, sadly, a global, financial tragedy-of-the-commons; albeit one that is already causing very real problems for exposed companies and sectors, of which coal is the most prominent example.
Carney’s central bank role means telling the market what to do is not an option. He can, however, introduce the instruments that should help avert crisis.
So what should be done?
The less chewed over part of Carney’s speech was his ‘action’ statement, which the Network for Sustainable Financial Markets (NSFM) web group has been debating in the last week or so.
Carney said: “The logical starting point is a coordinated assessment of what constitutes effective disclosure, by those who understand what is valuable and feasible. One idea is to establish an industry-led group, a Climate Disclosure Task Force, to design and deliver a voluntary standard for disclosure by those companies that produce or emit carbon. Companies would disclose not only what they are emitting today, but also how they plan their transition to the net-zero world of the future. The G20 – whose member states account for around 85% of global emissions – has a unique ability to make this possible.”
As NSFM participants pointed out, this call goes well beyond the GHG emissions reporting or sensitivity of assets to climate scenarios calls that institutional investors are asking companies for.Many responsible investors have spent so long (nobly so) trying to get the climate change/finance problem taken seriously that they’ve diluted their perception of risk (both environmental and financial) and what needs to be done for meaningful change. Without overarching policy and tax subsidy changes alongside a transformation of performance metrics and incentives along the business and investment chain there will be no real shift away from heavy C02 emitting industries. There’s too much money on the table. Too many vested interests and political/development axes to grind.
Alignment of governments, their representative bodies such as the G20, and investors, can change the rules of the game for climate risk management.
It’s not as if investors don’t recognise the seriousness of the situation and want to act. An open letter from 15 insurance company Chief Executives published in the FT clearly welcomed the Bank of England/Prudential Regulation Authority’s report that underpinned Carney’s speech. Link
Today’s UNEP Inquiry report is the next stage in the joined up thinking required to solve this commons tragedy.
It diagnoses the needs and opportunities within the financial system for change. And, importantly, it looks at how a broad-based social compact of public agencies (central banks, regulators, prudential authorities, standard setters, ministries of finance, stock exchanges and credit rating agencies) financial institutions (banks, pension funds and analysts) and civil society (NGOs, think tanks and, importantly: consumers) can genuinely develop a shared approach to action.
The organisations involved are as heavyweight as they come; as heavyweight as the challenge.
RI reports today on the areas identified by the Inquiry: four focused on specific asset pools and actors, five on developing the governing architecture to deal with sustainable development, and finally, the establishment of an international research consortium to take forward under-explored topics and themes.
RI will be analysing the report in more depth in the coming days and weeks.
Right now, it behoves us all to read the report carefully, pass it to peers, and work out where we fit in the action plan.