Mark Carney, the Governor of the Bank of England, has delivered a high-profile speech in which he highlighted the financial risks that climate change will bring. He warned that corporate investors need to be aware of the changing economics of burning fossil fuels in a low-carbon economy and also focused on the risks to the insurance industry of the effects of climate change.
The governor called for climate change to be tackled as soon as possible and highlighted the importance of looking further out than the 2 or 3 years horizon traditionally given to monetary policy, warning that “once climate change becomes a defining issue for financial stability, it may already be too late”. The insurance sector is already dealing with tripled weather-related claims and in future, those that suffer losses as a result of climate change could seek compensation from those they see as responsible.
Drawing attention to the financial risks of the transition to a low-carbon economy, Mark Carney warned that if a commitment is made to a global carbon budget in order to limit global warming to 2°C above preindustrialised levels, then between one-fifth and one-third of the world’s proven fossil fuel reserves would only be burnable with the use of carbon capture and storage. This would change the economics of fossil fuels and investors could potentially face huge losses if reserves become stranded. He remarked, “Changes in policy, technology and physical risks could prompt a reassessment of the value of a large range of assets as costs and opportunities become apparent.”
The Governor argued for tougher corporate disclosure standards so that investors can judge a corporation’s carbon intensity and therefore exposure to potentially increasing costs. He called for consistent, comparable, and clear disclosure in which companies not only publish what they are emitting today, but what their emission reduction plans are for the future. Mark Carney plans to ask the G20 to construct a new standard, to be implemented by a newly formed carbon disclosure task force.
A number of international reporting frameworks are available to international corporations, but these are usually voluntary and vary in structure. In the UK, there is already a legal requirement for listed companies to include a Green House Gas (GHG) statement in their annual report, in which they include KPIs to enable comparability. This is one of a range of UK carbon reporting schemes and the government has recently launched a consultation in which it seeks to develop a single effective reporting framework, incorporating the most effective elements of each. The Treasury has suggested basing this on one particular scheme, the Energy Savings and Opportunities Scheme (ESOS), an EU-wide mandatory energy measurement and auditing scheme.
By calling for consistency and comparability, Mark Carney emphasises the importance of creating a level playing field in the sphere of carbon reporting. However, this is a theme that can also be applied to carbon pricing. As different countries establish varying pricing mechanisms for carbon, this can impact international competitiveness for energyintensive industries. Global businesses have this year called for a global carbon price, in order to provide investor certainty.
Mark Carney has brought the issue of climate change further to the mainstream by focusing on the financial impacts he expects climate change to bring, although he has also faced criticism for going beyond his scope. His speech was timed to highlight the importance of taking action as international talks pave the way to the UN climate summit, due to take place in December.
Written By- Nikki Wilson