Climate change a threat to financial stability – Bank of England governor

Bank of England govenor

Bank of England Governor, Mark Carney. Creative Commons: Policy Exchange, 2015

Mark Carney, the governor of the Bank of England, has become the latest person to deliver a blunt warning about the risks of climate change to global financial stability.

Speaking at Lloyd’s of London, Carney warned that “the catastrophic impacts of climate change will be felt beyond the traditional horizons of most actors – imposing a cost on future generations” and that “climate change will threaten financial resilience and longer-term prosperity.”

He said:

Climate change is the tragedy of the horizon. We don’t need an army of actuaries to tell us that the catastrophic impacts of climate change will be felt beyond the traditional horizons of most actors – imposing a cost on future generations that the current generation has no direct incentive to fix…

The horizon for monetary policy extends out to two to three years. For financial stability it is a bit longer, but typically only to the outer boundaries of the credit cycle – about a decade. In other words, once climate change becomes a defining issue for financial stability, it may already be too late.

In his speech he laid out a host of ways in which climate change would impact financial stability.

Losses from extreme weather events are already costing the insurance industry $40 billion a year more than just three decades ago, while billions more in loans could be at risk as large swathes of fossil fuel reserves are left “stranded” in a carbon-constrained future.

Add to that the potential financial implications as more climate impacted communities seek compensation from those governments and companies failing to act, and as Carney told an audience in London last night “the challenges currently posed by climate change pale in significance compared with what might come.

Carney warned that time is running out and urged greater action to limit the risk, including stricter tests to identify the potential impacts of climate change on returns.

He also called for greater transparency by carbon intensive industries on how much they are emitting today and how they are planning for a carbon-free world, and recommended a voluntary ‘Climate Disclosure Task Force’ to help design and deliver a standard for disclosure by those companies that produce or emit carbon.

He said the Financial Stability Board, an international body monitoring the global financial system that Carney chairs, may recommend G20 countries make it easier for investors to compare the “carbon intensity” of different assets.

His speech was welcomed in financial circles, with Stephanie Pfeifer, CEO of the Institutional Investors Group on Climate Change saying:

Mark Carney spoke under the Lutine Bell, the way Lloyds has signalled great events that will affect the market. He chose his setting perfectly. We welcome his focus on more consistent and reliable carbon disclosure that will allow investors to make a more informed assessment of the climate risks in their portfolios.

Such measures would expose those companies continuing to bet on out-dated energy and leave them nowhere to hide as the rest of the world transitions to a low carbon economy.

His speech came as the Bank of England published a report on the impact of climate change on the British insurance industry, to be presented to the UK government.

Mark Campanale, Founder and Executive Director of the Carbon Tracker Initiative said:

This report highlights the risks facing these companies and the potential for litigation related to climate damage. With this report, investors will sit up and take notice of the potential risks and liabilities these companies face and begin to re-price this material risk. Fossil fuel investors face the combined risk of their business models being out-competed by price competitiveness of the renewables energy sector, while also potentially picking up the costs of climate damage.

His outspokenness on the issue sees the governor join a host of economic figureheads warning about the risk of continued reliance on dirty fossil fuels.

As governments work towards a new global climate agreement in Paris this December, Carney’s voice joins the growing movement from all walks of life, waking up to the huge opportunity of the transition to a clean energy future.

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