The investment industry should do more on climate change says Mark Carney

Wednesday 30 October 2019

Mark Carney and Margaret Franklin, CFA

Substantial changes will have to be made to the economy to meet climate change commitments of COP21. 

The UK financial industry is making inroads on climate change, but asset managers in particular could do more, suggests Bank of England (BoE) governor Mark Carney.

In a fireside chat with Margaret Franklin, CFA, chief executive and president of CFA Institute yesterday, Carney argued that while the City of London was ahead of many other financial districts in its approach to climate change, it was the insurance industry that had gone the furthest in tackling the issue. The discussion took place at CFA UK’s ESG Investing – the practical realities Conference on 29 October in London.

“The Bank of England supervises the insurance industry, and if you supervise those institutions, you supervise physical climate change risk management, [and] the most sophisticated catastrophe risk management professionals. The physical aspect is there, and we have to be on top of it, and they are on top of it,” he said.

Banks are also taking the issue more seriously. Carney also revealed that a survey undertaken by the BoE of UK banks, and foreign banks operating in the UK with a combined total of $11 trillion in assets, showed that climate change has shifted from being a corporate social responsibility (CSR) issue to a financial risk issue. While 10% of banks had considered it a financial risk four years ago, the figure now stands at 75%. 

Asset owners, he said, have also been ‘pretty good’ at looking at climate change.  But, he warned, as managers of other people’s money, it was going to be ‘less and less sustainable’ for asset managers not to have a view on the ‘continuum’ to get to a net zero emission economy, and on reporting where their asset portfolios were in that transition.

Earlier this year, Carney announced that the BoE would become the first regulator to stress test its financial system against a number of different climate pathways. He argued that meeting the Paris Agreement climate change commitment of limiting global warming to 1.5C would require substantial changes to the economy, and warned against current reporting approaches. “One of the points we’ve tried to make is that there is this miniature industry around taxonomy and green, and what is green. That’s important if I want to have a green fund, and my clients want to be sure that it is really entirely net zero consistent, or it’s zero impact. However, if you look at the big picture of where we are today, which is on the path to 4C, there’s actually a lot of brown, beige and olive.”

For example, he suggested, the carbon footprint of a fossil fuel company transitioning into a more renewable strategy would be very high. “You don’t want something that just reports, you want something that reports a transition path, or where it’s going,” he said.   

Carney also felt that asset managers should have a long term strategic view of climate change, and position themselves accordingly. He cited a possible election in the UK as an example of the type of decision-making required. “What is [an election] going to mean for climate policy in the UK over the course of the next four years? I don’t exactly know, but if you are managing a portfolio, your fiduciary duty is to know what the range of outcomes are. And if a company you are invested in hasn’t thought about that, then you are taking a factor risk.”

When asked by Franklin what CFA Institute and its member societies could do to help with the climate change challenge, Carney cited the work being undertaken by the Task Force on Climate-related Financial Disclosures (TCFD), which is developing voluntary, consistent climate-related financial risk disclosures for companies.

“Expect that, or something like that to become mandatory within a couple of years,” he said, going on to add that investment professionals should make sure that disclosures are well defined, useful, material, and efficient. 

 

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