• Former Bank of England chief is pushing the global financial sector to move assets into climate-friendly activities.
  • The risks posed by climate change and climate policies will drive big changes in financial markets, he says.
  • Companies will be increasingly required to disclose their climate impacts and plans to reduce emissions.

Former Bank of England Governor Mark Carney is now Finance Adviser to UK Prime Minister Boris Johnson in the run-up to the COP 26 climate summit in November, as well as UN Special Envoy for Climate Action and Finance.

During the Forum's Davos Agenda week, he told Radio Davos about challenges to expect this year and in the decade ahead.

Financial reporters are taught that markets move on two things: fear and greed, and if you're an investor, traditionally you put money in one end and hope to take more money out of the other end. You don't invest your money to do something nice. How are we going to see those investments going into these vital climate projects and out of things that are producing masses of greenhouse gas emissions?

Well, let me take your 'fear and greed' and turn them into 'risk and opportunity', and make a basic point, which is climate change is the existential risk: if we don't address it, [we face] fundamental challenges to human life and livelihoods, our economy, but also our ecosystem at its most fundamental level.

If you turn that around, if you're solving an existential risk, if you're part of the solution not part of the problem, it is a tremendous opportunity and if, again, to use your words, turns into the greed, or the opportunity part of the equation. Finance, whether it's investors, whether it's people lending, whether it's investing for our pensions, are focused on [that opportunity]. There are activities and assets that formerly were valuable that will not be valuable in a net-zero world. In other words, they will become stranded assets because they produce too much carbon because they are part of the problem. Conversely, there are technologies and activities that are part of the solutions and they will be tremendously valuable. And so what's happening right now is a shift away from those risks - that "fear" - and towards '"greed", in your words - those opportunities. And that's a huge, huge shift in capital. It will be measured in trillions of dollars every year for decades in order to address this challenge.

So tell us about your work on getting companies to disclose their climate impacts. Could you tell us why that's so important and how it's going to work?

Well, it's fundamental. We need information. What gets measured gets managed. And so you start from having information, not just about a company's climate footprint today. How many greenhouse gases they're emitting, but really how they intend to manage that going forward - both from a risk and from an opportunity perspective - and provide investors, lenders and all stakeholders with the information to see whether, again, a company is part of the solution or a part of the problem. Do they have a plan to manage?

So there's something called the TCFD [Taskforce on Climate-related Financial Disclosures]. What it means is companies providing that information, which historically they have not done. It really started five years ago. It's made tremendous progress. There's over 140 trillion US dollars of capital behind it. In other words, companies or investors and banks and others who want this information. The UK has made this a priority for COP, not just to rely on the private sector to do this, but actually for the public sector to now take the progress that has been made and to make this type of disclosure mandatory across the major economies so investors can compare, they can invest where the solutions are and preserve and manage risks where the problems will become. So it's fundamental. There's tremendous progress on it. It's necessary. But much more also has to happen.

Global Risks Report 2021
The risks are well known
Image: World Economic Forum

Could you give us some idea of where we are at the moment with that? Are these metrics being used, and are certain jurisdictions making it mandatory? Is it already having an impact on where investors are putting their money?

The answer to all of those is, yes. There's more to go. Twelve-hundred of the world's largest companies are reporting against TCFD metrics, and that is across G20 countries. So there is a lot of this reporting, but it needs to broaden out and it needs to be deepened in terms of the quality. So that's the first thing.

The second - investors are using this information. In fact, they want more because they find it valuable. They want it from more companies. They want more of this type of information.

Thirdly, in terms of countries making it mandatory, New Zealand, Switzerland, the United Kingdom have all announced to make it mandatory. The European Union has a broader process about sustainability disclosure, which includes this type of information, which will be legislated and therefore mandatory.

As part of COP, what we're looking for from countries is to establish pathways to make it mandatory over the next few years so that this is a consistent disclosure around the world.

One other point: the world's biggest reporting body, an independent body called the IFRS, which oversees financial reporting, is also launching a project for this to cover 140 countries for climate-related financial disclosures, the TCFD type of disclosure. So, there's lots of progress, but it's all implementation. We need to accelerate that further and make sure that it gets across the finish line.

And do you think the general public has a reason to trust big companies when they report their climate emissions and plans? Why should the person on the street believe what they're hearing?

One thing is nice statements about commitments to sustainability or 'green' or very selective reporting of information which shows only a sliver of a much broader picture of what a company is doing. And I think there is grounds for scepticism, healthy scepticism, around that.

It's an entirely different thing, what we've just been talking about, which is comprehensive disclosure of all the aspects of climate related risks and having them in formal company reports - that's the key thing - in their main financial reports, which brings a whole level of scrutiny, professionalism and liability for the companies when they actually do it.

So that's the reason to move from selective words to hard facts and prospective impacts and do it in a consistent way across jurisdictions, so there is that trust. It's not just the trust, though. It's also scrutinised very much by those who provide money for companies, investors, banks, others who need this information and will make real decisions on it. And that brings another level of scrutiny to make sure that these numbers are right and are followed through.

You've talked about something called the 'tragedy of the horizon'. I believe this means there are too many short-term investment decisions made. Could you explain that?

There are two big issues in environmental economics. One is 'tragedy of the commons' - think of common fishing on the high seas and nobody takes individual responsibility for it so collectively we all take too much and ultimately destroy the fishing stocks. Overgrazing on land is another example of the tragedy of the commons.

The 'tragedy of the horizon' is that the horizon of the normal business cycle is measured in [just a few] years, the political cycle - a four year political cycle. Regulators, central banks, often look out two or three years. All of those horizons are shorter the than horizon over which the truly catastrophic impacts of climate change that are building today will be [made] manifest. And, of course, by the time those physical impacts come in scale and frequency it's too late to address it. So you need to bring the future to the present in order to take actions today. That's how to solve the tragedy of the horizon.

Do you see a way that the cost of emitting greenhouse gas emissions can be embedded into the price of things we buy as individuals, or things that are traded in vast quantities?

Well, there's several ways to do it. If you look across the world, the average carbon price is around three or four dollars per tonne. There's only about 2% of the world's economic activity that is covered by some form of carbon price, and that carbon price itself averages about $15 dollars. So if you do the maths, it ends up at around $3 per tonne.

And to give a sense of what's needed in terms of an incentive to make the types of adjustment to get us on to that 1.5 degree horizon, something in the order of $75-100 per tonne would be required. Lots of other policies, lots of other regulations, lots of other things can help. But we're a long way from where the carbon price needs to be in order to get there.

The second way is a little more subtle, which is that a number of companies, including a number of companies at Davos, are committing to be net-zero. In other words, they want to manage their emissions down so they are net zero themselves. And when they look at their emissions, they don't just look at the emissions from their direct activities, but they're looking at the emissions from the power they use, whether in their head office or where they're producing in a supply chain around the world. And a number of them [are looking at] what are called 'scope 3' emissions: so what are the emissions of their suppliers and of the consumers using the product?

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