Shortly after the Bank of England launched an attempt to quantify the risk that climate change poses to the financial system, outgoing chief Mark Carney has today (30th December) issued a climate change warning, saying the world will face irreversible heating unless firms shift their priorities soon

 

Under the BoE’s plans, banks and insurers will face climate stress tests similar to the current financial stress tests; this could ultimately result in banks and insurers having to hold more capital to do certain kinds of business, and have a profound effect on the way the economy is funded.

‘every asset on the planet will be affected by climate change’

In December, Bank officials said that the value of every asset on the planet will be affected by climate change leading to financial risk; the bank wants to measure, and then manage it as asset values change.

Large banks and insurers will be asked to go through all of the assets on their balance sheet to assess the risks posed by a range of climate scenarios.

Its announcement came with bush fires raging in Australia and large parts of the north under floodwater; these two events can be seen to have a knock on effect for financial assets.

 

Climate Change and Financial Assets

 

If Australian bush fires became the norm because of climate change, insurers may decline to offer cover for houses in afflicted parts of the country; an uninsurable house becomes worth a lot less than one that can, and its value plummets, to be worth less than the mortgage the owner has on it.

The lender – the bank that offered that mortgage – along with all the others, are left nursing big losses, and in one fell swoop it could trigger an Australian financial crisis.

Closer to home, banks and insurers already look very closely at houses built in flood-affected areas and if the bank of England decides that it wants them to hold additional capital (penalising them for taking that risk) then insurance and mortgages will be harder and more expensive to get in blighted area.

‘the world will face irreversible heating unless firms shift their priorities soon’

BoE recognises two types of financial risk posed by climate change; physical risks arise from weather related events – floods, droughts, fire, etc – whilst ‘transition risks’ happen as a result of adjusting to a low carbon economy – meat becoming more expensive, mandatory insulation of homes.

The Bank’s pledged undertaking is huge and it is currently consulting on what information is most relevant and how it can best be gathered; both the European Banking Authority and the Federal Reserve and watching with interest with a view to following suit.

Making banks pay more to finance climate changing behaviour is the kind of powerful stick climate activists have been crying out for; the Bank says it does not wish to place additional burdens on financial institutions, but its ability to force them to hold more shock absorbing capital is a very powerful weapon.

Now Mr Carney, who will next year start his new role as United Nations special envoy for climate action and finance, has weighed in, telling the BBC the world will face irreversible heating unless firms shift their priorities soon.

Speaking in an interview with Mishal Husain on a special edition of BBC Radio 4 Today, guest edited by environmental campaigner Greta Thunberg, Mark Carney said the financial sector had begun to curb investment in fossil fuels – but far too slowly.

He said leading pension fund analysis ‘is that if you add up the policies of all of companies out there, they are consistent with warming of 3.7-3.8C’, adding that the rise of almost 4C was ‘far above the 1.5 degrees that the people say they want and governments are demanding.

‘The concern is whether we will spend another decade doing worthy things but not enough… and we will blow through the 1.5C mark very quickly. As a consequence, the climate will stabilise at the much higher level’.

 

‘It’s not Moving Fast Enough’

 

Scientists believe that an increase of 4C could lead to a nine metre rise in sea levels – affecting up to 760m people – searing heatwaves and droughts, and serious food supply problems.

Speaking to the special programme which included a number of climate related stories, he re-iterated his warning that unless firms woke up to what he called the climate crisis, many of their assets would become worthless:

‘If we were to burn all those oil and gas [reserves], there’s no way we would meet carbon budget,’ he said. ‘Up to 80% of coal assets will be stranded, [and] up to half of developed oil reserves.

‘A question for every company, every financial institution, every asset manager, pension fund or insurer: what’s your plan?

‘Four to five years ago, only leading institutions had begun to think about these issues and could report on them.

‘Now $120tn worth of balance sheets of banks and asset managers are wanting this disclosure [of investments in fossil fuels]. But it’s not moving fast enough.’

In contrast to climate campaigners Extinction Rebellion, which question whether the capitalist system can halt climate change, Mr Carney said capitalism had a vital role in raising funding for clean technologies.

‘by the time that the extreme events become so prevalent and so obvious it’s too late to do anything about it’

However, he added that it had to be tempered by government incentives, rules and prohibitions of the most damaging activities; he called climate change a ‘tragedy of the horizon’, because the decision-making time horizon of investment managers is between two and 10 years:

 

‘Start addressing future problems today’

 

‘In those horizons there will be more extreme weather events, but by the time that the extreme events become so prevalent and so obvious it’s too late to do anything about it,’ he said.

‘We look to political leaders to start addressing future problems today.’

Whilst applauding the UK government for hosting next year’s global climate conference in Glasgow, to those questioning consensus on climate change he said: ‘We can’t afford on this one to have selective information, spin, misdirection… It needs to be absolutely clear because we are all in on it.

‘To deliver, there needs to be shared understanding about what’s necessary. [But] it is reasonable for there to be debates at the margin about where does the role of the state stop – and what’s the role of markets.’

In response to the Bank of England’s ‘stress tests’, investment bank Goldman Sachs ruled out future finance for oil drilling or exploration in the Arctic and said that it would not invest in new thermal coal mines (for power stations) anywhere in the world.

It also announced plans to help its clients manage climate impacts by selling weather-related catastrophe bonds; the question is how quickly the institutions can adapt.

‘2020 is our last chance to bring the world together to take decisive action on climate change’

Companies appear to be moving at different speeds. Insurer Axa said that it would stop insuring new coal construction projects and phase out existing insurance and investments in coal, by 2030; government pension scheme Nest is testing whether it can invest its Climate Aware Fund in firms compatible with a 1.5C warming.

Environmentalists have broadly applauded the moves but say they don’t go remotely far enough; scientists say nations must cut emissions five-fold to avoid a temperature rise over 1.5C.

Meanwhile, two key environmental bodies have warned that 2020 is the ‘last chance’ to bring the world together to tackle climate change to protect communities and nature.

Climate change and damage to nature are already having ‘dire consequences’, the leaders of government agencies Natural England and the Environment Agency have said, pointing to the recent flooding which saw hundreds evacuated at Fishlake, Doncaster.

A report in October found two-fifths (41%) of the UK’s wildlife species had declined over the past 50 years and 13% of the species tracked were threatened with extinction in England.

‘It’s clear that 2020 is our last chance to bring the world together to take decisive action on climate change in order to protect our communities and reverse the alarming loss of wildlife we have witnessed in recent years,’ said the groups.

 

 





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