Fresh from his barnstorming turn at the ACT's International Treasury Week last month, UN Special Envoy Mark Carney said that financial services sector has ‘jumped ahead of government’ on the issue of climate change. Speaking at the Personal Investment Management & Financial Advice Association's (PIMFA’s) inaugural Virtual Fest, Carney told delegates that both corporates and the financial services industry have jumped ahead of the government in the development of strategies and solutions to climate change.
The former Bank of England Governor said professionals in the financial services sector had started to see climate change and the approach of corporates to achieving the government’s target of net zero carbon emission as “a new vector of value”.
“Corporates and the financial sector have jumped ahead of government,” Carney said. “Companies that have a strategy will be rewarded. This is not a passive investment strategy, you need the information but you also need the judgements around it. So yes I do think the industry is leading and I think the public will soon jump a bit ahead of us as well.”
Carney said one of the key issues for government policy was that it was going to have to be “consistent on the path to net zero carbon emissions”.
“As we come out of this period, what regulatory interventions are there going to be to point the way?" Carney asked. "Will there be regulatory demands on fuel consumption? Will there be retrofit standards or other standards that point the way in which climate policy is going, which leads to innovation, which leads to investment?”
Outlining the scale of the challenge facing world leaders in reducing carbon emissions, Carney said the recent COVID-19 crisis has seen a 6% fall in the level of global carbon emissions. But he added: “We would need to see that globally compound in order to achieve net zero emissions by 2050. So the scale of the challenge is quite significant. This is a whole economy adjustment, this isn’t just about niche products or renewable solutions or xing out some dark brown industries or fossil fuels.”
There has been some progress. For example, there has already been a couple of reporting cycles under the parameters outlined by the Task Force on Climate-related Financial Disclosure and the terms of those disclosures were already being refined so that it was as consistent as possible for the end user. The next step would be for such disclosures to become mandatory.
“From a demand side, the demand for this type of disclosure is very high," Carney said. "We’re talking about companies with huge balance sheets. If you total up the assets under management it’s US$130 trillion, Banks want it, insurance companies want it, the ratings agencies want it.”
The second stage in achieving a whole economy approach to net-zero carbon emissions involves a two-pronged risk-based approach. The first is the physical risk of climate change posed by extreme weather events, which has already increased three fold in recent decades. The second, and bigger risk, is how companies transition into a new net zero carbon world.
“What we all want for the economy is a smooth transition to net zero and a predictable path towards those changes," Carney noted. "The more predictable climate policy is, the easier it is to do that."
Pointing to the car industry, he said Tesla was already worth more than several of the largest global car manufacturers combined, reflecting the changes in government policy towards the car industry and the phasing out of petrol and diesel engined cars in favour of electric vehicles. For investors and portfolio managers, one of the key questions is which companies are likely to be the next Tesla?
A whole economy transition would affect everyone, Carney said. “So who is going to benefit? Who is ready? Who isn’t? We need common information to make those adjustments.”
Corporate transition plans
Carney added that a number of companies had already come out with transition plans, while others were planning to publish their own in the coming months. He added it was a mistake to see climate change as a binary issue and to simply divest from energy companies, noting that BP will publish its transition plans later this year. Investors might be faced with a choice as to whether BP’s transition strategy is credible, compared to whether another energy company had a transition plan at all.
"If we don’t come up with ways of communicating how important a company is in a portfolio, the whole thing becomes quite binary and it won’t achieve that whole economy transition," Carney observed.
As more disclosures of transition plans by companies come out over the next year, it will be interesting to see which companies have a transition plan for net zero carbon emissions.
“How the economy evolves in the years to come, to meet the twin challenges posed by the immediate pressure of the COVID-19 outbreak and the need to meet our climate goals, is likely to have profound and long-term implications for future generations," commented Liz Field, chief executive of PIMFA. "Transitioning to a whole economy approach to achieving net zero carbon emissions will require policymakers and industry to work together. But it is clear there is a desire to meet the climate change targets and that there is demand for a greener economy. Wealth managers and financial advisers will play an important role in helping investors to support those companies offering solutions to the climate crisis.”
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