Mark Carney and climate change – an historic speech

The following are extracts from a speech given by Mark Carney, The Governor of the Bank of England at a Lloyd’s of London dinner on 29 September 2015

He outlines how climate change is a huge financial risk, particularly for investments in unburnable fossil fuel assets. He points out that  the vast majority of these assets could be ‘stranded ‘and that the window of opportunity to address climate change is ‘finite and shrinking’

The media has described this as a ‘milestone speech’   See link  to full speech and references.

Extracts follow   John Menadue

The tragedy on the horizon

There is a growing international consensus that climate change is unequivocal. 2

Many of the changes in our world since the 1950s are without precedent: not merely over decades but over millennia.

Research tells us with a high degree of confidence that:

  • In the Northern Hemisphere the last 30 years have been the warmest since Anglo-Saxon times; indeed, eight of the ten warmest years on record in the UK have occurred since 2002; 3
  • Atmospheric concentrations of greenhouse gases are at levels not seen in 800,000 years; and
  • The rate of sea level rise is quicker now than at any time over the last 2 millennia. 4

Evidence is mounting of man’s role in climate change. Human drivers are judged extremely likely to have been the dominant cause of global warming since the mid-20th century. 5  While natural fluctuations may mask it temporarily, the underlying human-induced warming trend of two-tenths of a degree per decade has continued unabated since the 1970s. 6

While there is always room for scientific disagreement about climate change (as there is with any scientific issue) I have found that insurers are amongst the most determined advocates for tackling it sooner rather than later.  And little wonder.  While others have been debating the theory, you have been dealing with the reality:

Since the 1980s the number of registered weather-related loss events has tripled; and inflation-adjusted insurance losses from these events have increased from an annual average of around $10bn in the 1980s to around $50bn over the past decade. 7

The challenges currently posed by climate change pale in significance compared with what might come.  The far-sighted amongst you are anticipating broader global impacts on property, migration and political stability, as well as food and water security.

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.

That means beyond:

  • the business cycle; 9
  • the political cycle; and
  • the horizon of technocratic authorities, like central banks, who are bound by their mandates.

The horizon for monetary policy extends out to 2-3 years. For financial stability it is a bit longer, but typically only to the outer boundaries of the credit cycle – about a decade. 10

In other words, once climate change becomes a defining issue for financial stability, it may already be too late.

This paradox is deeper, as Lord Stern and others have amply demonstrated. As risks are a function of cumulative emissions, earlier action will mean less costly adjustment. 11

The desirability of restricting climate change to 2 degrees above pre-industrial levels 12 leads to the notion of a carbon ‘budget’, an assessment of the amount of emissions the world can ‘afford’.

Such a budget – like the one produced by the IPCC 13  – highlights the consequences of inaction today for the scale of reaction required tomorrow.

These actions will be influenced by policy choices that are rightly the responsibility of elected governments, advised by scientific experts.  In ten weeks representatives of 196 countries will gather in Paris at the COP21 summit to consider the world’s response to climate change. It is governments who must choose whether, and how, to pursue that 2 degree world.

Climate change and financial stability

There are three broad channels through which climate change can affect financial stability:

– First, physical risks: the impacts today on insurance liabilities and the value of financial assets that arise from climate- and weather-related events, such as floods and storms that damage property or disrupt trade;

– Second, liability risks: the impacts that could arise tomorrow if parties who have suffered loss or damage from the effects of climate change seek compensation from those they hold responsible.  Such claims could come decades in the future, but have the potential to hit carbon extractors and emitters – and, if they have liability cover, their insurers – the hardest;

– Finally, transition risks: the financial risks which could result from the process of adjustment towards a lower-carbon economy.  Changes in policy, technology and physical risks could prompt a reassessment of the value of a large range of assets as costs and opportunities become apparent.

The speed at which such re-pricing occurs is uncertain and could be decisive for financial stability.  There have already been a few high profile examples of jump-to-distress pricing because of shifts in environmental policy or performance.

Risks to financial stability will be minimised if the transition begins early and follows a predictable path, thereby helping the market anticipate the transition to a 2 degree world.

Transition risks

The UK insurance sector manages almost £2tn in assets to match liabilities that often span decades. While a given physical manifestation of climate change – a flood or storm – may not directly affect a corporate bond’s value, policy action to promote the transition towards a low-carbon economy could spark a fundamental reassessment.

Take, for example, the IPCC’s estimate of a carbon budget that would likely limit global temperature rises to 2 degrees above pre-industrial levels.

That budget amounts to between 1/5th and 1/3rd world’s proven reserves of oil, gas and coal. 24

If that estimate is even approximately correct it would render the vast majority of reserves “stranded” – oil, gas and coal that will be literally unburnable without expensive carbon capture technology, which itself alters fossil fuel economics. 25

The exposure of UK investors, including insurance companies, to these shifts is potentially huge.


Our societies face a series of profound environmental and social challenges.

The combination of the weight of scientific evidence and the dynamics of the financial system suggest that, in the fullness of time, climate change will threaten financial resilience and longer-term prosperity.

While there is still time to act, the window of opportunity is finite and shrinking. 31

Others will need to learn from Lloyd’s example in combining data, technology and expert judgment to measure and manage risks.

The December meetings in Paris will work towards plans to curb carbon emissions and encourage the funding of new technologies.

We will need the market to work alongside in order to maximise their impact.

With better information as a foundation, we can build a virtuous circle of better understanding of tomorrow’s risks, better pricing for investors, better decisions by policymakers, and a smoother transition to a lower-carbon economy.

By managing what gets measured, we can break the Tragedy of the Horizon.


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