Are the global financial markets ready to embrace Mark Carney and his Private Finance Agenda for COP26?

In January, Boris Johnson appointed Mark Carney, (then the Governor of the Bank of England) as his Finance Adviser for the purposes of COP26 to “help build a sustainable financial system to support the transition to a net zero economy”. Carney has also been appointed UN special envoy for climate action and finance.

Legacy as Governor of Bank of England

This appointment came as no surprise given Carney’s involvement in progressing the transition of the financial sector to a net zero economy whilst Governor of the Bank of England. During his tenure, the financial markets changed significantly. Green investments are now a central trend and investment in renewables and nuclear energy make up the top 55% of the investment market.

As a result, trillions of pounds have been invested in technology within the energy, construction, property and transport sectors and used to reduce carbon emissions. Last month, government figures revealed that the UK had reduced greenhouse gas emissions for the seventh consecutive year with nearly 37% of electricity generated by renewable energy sources in 2019.

As chair of the Financial Stability Board, Carney helped to develop the voluntary guidelines of the Task Force for Climate-related Financial Disclosures (TCFDs) which has since secured the backing of more than 1,000 firms, banks and organisations worldwide.

In appointing Carney, the government has acknowledged that the finance sector has an important role to play in helping the nation meet all Paris Agreement targets. Indeed, the finance industry could be the catalyst for other sectors to transition to a net zero economy as it will help raise the funds (via investment) required for the technology to guide all other sectors in this transition.

But will Carney be able to sufficiently galvanise the global financial markets into action?

Private Finance Agenda for COP26

On 27 February 2020, Carney launched the Private Finance Agenda for COP26 (the Agenda).

The aim of the Agenda is to unlock the trillions of dollars needed for the global financial sector to transition to a net zero economy. This is why the overarching focus is on climate risk disclosure, with the objective being “every financial decision must take climate change into account”.

To achieve this, Carney will implement a three pronged strategy which he called the “three Rs”:

  • Reporting: Carney will work with international regulatory standard setters and governments to find the best way to make climate disclosure mandatory.
  • Risk management: Carney advocated the Bank of England’s stress test of all major banks and insurers against climate change scenarios to be used on a global scale. The test “will expose those that have not” prepared for the net zero transition.
  • Return: Carney promoted disclosure of whether a client’s values are aligned with the investment of their money. Companies, banks, insurers, pension funds and investors will increasingly be expected to develop and disclose their transition plans which will indicate whether a client’s values have been taken into account.

Carney has yet to publish a full strategy. Details of how to build on current sustainability metrics or how companies will report climate risks and measure sustainability investments are not currently clear. However, his proposals have, on the whole, been well received. Fiona Reynolds, CEO of the Principles for Responsible Investment, noted that “this is the first time a host government for the COP has fully recognised the critical role that finance has to play alongside state actors…”.

Additional challenges

Nevertheless, there are some climate finance experts who consider that more work is needed to ensure Carney’s Agenda is truly holistic and inclusive of poorer nations.

Clare Shakya, Director of Climate Change at the International Institute for Environment and Development believes that “the tools set out by Mr Carney will not work in countries and regions that fail to attract investment already. Pushing for tightening private investment practice needs to be alongside a commitment to help the poorest countries reduce their vulnerability to climate change and build the governance and institutions that manage their risks. This will take significant public investment.”

The US’s position is also a major influence on global cooperation. With President Trump’s announcement that the US will pull out of the Paris Agreement, some believe that this will make global central bank action difficult.

COP26 was due to take place in Glasgow on 9-19 November 2020. However, due to the current COVID-19 pandemic, this has been postponed with a new date to be confirmed. While a delay is not ideal, the circumstances surrounding it could be used to demonstrate that a significant change in our working and personal lives can be achieved (albeit in extreme circumstances) and that we should take heed of the subsequent emission levels data produced. This should assist in reigniting the COP global agenda.

Comment

Carney’s call to action to the global finance markets to adopt mandatory climate disclosure confirms our views as set out last year. We may now see claims against companies, insurers, banks and investors and their directors and officers sooner than expected. The basis of these claims could be for: failure to properly disclose climate change risks to the market; failure to assess properly and take adequate action to mitigate climate risks; and failure to appropriately value a company’s assets and investments, taking into account climate risks.

To avoid this, the finance industry must include the consideration of climate risks in all environmental, social and governance policies. We would also advocate implementing a transition plan to help manage climate risks and circumvent solvency issues.

Read others items in London Market Brief - April 2020

Related items: