Carney: Climate change an opportunity for financial stability

Mark Carney ©Bank of England

For Mark Carney, Governor of the Bank of England, "green finance cannot conceivably remain a niche interest" if the economy is to be put back on a stable long-term path to growth. Speaking at the Arthur Burns Memorial Lecture in Berlin, an event traditionally hosted by the Bundesbank in cooperation with the Atlantik-Brücke, Mr Carney contended that green investment is a major opportunity to safeguard stability and growth over the long term, especially given the persistent tight financial conditions.

The 51-year-old Canadian ranks among the best-known experts to have put green finance on the fiscal policy agenda. "It is thanks to you, more than anyone, that the Financial Stability Board is addressing the long-term economic repercussions of climate change," Bundesbank President Jens Weidmann remarked in his welcome speech.

Financial stability risks

Mark Carney, who took office as Governor of the Bank of England in July 2013, distinguished three channels through which climate change affects financial stability. The first concerns the physical risks that arise from the increased frequency and severity of climate- and weather-related events. Insurers are relatively well-placed to manage these physical risks at present, he noted, but warned that growing swathes of our economies look set to become uninsurable against the catastrophic impact of climate change, which ultimately also exposes the broader financial system to large and variable physical risks.

The second problem, one which Mr Carney believes might become more pressing in future, concerns liability risks – that is, parties who have suffered loss from the effects of climate change seeking compensation from those they hold responsible. "Such claims could arise well into the future, as the science and evidence of climate change hardens, though some are already taking action against companies on the grounds of failure to disclose the risks posed to their business models by climate change," Mr Carney explained.

The final and, for Mr Carney, most important threat to financial stability involves transition risks which could result from the 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 – with untold repercussions for the financial system.

Invest with foresight

As the tenth anniversary of the start of the crisis approaches, Mr Carney believes that the global economy is caught in a "low-growth low-inflation trap". More than anything, he said, structural reforms are needed to escape from that trap. "In this context, green finance is a major opportunity." The transition, he said, needs to begin early and follow a predictable path, thereby helping the market anticipate the transition to a two-degree world. "The more we invest with foresight, the less we will regret in hindsight," Mr Carney said, adding that this will minimise financial stability risks.

At the end of the day, however, it is the governments, not the central banks, which will have to establish the frameworks for the transition to a low-carbon economy, Mr Carney stressed, noting that the G20 – whose members account for around 85% of global emissions – has a unique responsibility.