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Carney: how we are transforming the global economy

Author: ICAEW Insights

Published: 10 Nov 2021

Former Bank of England Governor turned climate activist Mark Carney explains how the financial system is changing to combat climate change.

Up to four-fifths of global emissions are now covered by the commitment to Net Zero by 2050, making it the key focus of the global economy.

“Commitments are one thing: action is what’s needed,” Mark Carney told an audience of ICAEW members and finance professionals at the DiT-sponsored British Chamber of Commerce event on the future of Green Finance, held in Hong Kong near the end of October.

“And action needs private finance at an unprecedented scale to fund the literally trillions of dollars of additional investment and decarbonisation that will need to happen every year for decades.”

The good news is that money for ambitious climate change action is coming into place and the private financial sector is being rewired, said Carney.

“Net-zero commitments are now the organising principle that’s cascading down from those country-level commitments to our companies. Thousands of the world’s largest companies are setting their own net zero objectives and developing their own decarbonisation plans. My view is that within a few years this will become the norm,” he added.

Fix the plumbing

To finance the net zero plans, both the plumbing and the commitments of the financial system need to be changed, said Carney.

Of the key changes, the first concerns reporting. “Climate change related financial reporting is critical, because what gets measured, gets managed”, he said. The private sector has taken TCFD as far as it could go since its launch six years ago.

The G20 has adopted the FSB’s roadmap, with TCFD disclosure at its heart, and signalled its support for the IFRS Foundation’s International Sustainability Standards Board (ISSB).

“The ISSB will deduce a climate disclosures standard based on the TCFD and drawing on other frameworks by the middle of next year – that’s lightning speed in terms of regulatory affairs,” said Carney.

“But it can do so because of the progress that’s been made by the private sector and because it can draw on the existing frameworks.”

The benefits are clear: it will ensure that investors and banks and over 130 countries all around the world have access to reliable, comparable, and comprehensive data that they need, he said.

Changes to risks

The second major change concerns risk, said Carney. Better disclosures and the heightened sense of urgencies will lead to a transformation of climate risk management. It will be difficult, he acknowledged, and require managing both physical and transition risk, but rather than being overwhelmed, authorities have stepped up, he said.

“A group of central banks at the Network for Greening the Financial System (NGFS) has grown in just a few years from its eight founding members to 90 authorities including the Hong Kong Monetary Authority.

“This covers over 80% of global emissions and all of the world’s globally systemic financial institutions. These supervisors are bringing climate risk management to the core of finance.”

Central banks in countries covering two thirds of global emissions are now pursuing climate stress tests, he added.

Manage returns in the new system

The third significant change concerns returns. A change to the ‘financial plumbing’ will help investors identify and measure the opportunities in the transition to net zero, said Carney. His rationale is that climate change is an existential risk, so it follows that those companies that are part of the solution will create enormous value.

The financial services industry increasingly recognises the importance of the transition, and the need for credible and robust plans.

“Today there are well over 300 major financial institutions from across 40 countries that control assets of over $90tn that have joined the Glasgow Financial Alliance for Net Zero, or Gfanz,” he said.

“Gfanz is the gold standard for climate commitments. It ensures that the climate pledges are in line with the climate goals on climate change, and that those pledges are anchored in the UN’s race to zero.”

Firms set targets to achieve Net Zero finance submissions by 2050 at the latest, as well as interim targets for a fair share of interim reductions as stated by the IPCC, said Carney.

In addition banks are required to set out five year decarbonisation plans, have board accountability, and report their progress annually against all targets.

Gfanz growth

“Gfanz membership continues to grow,” said Carney. “We’ve added over $20tn of assets in the past few months. And a few weeks ago, major insurers and reinsurers formed a new alliance, the Net Zero insurance alliance pledging to align their insurance underwriting with the transition to Net Zero.”

Carney said this included a new Net Zero service provider’s alliance of market infrastructure providers, including the major index providers, the leading credit ratings agencies, and the stock exchanges and all of the major audit firms.

Following the GFI conference, an FT interview with him put this figure at $131tn, after major investment managers like BlackRock joined up.

“They will align all of their major products and services with the financing of Net Zero. So Gfanz is where the core of the global financial system sets practical standards for the transition to the Net Zero economy.”

The flow of capital

It’s critical to connect the supply of capital in advanced economies with the demand and the need for it in the emerging and developing world, he added.

Potentially three quarters of the three and a half to five trillion dollars of annual energy infrastructure investment are required over the next three decades, said Carney, which must take place in the emerging and developing world.

“And for this to happen, we need to turn billions of public capital into trillions of private capital. We are currently far off the mark. And that’s why we are advocating new country platforms to deliver the one trillion dollars of new incremental private capital flows to the emerging world by the middle of this decade.”

These country platforms will combine country plans and the projects to help achieve them with Gfanz financing commitments for Net Zero aligned projects, as well as the expertise, and the multilateral development banks to encourage that investment.

His key takeaway then was that the momentum of the private sector must be met by the international development banks and global financial system, and that Gfanz would allow this to happen.

“Now is the time to craft the architecture of this system in ways that were for all types of financial institutions and in all regions. And that is what Gfanz will help do over the course of the next few years.”

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