Bank of England Governor Warns Investors Failing to Consider Climate Risks

June 30, 2017 by and

Bank of England Governor Mark Carney said he’s concerned investors aren’t doing enough to assess threats that global warming will have on assets they purchase.

The central bank governor who also leads the Financial Stability Board advising the Group of 20 nations also won the backing of more than 100 chief executive officers for his campaign to increase financial reporting standards on issues related to the environment. That transparency, he said, would help investors understand how rising temperatures will affect company performance.

“The risk is that people aren’t thinking about this sufficiently, and that there’s a bigger adjustment that comes — you get a climate Minsky moment where there’s much tougher regimes put in place,” Carney said in an interview on Bloomberg Television on Thursday, noting there’s already upheaval in the strategy of German utilities and stemming from the Volkswagen AG emissions scandal.

The remarks amplify a theme Carney has stressed for years, that the impact of rising temperatures and more unpredictable weather represents a long-term risk for investors more used to assessing investments a few months or at most a few years in advance.

The Group of 20 leading economies asked Carney in 2015, shortly before negotiations for the Paris Agreement on climate change, to compile a study weighing the financial risks implied by global warming. Companies with a combined market value of more than $3.3 trillion — equivalent to all the goods and services produced annually by Germany — threw their weight behind Carney’s final report on climate change as it was published on Thursday.
More companies are likely to join the effort “as people become engaged,” Carney said, adding that their support will improve steps toward transparency the FSB is suggesting.

The support of CEOs from companies including Royal Dutch Shell Plc, PepsiCo Inc., Bank of America Corp. and Dow Chemical Co. may help the Financial Stability Board dull the impact of this month’s decision by U.S. President Donald Trump to withdraw from the landmark deal.

The insurance industry is already adapting to growing climate risk, Carney said. Pricing in catastrophe bonds has changed dramatically in the last few decades “because they see the actual physical manifestations of climate change”, he said.

“Companies should be clear about how they plan to be resilient in the face of climate change and energy transition,” Shell CEO Ben van Beurden said in a statement. “It is right that it should be transparent which companies are truly on firm foundations over the long-term.”

What’s uncertain is how Trump’s decision to stimulate fossil fuels and pull out of the Paris deal will affect the way the G-20 treats Carney’s work at its annual summit next week in Germany.

Among the conclusions reached Carney and supported by the CEOs are:

  • Companies impacted by climate change should conduct scenario analysis and include results in their financial reports
  • Companies should show how their profits may be affected by tighter pollution rules and extreme weather events from climate change
  • Mining, energy, agriculture and real estate should consider scenario analysis in non-financial reports — even if they don’t see a direct financial impact from climate change

The issue of climate disclosure has emerged as a key concern for investors in recent months independent of action by governments, said Mark Lewis, a managing director at Barclays Plc and a member of the taskforce.

“It’s happening anyway, and there’s a sense that with the financial risks around climate change this is an idea whose time has come,” said Lewis.

Stockholders are overruling corporate boards on the environment in record numbers at annual meetings this year. They’ve supported to climate change proposals at companies such as Exxon Mobil Corp., PPL Corp. and Occidental Petroleum Corp. Fossil-fuel producers from Peabody Energy Corp. to Exxon have also clashed with New York Attorney General Eric Schneiderman over accusations they didn’t adequately inform investors about the climate risks they face.

Since the FSB’s draft report in December, the panel expanded recommendations on executive pay, urging all companies to link compensation to performance on climate-related topics. It says all organizations that see climate-related risk as “material” should tell investors if they include environmental targets in pay criteria. Previously that guidance focused only on the energy industry.

Carney will present their findings at the G-20 summit in Hamburg. Though the consensus-driven G-20 may not endorse it in its final communique, momentum continues to build behind Carney’s conclusions.

“This work becomes more important every single day regardless of what’s happening politically anywhere in the world,” said Mary Schapiro, a member of the taskforce. “In the absence of leadership at the federal level in the U.S., business will step up and lead on this issue.”

The U.S.’s position on the proposals issued Thursday isn’t clear, and the panel’s work will continue for another year to help companies adopt the recommendations, she said.

Michael Bloomberg, founder and majority owner of Bloomberg News and its parent company Bloomberg LP, was appointed to lead the 31-member panel, which also includes executives and advisers from a variety of industries around the world.

–With assistance from Emily Chasan.

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