On 24 September 2019, the Bank of England (BoE) published two speeches given by Mark Carney, Governor of the BoE at the United Nations Climate Action Summit. In his speech, Dr Carney asserts that for climate risks and resilience to be brought into the heart of financial decision making, climate disclosure must become comprehensive; climate risk management must be transformed, and sustainable investing must go mainstream.
Dr Carney sets out three steps on how to bring this change forward:
- reporting: a universal effort is needed to make climate-related disclosures mandatory. Dr Carney reiterates the UK and EU have already signaled their intent in legislating to accommodate for this. He stresses that the next two years will be critical to ensure the Task Force on Climate-related Financial Disclosures is able to collect relevant data to set comparable, efficient and decision-useful standards;
- risk management: it is vital for supervisory authorities and providers of capital to improve their understanding and management of climate-related financial risks. The BoE recently set out its supervisory expectations for the governance, management and disclosure of these risks, and will be pioneering a stress test of its financial system against different climate-related risks; and
- returns: sustainable investing must catalyse and support all companies that are working to transition from brown to green. Dr Carney reports that “tilt” investment strategies, which overweigh high environmental, social and governance (ESG) stocks and “momentum” investment strategies have outperformed global benchmarks for nearly a decade. It is crucial that these strategies become mainstream and that there are tools available to pursue them. However, the inconsistent definition and measurement of ESG is a barrier to this. An agreed taxonomy would allow financial markets to better understand where there is real outperformance and to direct investments accordingly. Dr Carney proposes a possible solution, as recommended by the UN’s Climate Financial Leaders Initiative, to develop transition indices which track companies in high-carbon sectors that adopt low-carbon strategies.
