Carney Warns Investors They May Undervalue `Huge' Climate Risks

Carney: Investors Need to Wake Up on Climate Risks
  • Bank of England governor sees risk in shift from fossil fuels
  • Insurers may undervalue losses by 50% based on weather trends

Bank of England Governor Mark Carney said investors need to wake up to the potential for huge losses from a sudden shift in regulations designed to curb global warming and the use of fossil fuels.

“The challenges currently posed by climate change pale in significance compared with what might come,” Carney said in a speech at a Lloyd’s of London dinner in the U.K. capital late Tuesday. “Once climate change becomes a defining issue for financial stability, it may already be too late.”

Carney is the most prominent figure yet from the world of finance to set out his concerns on how climate-related issues could destabilize financial markets in the years to come. His remarks prodding the Group of 20 nations to act on the issue also support campaigners led by environmentalist Bill McKibben as well as institutions such as Oxford University and the Rockefeller Brothers Fund Inc., which have pledged to shift away from investments in polluting industries.

“He chose his setting perfectly,” said Stephanie Pfeifer, chief executive officer of the Institutional Investors Group on Climate Change, which represents 110 funds controlling $12 trillion. “We welcome his focus on more consistent and reliable carbon disclosure that will allow investors to make a more informed assessment of the climate risks in their portfolios.”

The U.K. central bank has been looking into the economic and financial-stability risks posed by climate change, and Carney spoke as the BOE published a report on the impact on the British insurance industry. As well as physical and liability risks, U.K. insurers, which manage almost 2 trillion pounds ($3 trillion), also face threats from the re-pricing of investments in fossil fuels in the move toward a lower carbon economy, Carney said.

Insurance Risk

“The exposure of U.K. investors, including insurance companies, to these shifts is potentially huge,” Carney said, noting research suggesting current modeling in the industry may be under-pricing risk by 50 percent if current weather trends become normal.

The key danger is that changes in policy leave oil drillers and coal miners with stranded assets -- reserves that have little value because the fight against climate change will require them to be left in the ground. While disputed by energy companies, the issue has been gaining attention in the past year and is a focal point for a round of United Nations talks on global warming due to culminate in December.

At most, just over a quarter of fossil-fuel reserves can be used if warming is to be limited to 2 degrees Celsius above pre-industrial levels, scientists convened by the UN have concluded. The so-called carbon budget compatible with the 2-degree goal goal would be used up in about two decades at current levels of fossil-fuel consumption.

“A wholesale reassessment of prospects, especially if it were to occur suddenly, could potentially destabilize markets, spark a pro-cyclical crystallization of losses and a persistent tightening of financial conditions," Carney said. "The speed at which such re-pricing occurs is uncertain and could be decisive for financial stability."

Risks will be minimized if companies and investors begin adjusting early and policy follows a a predictable path, the governor said.

In an echo of the push to increase information disclosure following the financial crisis, Carney suggested that the G-20 could set up an industry-led group, a Climate Disclosure Task Force, to design a voluntary standards for detailing emissions by those companies. The G-20, whose member states account for around 85 percent of global emissions, is in a prime position to lead the initiative on this, he said.

For more, read this QuickTake: Climate Change