Ex Bank of England Governor Mark Carney has advocated in his BBC Reith Lectures that finance and business across the world are primed as never before to plan and act green - working towards combatting climate change.
Carney’s four lectures in the BBC’s annual series explore the history of the market from Adam Smith to the present day – specifically, how ‘we have come to esteem financial value over human value and how we have gone from market economies to market societies.
He argues that this has contributed to a trio of crises: of credit, Covid and climate.
The massive challenges of climate change were his ultimate target, especially bearing in mind his key role as Boris Johnson’s finance advisor to COP26 – the UN’s climate change summit being held in Glasgow later in 2021, the next big milestone since the Paris agreements in 2016.
In a nutshell, Carney says markets throughout the globe are now fast recognising, if major aspects haven’t done so already, that green philosophies and countering climate change – working towards net-zero carbon use and beyond – is now good business. Today, it all makes economic sense. Increasingly, it is what people want and is a fundamental way the world is going to get out of the climate mess it’s in.
A large chunk of the world of finance and business has already woken up to the realities of climate change, is planning futures accordingly, and the rest of it is rapidly re-thinking. From the rush to electric cars to financial institutions rejecting investment in fossil fuels, green economics is looking the better bet.
But, are the realities of climate change – from the melting ice caps, to extreme weather conditions, from still growing Co2 emissions to biodiversity collapses – going to hang around for the world of money and business to get its act together? The climate change clock is ticking very close to the points of no return – many scientists think we are beyond them already, including at the poles – and there are still so many vested interests across the globe not even dreaming, let alone acting, green. How much of the Amazon are we going to lose before the economics makes cutting down the trees a bad money deal?
Carney may be right on the overall financial drift but he’s over-optimistic on the rate of green change that will need to take place to help get the world to net-zero carbon emissions and stabilise Earth temperatures by mid-century. Climate alarm bells are already ringing loudly. As Greta Thunberg has said, our house is on fire.
Just as the world has been shocked into unprecedented action due to Covid in 2020 – we can deliver vaccines in under a year! – action equally as unprecedented, beyond the oil tanker of finance turning green, will be required by the international community within the next five years.
COP26 in Glasgow may deliver many good things, it may go beyond Paris and inject nations and organisations on all continents with greater energy and dynamism to combat climate change individual and collectively. But, if the clicking clock is to be slowed, then the conference will have to produce something substantially more.
According to Carney. there are three challenges to combatting climate change and there is progress on all fronts: Engineering – making our vehicles, machines and stuff net-zero; Political – a strong international consensus to make it happen; and Financial - developing the dynamic economic and financial momentums to fund and drive the new green world.
On engineering (quote): ‘With time scale and massive investment, we can green power generation buildings and most forms of transport and much of industry. We need to electrify everything and turn electricity generation green. Existing technologies, when applied at scale, can economically reduce about 60 percent of emissions, keeping the world on track to net zero consistent with 1 and a half degrees warming. However, we don’t yet have commercial technology to cut around 25 percent of man-made greenhouse gas emissions. We need greater investment and innovation in critical technologies, such as hydrogen, carbon capture and storage, and sustainable aviation fuels.’
On politics, Carney believes consensus is growing, and world leaders, organisations and many others are working with conviction towards a successful and impactful COP26 in Glasgow. No doubt the USA re-joining the Paris accords post Trump is another hot signal.
But it’s on finance where Carney focuses his expertise. Stung by the likes of Greta Thunberg, societies (quote) ‘… won’t settle for countries announcing plans in Paris five years ago for 2.8 degrees warming, far too high, that they don’t even meet. Society won’t settle for companies that preach green but don’t manage their carbon footprints, or financial institutions who can’t tell us whether our money is on the right or wrong side of climate history.’
He adds: ‘In a number of societies, demands for sustainability are approaching tipping points, giving newfound urgency to national commitments to net zero. This is reinforcing the hierarchy of values, with net zero at its apex, it is a prerequisite to solving the climate crisis. Legal scholar Cass Sunstein has documented how social movements that once seemed improbable, can unexpectedly gain traction. Within a few years, views that were publicly on the fringe suddenly become mainstream, causing more people to voice what’s really inside their heads, reinforcing convictions and catalysing actions. The economists Tim Besley and Torsten Persson, argued that similar dynamics could be at work over climate change. The connections between changing environmental values, changing technologies and the changing environmental politics can drive self-reinforcing cycles. Greater consumer demand for sustainable products increased the economic returns to green technologies and the political returns to green policies, and this is how a path to a more sustainable world begins to appear.’
Thus, markets and finance systems across the world are beginning to value the values of societies – what people want, love and care for, not just the value of things, whether it’s a car or a house. People wanting a safer world through zero-emissions and products and services that will create it will drive an economic world that delivers this because it will make sound economic sense.
Carney, as many others do, also see the transition to net-zero and the world beyond as being a massive financial and economic opportunity. Millions of new jobs stand to be generated through so many new, green ventures from electric cars to new power sources.
His last lecture takes a deep dive into the details. For example, the 3 R’s of financial decision making: Reporting – effective climate change action measurement for companies and assets; Risk management – which must be transformed because the financial risks are unprecedented; and Returns – how to focus on the financial returns of the net-zero future, not those of the here and now. On this, tellingly, Carney says:
‘A very basic approach is to report the percentage of their assets that have a net zero target. The most sophisticated and the most intuitive option is to assess the contribution of a pool of assets to global warming. And current calculations suggest the financial system as a whole is funding temperature increases of over three degrees centigrade. And that’s a striking gap between what society wants and what the market values.’
Concluding, Carney says markets do not have all the answers but they are playing, and will play, a vital role in beating climate change – ‘We won’t get to net zero without innovation, investment and profit.’
And looking forward to COP26 – ‘… private finance can bend the arc of history towards climate justice, value can serve values, moral sentiments can rebalance market sentiments, and the Glasgow of COP 26 can be reunited with the Glasgow of Adam Smith.’
There is a lot to think on, and in part admire, about Mark Carney’s Reith Lectures. On climate change, he offers hope and ways of progress in the ruthless world of finance and markets.
But is it going to be enough? The clock is ticking on an answer to that.
For Mark Carney’s BBC Reith Lectures and transcripts