Mark Carney, governor of the Bank of England, has warned that markets need to be prepared for the risks posed by climate change to avoid the fate of Germany’s utility companies.
He said extreme weather, unusable oil and gas reserves and desertification are all very real threats that financial markets do not always take into account. The implication here is that shares in insurers, natural resource companies and banks, which are directly exposed to these risks may not be correctly priced. But there was also a real danger that companies also did not react to government policies that were meant to address climate change.
Mr. Carney pointed out that German energy giants had failed to read government policy on climate change correctly and were caught out by the country’s decision to switch away from fossil fuels and nuclear energy towards renewables. Its two once-mighty companies, E.ON and RWE, both lost value after government policy rendered their business model unviable.
“You do not want another German utility situation where people ignore the change in policy until all value is destroyed,” he said.
The Financial Stability Board, an international body chaired by Mr. Carney that monitors and makes recommendations on the strength of the global financial system, set up a taskforce on this subject. On Thursday, it outlined proposals to better understand the financial risk of climate change.
“The transparency will help investors understand how climate change affects the performance of a company,” Mr. Carney said in an interview with Handelsblatt and Spanish economic paper, Expansión.
He called global warming a “tragedy waiting on the horizon” that could disrupt the financial market on a large scale should investors not prepare themselves early on.
“By the time it really matters it’s too late to do anything about it.” he said.
AP7, Sweden's largest pension fund, has already said it will pull out of climate polluters such as US oil giant, Exxon-Mobil, or Russia's Gazprom
Climate change will be one of the major topics at next week’s G20 summit in Hamburg. Despite US President Donald Trump’s insistence that his country would withdraw from the Paris climate accord, American companies, states and city governments have vowed to continue their push to reduce carbon emissions.
The task force calls on companies to provide detailed information on the impact of climate change policies on their bottom line, for example, by detailing how tougher carbon emissions restrictions influence profits.
“The financial stability risk is when climate policy is tightened quicker, made more rapidly, and the industry is unprepared, that’s the risk. And that’s why you want people disclosing early and thinking about it” he said.
More than 100 companies, including German insurer Allianz, natural resource producers Shell and Glencore, as well as banks like Morgan Stanley and Citigroup have said they want to comply with the proposed guidelines. The companies have a combined market cap of $3.5 trillion, and the financial institutions are responsible for about $25 trillion in assets.
The markets are already reacting. AP7, Sweden’s largest pension fund, has already said it will pull out of climate polluters such as US oil giant, Exxon-Mobil, or Russian gas producer, Gazprom.
Mr. Carney pointed out that pension funds will play a significant role in making companies respond to climate change and all sides would benefit from more information on the costs and impacts of climate change on a company’s bottom line.
“You need the right recommendations around disclosure. That’s the first step. Then you need some proof that this is right which means wider spread adoption of these recommendations. That’s the next big step. And within the group of people looking at this are some of the world’s major pension funds,” he said.
“[Financial markets] react to the climate policies which are in place, or what they anticipate will come, and they will reward people and companies which manage these risks well,” he said.
Katharina Slodczyk is Handelsblatt’s London correspondent. email@example.com