Climate change and financial stability
By George Harvey
Steven Strong sent us a note on a lecture given in London in September. Our readers may remember mention of Steven Strong in several of our articles, and the fact that he was the one who engineered the efficiency and renewable power at the Bullitt Building, the first building to meet the Living Building Challenge.
The lecture is well worth a review, even if we are a little bit tardy with it. Strong’s had this to say of it.
With his talk on “The Tragedy of the Horizon,” Mark Carney, the Governor of the Bank of England (equivalent to the US Federal Reserve) is addressing the world insurance and financial community via an “A-List Event” at Lloyd’s of London and lecturing them about the reality of climate change and the urgency to address this global threat in the immediate term before it is too late. Incredible!
Many people who have heard of Lloyd’s think it is an insurance company. That is close, but not really correct. Lloyd’s is an insurance market made up of many members, both individuals and corporations. It is a huge organization, contributing 300,000 jobs to the United Kingdom’s economy and ₤25 billion to its gross domestic product. The industry it guides manages about ₤2 trillion in assets.
Mark Carney’s lecture was notable from several points of view. One of them is the tone of the lecture. He did not bother trying to persuade anyone that climate change was real and important. He was clearly speaking to a group of people who did not need to be convinced.
In recent years Lloyd’s has had to pay ever-increasing claims, and it has researched the nature of the changes that have made its profits increasingly vulnerable. The audience was made up mostly of people who understood well that most important of these is disruption of the normal climate. Climate change is costing them billions of dollars each year, and the amount is increasing. Those people in the audience who were not part of Lloyd’s, and might have been unaware of this, only had to turn to the people at their elbows to understand the importance of the problem.
The word “horizon” was important to the lecture. It has to do with how far into the future we look to see what conditions are coming up, typically two to ten years, depending on purpose. Of this, Carney said:
We don’t need an army of actuaries to tell us that the catastrophic impacts of climate change will be felt beyond the traditional horizons of most actors – imposing a cost on future generations that the current generation has no direct incentive to fix.
He also commented on the tragedy of what will come about if we do nothing within the horizons we typically use for economic planning:
[Once] climate change becomes a defining issue for financial stability, it may already be too late.
He points out that about 19% of the companies in the country are at risk because of their intimacy with fossil fuels. He also points out that the switch to green business provides enormous opportunities for investment. Say’s Law, a well-known dictum of economics, says that supply creates demand. In real-world example, the supply of photovoltaic panels is one of the things that enable their own demand. This means demand is increased beyond the value of incentives, and that is an opportunity.
Carney quoted an old adage, “That which is measured can be managed.” He uses this to introduce an appeal for better information and clarity, and this is a central issue he advocates. He says that every company should make public its climate-change footprint. Every company should not only disclose its current effects on the climate, but how it plans to deal with those effects, ultimately reducing them to zero.
Carney concluded with this observation:
With better information as a foundation, we can build a virtuous circle of better understanding of tomorrow’s risks, better pricing for investors, better decisions by policymakers, and a smoother transition to a lower-carbon economy.
By managing what gets measured, we can break the Tragedy of the Horizon.
While we found the lecture entirely credible, we also found it precisely as Steven Strong said we would, “Incredible!”
“Breaking the Tragedy of the Horizon” can be found at http://bit.ly/breaking-the-tragedy.