Former Bank of Canada Governor Mark Carney provoked a strong reaction the other day, warning an audience composed of “the bedrock of the UK insurance industry” of the imminent danger presented by climate change to the stability of the financial sector, in a speech entitled “Breaking the Tragedy of the Horizon: Climate Change and the Financial Sector” delivered at Lloyd’s of London.
Pointing to the increased payouts by the insurance industry related to climate-driven events from an annual average $10 billion in the 1980s to $50 billion during the past decade, Carney suggests that the future looks to bring greater losses and then asks, “So why isn’t more being done to address it?”
In a room full of financial influencers, Carney staked out an assertive stance for what the financial sector’s response to the challenge poised by climate change must be.
“The more we invest with foresight; the less we will regret in hindsight,” he says.
With the climate change conference slated to be attended by representatives from 196 countries in Paris this December, Carney’s comments are not only timely, but also suggest a tumbling of resistance from sectors of society historically immune or openly hostile to even considering the reality of climate change.
In the remarkable speech, Carney told his audience that action now on climate change is not only some sort of altruistic PR exercise or feel-good activity, but an existential threat that ought to hit investors and insurance companies directly where it will do them the most harm: to their own self-interest.
“A wholesale reassessment of prospects, especially if it were to occur suddenly, could potentially destabilise markets, spark a pro-cyclical crystallisation of losses and a persistent tightening of financial conditions,” he says. “In other words, an abrupt resolution of the tragedy of horizons is in itself a financial stability risk.”
Noting the lag time between taking a decision and eventual action in either the financial sector or the insurance industry, which Carney pegs as two to three years for setting monetary policy, he asserts, “once climate change becomes a defining issue for financial stability, it may already be too late.”
“The combination of the weight of scientific evidence and the dynamics of the financial system suggest that, in the fullness of time, climate change will threaten financial resilience and longer-term prosperity,” he says, suggesting basically that climate change represents an end to the comfortable lives we’ve all grown accustomed to in developed liberal democracies.