60 minutes with Mark Carney
A discussion between Mark Carney, former Governor of Bank of England and the Prime Minister’s Financial Adviser for Cop26, and Rosa Sangiorgio, Head of ESG at Pictet Wealth Management
Responsibility is one of our five guiding principles at Pictet. Our mission has always been to partner with our clients in sustaining and building wealth over multiple generations. This clearly includes the preservation and improvement of the world that the next generation will inherit.
Rosa Sangiorgio (RS): Your career has followed an unconventional path, starting with Goldman Sachs then the central banks of Canada and England and now impact investing. Could you tell us how each step has influenced the next in that path?
Mark Carney (MC): Throughout my time at Goldman in the late 80s through the early 2000s, I worked across a range of financial-sector divisions, including experience with the energy sector, establishing a foundation of fundamental financial analysis. At that time, the climate transition concept wasn’t yet a consideration, even for long-term projects with 30+ year time horizons.
By the time I became governor of the Bank of England (BoE), the landscape had sharpened. Because of the BoE’s regulatory role over the UK insurance industry, I was exposed to not only the scale of physical climate risk, but also the speed at which these events were accelerating.
As chair of the Financial Stability Board, I had the mandate of identifying the financial implications of climate change. The response we delivered to the G20 was to focus on transition risk and specifically, the issue of the inadequate disclosure of climate-related risk. Institutions like Pictet helped to write that, endorsing the Task Force on Climate-Related Disclosures (TCFD) and making it a gold standard. One of the goals of the next UN Climate Change Conference (COP26) is to globalise this.
RS: In your book Values, you suggest that the three most significant crises of our century (the financial crisis of 2008, the COVID-19 pandemic and climate change) were driven by a common crises of values. Can you elaborate on this? And is it possible to re-build the relationship between value and values for (what you call) a better future for all?
MC: I started my tenure at the BoE in crisis and ended in crisis: the 2008 financial crisis and COVID-19 (with Brexit and euro crises in between). Ahead of the former, there was an over-reliance on short-term value creation and market value, while ignoring the broader social context. We had put these types of value ahead of principles and ethics. Since then, society has reinforced its emphasis on valuing certain outcomes over others. Regarding the climate, we needed to break out of the tragedy of the commons cycle of free riding, ignoring externalities and putting off until tomorrow the issues we need to take to address climate change, even when it is costly to act early. Recently, value is being placed on sustainability and the market is channeled to support delivery of that. Today’s biggest opportunities are now consistent with building sustainably, lowering our footprint, decarbonising. Values are now aligning with responsibility.
RS: You mentioned the tragedy of the commons, what do you think about cost-sharing in society, especially when it comes to the more difficult sectors to decarbonise?
MC: We can take lessons from the voters – from the recent Swiss referendum on CO2 to the gilets jaunes, it is important to think through to the “retail implications” of various climate policies and the sequencing of these that minimise the costs and maximise the benefits.
The shift of the power sector has been phenomenal. Today the most cost effective new generating capacity in nearly every jurisdiction is renewable power and associated grid. These investments are capital and labour intensive, so they have a good GDP multiplier effect.
Another approach is to provide greater longer term policy certainty, i.e. where regulation and carbon prices are going toward the end of the decade. If this can be done convincingly, the market will pull forward the adjustment, make the investments today to be competitive tomorrow.
RS: Talking about credibility in policies, the COP has taken place every year since 1995, and is the key forum for global discussion on the climate crisis. Will COP26 later this year be the summit that addresses what has and hasn’t been achieved since the Paris Agreement in 2015?
MC: This is the key question. One goal is to set sub 2 degree targets, with 1.5 degrees kept within reach. A year ago 30% of global emissions were covered by net-zero objectives; today it’s 70%. We need to do more for adaptation, especially for developing economies. We also need to finish some elements of Paris, including Article 6, which governs carbon markets, which will add to the momentum in addition to being important in and of themselves.
Critically, what countries are doing will reveal areas where investors can benefit. Because of its architecture, net zero has cascaded down from the country to the company level and has thereby become an opportunity to differentiate between who will be part of solution and who will be exposed to risk.
RS: To reach the Paris commitments, we need to achieve a -8% reduction per year. In 2020, when COVID-19 brought activity around the world to a standstill, global emissions only fell by 6-7%. Is 8% year-on-year achievable?
MC: COVID-19 amplified the valued placed by society on sustainability and the need for financial institutions and investors to take part in supporting this. But it also revealed how difficult it is going to be. We clearly cannot replicate the locked down lifestyles of the last year as a solution to achieving net zero emissions. The corollary of this is the urgent need to invest in technology to reduce emissions. The scale of renewable power is enormous and we need to throw our weight behind this. We are not going to shrink ourselves to net zero, but rather, need to re-engineer how our economy operates to deliver the goods and services in demand with a much lower footprint.
RS: We are seeing central banks address climate change in different ways. What role do you see for central banks in fighting climate change?
MC: The role of central banks naturally started with risk, ensuring that adequate information was available to assess climate-related risk (TCFD) and that institutions were actively managing the climate risks they face, both physical risks (real estate, supply chain) and transition risks (industries becoming less competitive, stranded assets).
We can't have success bringing failures: central banks cannot get themselves into trouble if society actually achieves what it wants. The essentials tools for this are climate stress tests and climate supervision that is layered on top of that.
The third element for some central banks (BoE and ECB) is to consider monetary policy operations – what types of corporate securities to buy and when lending against collateral, what types of collateral to accept and at what prices.
RS: How can the public and private sectors complement each other in this effort? What role does each have to play?
MC: Financial regulation and consistency of information are two elements the public sector must provide so that the private sector can do its job. A key focus of our work between now and COP26 is to establish much better information sets and tools for markets to use. The second, aligned with the above, is providing credible and predictable climate policy to draw private investment.
The public sector can spur demand for certain tech and support primary R&D in areas like hydrogen. Greater demand certainty for hydrogen blends and support for spurring product development together could drive down the cost economics of blue (natural gas) and green (renewable) hydrogen. This, with the added benefit of building the capital equipment necessary for establishing a hydrogen economy.
A last point regarding the opportunity set is around the 60% emissions in advanced economies that can be economically reduced due to existing, cost-competitive technology that will do the job and be profitable, even as stranding some assets. Others, like hydrogen, are close, but not yet there, and this is where the public sector comes in. There is a range of breakthrough tech that require a combination of venture capital funding and primary investment in general purpose tech from governments. Depending on investor risk appetite, capital can flow in to scale to opportunities.
RS: Which are the sectors and activities better positioned to profit from the opportunity presented by the climate transition?
MC: It's everything. The climate crisis presents both an exciting and daunting proposition. In order to get to where we need to be, a rewiring of the economy we haven't seen since the internet must happen everywhere. There is a huge range of opportunity around energy, even in using technology to optimise energy as we use it today. But then there is the greater circular economy and lifestyle shifts: eating plant protein, the nature of work. There is an optimisation opportunity here as well. The opportunity is very broad and depends on risk appetite.
In reality, we will need some breakthrough technology like direct air carbon capture to achieve net-zero targets. So far, very little has been invested in carbon storage vis-à-vis wind and solar development. As investors become aware of such nascent opportunities, they are identifying where outsized returns opportunities lie in entire emerging sectors that will be essential to realising both social and financial value in our portfolios.