Climate change tragedy on horizon
Ex-Bank of Canada governor speaks about environment’s impact on the insurance industry
If there were any doubts that climate change is an economic issue that puts global financial stability at risk, then Bank of England Governor Mark Carney has put them to rest.
In a sobering speech Tuesday to insurers at a Lloyd’s of London event, Carney, a former governor to the Bank of Canada, spoke at length about the impact of climate change on the insurance industry — from “physical risks” such as damage to property due to increased flooding and rising storm intensity, to “transition risks” that could strip billions of dollars of value from assets and disrupt global markets.
“The challenges currently posed by climate change pale in significance compared with what might come,” warned Carney.
Referring to what he described as the “tragedy of the horizon,” he acknowledged how difficult it is for businesses, politicians and technocrats to take the long view. Three years to a decade is the typical cycle of thinking in those worlds. But managing climate risks requires planning well beyond that horizon, he said. “In other words, once climate change becomes a defining issue for financial stability, it may already be too late.”
Brian DePratto, an economist at TD Bank who worked at the Bank of Canada when it was led by Carney, called it “wonderful” that a person of such high stature is raising awareness of such an important issue. “This is something happening and it needs to be dealt with,” said DePratto, adding that it’s inevitable that such considerations will become commonplace in the financial world.
Environmental economist Dave Sawyer said Canadians are just starting to come to grips with the physical risks — to property and human life — that will increasingly result from climate change.
“Fundamentally, what Carney is saying is that climate change is not an environmental issue. It’s an economic issue, and more than that, it’s a long-term economic issue. And we just don’t think this way in Canada, we’re too focused on the short term,” Sawyer said.
The Bank of Canada would not comment on the contents of Carney’s speech, but did point to an April 2015 meeting of G20 finance ministers and central bank governors.
At that meeting, the international Financial Stability Board — which is chaired by Carney — was asked to review how the financial sector should account for climate-relates issues.
Unlike Carney, Bank of Canada Governor Stephen Poloz has not spoken out about the risks that climate change poses to the financial system, nor has the issue been a topic of discussion during the federal leadership campaign.
One topic Carney raised that is directly relevant to Canada is the suggestion by the Intergovernmental Panel on Climate Change that only one-fifth to one-third of the world’s proven oil, gas and coal reserves can be burned if the worst effects of climate change are to be avoided.
“If that estimate is even approximately correct it would render the vast majority of reserves ‘stranded’ — oil, gas and coal that will be literally unburnable without expensive carbon capture technology, which itself alters fossil fuel economics,” said Carney.
While preaching long-term thinking to the insurance industry, Carney also warned about having a knee-jerk reaction — a sudden and wholesale shift in behaviour that could destabilize markets and lead to a persistent tightening of financial conditions.
“The more we invest with foresight, the less we will regret in hindsight.” This article is part of a series produced in partnership by the Toronto Star and Tides Canada to address a range of pressing climate issues in Canada leading up to the United Nations Climate Change Conference in Paris, December 2015. Tides Canada is supporting this partnership to increase public awareness and dialogue around the impacts of climate change on Canada’s economy and communities. The Toronto Star has full editorial control and responsibility to ensure stories are rigorously edited in order to meet its editorial standards.