Climate crisis is scaring central banks into action
Carney’s 2015 warning to investors is finally sinking in
Bank of England governor Mark Carney was in no mood for laughter as he stood in his tuxedo before the great and good of the British insurance industry.
“I’m going to give you a speech without a joke, I’m afraid,” Carney began his remarks on the night of Sept. 29, 2015, at Lloyd’s of London. “So charge your glasses and prepare yourself because I’m going to talk about a serious subject.”
Not Brexit, which Britons were still nine months from voting for. Instead, Carney put investors and insurers on notice that they risked underestimating the “huge” threat climate change posed to global financial stability. He described a “tragedy of the horizon” where such dangers aren’t within the normal field of view of businesses, politicians and technocrats.
It was a warning shot that took time to echo in policy-making corridors. But what Carney did was start conversations at the highest levels of financial services about global warming, as almost every major central bank began a dialogue with the institutions they work with.
“Carney’s Lloyd’s speech was a landmark,” said Nick Stern, a former U.K. government adviser and now chair of the Grantham Research Institute on Climate Change and the Environment. “Every cause needs leaders. Now it’s become much more the core and midstream of discussions. It’s become more of a stability story.”
Most major central banks — with the exception of the U.S. Federal Reserve — are joining forces to promote sustainable growth after realizing that climate change threatens economic output and could even sow the seeds of a financial crisis. In March, the Bank of Canada for the first time listed climate change as an important vulnerability to the country’s economy, alongside worries over household debt and the housing market.
One danger evident in Europe is the disruption to supply routes caused by higher temperatures, with the recent drying of the Rhine River creating transport bottlenecks. Then there’s the risk of economic shocks caused by effects of extreme weather, whether in the direct damage they cause or their impacts on production.
Climate change also threatens increased migration prompted by rising seal levels, droughts and land degradation — a phenomenon that JPMorgan Chase & Co warns could lead to “brain drain” and hurt developing economies.
Mortgages for homes built on flood-prone lands, or bonds for companies reliant on fossilfuel-intensive business, could pose a threat if their riskiness isn’t quantified and mitigated.
Contemplating such dangers, Carney has warned of a “Minksy moment,” in which a climate-related alarm could cause asset prices to collapse. Bank of France governor François Villeroy de Galhau said this month that global warming could hit growth and lead to upward price pressures, generating a “stagflationary shock.”
For those reasons, the Bank of England wants to test financial institutions’ resilience to climate-related risks in 2021. It’s working to integrate global warming scenarios with macroeconomic and financial system models.
“We absolutely recognize that this is groundbreaking stuff, and it’s hard,” said Sarah Breeden, the Bank official in charge of the project, speaking in an interview on a day of recordbreaking summer heat in London.
Breeden is liaising with institutions on test scenarios, which include a continuation of the world’s current pathway of carbon emissions, where physical risk is high as the planet gets hotter. Then there’s the transitioning of economies to carbonneutral models. The warning from central bankers is to do it in an early and orderly way, rather than a late and disruptive one with more economic damage.