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Harnessing the power of finance for a sustainable future
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The global economy is vulnerable to the forces of nature. If that notion was ever in doubt, the COVID-19 pandemic has proved otherwise. Speaking as part of the Barclays Asia Forum virtual event series, Mark Carney, UN Special Envoy for Climate Action & Finance, Prime Minister's Finance Adviser for COP26 and former Governor of both the Bank of Canada and the Bank of England, says finance has a vital role to play in addressing the ongoing climate crisis. In this “3 Point Perspective” he explains some of the necessary elements.

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A new Bretton Woods

Just like the Bretton Woods Agreement laid the groundwork governing monetary relations among independent states after WWII, Mark Carney argues that now is the time to lay the groundwork for a more sustainable financial system to address the climate crisis whilst also, positioning the global economy for sustainable growth.

This new “Bretton Woods” is starting to take shape through a mix of interrelated initiatives. The Network of Central Banks and Supervisors for Greening the Financial System (NGFS) has grown to include over 70 central banks, and the US Fed has announced that it intends to join. Carney points out that, “80 to 85% of global emissions are covered by the regulators that are in the NGFS. That means a much more consistent approach to supervisory expectations and stress testing.”

Then there is COP26, the meeting of signatories to the United Nations Framework Convention on Climate Change (UNFCCC), which asks each nation for concrete commitments to follow the terms of the Paris Agreement, like reducing greenhouse gas emissions and spending on climate finance for poorer countries.

Carney has been instrumental in developing a COP26 private finance hub which aims to, “identify the key areas, point the direction, have high ambition, and then get the best of the private sector to solve the questions.”

Strategy of COP26 Private Finance Hub – a virtuous cycle
Strategy of COP26 Private Finance Hub – a virtuous cycle

Source: Mark Carney, COP26 (PDF, 887KB)

Additionally, the Task Force on Climate-related Financial Disclosure (TCFD) provides clear guidance to companies on what they should monitor and report as part of their required disclosure. This gives investors, lenders, and insurers the visibility needed to make informed decisions that will steer the economy towards better business models.

The UK Chancellor recently announced plans to make TCFD reporting mandatory, which Carney calls, “a major step forward.”

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Restore “missing markets”

It is unrealistic to think market forces can solve the climate crisis on their own. Carney calls climate change a clear market failure. In fact, there are currently “missing markets” that should be contributing more to the solution.

Today the carbon offset market is worth about USD300 million a year1, which isn’t ready for the surge in demand it’s set to experience. He believes it could be in the hundreds of billions a year in the future.

Infrastructure spending is another area that should be increased. Annual global spending should be twice the current levels “for the next three decades, at least,” says Carney.

He also expects to see a series of transformations that he calls, “real economy companies,” including industrial companies, consumer goods companies, and others that will bring themselves into a “Paris aligned, low carbon world.”

1 Ecosystem Marketplace, State of Voluntary Carbon Markets Report 2019

Corporate ESG bonds more diversified. Tech, Auto and REITs see increase.
Corporate ESG bonds more diversified. Tech, Auto and REITs see increase.

Source: Barclays Research.

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A decisive financial sector

The behaviour of the financial sector will be decisive in how well the market can work together with regulators and policymakers. According to Carney, the world needs a financial sector that understands risks and knows how to seize opportunities so that truly transformative projects get the backing they need.

This is one of the reasons why reporting standards like TCFD are so important. The private sector needs to see the financials. It needs accurate information to make effective funding decisions. In addition, the financial sector also needs as much clarity and certainty about regulatory policy and climate policy as possible from governments.

7 Principles for effective disclosure
7 Principles for effective disclosure

If this can be achieved, and if decision makers can follow the strategy of the COP26 private finance hub Carney is optimistic that, “the market will really drive the solution.”

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About Mark Carney

Mark Carney is currently the UN Special Envoy for Climate Action and Finance, and Prime Minister Johnson’s Finance Adviser for COP26.

Mark was previously Governor of the Bank of England (from 2013 to 2020), and Governor of the Bank of Canada (from 2008 to 2013).

Internationally, Mark was Chair of the Financial Stability Board (from 2011 to 2018). He chaired the Global Economy Meeting and Economic Consultative Committee of the Bank for International.

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