Picking up on a warning delivered last fall by Bank of England Governor Mark Carney that investment markets had yet to account for how severely “climate change will threaten financial resilience and longer-term prosperity,” two of Britain’s leading economists have laid out what that accountability should look like.
In a submission to the Task Force on Climate-related Financial Disclosures (TCFD), struck by a network of central bankers in the wake of Carney’s remarks, Nicholas Stern and Dimitri Zenghelis, respectively Chair and co-head of climate policy at the Grantham Research Institute on Climate Change and the Environment at the London School of Economics, call for securities disclosures that clearly “articulate and unbundle material risks” to investors’ assets arising from climate change.
“Actual or expected changes in policy, technology, and physical risks, as well as the threat of litigation, could prompt a rapid reassessment of the value of a large range of assets,” Stern and Zenghelis write, “as changing costs and opportunities become apparent.” At the same time, unexpectedly fast take-up of new technologies can produce very sudden “tipping dynamics” in commercial markets.
“The point here is [that] change could be rapid. Investors will rightly demand that firms have made appropriate contingency plans for such potential rapid changes, even if such changes remain one scenario among many.”
Securities regulations, they say, should “ensure businesses provide an answer to the question: ‘What strategy is in place to transition business models to ones that remain valuable if ambitious climate policies are imposed, or if disruptive climate impacts apply?’”
The two leading students of the economics of climate change also make a grim aside. Some researchers, they note, have concluded that in order to meet the internationally-agreed target of limiting warming to 2ºC, “no new emitting electricity infrastructure can be built after 2017, unless other electricity infrastructure is retired early or retrofitted with carbon capture technologies.”
That analysis “highlights the gap between what politicians have signed up to in Paris and what markets and fossil fuel companies are assuming,” they write. “This gap should alarm policy-makers and central bankers: it suggests either asymmetric information or a lack of credibility in policies.”