Introduction to Climate Change and Finance
A decade ago, Mark Carney, the governor of the Bank of England at the time, delivered a seminal speech that highlighted the economic risks associated with climate change. He emphasized that climate change poses a significant threat to the stability of the financial system. Carney’s speech marked a turning point in the global conversation about climate change and its implications for the finance sector.
The Tragedy of the Horizon
Carney’s speech introduced the concept of the "tragedy of the horizon," which refers to the fact that the catastrophic impacts of climate change will be felt beyond the traditional horizons of most actors, imposing a cost on future generations that the current generation has no direct incentive to fix. He argued that by the time climate impacts become a defining issue for financial stability, it may already be too late. Carney’s solution to this tragedy lay in better information, particularly in companies reporting consistently on their climate change impacts, so that banks and lenders could more clearly assess and manage these risks.
Global Response to Climate Change
In response to Carney’s speech, global financial markets began to account for risks related to climate change. Governments rolled out strategies to support this evolution in finance, including the European Union, the United Kingdom, and Australia’s Sustainable Finance Strategy in 2023. A global taskforce was established to set out standards for companies to disclose their impacts on the climate. These standards have been rolled out around the world, with the most recent implementation in Australia.
The Growth of Green Finance
The global green bond market has grown exponentially since 2015, becoming a critical market for raising capital for projects that improve the environment. However, despite some positive examples, the tragedy of the horizon remains. The Network for Greening the Financial System concluded that climate change is no longer a tragedy of the horizon but an imminent danger, with the potential to cost the EU economy up to 5% of gross domestic product by 2030.
The Funding Gap
A report found that climate finance reached $1.9 trillion in 2023, but this was far short of the estimated $7 trillion required annually to achieve Paris Agreement goals. The economic cost of protecting nature has been estimated at $700 billion per year, compared to only $100 billion currently being spent. The finance sector is falling short of delivering the level of capital needed to meet critical sustainability goals and continues to cause harm by providing capital to industries that damage nature.
Dealing with Symptoms, Not the Cause
Despite nearly a decade of action in sustainable finance, policy remedies have merely subdued the symptoms but have not overcome the core of the problem. The policy solutions put forward have been insufficient to deal with the scale of change required in finance. While sustainable finance has grown, plenty of money is still being made from unsustainable finance that continues to benefit from policies and a lack of pricing for negative environmental impacts.
Evolving the Tools of Finance
To rectify the tragedy of the horizon, the tools of finance need to evolve. This includes changing the way assets are valued and performance is measured, ignoring negative impacts. Currently, investors focus disproportionately on short-term performance rather than long-term sustainability. Big sustainability challenges require a systems-level approach, and capital is not flowing to sectors critical to achieving net-zero and a nature-positive economy.
Critical Sectors
Critical sectors that require investment include nature protection, emerging markets, climate adaptation, health systems, and Indigenous-led enterprises. "Invisible" sectors in the economy, such as state-owned enterprises and unlisted private companies, continue to emit greenhouse gases without investor scrutiny and are essential to decarbonize.
Conclusion
In conclusion, Mark Carney’s speech helped recognize that our biggest sustainability challenges are also our biggest economic challenges. Despite a decade of momentum for sustainable finance, the tragedy of the horizon looms large. New approaches to finance are required to ensure our future is protected. The finance sector must evolve to address the scale of change required to meet critical sustainability goals and prevent the catastrophic impacts of climate change.
