Mark Carney: Now is not the time for half measures

Mark Carney, UK Prime Minister’s Finance Advisor and UN Special Envoy for Climate Action and Finance, spoke at the Venice International Climate Conference on July 11. His speech gave an update on the work of the Glasgow Financial Alliance for Net Zero (GFANZ). Of particular note was the launch of a workstream focused on the role GFANZ members can play by stepping up their commitment to work with governments to mobilize private capital for critical climate solutions. By Climate Champions | July 14, 2021

Governor Visco and Minister Franco thank you for the Italian G20 Presidency’s drive to create a more sustainable global financial system, and for bringing us to Venice for inspiration.

The first inhabitants of Venice sought shelter in its marshes from waves of invading powers as the Roman empire crumbled.  From these humble beginnings, Venetians built the foundations of a commercial power that would conquer the world through trade.

Venice, and the whole world, is again under siege: from rising sea levels, from extreme weather, from climate change.  These waves will not stop unless we build the right foundations and look outwards to transform our world.

The Italian Presidency is helping to cement the enormous progress in recent years, laying the foundations of a system in which every financial decision takes climate change into account.

Climate-related financial reporting is fundamental because what gets measured gets managed. Five and a half years ago in Paris, the TCFD was a concept. Only three years ago in Hamburg, the final TCFD recommendations were delivered to G20 leaders. Today, virtually the entire financial sector demands TCFD disclosures and over 2000 major companies around the world are responding.

Despite these advances, coverage is still limited, and reporting still incomplete, particularly of critical forward-looking metrics. The private sector has taken disclosure about as far as it can on its own. Now it is the time for the G20 to finish the job by making TCFD disclosures mandatory.

Yesterday, the G20 adopted the FSB’s roadmap with TCFD disclosure at its heart and signalled its support for the IFRS Foundation’s intention to establish a new International Sustainability Standards Board (ISSB) to produce a climate disclosure standard, based on the TCFD, by the middle of next year.

Better disclosure and a heightened sense of urgency is leading to a transformation of climate risk management. This began with central banks and supervisors at the NGFS, which has, in just a few years, grown from its eight founding members to over 90 authorities in countries responsible for more than 80% of the world’s emissions and all the world’s Globally Systemically Important Financial Institutions.

Central banks in countries with 50% of global emissions are beginning to conduct climate stress tests. And today the BIS, NGFS, IAIS and Sustainable Insurance Forum are launching the Climate Training Alliance to build risk management capacity in financial authorities.

For COP26, our priorities are to secure mandatory climate disclosure, to embed supervisory expectations for more effective climate risk management, to mainstream the use of NGFS scenarios, and to ramp up climate stress testing.

Commitment, alignment, engagement

Building on the foundations of reporting and risk management, the financial system can look outwards, tackling climate change through commitments; alignment; and engagement.

Commitments begin with Net Zero objectives of countries. These have risen from 30% of emissions when the UK and Italy assumed the COP Presidency to over 70% today. These commitments are cascading down to company Net Zero plans.

We are building commitment to a whole economy transition because we know we won’t get to net zero in a niche. Rather, virtually every company in every sector needs to transform its business model, requiring investments of over $100 trillion in the next three decades.

The Glasgow Financial Alliance for Net Zero (GFANZ) was created to meet those needs. Bringing together over 250 financial institutions responsible for over $80 trillion of assets and anchored in the COP’s Race to Zero, GFANZ is the gold standard for financial sector commitments to sustainability.

By joining GFANZ, financial institutions commit to manage their investments, lending and insurance underwriting to net zero by 2050. They will set interim targets across their scope 1, 2 and 3 emissions, embed board accountability, and report their progress annually.

We will deepen and broaden GFANZ membership in the  run up to COP26. We’ve added $10 trillion of assets in just two months. Major insurers and reinsurers are working on an alliance to align their underwriting with net zero (you will hear more from Generali’s Phillipe Donnet on this later today).

As you’ve heard, we are forming an alliance of market infrastructure providers—including index providers, credit rating agencies, and stock exchanges—who will align their products and services with the financing of net zero.

By Glasgow, all major financial firms, including private equity firms and sovereign wealth funds, should decide whether they too will be part of the solution to climate change or risk facilitating the type of climate arbitrage referred to by Larry Fink that slows global progress. A new GFANZ working group will address this issue including how to defease stranded assets.

GFANZ is a big tent, but it will be the only tent in Glasgow. While there are many well-intentioned initiatives, now is not the time for half measures.

GFANZ starts with commitments, but its real purpose is climate action through alignment and engagement.

Alignment means defining best practice net zero plans for companies and financial institutions.

To these ends, GFANZ will leverage existing work on net zero plans by member alliances and initiatives such as Partnership for Carbon Accounting Framework. And it will build on sector – and country-specific science-based pathways from organisations such as the Transition Pathway Initiative and Science Based Target Initiative.

Alignment also means robust assessments of the portfolios of financial institutions relative to net zero pathways. GFANZ members are focused on financing a whole economy transition. This requires much more than financing deep green activities or blacklisting dark brown ones. We need fifty shades of green to catalyse and support all companies that are committed to moving towards net zero.

Central banks, notably the ECB and the Bank of England, are setting the tone as they examine how to revise their collateral frameworks and monetary policy operations to be more consistent with the legislated climate objectives and policies in their jurisdictions.

Options range from setting targets for emissions to eligibility assessments based on whether companies have net zero transition plans, and tilting portfolios to issuers performing strongly on climate change, based on a scorecard of past efforts to decarbonise, current emissions intensity and forward-looking metrics.

In a similar vein for the private sector, the TCFD has undertaken an extensive review of methodologies to assess Portfolio Alignment including benchmark divergence and implied temperature rise. A dedicated GFANZ working group will take up this critical work, which will provide an essential complement to binary taxonomies that serve more narrow objectives.

The combination of forward-looking climate disclosure, a net zero plans and portfolio alignment will pull forward investment, especially if there are credible and predictable climate policies (like a carbon tax) as outlined in the G30 paper that Janet Yellen, Phillip Hildebrand and I published last year.

This brings me to engagement

While estimates vary, most suggest that the world needs an additional $1.5-2.5 trillion of investment annually for the next three decades to transform our economies.  [The IEA estimates that] three quarters of this investment must flow to emerging and developing economies, with over 70% of these flows privately financed.

We are currently far off the mark.  In recent years only a  quarter of total clean energy investment, and less than a sixth of sustainable debt issuance in 2020 was in emerging and developing economies.  We must turn billions of public capital into trillions of private capital by scaling blended finance, catalysing standalone private capital flows and building new markets.

MDBs are uniquely placed to de-risk projects and mobilize private finance, but thus far the results have been modest with only $10.8bn mobilized in 2018, just 14% of total climate finance provided from advanced to developing economies.

These orders of magnitude must change.

A rule of thumb for climate finance is to concentrate on initiatives that have the prospect of catalysing at least $50-100 bn per year in investment to EMDEs for decades. Actual investments will, of course, depend on the specific projects and the overall investment environment within the recipient countries, including the credibility of NDCs, but these conditions are more likely to develop if the sufficient financing capacity is in place.

To orchestrate a step change in financing capacity requires three initiatives:

  1. Private Commitments. A GFANZ working group, led by Shemera Wikramanayake, will build on initiatives including Fast Infra, the GISD, and CFLI to secure commitments of significant private financing capacity for projects to advance the net zero transition in emerging and developing economies. Financing will be both bank and market-based.
  2. Public facilities. MDBs should identify and be prepared to dramatically scale up blended finance vehicles, instruments and facilities that support significant mobilization of private capital.  Potential candidates include the IFC’s Managed Co-Lending Portfolio Program and the AFD’s Room2Run Synthetic Securitisation Program, as well as platforms like the Global Infrastructure Facility.
  3. Country platforms. The public and private sector are coming together through initiatives such as GISD and CFLI to build country platforms which will help address specific needs (such as coal phase out in South Africa or steel decarbonisation in India) and broader challenges (such as dispute resolution mechanisms or subsidies).  With private finance focused on achieving Net Zero, country platforms must integrate Paris-aligned NDCs to attract capital at scale. Projects that are consistent with long term country strategies that are certified as Paris aligned are more likely to attract private capital and less likely to be subject to project risks, including changes in regulation.

When these initiatives gain traction significant additional capacity and capital will be required for MDBs. Make no mistake: a radical re-think of the international development architecture is required.

One example is the need to build a high integrity market for carbon offsets.

The conditions for this market are coming into place.  Over 1,600 companies have committed to set science-based targets. To achieve them companies will need an appropriate mix of emissions reductions and credible carbon offsets, including nature‐based solutions such as reforestation and the switch to greener power in developing countries.

To be clear: companies’ responsibility is first and foremost to reduce absolute emissions. But where they cannot [because of technological constraints] they should use offsets.  Indeed, to keep the total stock of carbon emissions in the atmosphere below a critical threshold, to limit global warming to 1.5°C, our aspiration is that companies not only aim for “net-zero” as an endpoint. On top of absolute decarbonisation of their operations and value chains in line with scientific consensus, companies should also compensate and neutralize their residual emissions “on the path to net-zero”.

At present, the market for carbon offsets is fragmented and of uneven quality and worth about $1 billion.  This market could be grow to over $150 billion per year and facilitate major cross border capital flows, as most of the companies making net zero commitments are in advanced economies, and the vast majority of high emission reduction projects will be in emerging and developing economies. It has the potential to create significant co-benefits for biodiversity and other SDGs.  And could play an important role in helping to finance the retirement of stranded assets and the avoidance of new coal generation.

A private sector taskforce, comprised of 250 organisations led by Bill Winters and Annette Nazereth, just published their final recommendations on how to develop and rapidly scale a professional, global carbon offset market with the highest standards of integrity, transparency and credibility.

Moving from blueprint to build is the next step. Two of the world’s largest financial centres — London and Singapore —are already stepping up to implement the recommendations. I would recommend that countries and companies engage with this essential market to maximise our very limited carbon budget.

From its troubled beginnings, Venice grew to become a city of unimaginable wealth and beauty, whose splendour continues to inspire the world.

Let’s build on the inspiration of the past few days. On the foundations of the new sustainable financial system we must commit to net zero, align financial flows with those companies and projects in all economies that will advance its attainment, and engage in new ways and in new markets to deliver the trillions of capital.


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