{ "title": "We Need a New Financial System to Stop Climate Change", "sourceUrl": "https://www.imf.org/en/publications/fandd/issues/2019/12/a-new-sustainable-financial-system-to-climate-change-carney", "canonical": "https://www.imf.org/en/publications/fandd/issues/2019/12/a-new-sustainable-financial-system-to-climate-change-carney", "overlayPath": "/en/publications/fandd/issues/2019/12/a-new-sustainable-financial-system-to-climate-change-carney/index.md", "summary": "Bank of England Governor Mark Carney explains why the world needs a new, sustainable financial system to stop climate change", "sections": [ { "heading": "Overview", "content": "- Author and role: MARK CARNEY, UN special envoy for climate action and finance.\n- Central thesis: A new, sustainable financial system is required to stop runaway climate change by aligning capital allocation, risk management, and disclosure with the transition to a net-zero world.\n- Framing problem: Climate impacts extend beyond traditional decision horizons (“The Tragedy of the Horizon”), creating misaligned incentives for current financial actors." }, { "heading": "Scale of losses and insurance gap", "content": "- Insured losses in 2018 were $80 billion, double the inflation-adjusted average for the past 30 years.\n- In 2017, insured losses totaled $140 billion and uninsured losses totaled $200 billion.\n- In Bangladesh, Egypt, India, Indonesia, Nigeria, the Philippines, and Vietnam, insurance penetration is less than 1 percent.\n- Lloyd’s of London estimate: a 1 percent rise in insurance penetration can translate into a 13 percent reduction in uninsured losses and a 20 percent lower disaster recovery burden on taxpayers.\n- Macroeconomic benefits from closing insurance gaps include increased investment, higher output (potentially up to 2 percent of GDP), and greater climate resilience." }, { "heading": "Urgency and required investment", "content": "- IPCC 2018 finding cited: only 12 years left to stop runaway climate change.\n- Recent trend: global energy emissions increased 1.7 percent last year.\n- To limit warming to 1.5˚C requires a 45 percent decrease by 2030 and net-zero emissions by 2050.\n- International Energy Agency estimate: a low-carbon transition could require $3.5 trillion in energy sector investment every year for decades—twice the current rate.\n- Under the agency’s scenario requirements by 2050:\n - nearly 95 percent of the electricity supply must be low carbon;\n - 70 percent of new cars must be electric;\n - the carbon dioxide intensity of the building sector must fall 80 percent." }, { "heading": "Reporting (disclosure)", "content": "- Task Force on Climate-related Financial Disclosures (TCFD): established by private sector, catalyzed by the Group of Twenty; described as a comprehensive, practical, and flexible framework for corporate disclosure of climate-related risks and opportunities.\n- Supporters controlling balance sheets totaling $120 trillion now back TCFD-aligned disclosure.\n- Climate-related shareholder resolutions spiked to 90.\n- Investment managers controlling more than 45 percent of global assets under management now back shareholder actions on carbon disclosure.\n- Companies representing over 90 percent of all shareholder advisory services now support the TCFD.\n- Four-fifths of the top 1,100 Group of Twenty companies now disclose climate-related financial risks as some TCFD recommendations advise.\n- Three-quarters of those who use this information have seen an improvement in the quality of climate disclosure.\n- Policy direction: next step is to make disclosure mandatory; the United Kingdom and European Union have already signaled moves in that direction.\n- Short-term priority: over the next two years the disclosure process must ensure TCFD standards are as comparable, as efficient, and as decision-relevant as possible." }, { "heading": "Risk management (supervisory and firm actions)", "content": "- Capital providers (banks, insurers, asset managers) and supervisors must better understand and manage climate-related financial risks.\n- Drivers of reassessment: changes in climate policies, new technologies, and growing physical risks.\n- Bank of England survey: almost three-quarters of banks are starting to treat risks from climate change like other financial risks.\n- Banks are assessing:\n - exposure of mortgage books to flood risk;\n - impact of extreme weather events on sovereign risk;\n - exposure to transition risks (carbon-intensive sectors, consumer loans for diesel vehicles, mortgages for rental properties given new energy efficiency requirements).\n- Bank of England supervisory expectations to be embedded into practice:\n - Governance: embed climate risk consideration into governance frameworks and assign oversight to specific senior managers.\n - Risk management: consider climate change in accordance with board-approved risk appetite.\n - Regular use of scenario analysis: necessary to test strategic resilience.\n - Appropriate disclosure of climate risks: develop and maintain methods to evaluate and disclose these risks.\n- Bank of England initiative: first regulator to stress-test its financial system under various climate pathways, including a catastrophic business-as-usual scenario and the transition to net zero by 2050 consistent with the UK-legislated objective.\n- Approach: integrate climate scenarios with macroeconomic and financial models; develop in consultation with industry and stakeholders, including experts from the Network of Central Banks and Supervisors for Greening the Financial System (a 42-member group representing jurisdictions that account for half of global emissions)." }, { "heading": "New horizon for investment and markets", "content": "- Sustainable investment recognized as opening enormous opportunities (transforming energy, reinventing protein).\n- Estimated $90 trillion in infrastructure investment expected between 2015 and 2030.\n- Green bonds:\n - Offer investors stable, rated, and liquid investments with long duration.\n - Provide issuers access to a $100 trillion pool of long-term private capital managed by global institutional fixed-income investors.\n - Accounted for only 3 percent of global bond issuance in 2018.\n- Role of capital markets: shifting from banks to capital markets can free bank balance sheet capacity for early-stage project financing and infrastructure lending.\n- Sustainable investing beyond exclusion: must catalyze companies shifting from brown to green.\n- Investment strategies:\n - “Tilt” strategies (overweight high ESG stocks) and “momentum” strategies (focus on companies that have improved ESG ratings) have outperformed global benchmarks for close to a decade.\n- Measurement challenge: inconsistent measurement of ESG is a major hurdle.\n- Taxonomy needs:\n - EU green taxonomy and green bond standard are a good start but are binary (dark green or brown only).\n - Aim for a richer taxonomy capturing “50 shades of green.”\n - Eventually asset owners should report the climate pathway of their portfolios." }, { "heading": "Avoiding a “Minsky moment” and policy recommendations", "content": "- Risk: financial disruption if the market does not adjust efficiently to the transition (a climate “Minsky moment”).\n- Role of finance: develop frameworks for markets to adjust efficiently and enable feedback between markets and policymaking.\n- Finance complements and amplifies climate policy but does not substitute for it.\n- Policy frameworks with greatest impact are those that are:\n - Time-consistent (not arbitrarily changed);\n - Transparent (with clear targets, pricing, and costing);\n - Committed (through treaties, nationally determined contributions, domestic legislation, and consensus).\n- Execution path:\n - Countries should turn Paris commitments into legislated objectives and concrete actions to increase market confidence;\n - More prolific reporting, more robust risk assessment, and more widespread return optimization will hasten the transition and help break the Tragedy of the Horizon." }, { "heading": "Key statistics and figures (extract)", "content": "- $80 billion: insured losses in 2018.\n- $140 billion: insured losses in 2017.\n- $200 billion: uninsured losses in 2017.\n- Less than 1 percent: insurance penetration in certain highly exposed countries (Bangladesh, Egypt, India, Indonesia, Nigeria, the Philippines, Vietnam).\n- 1 percent rise in insurance penetration → 13 percent reduction in uninsured losses and 20 percent lower disaster recovery burden (Lloyd’s of London estimate).\n- Potential output gain: potentially up to 2 percent of GDP from closing insurance gaps.\n- 12 years: time left per 2018 IPCC report to stop runaway climate change.\n- 1.7 percent: increase in global energy emissions last year.\n- 45 percent decrease by 2030 and net-zero emissions by 2050: requirements to limit warming to 1.5˚C.\n- $3.5 trillion per year: estimated energy sector investment required for a low-carbon transition every year for decades.\n- nearly 95 percent: share of electricity supply that must be low carbon by 2050 under IEA scenario.\n- 70 percent: share of new cars that must be electric by 2050 under IEA scenario.\n- 80 percent: required fall in carbon dioxide intensity of the building sector by 2050 under IEA scenario.\n- $90 trillion: estimated infrastructure investment expected between 2015 and 2030.\n- $100 trillion: pool of long-term private capital managed by global institutional fixed-income investors.\n- 3 percent: green bonds’ share of global bond issuance in 2018.\n- $120 trillion: balance sheets controlled by current supporters of TCFD disclosure.\n- 90: number of climate-related shareholder resolutions (spiked figure).\n- more than 45 percent: share of global assets under management controlled by investment managers backing shareholder actions on carbon disclosure.\n- over 90 percent: share of companies representing shareholder advisory services supporting the TCFD.\n- Four-fifths: proportion of top 1,100 Group of Twenty companies disclosing climate-related financial risks per some TCFD recommendations.\n- Three-quarters: proportion of TCFD information users who have seen improved quality of climate disclosure.\n- almost three-quarters: proportion of banks starting to treat climate risks like other financial risks.\n- 42-member group: Network of Central Banks and Supervisors for Greening the Financial System membership, representing jurisdictions that account for half of global emissions.\n\nWe Need a New Financial System to Stop Climate Change – IMF F&D | DECEMBER 2019\n\n---\n\n Content in this bundle\n\n- We Need a New Financial System to Stop Climate Change – IMF F&D | DECEMBER 2019\n - We Need a New Financial System to Stop Climate Change – IMF F&D | DECEMBER 2019 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n - We Need a New Financial System to Stop Climate Change – IMF F&D | DECEMBER 2019 (PDF){rel=\"external\" type=\"application/pdf\"}\n- وجهة نظر\n - وجهة نظر (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n - وجهة نظر (PDF){rel=\"external\" type=\"application/pdf\"}\n- Cincuenta sombras de verde ● Finanzas y Desarrollo ● Diciembre de 2019\n - Cincuenta sombras de verde ● Finanzas y Desarrollo ● Diciembre de 2019 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n - Cincuenta sombras de verde ● Finanzas y Desarrollo ● Diciembre de 2019 (PDF){rel=\"external\" type=\"application/pdf\"}\n- Cinquante nuances de vert\n - Cinquante nuances de vert (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n - Cinquante nuances de vert (PDF){rel=\"external\" type=\"application/pdf\"}\n- Пятьдесят оттенков зеленого – Финансы и развитие – декабрь 2019 года\n - Пятьдесят оттенков зеленого – Финансы и развитие – декабрь 2019 года (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n - Пятьдесят оттенков зеленого – Финансы и развитие – декабрь 2019 года (PDF){rel=\"external\" type=\"application/pdf\"}\n- We Need a New Financial System to Stop Climate Change – IMF F&D | DECEMBER 2019\n - We Need a New Financial System to Stop Climate Change – IMF F&D | DECEMBER 2019 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n - We Need a New Financial System to Stop Climate Change – IMF F&D | DECEMBER 2019 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/fandd/issues/2019/12/a-new-sustainable-financial-system-to-climate-change-carney" } ], "bullets": [ "[Markdown version](/en/publications/fandd/issues/2019/12/a-new-sustainable-financial-system-to-climate-change-carney/index.md)", "[Structured JSON version](/en/publications/fandd/issues/2019/12/a-new-sustainable-financial-system-to-climate-change-carney/index.json)", "[Bundle manifest](/en/publications/fandd/issues/2019/12/a-new-sustainable-financial-system-to-climate-change-carney/bundle-manifest.json)", "Authors: MARK CARNEY", "Published: December 1, 2019", "Author and role: MARK CARNEY, UN special envoy for climate action and finance.", "Central thesis: A new, sustainable financial system is required to stop runaway climate change by aligning capital allocation, risk management, and disclosure with the transition to a net-zero world.", "Framing problem: Climate impacts extend beyond traditional decision horizons (“The Tragedy of the Horizon”), creating misaligned incentives for current financial actors.", "Insured losses in 2018 were $80 billion, double the inflation-adjusted average for the past 30 years.", "In 2017, insured losses totaled $140 billion and uninsured losses totaled $200 billion.", "In Bangladesh, Egypt, India, Indonesia, Nigeria, the Philippines, and Vietnam, insurance penetration is less than 1 percent.", "Lloyd’s of London estimate: a 1 percent rise in insurance penetration can translate into a 13 percent reduction in uninsured losses and a 20 percent lower disaster recovery burden on taxpayers.", "Macroeconomic benefits from closing insurance gaps include increased investment, higher output (potentially up to 2 percent of GDP), and greater climate resilience.", "IPCC 2018 finding cited: only 12 years left to stop runaway climate change.", "Recent trend: global energy emissions increased 1.7 percent last year.", "To limit warming to 1.5˚C requires a 45 percent decrease by 2030 and net-zero emissions by 2050.", "International Energy Agency estimate: a low-carbon transition could require $3.5 trillion in energy sector investment every year for decades—twice the current rate.", "Under the agency’s scenario requirements by 2050:", "Task Force on Climate-related Financial Disclosures (TCFD): established by private sector, catalyzed by the Group of Twenty; described as a comprehensive, practical, and flexible framework for corporate disclosure of climate-related risks and opportunities.", "Supporters controlling balance sheets totaling $120 trillion now back TCFD-aligned disclosure.", "Climate-related shareholder resolutions spiked to 90.", "Investment managers controlling more than 45 percent of global assets under management now back shareholder actions on carbon disclosure.", "Companies representing over 90 percent of all shareholder advisory services now support the TCFD.", "Four-fifths of the top 1,100 Group of Twenty companies now disclose climate-related financial risks as some TCFD recommendations advise.", "Three-quarters of those who use this information have seen an improvement in the quality of climate disclosure.", "Policy direction: next step is to make disclosure mandatory; the United Kingdom and European Union have already signaled moves in that direction.", "Short-term priority: over the next two years the disclosure process must ensure TCFD standards are as comparable, as efficient, and as decision-relevant as possible.", "Capital providers (banks, insurers, asset managers) and supervisors must better understand and manage climate-related financial risks.", "Drivers of reassessment: changes in climate policies, new technologies, and growing physical risks.", "Bank of England survey: almost three-quarters of banks are starting to treat risks from climate change like other financial risks.", "Banks are assessing:", "Bank of England supervisory expectations to be embedded into practice:", "Bank of England initiative: first regulator to stress-test its financial system under various climate pathways, including a catastrophic business-as-usual scenario and the transition to net zero by 2050 consistent with the UK-legislated objective.", "Approach: integrate climate scenarios with macroeconomic and financial models; develop in consultation with industry and stakeholders, including experts from the Network of Central Banks and Supervisors for Greening the Financial System (a 42-member group representing jurisdictions that account for half of global emissions).", "Sustainable investment recognized as opening enormous opportunities (transforming energy, reinventing protein).", "Estimated $90 trillion in infrastructure investment expected between 2015 and 2030.", "Green bonds:", "Role of capital markets: shifting from banks to capital markets can free bank balance sheet capacity for early-stage project financing and infrastructure lending.", "Sustainable investing beyond exclusion: must catalyze companies shifting from brown to green.", "Investment strategies:", "Measurement challenge: inconsistent measurement of ESG is a major hurdle.", "Taxonomy needs:", "Risk: financial disruption if the market does not adjust efficiently to the transition (a climate “Minsky moment”).", "Role of finance: develop frameworks for markets to adjust efficiently and enable feedback between markets and policymaking.", "Finance complements and amplifies climate policy but does not substitute for it.", "Policy frameworks with greatest impact are those that are:", "Execution path:", "$80 billion: insured losses in 2018.", "$140 billion: insured losses in 2017.", "$200 billion: uninsured losses in 2017.", "Less than 1 percent: insurance penetration in certain highly exposed countries (Bangladesh, Egypt, India, Indonesia, Nigeria, the Philippines, Vietnam).", "1 percent rise in insurance penetration → 13 percent reduction in uninsured losses and 20 percent lower disaster recovery burden (Lloyd’s of London estimate).", "Potential output gain: potentially up to 2 percent of GDP from closing insurance gaps.", "12 years: time left per 2018 IPCC report to stop runaway climate change.", "1.7 percent: increase in global energy emissions last year.", "45 percent decrease by 2030 and net-zero emissions by 2050: requirements to limit warming to 1.5˚C.", "$3.5 trillion per year: estimated energy sector investment required for a low-carbon transition every year for decades.", "nearly 95 percent: share of electricity supply that must be low carbon by 2050 under IEA scenario.", "70 percent: share of new cars that must be electric by 2050 under IEA scenario.", "80 percent: required fall in carbon dioxide intensity of the building sector by 2050 under IEA scenario.", "$90 trillion: estimated infrastructure investment expected between 2015 and 2030.", "$100 trillion: pool of long-term private capital managed by global institutional fixed-income investors.", "3 percent: green bonds’ share of global bond issuance in 2018.", "$120 trillion: balance sheets controlled by current supporters of TCFD disclosure.", "90: number of climate-related shareholder resolutions (spiked figure).", "more than 45 percent: share of global assets under management controlled by investment managers backing shareholder actions on carbon disclosure.", "over 90 percent: share of companies representing shareholder advisory services supporting the TCFD.", "Four-fifths: proportion of top 1,100 Group of Twenty companies disclosing climate-related financial risks per some TCFD recommendations.", "Three-quarters: proportion of TCFD information users who have seen improved quality of climate disclosure.", "almost three-quarters: proportion of banks starting to treat climate risks like other financial risks.", "42-member group: Network of Central Banks and Supervisors for Greening the Financial System membership, representing jurisdictions that account for half of global emissions.", "**We Need a New Financial System to Stop Climate Change – IMF F&D | DECEMBER 2019**", "**وجهة نظر**", "**Cincuenta sombras de verde ● Finanzas y Desarrollo ● Diciembre de 2019**", "**Cinquante nuances de vert**", "**Пятьдесят оттенков зеленого – Финансы и развитие – декабрь 2019 года**", "**We Need a New Financial System to Stop Climate Change – IMF F&D | DECEMBER 2019**" ], "related": [ { "title": "We Need a New Financial System to Stop Climate Change – IMF F&D | DECEMBER 2019", "role": "document", "sourceUrl": 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