We focused in on disclosure and then we asked the private sector to decide whether there really was an issue here and how best to address it.
So we commissioned Mike Bloomberg to head a panel of 30-odd people from the private sector, came up with recommendations, and what you see today is 100+ CEOs have signed up saying this is the right step to improve disclosure so the market can function and so the G20 is kind of taken out of this.
LACQUA: So you’re not expecting anything official from the G-20, for example, mention the communiqué or anything like that?
CARNEY: Well, I mean the G20 leaders asked for this. They have been made aware of the progress made and the momentum behind it, so I don’t want to presume decisions of G-20 leaders.
These are the leading companies who are saying this is important, this is the right way forward and are engaged in working with it to make it better over time.
Because what will happen with this is, though it’s a living approach, it will be decided not by the G20 in some meeting, not by technocrats like me, but by the actual providers and users of capital around the world.
LACQUA: What does it mean if you’re a company that didn’t sign up to this?
CARNEY: What it means, and I think this is true of a lot of companies who are starting to look at this issue, and after today we’ll look at it more closely, is you learn from the process.
There’ll be a number more we would expect to adopt it, both as users of capital and providers of capital over time. This is going to get better because people are engaged.
One of the things that’s true about this is the taskforce, the people who have been working on it, and the institutions behind them, are going to live on for another 18 months to adjust these as they learn.
LACQUA: When do you actually expect executive pay to be linked to performance in key industries?
CARNEY: Well, I think that’s an issue for boards and ultimately investors. And it will matter – the extent to which this is either a major risk or major opportunity for a specific industry.
There will be some industries, some firms in industries for which actually, climate change over their horizon, over their investment horizon and given their footprint, it’s not an issue, it’s not one of their top issues.
Now, they probably want to explain why that is the case, and they should be able to explain why that is the case, but it doesn’t mean you then become linked to some target. In other cases, it will be much more material.
LACQUA: The final report says even companies not materially affected from climate change to actually disclose or publish these climate scenarios – is that a waste of time for them?
CARNEY: Well I think the first thing is to explain why you’re not affected by climate change. It could be because of the horizon – there’s a variety of reasons why that could be the case. There’s entirely legitimate reasons why that might be the case for various firms.
It’s just to explain what your governance for this is, how you think about risk management, and what the metrics are that you look at. That answers the question.
The scenario analysis stuff, I think it would be more important for – my personal view – for companies for which this is material, number one, number two, different companies are going to do different approached to scenario analysis.
This is an art which will develop over time, and some are extremely sophisticated at it while others will be less so. And this is one aspect of the recommendation – I’m giving my personal opinion – that will take some time to fill out.
LACQUA: Governor, give me a sense, your aim of the taskforce was to create a market where companies can operate successfully in the two-degree world – how long will it take to have something a little bit more substantial?
CARNEY: I think it is pretty substantial, first point, in terms of, it answers the question and now it’s to take it from the level of these recommendations into actual company filings.
What belongs in the mainstream financial filing, what belongs in other corporate information, whether it’s a CSR report or something. Companies will decide and investors and providers of capital will determine that.
How long does it take? I think in some industries, you’re starting to get critical mass. If you look at bulge-bracket investment banks, global investment banks, you’re getting a core, and that expertise will be there and people will be able to make a judgement.
LACQUA: The G20 asked the FSB to look at the potential impact of the risk. Why not look at the risks first? Can we measure the risk?
CARNEY: This is a core point of the economics, if you will, of climate change. We have used this term called the tragedy of the horizon, and used it for a purpose, which is when I sit in one of my roles and manage monetary policy, climate change doesn't come into the equation because we are managing to a two- or three-year horizon.
When we manage most financial stability risk, kind of out to a five-year horizon, it’s there and present for something like general insurance and reinsurance. We have to think about it when we oversee them.
But these guys are actually very good at managing it. They change the pricing. They change the coverage of insurance to adapt to climate change. The whole cat-risk pricing in catastrophe bonds changed dramatically of the course of the past few decades because they see the actual physical manifestations of climate change
So we make sure as supervisors they are on top of it. But in general they are very much on top of it. The fact things roll over every year makes it easier to be honest.
Where we see the biggest risk though is, as we roll forward there are going to be changes in government policy, climate policy, that can have big effects on industries.
There will be potentially a pull forward in anticipation – because that’s what markets do best - of such changes. Who's going to win, who's going to lose? Who's going to benefit? Who's going to be penalized?
If I'm allocating capital I want to know, I want to have the information in order to make those judgments and I also want to have some information, some perspective, soft information on who's thinking about this so I can make those qualitative judgments about management and risk management which often unlocks bigger value.
You can see the full interview between Lacqua and Carney HERE