AFTF 2021: for business, nature has value, Carney says

With the environment under pressure, businesses and investors are increasingly being asked to understand their dependence on nature - and their impact on it, according to former Bank of England Governor, Mark Carney.

Speaking at the 2021 ANZ Finance & Treasury Forum, in October, held ahead of COP26 in Glasgow, Carney said one of the challenges in the investment world is that market value has been taken to represent total value.

“And so, if a good or activity isn't in the market, it's not valued,” he said.

Tech giant Amazon is one of the world's most valuable companies by market capitalisation, “but the value of the vast reaches of the Amazon [rainforest] only has monetary value when stripped of its foliage and converted to farmland”, Carney said.

The degradation of forests, bio-diversity loss, rising ocean temperatures, and extreme weather events are all “having a bigger and bigger impact on financial values, including insurance losses which have gone up eightfold since the 1980s,” he said.

Global focus

The financial services sector is increasingly focused on nature-related risks on assets, leading to the establishment of the Taskforce on Nature-related Financial Disclosures (TNFD) Forum this year, which ANZ has joined.

“[The TNFD’s] goal is to provide by 2023, a framework for firms and financial institutions to identify, to assess, to manage and report on their dependencies on nature and their impacts on nature,” Carney said.

“The TNFD will look at nature through this lens of double materiality in a blend of enterprise and sustainability.”

The TFND builds on the work of other initiatives such as the FSB Task Force on Climate-related Financial Disclosures (TCFD) and the European Union’s Taxonomy for Sustainable Activities.

“Today virtually the entire financial sector demands TCFD disclosures and thousands of companies around the world are responding,” Carney said. “Our judgement is that the private sector has taken the TCFD about as far as it can. Now is the time to finish the job by making it mandatory.”

Financial markets have come a long way in recognising and managing climate risk since Carney’s ground-breaking 2015 speech Breaking the Tragedy of the Horizon at a Lloyds of London gala dinner.

Then Bank of England Governor and Chairman of the Financial Stability Board, Carney warned financial risks posed by climate change paled in significance compared with what would come. The tragedy of the horizon, he argued, was the present generation had no incentive to fix the problem of climate risk now since it would only impact future generations.

More recently, new groupings have emerged including the United Nations-convened Net Zero Banking Alliance (NZBA) that is part of a larger strategic forum, chaired by Carney. ANZ is a member of the NZBA.

Immense opportunity

Even so, the opportunity is immense in the race to get to net-zero, described by Carney as “the greatest commercial opportunity of our time”.

The scale of the investment required is large. “It’s an additional two percentage points of global GDP in investment in energy infrastructure alone,” Carney said. “[That’s] an extra about $US2 trillion every year for decades.”

Almost 3,000 of the world’s largest companies have set the most rigorous net-zero targets and are developing ambitious de-carbonisation plans, according to Carney.

“In my judgement, within a few years, such commitments and plans will become the norm,” he said.

Carney said he hoped COP26 would accelerate a financial system in which “every decision takes climate change into account”.

“That means disclosure of necessary information, the right tools like climate stress tests, and it means new markets to fund those who will contribute to climate solutions,” he said.

“Hope is building for a breakthrough on climate. If it comes, it will be in no small part due to the transformation of the financial sector in recent years.”

Carney said since the UK “assumed leadership of COP, the percentage of global emissions covered by national net zero targets has risen from less than a third to three quarters”.

“This is reinforcing a hierarchy of values with net zero at its apex,” he said. “That's a prerequisite to solving the climate crisis.”