Mark Carney gives evidence to the House of Lords Economic Affairs Committee - extracts on net zero
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Mark Carney, outgoing Governor of the Bank of England, last week
gave evidence to the House of Lords Economic Affairs
Committee. The following is an extract of questions on net
zero. The Chair (Lord Forsyth of Drumlean): What do you think
the target of net zero will mean for the UK economy? Could you give
us some indication of the scenarios that the bank will use to
factor this into its policy-making? Mark Carney: For the purposes
of stress-testing the bank and insurance sectors,...Request free trial
Mark Carney, outgoing Governor of the Bank of England, last
week gave evidence to the House of Lords Economic Affairs
Committee. The following is an extract of questions on net
zero.
The Chair (Lord Forsyth of Drumlean): What do you think the target of net zero will mean for the UK economy? Could you give us some indication of the scenarios that the bank will use to factor this into its policy-making? Mark Carney: For the purposes of stress-testing the bank and insurance sectors, we are in the process of developing, in consultation with the industries, three scenarios for the UK economy. One is a smooth transition to the legislated target of net zero by 2050; the second is a sort of delayed and more abrupt transition, where climate policy is delayed and comes in more sharply; and the third is business as usual, which is, basically, no adjustment to climate policy. The consequences of those scenarios are both around climate policy and macroeconomic outcomes, and they are then fed into the banks and insurance companies, which assess their portfolios and whether the strategies are reasonable for them. We will release them in spring this year, in April, so they will be open source, effectively. We are working with the institutions, particularly the cat risk insurers, on the physical risks in those 25 scenarios. The bigger risks or economic drivers are actually around the transition paths and the changing economics of certain business activities associated with that. It is likely, or I am confident that it will be the case, that the economic outcomes on the do-nothing scenario are much worse than those on the smooth and steady transition scenario. With reference to the expertise resident in Lloyd’s of London, as in other entities that we supervise in the UK, the do-nothing scenario does not mean business as usual; it means business as usual with mounting physical risks that affect the value of mortgages and business activities, and real physical loss. Sometimes, the discussions around climate change and the costs of adjusting to net zero are entirely in isolation from those physical costs. We will put those out and run the stress tests. A number of other major jurisdictions are adopting similar approaches, which will become increasingly evident in the course of the next year, in the run-up to COP. To take a step back, as regards the opportunities around the transition to net zero, we alluded a little earlier to the financial services sector. In effect, what is happening is that transition risk and transition opportunities are becoming one of the lenses by which the financial services sector values assets and companies. It is very simple in the United Kingdom; it is the law of the land to go to net zero. It is the imperative of climate physics, whichever temperature we are going to sustain at, ultimately at some point to get to net zero. It is an entirely reasonable question for any listed company: “What’s your plan for net zero? And if you don’t have a plan for net zero, over what horizon are you running your business?” It could be a possible strategy. A plan for net zero could be, “I have no plan for net zero, and I’m hoping that some cold fusion will turn up or something new will happen”. But then the judgment is made within the financial sector about whether or not that is a realistic plan or for what period it is. To shift to the broader COP, one of our priorities is to make sure that the financial sector has the information it needs to make those judgments in a way that is consistent and comparable and takes into account the entire economy. In the absence of the right information, the defaults often become simplistic, and that is quite dangerous. The default becomes only green, and certain things are classed as that: “Renewables are clearly green, so I will invest only in green”. Or there is a divestment strategy, whereby whole industries are viewed as being too brown for the ultimate transition and then are taken out. The reality of transitioning to net zero properly, in a smooth, deliberate and effective manner, is that it is for the whole of the economy. You need the information to figure it out within each sector and make judgments, and different institutions will make different judgments about who is ahead of the curve, who is behind, and who is above the line but will go below the line accordingly. That creates a tremendous commercial opportunity for UK financial services, because those are all judgments. They are very difficult judgments to make, but they are crucially important judgments, and the allocation of the associated capital decisions is enormous and will make a tremendous difference to the speed with which we move. I shall pass to Lord Burns, with your permission, Chair. The Chair: Before coming to Lord Burns, can I clarify this in my mind? You may not be aware of this, but the Times is having a go at the Bank of England because, of a £10 billion issue of bonds, £300 million, or 3%, went to energy extraction companies. Is there a danger that, in considering the impact and the risks associated with climate change, it gets translated to, “You mustn’t lend any money to anyone involved in fossil fuel extraction”, thereby preventing them being able to move forward? Could you clarify what the policy is? We were very privileged the other day to have a lecture from David Attenborough. I talked to him afterwards, and he is quite realistic about making the change and about the pathway that needs to be taken, but there are some people, such as those criticising the Bank for its bond issue, who see it differently. How do you see it? Mark Carney: It is an important question. The corporate bond purchase programme, you are absolutely right, is for £10 billion, and 3% is for energy companies, because that is the proportion of the non-financial bond universe; in other words, it is the investment grade, but not companies that we regulate. It is that proportion of the bond market. What we have done for monetary policy is to be absolutely neutral across the market, because our job is not to allocate capital but to set the overall price of capital for the purposes of achieving the inflation target and, more broadly, employment and growth outcomes. There is a general point. Unless directed by government to use monetary policy or instruments in a different way, that is not a decision that the Bank of England takes. We think, rightly, about the financial stability risks of the financial sector not adjusting over time for what is now the legislated objective of the country. That is the financial stability risk, which is why we do stress-testing, and other things. You raise a more general point about the transition. There is an energy transition, which is absolutely necessary; a profound energy transition is necessary to achieve net zero, and it will need to happen faster than previous energy transitions. Some of the drivers of that energy transition are large energy companies, because they have cashflow and expertise and in some cases, although not all, the will to put that into effect. The market, along with citizens with social licence, needs to make a judgment about who is going to contribute and who is going to lag behind. Wholesale divestment of industries does not accomplish that; the transition is whole economy. There will be leaders and laggards, and the laggards will be punished, in my view, by the market. There will be great value destruction as a consequence of company decisions to ignore the issue and not take society’s objectives seriously. There will also be huge beneficiaries and leaders, including from established energy companies, which will be part of the solution. There is no one solution to all this, as you can appreciate, but they will be part of the solution, and they should be allocated capital to get on with it. To read the full hearing, click here: https://www.parliament.uk/documents/lords-committees/economic-affairs/TRANSCRIPT-EAC-Ev-1-11-02-20-Carney-V1-Hansard.pdf |