Three weeks ago, we were all led to believe that ‘coal is amazing’ and that climate change was ‘bullshit’. Wind turbines were ‘ugly’ and, dear God, when you’ve got business leader and serial tin-foil-hat wearer Maurice Newman offering business advice to the government, there’s not much doubt in which way the political winds are blowing.

 

 

Thankfully, some with a serious understanding of economics are looking to the future and attempting to recognise the effects of climate change on big business. This week, it was the Bank of England’s (BoE) Governor, Mark Carney, that delivered a thoughtful piece of the risk presented by the warming of the Earth.

In a fascinating speech to Lloyd’s of London, Carney uses the theme of Tragedy of Horizon to bring together a number of scenarios and inputs that will have dramatic impact on the way global business operates into the near future.

However, this is not to say that Carney is some sort of climate change evangelist. in fact, far from it. Carney is an economic realist who , as the had of a large bank, must adopt a conservative approach to future impacts. in making this speech, Carney is doing what bankers and investors do best: reading the tea leaves and declaring risk.

And the risks are not just ‘in the air’ (so to speak).  One of the outcomes of the increased global momentum for reduction of greenhouse gases is that long-term investments in energy extraction made under different economic forecasts may become stranded. That is, and this is key, that the economy may be highly disrupted through trillions of dollars worth of fossil fuels becoming too expensive to develop.

 

 

Basically, Carney identifies three key risks as we move towards a carbon-free economy.

1. Physical Risk. The economic impact of floods and droughts as a result of climate change
2. Liability Risks. The impact of flood- or drought-affected parties seeking compensation from those deemed responsible for the cause (i.e. mining companies and energy producers)
3. Transition Risks. Financial impacts of moving away from fossil fuels (stranded assets being the primary example of this).

That all seems pretty logical, and looks like something you’d expect a banker to say… except for the fact they usually don’t. Politically, it seems this speech has placed a global focus on the role big business will play in the outcomes of the COP21 Paris talks in December.