Why we can’t ignore climate risk

LAST week was a big week for the climate change agenda.

Sadly, not because of Guernsey’s Sustainable Finance Week, which was all jolly good fun, but because of the UK government announcement last Thursday delaying various climate change policies. You know the one. The one pushing back on the date for phasing out petrol engines, putting a stop to making everyone install a heat pump, and resuming drilling for oil in the North Sea.

Sadly, it cast a little shadow over Guernsey Finance’s local event.

In a real triumph for spin, the announcement was headlined as ‘a new way to reach net zero’. One communication I saw hailed the changes as the Tories putting a stop to expensive insulation upgrades, taxes on eating meat, compulsory car sharing and new taxes on flying. All presented as if it had been another party in power for the last 13 years.

Political chutzpah at its finest.

The manner of presentation and headlines were all for domestic political consumption. Just look at the latest UK opinion polls. The real question is whether the moves were that significant. Were they a fundamental reset or just a pragmatic set of revisions to accommodate the bumpy economic road on which we’re all presently travelling?

Or put it another way, was the headline-grabbing move on pushing back by a few years the phasing out of ICEs (internal combustion engine, climate policy jargon for petrol and diesel cars) really that significant in the grand scheme of things?

Personally I don’t think so and my foot is in the ‘pragmatic set of changes’ camp. As I said at the International Sustainability Institute’s fringe event for Sustainable Finance Week last Tuesday (a couple of days before the UK announcement), the EU had already rowed back earlier this year on the speed of its commitment to phase out ICEs under pressure from the Germans. In that context, that change hardly sets the UK apart.

But as the UK has led the world with its reduction of carbon emissions since 1990, there are some that worry that the message that’s being sent is the lowering of the UK’s commitment to climate change mitigation.

I don’t think so.

Surely it’s legitimate to question the speed, path and costs of the transition to net zero? A bit of critical analysis ought to be helpful and welcomed. Acknowledging these points should not warrant being immediately labelled as a climate change sceptic. But those voices are getting louder.

Then there’s the ‘China argument’ doing the rounds. The one that questions the point of incurring the costs of net zero if the Chinese, the world’s greatest emitter, just carry on pumping huge amounts of carbon into the atmosphere. Tony Blair kind of made this point earlier this summer. It got widely reported as him coming out against net zero.

I rather imagine he had in mind that exerting more pressure on China to do more was the solution, rather than doing less ourselves. Working out how to handle China really oughtn’t to be at the expense of maintaining our own commitments. One thing a lot of people forget (or didn’t know in the first place) is that China was quite clear, its commitment was to net zero by 2060 not 2050. It said its economy couldn’t bear the cost of an earlier transition.

Mind, China’s approach increases the attractiveness of levying a carbon tax on imports, as is being proposed by the EU. Some argue it’s a protectionist move, but if Europe is to incur the costs of decarbonisation of its economy it seems logical to tax the ‘carbon bad’ of imports. It avoids being undercut by others with a lesser commitment to net zero. An equalisation measure.

This more sceptical environment for action on climate change is mirrored in sustainable finance. There are two growing voices arguing against the use of financial regulation as a tool of the climate change agenda. Earlier this year, Jay Powell, chair of the US Federal Reserve, forcefully stated the Fed would not become a climate policy maker. There’s also been plenty of recent criticism of the Bank of England’s focus on climate over the last few years (at the expense of its day job, monetary policy). Mervyn King, a previous governor, for one, was very vocal on this topic this summer.

But the precedents have been set and financial regulators have already determined climate risk to be a potential threat to financial stability. Using this as justification, the Financial Stability Board established the Task Force on Climate Disclosures, thus giving regulators the mandate to demand firms include consideration of climate risk in their risk management frameworks.

The GFSC was one of the first offshore regulators to tackle this issue and gently amended the Code of Corporate Governance a couple of years back to bring climate risk into scope.

The objective of my fringe event last week was to draw attention to the growing legal and regulatory risks, particularly across the fiduciary sector, from the prevalent do-nothing or do-little approach to climate risk assessment. After all, if climate risk can be a source of financial instability, then one assumes the risks are significant enough to have impacts on the price of assets and portfolios. Inaction or inertia justified by the ‘lack of clarity’ in the Corporate Governance Code seems a dangerous approach.

Not least when it’s clear climate change is happening. Average temperatures are rising, the scientists agree that its due to carbon emissions. Don’t take my word for it – look at the data from NASA (below). The science and the impact of carbon emissions on temperature is accepted by 99% of the scientific community.

I wrote ‘lack of clarity’ in speech marks deliberately. Personally, I don’t believe there really has even been a lack of clarity. It’s just convenient to be able to suggest this. It’s an irony that 15 years ago when Carol Goodwin chaperoned the launch of the Corporate Governance Code, the sector was up in arms and had to be reassured the code was just a set of principles. Today, principles aren’t enough – the sector wants the comfort blanket of rules.

But it doesn’t take the brains of Albert Einstein to determine how to incorporate climate risk into business risk assessments nor to work out the prudent approach in the exercise of fiduciary duty. And if it’s unclear, they ought to seek out advice.

As I cheerfully explained to a room of friendly faces at the Cotils last week, it would be an interesting approach when challenged to rely on the argument that, when faced with such a potentially significant risk to client assets and portfolios, the lack of specifics in the GFSC’s corporate governance code condoned a do-little or do-nothing stance.

No amount of back-pedalling by the UK on the net-zero agenda would warrant such an approach.

A footnote: The International Sustainability Standards Board finalised its sustainability reporting standards this June for adoption in 2024. These follow the same four-pillar approach set out by TCFD in 2017 and include the same reporting metrics, ie. assets and portfolios. In July this year, the TCFD announced its work was done and that it now planned to disband. The same month the International Organisation of Securities Commissions called on its members to incorporate these standards into their regulatory requirements.

Earlier in May, in the GFSC’s annual report, William Mason wrote ‘we will look to see the speed with which those standards [the ISSB standards] once finalised are adopted by IOSCO and others…. we will then consider at what point after 2023 it might be sensible for the Bailiwick to consider ….a balanced adoption of those standards.’

Go figure.