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In late September, Bank of England Governor Mark Carney unveiled the long-awaited results of the Bank’s probe into the risk posed by climate change and carbon bubble to financial stability. The Governor concluded that the while the financial markets are not at risk right now, the ‘perfect storm’ of physical risk to infrastructure from climate change events, value at risk from the carbon bubble, and the threat of fiduciary duty-related litigation does present a systemic risk to financial markets. In turn this means that the markets can’t simply be left to manage the fall out of the transition to the low carbon economy and that financial regulators do have a role to play in driving forward an orderly low carbon transition.
The Governor’s announcement trailblazes the findings of a broader review across G20 countries – undertaken by the Financial Stability Board (of which Mark Carney is the chair). The Board is expected to report its findings at the G20 summit in Turkey next month.
Against this backdrop, it is worrying that the European Commission’s recent Capital Markets Union Action Plan is silent on the need to build safeguards into this initiative, to manage systemic risks relating to climate change and wider environmental, social and governance (ESG) risks. [...]
In 2014, EUROSIF – the European Sustainable Investment forum – published data showing socially responsible impact investing registered growth of 132% during 2011-2013. This figure is made all the more remarkable when you consider overall growth of the total European asset management industry was 22% over the same time period. Why would investors do this? Because more sustainable companies generally outperform less sustainable ones over the medium to long-term. [...]
It seems to indicate that current ESG risk management systems are inadequate and need further strengthening in the face of increasingly non-trivial financial risks. The Volkswagen scandal, which saw the company’s share value plunge 30%, is only the latest in a long line of examples of companies failing to fully manage environmental risks – and paying the price. [...]
As financial regulation to manage these risks starts to emerge around the globe, the European Union will need to play a coordinating role in developing cutting edge financial regulation to manage these risks while expanding opportunities to connect capital to a sustainable real economy. This is likely to require:
The upcoming Financial Stability Board report to the G20 and agreement on a global climate deal in Paris give the European Commission legitimate reason to act. A next step could be to set up a Task Force to report to DG FISMA within 6 months on the materiality of climate-related risk to capital market stability and options for addressing this within the Capital Markets Union.
E3G Report: Future Proofing the Capital Markets Union: Driving Sustainable Growth