Climate Change Will Soon Affect Global Financial Markets

In a speech delivered to insurers, investors and financial analysts, Bank of England Governor Mark Carney spoke of his grave concerns that climate change will have on financial stability of markets in the near future. While his speech was geared towards the British economy, his warnings are certainly applicable to the economy of the United States and the global economy as a whole.

Carney said that investors need to get in the game and wake up to the potential for huge losses that will be sustained when government regulations shift and in order to fight global warming and decrease the use of fossil fuels, such as coal and oil.

He pointed out that, “The challenges currently posed by climate change pale in significance compared with what might come. Once climate change becomes a defining issue for financial stability, it may already be too late.”

Carney further proffered that, “The exposure to . . . investors, including insurance companies, to these shifts is potentially huge,” and noted that the most imminently exposed to such losses are insurers.

He described the scenario in which policy changes will leave coal miners and oil drillers with stranded reserves and assets that have little value. This will happen because regulations aimed at fighting climate change will require that these resources are left in the ground rather than be harvested.

Carney emphasized that, “A wholesale reassessment of prospects, especially if it were to occur suddenly, could potentially destabilize markets, spark a pro-cyclical crystallization of losses and a persistent tightening of financial conditions. The speed at which such re-pricing occurs is uncertain and could be decisive for financial stability.”

However, he surmises that these risks can be minimized if investors and companies prepare for regulatory changes and adjust their policies.

Carney is the most important figure yet from the finance world to lay out his concerns on how climate change could destabilize the world’s financial markets. Stephanie Pfeifer, chief executive officer of the Institutional Investors Group on Climate Change, stated that, “[Carney] chose his setting perfectly.”

She further noted that, “We welcome his focus on more consistent and reliable carbon disclosure that will allow investors to make a more informed assessment of the climate risks in their portfolios.”

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