Cash & Liquidity ManagementInvestment & FundingNet zero: Firms will be rewarded or punished accordingly, Mark Carney says

Net zero: Firms will be rewarded or punished accordingly, Mark Carney says

Former BoE Governor warns net-zero failings will heavily affect valuations, carbon offsets can't be used as “indulgences”

With two weeks until COP 26 kicks off in Glasgow, Mark Carney, UN Special Envoy for Climate Action and Finance, said every business will be affected by climate financing.

“If you sit on the sidelines of this, you are still going to be affected by this because it’s going to affect valuations quite substantially,” he said in his Sibos 2021’s closing remarks on Thursday.

The former Governor of the Bank of England added there will be a clear delineation of companies that are on the right track and those who aren’t.

“With net zero, the system is going to be very clear, very robust: you’re either on the path or you’re not. And you will be rewarded or punished accordingly.”

Carney also said climate goals should be a strategic KPI.

“With anything that’s strategic for a company, and this is fundamentally strategic, it makes sense to have robust board oversight and to tie management compensation to the outcomes of the progress on those paths.”

Meanwhile, policymakers and prudential authorities can play a key role in helping to nudge the market towards the net-zero goal.

“If you have credible and predictable institutions, if you have a track record of delivering price stability, candidly, it’s easier to keep doing that. Markets anticipate what you’re going to do, and then you don’t have to do as much of it.”

“What the market is fantastic about is [that it’s] looking forward, and the more it anticipates [the move to net-zero] the more it’s going to put money into those solutions.”

Members of the Glasgow Financial Alliance for Net Zero, a group of financial institutions chaired by Carney, has committed to net zero by 2050. Those institutions hold around $88trn of assets under management – about one-third of existing global assets.

In the meantime, to better help firms divest and decarbonise, many governments have announced they will require mandatory climate disclosures. Both the G7 and G20 support mandatory disclosures, while the International Accounting Standards Board’s (IASB) new International Sustainability Standards Board will be set up in Glasgow.

The new board will build on the work done by the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures to develop its own standards, with a view to release them by Summer 2022.

Carbon offsets not a substitute for emission cuts

In order to meet the Paris Agreement’s goal to limit global warming to 1.5 degrees Celsius above pre-industrial levels, Carney says Co2 emissions offsets will have to play a role in helping companies reduce their carbon footprint.

“The core responsibility of companies is to reduce their absolute emissions. But while they’re doing it, having offsets playing a role will be important to keep us on track.”

He noted the carbon market remains quite small, valued only around $1bn a year. But initiatives in the private sector to develop more rigorous monitoring and taxonomies could grow the market to $100bn to $150bn, he noted.

“The only way it becomes that big is if it is high integrity. The offsets have to be real, you need proper qualification monitoring.”

“Those who purchase the offsets have to […] also be part of the solution, they can’t be buying ‘indulgences’. They have to be reducing their absolute emissions as well, and offsets are our complement to that.”

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