The Governor of the Bank of England gave a speech in Berlin this week throwing his support behind increased investment in green technology as a means to both fight climate change and promote global economic growth at the same time.
The two issues – climate change and financial stability – are linked, said Carney, largely because of two identified paradoxes. First, he explained, is the fact that the timeframe for climate issues is so broad that, on the one hand, few who act to stop it now will actually reap the full benefits of their actions, and on the other, if we wait until “climate change becomes a clear and present danger to financial stability it may already be too late to stabilise the atmosphere”.
The second problem is that “too rapid a movement towards a low-carbon economy could materially damage financial stability”.
Focus must be placed, according to Carney, on identifying and attempting to overcome “transition risks” – something that becomes of particular importance in the wake of the Paris climate agreement and the global policy shift that must take place for its terms to be met.
It is both these transition risks to financial stability, as well as physical (e.g. weather related) risks (and related liability and insurance issues) that come about as a result of climate change that must be tackled in order for a low-carbon economy to be developed successfully, stably and in a way that promoted general global economic growth. Increased investment in green technologies is essentially, in Carney’s view, the best way to address these problems.
Carney spoke about investment in green technologies as a means of ensuring the financial stability flows along with capital from advanced to emerging economies, something that has, at least recently, had the opposite to intended effect.
“In this context,” he said, “green finance is a major opportunity. By ensuring that capital flows finance long-term projects in countries where growth is most carbon intensive, financial stability can be promoted. By absorbing excess global saving, equilibrium interest rates can be raised and macroeconomic stability enhanced. And by allocating capital to green technologies, the prospects for an environmentally sustainable recovery in global growth will increase.”
He also explained that, on a broad scale, “financing the de-carbonisation of our economies implies a sweeping reallocation of resources and a technological revolution.”
The best way to support this, he argued, would be by mainstreaming green finance through, in part, vastly increased investment in green bonds.
He explained: “For investors, green bond markets offer a stable, rated and liquid investment with long duration. For issuers, green bonds are a way to tap the huge US$100 trillion pool of patient private capital managed by global institutional fixed-income investors.”
He implored the G20, “whose members account for around 85% of global emissions”, and Germany in particular as its president to take hold of this opportunity to resolve what Carney referred to as “the tragedy of the horizon” and to tackle climate change and global economic instability head on.
