Bank of England governor Mark Carney said that companies must be more open about their “climate change footprint” to avoid abrupt changes in asset prices that could destabilise markets.
The speed at which assets such as coal, oil and gas reserves are repriced to reflect the impact of climate change is vital to reduce potentially “huge” financial risks to British insurers and other investors, he said.
“Risks to financial stability will be minimised if the transition begins early and follows a predictable path,” Carney told a Lloyd’s of London insurance market event.
The goal of limiting global temperature rises to two degrees above pre-industrial levels would render the vast majority of fossil fuel reserves “stranded” or unburnable without expensive carbon capture technology, he said.
Carney, who made no comment on UK monetary policy, also heads the Financial Stability Board (FSB), which coordinates financial regulation for the Group of 20 economies (G20).
At a meeting in London last week, the FSB agreed to consider recommending to G20 leaders in November that more should be done to develop consistent, comparable, reliable and clear disclosures by companies on the “carbon intensity” of their assets, he said.
Such disclosures would show investors how companies will manage risks from climate change.
“The right information allows sceptics and evangelists alike to back their convictions with their capital,” Carney said.
“It will reveal how the valuations of companies that produce and use fossil fuels might change over time.”
Disclosures would expose the likely cost of doing business, paying for emissions, help smooth price adjustment, and inform policymakers, Carney said.
Carbon footprint disclosures differ greatly and the FSB could help forge consistent, global standards, he said.
One approach would be to set up an industry-led climate disclosure task force to design and deliver a voluntary standard by firms that produce or emit carbon.
“The G20, whose member states account for around 85 per cent of global emissions, has a unique ability to make this possible,” Carney said.
Carney said climate change can affect financial stability through the cost of damage to property or trade, compensation claims, and reassessment of asset prices.
He said Britain’s environment ministry published a report on Monday which found Britain’s insurers exposed to all three types of risks in the longer term.
Increasing levels of physical risk could present significant challenges to general insurers in particular, Carney said.
He said “static” disclosure is a necessary first step which could be complemented by governments giving guidance on the possible future course of carbon prices.
This could be combined with stress testing to profile the size of the skews from climate change to the returns of various businesses.
“You peer into the future, building your defences against a world where extreme events become the norm,” Carney said.