Governments must stop relying on financial actors to solve the climate crisis
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Pardon the Interruption
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The Net Zero Asset Managers initiative is pausing some of its work and carrying out a review - about time. The children of the Glasgow Financial Alliance for Net Zero are having a tough time, as the kids next door are beating them up. GFANZ has just undergone organisational surgery. Another net zero sibling, the Net Zero Insurance Alliance, suffered an early death some time ago, and a weaker Foundation Insurance Test emerged as sort of a cousin.
A fundamental cause of this disruption is the belated recognition that societal risk and financial risk are separate constructs. Sure, they overlap at the systemic level, but they are different. We appoint governments to manage societal risks such as defence, health, and climate change. Governments (together with non-financial regulators), on our behalf, shape the markets in which capitalism seeks to thrive.
But over several decades, governments have over-delegated this role to finance. Investors, insurers and bankers make their decisions in a financial risk domain. It is narrower than where governments live; government’s house is full of policy tools – taxation, subsidies, regulatory guidance, political messaging – they can create an investment environment, whereas financial actors respond to it.
Societal risks are contested. That’s politics. Ask BlackRock! Financial risks, on the other hand, are contested but resolved via market prices. Supply and demand meet at a price; equilibrium rules.
But if some of the supply of climate risk is ignored, and climate change has no equilibrium, governments’ reliance on the finance sector is misguided. As someone who contributed to building what Mark Carney later named GFANZ after he embraced the idea, I have skin in this game. We can now say clearly, and sadly, that his “$130tn ready to go” at the GFANZ launch let governments off the hook. And finance is showing ever so clearly it cannot solve the problem.
Where next? A good transition plan combines societal risk and opportunity with financial risk. The UK needs a national transition plan. I hear stories of bureaucratic cost benefit analysis in government, to see if they are worth it. Deeply misguided. They are priceless! Let’s just get on with it.
A fundamental cause of this disruption is the belated recognition that societal risk and financial risk are separate constructs. Sure, they overlap at the systemic level, but they are different. We appoint governments to manage societal risks such as defence, health, and climate change. Governments (together with non-financial regulators), on our behalf, shape the markets in which capitalism seeks to thrive.
But over several decades, governments have over-delegated this role to finance. Investors, insurers and bankers make their decisions in a financial risk domain. It is narrower than where governments live; government’s house is full of policy tools – taxation, subsidies, regulatory guidance, political messaging – they can create an investment environment, whereas financial actors respond to it.
Societal risks are contested. That’s politics. Ask BlackRock! Financial risks, on the other hand, are contested but resolved via market prices. Supply and demand meet at a price; equilibrium rules.
But if some of the supply of climate risk is ignored, and climate change has no equilibrium, governments’ reliance on the finance sector is misguided. As someone who contributed to building what Mark Carney later named GFANZ after he embraced the idea, I have skin in this game. We can now say clearly, and sadly, that his “$130tn ready to go” at the GFANZ launch let governments off the hook. And finance is showing ever so clearly it cannot solve the problem.
Where next? A good transition plan combines societal risk and opportunity with financial risk. The UK needs a national transition plan. I hear stories of bureaucratic cost benefit analysis in government, to see if they are worth it. Deeply misguided. They are priceless! Let’s just get on with it.
