Mark Carney at the Science and Industry Museum in Manchester, England, on July 15, 2019.OLI SCARFF/AFP/Getty Images
Mark Carney’s green financial revolution was never going to be easy. Now it’s getting harder.
Last year, the former central banker announced that he had secured commitments from 450 global banks, insurers and asset managers to align their lending and investing to the goals of the Paris agreement on limiting climate change. The expanded membership was one of the marquee announcements at the COP26 climate summit in Glasgow.
Since then, Russia’s invasion of Ukraine and surging inflation have returned the spotlight to oil and natural gas, and shortages thereof, just as it seemed the transition to clean energy was about to hit its stride. A big question is whether the global financial industry can keep climate considerations as a priority. Meanwhile, the general public, after two years of pandemic-induced restrictions and rising costs of living, is irritated and skeptical.
This is the backdrop for Mr. Carney as he oversees the implementation of all the processes and procedures of the Glasgow Financial Alliance for Net Zero, or GFANZ, which is aimed at ensuring that climate considerations are part and parcel of investment decisions made by institutions that collectively manage more than US$130-trillion of assets.
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Now, at least some of those investments will have to go to filling the gap in global oil supplies left by Western sanctions against Russia, he said in an interview from Washington. This, as spending on renewable energy is still running at just a third of what is necessary to meet the imperative to get to net-zero carbon emissions by 2050.
“What’s happening today, because of the Russian invasion and the rupture in global energy markets, is we are going to build in – it’s a question of how much – more stranded assets, effectively, in the system because we’ll develop other sources of hydrocarbons to displace Russian gas, Russian oil,” said Mr. Carney, UN special envoy for climate action and finance and the former governor of the Bank of Canada and Bank of England.
This is a difficult point to make, both to pro-oil types who do not see capital directed to replacing reserves as potentially leading to stranded, or obsolete, assets, as well as to green purists who call for an abrupt end to all lending and financing to fossil-fuel ventures.
GFANZ is developing plans to manage the phase-out of stranded assets. The idea is to come up with ways for lenders and financiers to unwind assets that do not fit with climate goals rather than passing them on to others, who would keep operating them.
Even before Russia’s aggression led to oil and gas price spikes, the global energy supply situation was tight, and the push for green energy was being criticized in some quarters as insufficient to meet needs, especially in Europe. Mr. Carney and others had spent no small amount of time explaining that draining the economic system of carbon would be gradual, difficult and expensive. That’s more than evident today.
“We do need some investment in fossil-fuel financing and fossil fuels during this period of transition, but it is a very limited number, and it needs to be anchored in pathways that are consistent with the carbon budget,” he said. That budget refers to the capacity for further emissions while still keeping the global temperature increase to 2 C or less above preindustrial levels.
Mark Carney at The Bank of England's headquarters in London, England, on Dec. 19, 2019.Francesca Jones/The Globe and Mail
One of GFANZ’s current tasks is devising “sectoral pathways” to help industries such as oil and gas, transport and mining and their investors determine how quickly and drastically emissions will have to drop to stay on side with the carbon budget, Mr. Carney said. This will help determine the rate at which financing will have to go to technology such as carbon capture, utilization and storage.
A couple hundred finance professionals within the group are developing a “net-zero framework” that will help shape financial institutions’ plans for the energy transition, in terms of measuring emissions of their borrowers and portfolio companies, and setting interim and long-term targets for reducing them. Their recommendations will be released for comment on June 1, with plans to be finalized by November.
Another thrust for GFANZ is setting out a strategy for directing private capital to the developing world to help wean countries off coal-fired power and replace it with cleaner energy sources.
A core of environmental activist groups has been critical of financial institutions, and the GFANZ effort itself, for not cutting fossil-fuel companies off from the capital they require to maintain operations. Reclaim Finance, an environmental group focused on the financial industry, this week marked the first anniversary of GFANZ’s creation by warning that the effort “is at risk of becoming a smokescreen to hide the finance sector’s foot-dragging in decarbonization.”
Mr. Carney, who also co-manages an energy transition impact fund for Brookfield Asset Management, is adamant that decarbonization does not mean a quick end to fossil fuels. Instead, he said, financial institutions will have to provide the capital for emitting industries to make necessary changes to operations and cut carbon intensity even as banks and asset managers direct more money to renewable energy.
“A huge element of the financing is to get emissions down in the steel sector, in aviation, in cement, in transportation. During that transition period there still needs to be – needs to be, it’s a requirement – financing for conventional energy on an appropriate level and appropriate pace,” he said.
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Jeffrey Jones