Mark Carney’s latest speech discusses the importance of green finance in transitioning to a low-carbon economy.

By Paul A. Davies and Michael Green

In September 2015, Bank of England Governor Mark Carney delivered his milestone Tragedy of the Horizon (Tragedy) speech. This speech warned that climate change will lead to financial crises, falling living standards, political instability, and profound implications for the financial sector and economy.

In March 2019, Mr. Carney delivered a follow-up speech entitled A New Horizon at the European Commission Conference on a global approach to sustainable finance in Brussels. Mr. Carney underlined the financial industry’s progress since Tragedy, but noted that combatting climate change requires “the right information, proper risk management, and coherent, credible public policy frameworks.”

A New Horizon focused on three areas: reporting, risk, and return.


A New Horizon noted a “step change in both demand and supply of climate reporting” as a result of the Financial Stability Board (FSB) establishing the Task Force on Climate-Related Financial Disclosures (TCFD). The TCFD produced the Recommendations on Climate-Related Financial Disclosures Report providing context, background, and a general framework for climate change disclosures.

The TCFD has published 11 “Recommended Disclosures” (RDs) covering the following reporting areas: governance, strategy, risk management, metrics and targets. In September 2018, the TCFD reviewed publicly available reports from almost 1,750 large companies — banks, insurance companies, and asset managers — against the RDs. The TCFD found that in many instances disclosures were made in multiple reports, preventing clear and direct comparison. Further reports contained no disclosures whatsoever.

Therefore, Mr. Carney concluded that reporting against the RDs must be improved to allow investors to make informed, practical investment decisions.

Risk Management

Mr. Carney advocated better climate change risk management and discussed two types of risk — physical and transition. Physical risks stem from climate and weather-related events that damage property and impede trade. Transition risks stem from adjustment toward a lower-carbon economy, and are impacted by physical risks, government policy, and technology.

Although physical and transition risks have several elements that require strategic management (including magnitude, foreseeability, and uncertain time horizon), transition risks present the most danger. Therefore, Mr. Carney’s view is that financial sector resilience to transition risks must be tested. The financial sector planning horizon is around four years — a shorter timeframe than it will take for most climate change risks to crystallise — but banks have already started to consider physical risks in business models by incorporating flood risk, extreme weather events, and transition risk.

Building on these developments, the Prudential Regulation Authority Supervisory Statement, due for publication in 2019, is expected to outline expectations for the financial sector regarding governance, risk management, scenario analysis, and disclosure of climate risks.

The TCFD 2018 Status Report noted that the financial industry lagged behind industries such as energy and transport in measuring strategic resilience, and stakeholders hoped that the financial industry will move to a more strategic and long-term approach that includes scenario analysis.


A New Horizon noted that opportunities afforded by transitioning to a low-carbon economy have significant potential returns for investors. Green finance is strengthening, particularly the green bond market in which issuance rose to US$168 billion in 2018. However, notably, this sum only accounts for 3% of global bond issuance.

The transition to a low-carbon economy will not be achieved solely through the use of sustainable finance, as Mr. Carney remarked that, “the transition will require mobilising mainstream finance,” a focus on sustainable long-term value creation, and a strengthening of environment, social and governance (ESG) matters.

Mr. Carney used study data to show that ESG-aware companies have generated higher cashflows and outperformed global benchmarks for several years. He noted that, in future, “climate and ESG considerations are likely to be at the heart of mainstream investing.” Companies are therefore encouraged to use ESG to plan for and adapt to future climate-related risks and opportunities, increase strategic resilience, aid strategic planning and long-term value creation, and reflect green investors’ preferences.

A “Virtuous Circle”

Mr. Carney’s speech concluded with the image of a “virtuous circle” in which companies disclose more information, allowing investors to make more informed decisions, and in turn drive sustainable finance toward the mainstream. The aim is positive, but the process is time-bound and requires clear and credible policy directives to stimulate the financial sector into committed and transparent action.

This is another example of the regulatory developments we are seeing that promote increased reporting, robust risk assessment and modelling, and ESG as factors in moving toward a greener financial future. The rate of adoption of these factors is likely to be a key determinant of how successful this transition will be.

Latham & Watkins will continue to follow and report on developments in this area.

This post was prepared with the assistance of Martin Cassidy in the London office of Latham & Watkins.