Mark Carney on the Energy Transition

issues facing the transition and decarbonization. Our summit in New York City took place in April earlier this year, and this episode includes an interview conducted by my colleague Ethan Zindler, whose head of America's for bien EF. He was privileged to sit down with none other than Mark Karney, you un Special Envoy for Climate Action and Finance and chair of the Glasgow Financial Alliance for Net Zero or g

FANS for short. He's the author of the book Values and previously Governor of the Bank of England from twenty as well as Governor of the Bank of Canada from two thousand eight to twenty ROUTEAM. Among the topics they discussed was the role and importance of corporate disclosure as it relates to climate. Please note that BNF does not provide investment or strategy advice, and we have a full

disclaimer at the end of the show. If you get to the end of this episode and you like what you hear, don't forget to hit subscribe to switch it on on whatever your player you're listening to us on. Now let's hear Ethan's interview with Mark Karney. Mark, thank you for joining us, and it's nice to see you probably a few feet from my office in Washington, p C. Thanks for joining us from the bureau down there, so we're really pleased that you're able to join us and

take part in our conversation. Where one year we'll give or take a few weeks since the announcement of g fans, maybe give us a status update on where it stands today and what its ambitions are for the balance of the year. First off, thank you for having me Ethan, and your office is in good shape. I'm checking it out.

Look In terms of g fens, you know, over the course of the last year, we've obviously grown the tremendously in terms of the number of member firms, and the assets so that they control importantly, and it's not headline news, but it's necessary to ensure that it can be as

effective as possible. We've really built out the core team in de fans, from the private sector, from the public sector, the stakeholder groups, built out the advisory panel under Billy Gilbert's that leadership, but huge additions to leadership with Mike Bloomberg is co chair and and Mary Shapiro's vice chair and all their expertise and energy that they brought. And we're in the process of expanding its global footprint and you know, watch this space over the course of the

next few months for more announcements on that. But at the core of what we've been doing obviously securing members and having their core net zero commitments, what we've been doing is is having hundreds of people from those member firms working on a series of initiatives around what is best practice for implementing net zero commitments, So UH net zero implementation plans for financial institutions that consistent standard across

financial institutions. A draft consultation on that will come out in the next six weeks. How do we bring consensus around sectoral pathways the pathways towards net zero in key high emitting sectors, whether it's steel, transportation, oil and gas, and others. What is best practice for company net zero plans? In other words, what is the financial institution financial industry expect from companies for decision useful information so that we can get capital to go to where the emissions are

and get those emissions down again. A consultation will come out and that in the course of the next two months, and in very important to other elements of that, and I'll stop here after these. Even working on the approach to managing the phase out of stranded assets, we need a responsible and transparent framework to do that so that the so called industries that are high emitting energy sources that are causing climate change that can be responsibly managed

down and truly be part of the transition. And then the last thing I really want to underscore, because it's critical, is a tremendous amount of work is being done to help mobilize capital at scale to the emerging and developing world where most of the emissions are today and where the challenges for just transition and secure sustainable energy transition are the greatest. So thanks for that over here. That's very helpful. You know, I was in treatuing when g

FANS got. One of the major announcements around g FANS was at at Glasgow, of course, and you know, the discussion out of a hundred and thirty trillion dollars of total assets among all these four fifty institutions that are involved. And yet surprisingly to me somewhat, you know, the the initiative has generated some pushback and some complaints from environmental groups that not all the commitments are sort of ironclad, not all the organizations have made the same level of commitments.

How would you respond to some of the criticism that the initiatives received you in that regard, Well, look, the first thing is that we wealth welcome scrutiny and and welcome the high expectations. The world has been on track for a climate catastrophe. The world has been you know, government policy, company investment, and financial institutions have been funding

the world that was headed towards above three degrees. Now we started to turn with the ambitions at Glasgow by countries in the Glasgow Climate Pact of now covering of global emissions with net zero objectives were starting to turn with leaders in industry with their initiatives and the core of the financial system that number dred trillion ist of global financial assets as you know, and those assets turn over, and the key is as those assets turn over, as

loans mature, as investment decisions are made, that all of those decisions take climate change and the net zero transition into account, that they do so transparent and so that all stakeholders can judge and see who is funding the solutions and who is still part of the now just

by adjoining DEFENS, making the commitments committing to the transparency. Remember, there will be annual reporting of all DEFENS members of their emissions, of their portfolio companies Scope one, Scope too, and Scope three emissions where material and you know, one thing finance can do is count and we'll be able to see, as I say, who's part of that solution and all of that work I mentioned in the ends in response to your first question is is to bring

in a discipline, rigorous, consistent approach to implementing those commitments. So thanks for that clarification, and certainly look forward to the counting the disclosure. I think Scope three strikes me as the real challenge and in many of these cases since I've got you, we're gonna shift topics a little bit and want to get your view on the macroeconomic picture within the context of energy of course as well.

I mean, one of the things we've talked a lot about has been how much the entire macro economic situation has changed so dramatically in the last two months to the conflict in Ukraine. We just wanted to get your thoughts on on really, how does the energy transition fit within the current picture. You know, the reaction we've seen from Washington has been to release more oil from the strategic Petroleum Reserve, loosen standards around ethanol temporarily, and and

now there's also going to be additional drilling. Do you think these are the appropriate responses? And how does it this fit within a grander challenge that we have now of addressing climate change? Well, let me let me go to the grander challenge, since we're talking macro and and and within that the energy transition. I think the first thing to say is that the horrible events and that Russia's uh in a horrific convasion of Ukraine has added

an additional layer and additional challenge. But the macro environment was shifting. Before that, we're moving to a world of quite significant supply constraints, supply adjustments. These were much broader than short term. Part of that has to do with the nature of global integration and the reversal of many elements of that. Of course, that has been reinforced by

recent events. It also has to do with the with the energy transition, and I think the way i'd look at the specifics of the energy transition, the consequence of Russia's invasion and the reaction to it, I divided into the near term, medium and longer term. In the near term, it's not good news for the energy transition. It's not

good news for our climate objectives. There will be more emissions as a consequence of this war is a consequence of short term scramble for energy, energy sources that are available and readily available now, I think is a fact. And you know climate physics that doesn't ask why carbon has been put in the atmosphere. It just subtracts it from the carbon budget. So it makes our challenge more difficult.

That's first point. In the second is that the response to it, the medium term response for material shifts in energy mixes in countries it takes three to five years to really move the needle. And with that horizon, the judgment about which energy sources to the elop which to accelerate, which to use as bridges. Clean energy performs exceptionally well with relative to conventional energy. There will be a need for additional fossil fuels, and I'll come back to that.

But to be clear, clean energy it's not just sustainable or cost effective, it's also secure once it's built. No one owns the the sun and the wind, and hydrogen is literally everywhere if you're producing green hydrogen. So you see this tripling of ambition in Europe, in the UK, the up of ambition in Canada's emission reduction plan that was put out two weeks ago, and I think we'll see more of that because the raw economics the realities

of energy security overlap exceptionally well with the needs of sustainability. Now, the medium and longer term point about bridging what is also required from this and and the dictates of energy security will mean that there will be in my judgment, more stranded assets. I mean, we all are familiar with the geological drivers of the stranded assets. Geology meets climate physics. But what I mean is that there will be more energy sources developed that are for purposes of energy security.

They will make other energy sources redundant in the fullness of time if we are going to hold to our climate objectives. That changes the economics of those new developments again,

and it reinforces the drive on on clean energy. So challenges in the short term, we need to be disciplined about what we do in the longer term, and to loop it back into gfans, we need a financial sector which is laser focused on the transition and that can responsibly finance those investments, particularly in the emerging and developing world, that are necessary to get us through this period well accelerating the investment in clean energy. Now for a very

short break, stay with us. So I hear you right? Are we running some risk though? I mean you mentioned a three to five year time arising around the build out of large energy infrastructure, which totally makes sense. But you know, Europe is staring at a winter coming next year where they either of they'll attempt to completely wean themselves off of Russia or simply dramatically reduce that reliance. How do those timelines sync up? That seems like a

real fundamental challenge. It is a fundamental challenge, and that Europe is doing its best to to bridge, partly through spot gasts wherever they can find it, partly through very high emitting sources I reference to coal, partly through a potentially demand management which is part of their plan some near term acceleration on the clean energy, but it's limited

in that time horizon, so there are big challenges. And one element, as you know, that has not been put on the table has been the restarting of of nuclear facilities, which could play a role here. But it's yes, it is a challenge, and it's one of the reasons I said in the short term that you know, this is not positive new I mean clearly it's not in any such stretch of the imagination to start with the humanitarian but from a climate perspective, it will use up more

as the carbon budget. It does strike me that it requires policymakers to take both a short term and long term view simultaneous, which isn't always the best thing. That yeah, can I just re emphasize this point though, you said, because whether you're building a new Elergy train, whether you're accelerating hydrogen, whether you're building major offshore, when whether you

have nuclear as part of your consideration. These are the time horizons three five years, and look at the economics of that as a policy maker, look at the overlap between energy security and sustainability, which is virtually total once that these facilities are built. And you know, this is a horrible situation to be in, but it concentrates the mind and I'll just underscore it. Particularly for Europe the

finances there. We've got huge balance sheets looking for these transition investments and we've seen and I want to I want to give credit to the European Union in the Member States. Thus far, the response has been ambitious and more needs to be done, but it's headed in the

right direction. Thanks for that. Can we world shift gears for just for one last segment of questions here you're in Washington, of course, the Securities Exchange Commission the other day issued a fairly comprehensive bit of rulemaking around requiring companies to disclose their CEO two emission profiles and the risk their climate risks. Essentially. First, my understanding is to some degree this is based on the Task Force for Climate Disclosure Framework, which you worked on as well as

Mary Shapiro and others. So congratulations on that. But second, we're in the comment period officially for that for that rule, would I would like your comment. What do you think of that? Well, I look, it's it's hugely welcome that

the SEC has done this. It is a and they put out this proposed standard after a very comprehensive and detailed analysis, and they've had the benefit of learning from the experience of the TCFD, which you reference, learning from what's been done in other jurisdictions, responding to very very significant demand for investors in the United States. Financial institutions in the United States, many of whom disclosed on the

basis of the TCFD. But what they really want is this disclosure from the companies in which they invest and to which they lend. You know, there's twenty eight trillion dollars of balance sheet that supports the TCFD. The SEC is has taken it to another level in terms of the quality and the rigor, and keyword that I think

they really live by is decision useful. What they're putting in this standard is what investors want, and it's not just about what they want to manage the risks, although those risks are pretty significant, but it's to seize the opportunities that come with the transition, recognizing that this is a top strategic priority for most companies in America, most companies around the world, which is to get their emissions down and be carbon competitive, and events of the last

two months have only reinforced that, so very much welcome it. The last point I'd make is that the SEC, while showing leadership, is being joined with a difference, you know, a different version of a similar objective through something called the I S S B, which will cover ultimately over a hundred and thirty countries other than the United States, including the rest of the G seven and G twenty.

The push back, it seems that it's been on the SEC rule and and there's been different types, but one of them has been that, you know, we have something called the Environmental Protection Agency and that's their job is to worry about zotomissions and it's not not the SEC's job. So I wonder if your take on that, well, that's not I mean, that's nonsense, absolutely nonsense. This is this

is disclosure for financial institutions. Financial institutions want this information, so that they can manage risks, sees, opportunities, differentiate between companies that have a strategy to address these issues and companies that don't. And if the company doesn't, then of course the lender, the investor in them, they want to make a judgment of whether management has made the right call, and that you need disclosure in order to make those judgments.

You don't make it on an inference. And you know, corporate disclosure. That's like saying the the telecom regulator, the SEC, should regulate a corporate disclosure for all tech companies and telephone companies. No, the SECS job is material corporate disclosure. It's a job that constantly involves what is material evolves as the U S economy evolves, and as climate comes in, climate management and transition and the energy security issues come

center stage. You know, the system has been lacking comprehensive comparable disclosure in the SEC is right and the moved to address this, and you rightly point out that a number of companies have embraced us, but certainly many others have not. Does this require essentially a cultural change and a number of corporations to assuming this rule does go into effect, which it looks like it's it's in line

to do. First off, if a company doesn't see this as a major issue, their view is that both the physical risk from climate change, the regulatory risks around it, the competitiveness issues around having a high carbon footprint or a higher carbon footprint relative to other companies in their industry. If they don't think that that's important, that you know, they disclose that, and they disclose it in away, and then their investors and lenders make the judgment. That's the

way the capital markets work. What I think you've flipped this around, though, which is what do the investors and the lenders want, and that's this information. I have the honor with Mike Bloomberg of Coachair in defense and so a hundred and thirty trillion of assets in that as you know, and included in that or all the major US banks, the two largest US investors, in fact global investors in black Rock and Vanguard, both of whom supporters of this type of disclosure from the start. And I

could give you many, many examples. And they need that information in a consistent way across companies to make the judgments so how to discharge ultimately their fiduciary duties to two Americans. Who's whose money they're managing? Well, listen, thank you so much for taking the time of Chael in terms of busy week, I know with the meat taking place in Washington, and really welcome your perspective on all these issues. Recovered a lot of ground in exactly twenty minutes,

So thank you so much for your time. Really appreciate it. Thanks very much. Today's episode of Switched On was edited by Rex Warner of gray Stoke Media. Bloomberg any F as a service provided by Bloomberg Finance LP and its affiliates. This recording does not constitute, nor should it be construed as investment advice, investment recommendations, or recommendation as to an investment or other strategy. Bloomberg an e F should not be considered as information sufficient upon which to base an

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