Viewpoint: The tragedy of the horizon, act II – from promise to peril

10 years on from Mark Carney’s seminal speech, Frédéric Ducoulombier, programme director at EDHEC Climate Institute, says a focus on disclosure stayed difficult but vital action from policymakers.

With his landmark “Tragedy of the Horizon” speech a decade ago, Bank of England governor Mark Carney elevated climate change from an environmental concern to a systemic financial risk. That speech also announced the Task Force on Climate-related Financial Disclosures (TCFD), whose 2017 recommendations set a global benchmark for voluntary reporting and inspired mandatory regimes worldwide.

Carney’s “tragedy” lay in the mismatch between the long timescales of climate impacts and the short timeframes used by prudential supervisors, politicians and corporate managers.

If action is delayed until climate risks finally enter the horizons of these decision-makers, the damage will be catastrophic. Better information, he suggested, could help “break” this tragedy by starting a virtuous circle: investors would price risks earlier, policymakers would act more boldly, and innovators would accelerate the transition. (...)

Now, some groups that aligned with the IFRS Foundation to oppose double materiality call for an end to sustainability reporting, and the chair of the Securities and Exchange Commission (SEC) has threatened to undermine the Foundation’s core financial reporting standards if it diverts resources to support the sustainability disclosure framework that is the legacy of the TCFD.

Paradoxically, this occurs just as improved stress-testing models deliver better assessment of climate risks and emerging probabilistic scenario tools enable credible pricing of assets, creating the potential for financial institutions to integrate and mitigate them more effectively, but only if reliable data continue to flow.

Carney concluded his speech by suggesting that better information could underpin a virtuous circle of improved risk understanding, investor pricing, policy decisions and a smoother transition. Better measurement can support better management — but only if paired with the right incentives and policies.

If the next decade is to look different from the last, we must preserve sustainability reporting and invest further in research to better integrate climate risk into financial decision-making. But regulators must also reshape prudential frameworks to reward financial institutions for managing climate risks and financing the transition.

Above all, governments must deliver clear, credible and durable policy signals to the real economy through regulation, taxation, public spending and investment, to close the virtuous circle Carney envisaged. Without such action, neither markets nor societies can transition at the speed and scale required.

Frédéric Ducoulombier, is programme director, climate regulation and policies, at EDHEC Climate Institute, EDHEC Business School