To begin to access the trillions of dollars needed to transition to green energy, policy-makers are increasingly justifying climate change as a threat to the financial system and using regulation to steer funding away from fossil fuels.
However, experts are highly skeptical. They say this trend could diminish the independence of central bankers and financial regulators from government, and that these bodies that watch over the financial system don’t have the specific expertise to deal with climate change. Experts also point out that investment managers have a fiduciary duty to their clients.
Fund managers’ fiduciary duties—their legal duty to act in the best interests of their clients—prevent them from “monkeying around with people’s retirement savings in pursuit of their [policy-makers’] environmental goals,” Ross McKitrick, a University of Guelph economics professor specializing in environment, energy, and climate policy, told The Epoch Times.
If green investments are sound and earn a competitive rate of return, the market will seek them out and people will invest in them—without needing a lot of climate finance rhetoric, McKitrick said.
“But that should happen through ordinary market processes, not through governments, central planners forcing the money in there,” he added.
Such concerns are challenging the views expressed by policy-makers like Mark Carney, UN special envoy on climate action and finance.
The former governor of both the Bank of Canada and Bank of England, speaking on English journalist Lionel Barber’s “What Next?“ podcast on Nov. 11, said the brunt of the astronomical cost of transitioning to green energy “can only truly come from the private sector … Governments just do not have the money or, candidly, the expertise to address these issues on that order of magnitude.”
Over US$130 trillion of private capital is said to be committed to “science-based net-zero targets and [its] near-term milestones” under Carney’s direction as head of the Glasgow Financial Alliance for Net Zero (GFANZ), a global coalition of financial institutions “committed to accelerating the decarbonization of the economy.”
John H. Cochrane, senior fellow at Stanford’s Hoover Institution and former University of Chicago business professor, said in a Nov. 19 blog post “A convenient myth: Climate risk and the financial system” that, “in even the most extreme scientific speculations,” there’s nothing to support the possibility that climate change could cause a near-collapse of the financial system like in 2008 or worse.
“Climate risk to the financial system is a big lie,” he said.
One of the reasons for financial regulation to factor in climate change amounts to climate policy advocates wanting to dismantle the fossil fuel sectors, Cochrane said.
He pointed out that financial regulators are not climate scientists, and noted that the problem is that the politically motivated movement is of the view that financing the “wrong” investments—fossil fuels—is what represents “the financial system’s risk to the climate.”
“That central bankers will figure out what to deny, what to subsidize, and how to rate banks on their climate investments is a fantasy,” Cochrane said.
“A dispassionate, honest effort to look at out-of-the-box risks to the financial system, together with a humble attitude towards regulators’ ability to foresee them, is a good idea.”
Protecting Fiduciary Duty to Clients
“Our goal for COP26 has been to build a financial system in which every decision takes climate change into account,” Carney said on Nov. 3 at the Conference of the Parties UN climate summit, adding that “doing so will require a radical new approach to mobilize private finance at unprecedented scale.”
However, respondents to a climate change consultation launched by Canada’s banking regulator said financial institutions could manage climate-related risks through existing governance and risk management frameworks, along with new tools like climate-related scenario analyses. The Office of the Superintendent of Financial Institutions (OSFI) on Oct. 12 published feedback from over 70 respondents, among them federally regulated financial institutions and pension plans.
Regarding integrating ESG (environmental, social, and governance) factors in investment decisions, respondents said pension plans should consider whether those factors “are relevant to the financial performance of an investment pursuant to the plan administrator’s fiduciary duty to act prudently.”
