Carney speaks with IHS Markit chairman and CEO Lance Uggla for the latest CERAWeek Conversations – available at www.ceraweek.com/conversations

Former Governor of the Bank of England and current UN Special Envoy for Climate Action and Finance Mark Carney says governments acted early “with real force and determination” providing effective stimulus in response to COVID-19; that you cannot “wish away systemic risks” like a pandemic—or climate change; and why energy transition is not as simple as a “flip the switch from A to B” in the latest edition of the CERAWeek Conversations series.

Mark Carney, former Bank of England Governor: How banks are better positioned to deal with downturn this time; why China has less room to act as a global stimulus and how energy transition will move "More and more to center stage" for investors- oil and gas 360

Source: bankofengland.co.uk

In a conversation with Lance Uggla, chairman and CEO, IHS Markit (NYSE: INFO), Carney talks about maintaining “ambition” for the Paris Climate Agreement amid U.S. withdrawal from the process and pandemic-induced lockdowns; how the private sector has “done a great job” moving towards a global standard for climate related-financial disclosure but now “it’s time for the public sector to bring it in” and more.

The complete video is available at: www.ceraweek.com/conversations

Selected excerpts:

Interview Recorded Thursday, May 28, 2020

(Edited slightly for brevity only)

  • On governments’ response to the financial shock of COVID-19:

    “We weren’t in the situation that we were in 2008 where really keeping the system together was the first priority in order to then figure out what to do about it. It didn’t have to be nailed that way.

    “I certainly think [governments] acted with real force and determination early that very much helped market function. Markets were able to find the price. In terms of the financial channels it has been very effective, and the direction of stimulus has been very effective.”

  • Parallels with the 2008 financial crisis and China’s role in stimulating the global economy:

    “In 2008 the financial sector itself was the core of the problem. So part of the challenge was just actually getting stimulus through that sector. You can put liquidity into it. You can cut rates. But actually, that didn’t flow through to the real economy and support. The fiscal side was quite important.

    “China had less policy room coming into this both on the fiscal and on the monetary financial side. Part of the challenge of success quite often is the degree of financial innovation you get on top of that, and the so-called “shadow banking” sector in China had grown quite substantially over the last several years. They’ve been taking steps to manage that down, but then that meant a certain stance of policy.

    “It’s still very early days in this because still most economies [are] suspended effectively. It’s such an unusual situation and it’s only when those physical controls start to come off that we will see how much scarring has been done to the labor market and to business, and then calibrating policy from there.”

  • On the financial strength of banks to weather prolonged economic slowdowns:

    “The absolute requirements of the banks went up almost 10 times in terms of their capital, and for U.K. banks the actual capital has gone up four times. Liquidity is up one trillion [pounds] in the U.K. for the major banks—so a much, much stronger position. We like to say that’s ‘prudence with a purpose.’ It’s ‘resilience with a reason.’ It’s not there just to allow me to sleep at night. It’s there for times like this.

    “One of the things that we did before I left, as the financial policy committee we loosened the capital requirements of the banks so that they could put some of those excess buffers to work so they’d be able to lend into the economy. That has been taken off—it’s there. When you have the restart you’d have an expectation that would be used.

    “Eventually as government starts to pull back, you have fewer of these guarantees, and the banks have the capital.

    “They’re definitely part of this solution, but the flip side, whether it’s in energy or industrial or services, is everyone at the moment—bar tech—is sitting there saying ‘how am I going to invest? What’s the demand outlook going to be?’ You need that to actually do more than just draw down on your working capital line.”

  • COVID-19’s impact on the energy transition:

    “The phrase that gets used by some of them is, “let’s build back better.” So what is better? As you restart your economy where do you want to go? Where do you want to go as a society? That question is being asked everywhere around the world in all the senses.

    “You start with what are the lessons from the COVID crisis. One of them is: the first job of the government is protection—you’ve got to have a resilient economy. You can’t wish away systemic risks like a pandemic and it would be nice to wish away climate change, but you can’t just put your head in the sand and pretend it’s going to go away.

    “You’ve got 125 and counting countries that have net zero as a legislative requirement. The U.K. and Canada are prominent examples, but many, many more. In that environment—and you’re re-setting your medium-term economic strategy—it’s pretty likely that’s the orientation, and the policy is set in that way. The conversations with companies, particularly in the financial sector, is that they expect that orientation towards net zero.

    “What’s crucial here is this is a whole economy transition; it’s every sector in the economy—that’s the right way to go from where we are to get to net zero. What you don’t want to do is try to jam everything into [groups of] deep green activities and everything else is brown and bad. It’s different industries moving at their pace towards that transition. It would have been better to start a decade ago a little more assiduously, but you don’t want to delay it.

    “When you sit down and fundamentally reassess your strategy as a company, I think the question is going to be asked in a lot of jurisdictions: What’s your strategy for net zero? How does that play in? And as a provider of capital, you’re looking at where’s the opportunity for that? What can I fund? And what risks do I need to manage? I think that’s where it’s going to land.”

  • His outlook for policy signals to support sustainable energy:

    “Most people know well that these energy transitions tend to take a long time. You’ve got installed base and it’s marginal costs not average cost that’s driving it. Hydrocarbons will be here for some time, without question, and that’s why it’s important to have a transition as opposed to as flip the switch from A to B—and we spent a lot of time emphasizing that.

    “One issue that a number of governments are facing, or will face very soon, is if they bailed out a heavy-emitting industry like an airline, for example: what’s the quid pro quo in terms of the speed with which that entity when it gets relaunched moves on a path? So around air transport and marine transport questions come up—and you see it in some of the bailout packages in Europe—around fuel mandates: a blended renewable fuel by a certain date, a certain proportion will be there and that’s the type of policy we may see.

    “Certainly the low-emission vehicle versus internal combustion engine—on the margin those economics have just changed with the petrol price. If there’s “cash for clunkers” it’s more likely to have a green tint to it than it did in 2008, in part because the economics are there and the installed capacity is there

    “This in the jargon is called “transition risk:” Where’s regulation? Where’s it headed and what signal does that send to the market? As it comes into the investing consciousness and the lending consciousness that we actually are headed towards something like net zero, you ask yourself the question for a specific industry and company: what logically is going to have to happen in that industry? If I’m an automaker and I look at no more internal conduct combustion engine cars in the in the U.K. by 2035, that tells me something about where the system’s going. Then the question becomes: is it possible that’s going to get pulled forward or other economic levers are going to be tweaked in that direction?”

  • On data-driven approaches to assess corporate ESG commitments and energy transition “readiness”:

    “We think about it a couple ways. One of them is the Task Force on Climate-related Financial Disclosures (TCFD) and just trying to get as global as possible a standard for climate related-financial disclosure and flipping that from what is a private sector initiative which has got $140 trillion of balance sheet behind it now between the asset managers and banks. That needs to be put into disclosure regulation or listing regulation or accounting standards. The private sector has done a great job. Now it’s time for the public sector to bring it in.

    It gets to the heart of ESG and the components of what drives it and how different institutions will want to use data.

    “If you’re an investor or bank you’re going to want to drill down on the components, at least to have the option of doing that. Or if you’re an index provider, is there a better way to really home in on transition and transition readiness of a company? These types of issues will just move more and more center stage.”

  • The current state of international cooperation to address global climate issues:

    “People recall that in the run up to Paris, there was an agreement between the U.S. and China in September which helped unlock the ambition for a bunch of other countries. The U.S is leaving the COP process. So that dynamic is not there and it really is the China-E.U. dynamic. The question is: will there be similar levels of ambition?

    “The E.U. released their latest variants on the Green Deal, which is more ambitious than it was coming in; a long process still to come but some of the elements are being put in place there.

    “The E.U.-China process is still on track. There’s a meeting in September in Leipzig, which is a key summit. What we’re doing on the private finance side is putting in place interim milestones. But in the end, it’s a negotiation. Many aspects of COP are negotiations so you do need that deadline for the negotiation to get closed and when we have a new date that will mean certain things only get gripped at the end.”

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