Mark Carney’s “tragedy of the horizon” speech in September 2015 was a clarion call, warning of the risks of climate change to financial stability.
Any fair evaluation of the speech should assess what he got right and what he and the resulting agenda may (with the obvious benefit of hindsight) have missed. It should also examine what the financial system, as a whole, got right or wrong. But an analysis deserves an exam question: what can be done to “break” the horizon, as Carney put it, or at least to bring it closer to the present? Leveraging Carbon Tracker’s decade-plus of dialogue with investors, we wanted to mark this anniversary by considering how finance and policy have responded to this existential challenge.
While giving Carney credit for riding the wave of the Paris Agreement in order to embed climate considerations into mainstream finance, the evidence suggests that his overall approach – that disclosure and information would be enough, and the market would solve the rest – has been insufficient. The outcome 10 years on is clear: capital allocation remains largely climate-indiscriminate; emissions are rising.
Our view is that the market hasn’t solved the problem because the incentives for market participants remain too short-term (the core of Carney’s thesis in 2015), and that they are taking bad advice based on economic scenario models that are not up to date with the cutting-edge climate science. Ironically, the economic, commercial and technological underpinnings are stronger than ever. Our collective understanding of the severe economic damage that will result from the present warming trajectory is also clearer than ever before. But a firmer and more directive policy approach – which Carney shied away from – is essential if we are to avert tipping into financial instability as well as a more perilous planetary crisis.
Credit where credit is due
To return to 2015, it’s worth reminding ourselves that Carney’s speech came just six months after the G20 asked the Financial Stability Board (FSB) to consider the implications of climate change for financial stability. Carney’s analysis of the three ways in which climate could affect financial stability – through physical, liability and transition effects – remains a seminal framing of risks that loom larger today than they did 10 years ago.
Carney’s primary prescription certainly made major waves in the world of financial markets. Just three months later, the Paris COP witnessed the launch of the Taskforce for Climate-Related Disclosures (TCFD), the industry-led group tasked with creating a voluntary disclosure framework.
As my colleague Mark Campanale has noted, the tragedy framing had a “ripple effect” by bringing financial institutions to the table on climate. Alongside the carbon market, Carney put climate and sustainability on boardroom agendas – providing the springboard for taxonomies, sustainability reporting, climate accounting frameworks, and more recently transition plans (although the jury remains out here on whether progressive European governments will turn their intentions into action).
But what was missed?
Despite this mountain of activity, emissions are still rising and we are on a pathway to 2.5-3.0°C of warming, or worse.
So, while we shouldn’t devalue the benefits of better information on climate risk and the transition for investor decision-making, the TCFD and all that it has spawned still feel more about backward-looking risk, rather than about taking action to face present climate change and its all-encompassing future implications – in both the short and longer term.
We should also acknowledge that disclosure is an essential foundation. As the expression goes, “you can’t manage what you measure”. But it should not be a goal in itself, and there has perhaps been too much emphasis on measurement, at the expense of emissions reduction.
If we boil down Carney’s speech, the thrust of his new thinking then and subsequently was: “put the information in the hands of investors and they will make the right decisions”. But in our view, this gave policymakers a pass. As he put it – “it is not for a central banker to advocate for one policy response over another” – and the overall framing was of a voluntary approach by financial regulators and investment decision-makers alike.
With the benefit of hindsight, this hands-off approach (policymakers in the back seat rather than at the wheel) has not worked. Policy support was a condition of financial institutions’ Glasgow Financial Alliance for Net Zero (GFANZ) commitments; and the failure of that support to materialise has had a dampening effect on collective action and the ability of investors to see their commitments through.
And so now, as we come to the present day, the consensus – internationally and in the UK – about climate action was much stronger in 2015; whereas the science now demands a course correction in financial policy and regulation when the geo-political conditions are self-evidently more difficult.
Apart from the failure of the voluntary approach, the other major shortcoming in how finance has responded to Carney’s warning is in the structural under-estimation of the economic and financial risks at stake.
There’s an irony here, given that Carney was Governor at the Bank of England when he delivered ‘Tragedy of the Horizons’. But, in this context, we must highlight the pivotal role and responsibility that central banks have for climate scenario analysis. Of course, the science of climate tipping points and cumulative risk was much less developed 10 years ago. But it is still nearly eight years since the Network for Greening the Financial System (NGFS) was established at the One Planet Summit in Paris. And the point here is that for years the scenario models commonly used by investors have been at odds with Carney’s warnings about financial instability
Six years on from ‘Tragedy of the Horizons’, Carney launched GFANZ and its vaunted “wall-of-money” at COP26. At the time, the GFANZ membership of over 450 financial firms from across 45 countries representing USD 130 trillion of assets under management was an extremely big deal. However, we believe that the impact of GFANZ has been blunted by the limitations of commonly used scenario models (which assume business-as-usual GDP growth at higher levels of global warming) to reflect the systemic risks posed by climate change. The effect was to sow confusion over whether member commitments were aligned or in tension with the fiduciary obligations of investors. In our view, a necessary condition for the success of GFANZ was clarity that climate risk is a systemic risk to financial stability – and to long-term financial returns on capital. To quote again from ‘Tragedy of the Horizons’: “Once climate change becomes a defining issue for financial stability…central banks are well placed to take a precautionary, longer-term view of the existential threats to the economy and financial system posed by environmental breakdown.”
Fast forward to 2025, and the science shows a more serious existential risk from physical impacts than previously considered. Tipping points – from the disruption to the Atlantic Meridional Overturning Circulation (AMOC) to the melting of the Polar ice sheets – and their cumulative risk are potentially posing huge dangers to the global economy, and by extension to financial stability.
The proximity of these tipping points significantly increases the uncertainty of temperature outcomes corresponding to a given amount of greenhouse gas emissions. The recent work by the Institute of Actuaries on “planetary solvency” lays bare the failure of current investment and policy approaches to manage the tail of plausibly bad outcomes to an acceptably low level of occurrence. Finance and policy are running a much higher tail “risk of ruin” than any sensibly prudent approach should consider.
This chimes with what Carbon Tracker has been saying over the last two years. Our overarching message is of a fundamental disconnect between what scientists expect from global warming and what pensioners, investors, and the overall financial ecosystem are prepared for. The inadequate advice given to pension funds and other asset owners – based on an unfit-for-purpose scenario analysis modelled by the central banks and the neo-classical economics mainstream – is responsible for much of this disconnect.
In the round, this is about more than misdirected capital allocation – crucial though that is. A macro-economic and wealth-damaging correction can’t be ruled out; and the risks will increasingly multiply and compound unless policymakers and regulators switch to a much more proactive mode.
It’s also worth repeating the message we gave 10 years ago, that financial policy should focus on the point at which capital flows from investors to companies – including how fossil fuel companies raise money in public debt and equity markets, notably in London. The simple maths then, and more acute now, is that the reserves owned by listed companies shouldn’t exceed their share of the carbon budget if we are to keep warming within safe limits. This is why we and ClientEarth have been engaging with the Financial Conduct Authority (FCA) about how they can properly oversee the capital raising process for fossil fuel companies.
In addition, on debt, volumes of primary debt issuance are multiples that of equity, because debt is temporary whereas equity is permanent. A March 2024 report from the London Stock Exchange Group identified that USD 3.2 trillion bonds outstanding from a range of carbon-intensive companies are due to be refinanced over the coming years. Physical and transition risks, combined with broader economic vulnerability for many of these borrowers could exacerbate the risks to financial stability further.
And we are now arguably heading backwards
Perhaps the most definitive verdict on the 10-year anniversary of the Carney speech is that emissions from oil, gas and coal are on the rise. September’s United Nations Environment Programme (UNEP) Production Gap Report spelled it out: “Governments, in aggregate, still plan to produce more than double the amount of fossil fuels than would be consistent with limiting warming to 1.5°C. The persistence of the global production gap puts a well-managed and equitable energy transition at risk”. One important point made by the report is that fossil fuel subsidies – despite all the subsidies rhetoric from the G7 over the years – are a key driver of this production gap, particularly those that encourage new exploration and development of fossil fuel projects.
The “comeback” of the fossil fuel industrial complex can be ascribed to several factors, especially geopolitics. But the fact is that the market has not delivered the scale of capital reallocation that the authors of the Paris Agreement envisaged when they wrote Article 2.1.c about the need for financial flows to support low-emissions pathways; and which Carney may have thought he was reinforcing when he launched GFANZ.
A Carbon Tracker report commissioned by the UK Environmental Audit Committee in 2022/23 was revealing in this context. Yes, GFANZ members from the banking and investor community were happy to publish net-zero targets. They were however less enthusiastic about sharing their investment strategies and policies for aligning their capital allocation to their net-zero commitments; nor did they wish to say how they intended to respect the conclusion reached by the International Energy Agency (IEA) in its 2021 Net Zero Roadmap, that no new oil and gas projects were needed if the world is to limit global warming to 1.5°C.
Last month’s UNEP report underlines the gravity of the challenge to get emissions under control. For all the progress renewable energy is making globally, it’s highly uncertain whether the international community can agree a robust statement of intent at COP30 that reinstates – and ideally strengthens – the language of COP28 in Dubai about transitioning away from fossil fuels. Memories are still fresh about the backwards steps taken at last year’s COP in Baku.
As we approach COP30 in Belem, the nationally determined contributions (NDCs) tabled to date do not inspire confidence that the international community can get back on track.
So, can the horizon tragedy be broken?
To restore some forward momentum and galvanise the essential behaviour change that lands in the real world, what can be done to build on the Carney legacy and address the key issues that have either been overlooked or need a substantial strengthening?
Our recent response to the UK transition plans consultation proposed a reset of sustainable finance policy. These three elements should be core:
- The voluntary market approach advocated by Carney on climate has failed. Governments should resist the siren calls of “red tape” and not be afraid to regulate in this area.
- A systems approach towards financial stability and climate risk must be the way forward. By “systems approach”, we mean one based on the fundamental macro principles of interconnectedness, feedback loops and non-linearity (cf. the tipping points highlighted above);
- Central banks have a pivotal role – as the link to the financial ministries, as a financial supervisor, and as the lead governmental authority on scenario analysis. The Banque de France recognised this as long ago as 2020. In 2025, the Bank of England’s mandate to ensure financial stability includes the need to address “systemic vulnerabilities”. Climate change clearly falls into that category and therefore demands a proactive approach from the central bank.
We emphasise that the systems change approach needs all stakeholders to play their part. To make it happen, financial policy and regulation have to be fully lined up with climate science. This means a joined-up approach towards the issues we have identified above – scenario analysis, financial supervision, capital reallocation, and climate-aligned policy incentives. Without this, the consequences for financial stability from the tragedy of the horizons will remain undimmed. But with a determination to grasp this agenda, policymakers, regulators and their champions in finance and investment – with progressive decision-makers in the vanguard – can yet break that horizon.
