Mark Carney wants business to calculate the fossil fuel future: Don Pittis

No doubt Bank of England governor Mark Carneyhas personal views on whether or notclimate change is a danger to his children's future. Most thoughtful people do.

But when the former Bank of Canada governorspoke to a high-powered audience of insurance executives this week, unlike environmentalists such asLeonardo DiCaprio,he didn't emphasizetheir moral obligationto future generations. Perhaps after the VW scandal, he realized there was a more direct way to a businessperson's heart.

He appealed to their bottom line.

"Changes in policy, technology and physical risks could prompt a reassessment of the value of a large range of assets as costs and opportunities become apparent," he told the group.

"Longer-term risks could have severe impacts on you and your policyholders."

• Mark Carney says climate change could have 'huge'cost to insurers
• DiCaprio's move to sell oil stock could affect Canada

When New Democratic Party candidateLinda McQuaigraised some of the same issues in the current federal election campaign, saying partof Canada's fossil fuel resources might have to be left in the ground, it played as a left-rightissue.

"For the hundreds of thousands of people whose jobs are dependent on Canada's energy sector, listen to what you just heard," respondedConservative candidate Michelle Rempel.

Profit and loss, not left and right

But for Carney's audience at a Lloyd's of London black tie dinner, the issue is not a matter of left or right politics, but a matter of profit and loss.

Insurance companies often pay the bills when storms and flooding do their damage. Climate change is likely tomake those insurable crisesworse.

But perhaps more important, against thosepotential losses,insurance companies hold trillions of dollars in assets invested in all kinds of stocks and bonds. And Carney said those assets were threatened.

Carneywarnedthat oil, gas and coalcompanies may beworth far less than their current book value would suggest.

That's because a big part of their assets includes fossil fuel resources discovered but not yet extracted. Fears about climate change couldrender the vast majority of reserves "stranded," said Carney.In other words, the reserves would beleft in the ground andunextractable.

The other part of Carney's warning was the danger that climate change would mean the entire global economy would become less productive,shrinking the future value of certaininvestment holdings.

"In the fullness of time, climate change will threaten financial resilience and longer-term prosperity," Carney said in his speech. "While there is still time to act, the window of opportunity is finite and shrinking."

But according to analysis from sources such as a group of scientists who call themselvesClimate Interactive,we mayalready be too late.

Slow progress in cutting carbon output means that we are currently heading towards a global temperaturerise thatthe New York Times says "is likely to produce catastrophes rangingfrom food shortage to widespread extinctions."

I must admit to being of two minds on whether market forces can solve long-range global crises. When I look back, I see I have argued both sides.

• Why businesses are not seeking solutions to climate change
• Climate change will push Canadian business onside

When Swiss mining giantGlencoreshares can fall by 82 per centfrom their IPO price just four years ago and oil can fall by half with hardly a word of warning,I am notcertain whether investors, even those as smart as those in theinsurance industry, reallycan use their investment clout to steer the ship away from thewaterfall.

Oil companies responded to Carneyby saying that investors should not worry. In spite of warnings about climate change, they see their market continuing to grow, especially in developing countries.

Indeed, governments have often had a poor track record ofputting global concerns ahead of the short-term interests of their own citizens, such asAlberta jobs.

A light in the darkness

And what happens if climate change should become so severe that governments are forced to crack down?

"If we don't get on with making a managed transition away from high emissions, climate change might actually be a reason for a dramatic extension of the state," Oxford climate scientistMyles Allentold me on aprevious occasion.

The fact is Carney realizes that thescope ofclimate change is beyond the horizon of many of our ways of preparing for the future. Politicians just worry about keeping voters happyuntilthe next election. Carney says that traditionally even central banks only worry about financial stability for about 10 years into the future.

"Once climate change becomes a defining issue for financial stability," Carneysaid, "it may already be too late."

The truly long-range thinking of the insuranceindustry,which,like the pension industry,concerns itself with how much their investments will be worthmany decades into the future,could be anexception.

In some ways, insurance companies are giant machines for calculatingmathematical risk based on all the details of what we know now and the estimates of how conditions will change.

Carney hopes that calculating skill"could act as a time machine, shining a light not just on today's risks, but on those that may otherwise lurk in the darkness for years to come."

Follow Don on Twitter @don_pittis

More analysisby Don Pittis