The frequency of the unthinkable
Aldersgate Group event
Thank you. Four years ago, in Mark Carney’s speech on “the tragedy of the horizon”, he discussed three risks climate change poses to the financial system:
- Liability risks (i.e. can people be sued for previous emissions?)
- Transition risks (i.e. the risks of destabilising the economy as we reduce emissions); And,
- Physical risks.
In this speech, I’m going to leave liability risks to the lawyers in the room, and focus on the other two.
Storms, floods, droughts and heatwaves are getting worse.
This is most obviously a threat in the global south where the frequency of the unthinkable is increasing at an alarming rate.
However, our resilience is being tested in England too.
Incidents like the floods of December 2015, and last summer’s heatwave create shocks to the financial system by - for instance - damaging assets, and disrupting supply chains.
Floods can knock out bridges.
Overheating can melt rail tracks.
Such shocks have always happened, but today we need to ask whether we’re sufficiently ahead of them. Since 2008, the UK has cut carbon from electricity generation faster than any other major economy…
But, last week, Ofgem reported the UK’s greenhouse gas reductions have slowed.
If it weren’t for flood and coastal infrastructure in England, the January 2017 tidal surge alone could have caused £37 billion in economic damages…
But, the Intergovernmental Panel on Climate Change recently said once-a-century sea level events will be an annual event by 2050.
Thankfully, climate policy is radically shifting.
In June, the UK became the first G20 country to set a net-zero target by 2050.
The impact of this decision will be complex.
Some sectors will be able to reach net-zero by 2030.
Others will struggle to get there by 2050.
But, there is agreement that net-zero is necessary, because it is now apparent that the physical risks to everything that exists in the world trump the transition risks to the economy alone.
That does not diminish the transition risks.
It is that the wider context cannot be unseen.
The editor of the Financial Times recently said:
The long-term health of free enterprise capitalism will depend on delivering profit with purpose. Companies will come to understand that this combination serves their self-interest as well as their customers and employees. Without change, the prescription risks being far more painful.
The use of “prescription” is interesting.
Doctors prescribe something when we are too sick to fight an illness alone.
Prescriptions can have uncomfortable - sometimes dangerous - side effects.
It’s much better to increase your resilience through healthy living than to hope doctors can pick up the pieces. Everybody has the responsibility to reduce consumption and prepare for climate impacts - at home and at work.
But, as the years race past 2030 towards 2050…
It will fall to regulators - including the Environment Agency - to ensure businesses do this.
We don’t want to punish laggards.
We want to see businesses succeed.
We want to see them prosper.
We want to see them lead.
That means, we cannot be spectators.
Our new draft strategy for dealing with flooding and coastal change aims to ensure the whole country is preparing for a range of climate futures, including a 4°C rise in global temperatures.
We say a nationwide standard of flood resilience – as recommended in the National Infrastructure Assessment – would improve the capacity of people to live with flooding and coastal change.
To explore this, we want to work with partners to develop a suite of tools that can be used in combination to deliver resilience.
This could include traditional defences, natural flood management, ensuring new development is safe from flood risk, property alterations, and giving communities choices about how they adapt to a range of climate futures.
The costs of making homes, businesses and infrastructure more resilient are far smaller than repairing damage.
The National Audit Office says for every £1 spent on protecting communities, around £9 in property damages and wider impacts is avoided.
But, we have always been clear: preparing for these impacts is no panacea for rising global temperatures.
We urgently need to reduce emissions. And we all need to play a part.
Today, the Environment Agency has set itself the goal of becoming a net zero organisation by 2030.
That means we will be taking as much carbon out of the atmosphere as we are putting into it, so that we are no longer contributing to climate change.
We will adopt a tough, internationally recognised definition of net zero.
That includes: the carbon we produce ourselves (which is currently 44,000 tonnes a year).
And, the carbon we consume through our supply chain (136,000 tonnes a year).
We will achieve this by reducing our emissions 45 per cent by 2030, and offsetting what remains through activities including tree planting, restoring soil quality and peat bogs.
We know we can reduce emissions because we already have done so.
We hit our 2020 operational carbon reduction target a year early, and our new contract arrangements for delivering flood schemes ensure partners are innovating low carbon solutions for construction.
Hitting net zero in 2030 is already very ambitious. But we want to be more ambitious still. So as we move forward we will also explore whether we can become an absolute zero organisation – one that does not produce any carbon at all – by 2050.
All of this means a significant change to business-as-usual.
It does not mean that we will stop:
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building flood defences (currently 80,000 tonnes of carbon a year)
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pumping water out of people’s homes if they flood, or around the country to alleviate drought (17,000 tonnes)
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travelling (12,000 tonnes)
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or heating our buildings (9,000 tonnes).
But, we will certainly have to find radical new approaches to fulfilling our duties - creating better, more resilient, places and responding to emergencies – without producing carbon emissions.
Success will require a wholesale cultural shift by our employees, partners and suppliers.
It will require sustained focus on our goal, ensuring that all our future decisions support it.
It will require innovation, because some of the technologies we’ll need do not yet exist.
But, when the US committed to land a man on the moon by 1969, no-one knew how to do it - and the consequences of not walking on the moon weren’t as grave as this.
As Greta Thunberg said:
Avoiding climate breakdown will require cathedral thinking. We must lay the foundation while we may not know exactly how to build the ceiling.
We will report on progress as we go.
No one can underestimate the importance of disclosure on both physical and transition risks over the next 30 years.
The Aldersgate Group’s briefing today is a reminder of the many business benefits associated with the Task Force on Climate-related Financial Disclosures.
Unfortunately - the insurance sector notwithstanding - there is a less established understanding of how the physical challenges of climate change are interconnected - particularly with regard to adaptation.
If that seems incongruous with the obvious impact severe weather has on the economy… it is because it is incongruous.
Global economic losses from climate disasters are currently estimated at 520 billion dollars a year.
Last month, the Global Commission on Adaptation report - Adapt Now: A Global Call for Leadership on Climate Resilience - suggested that investing 1.9 trillion dollars in adaptation globally from 2020 to 2030, could guarantee 7 trillion dollars in net benefits.
Over 90 trillion dollars is expected to be invested globally in infrastructure by 2040, especially in developing countries.
This should be resilient to the heatwaves and hurricanes of the future, but we lack the collective understanding to ensure that it is.
The City has understood the concept of stranded assets for years.
Maybe we should also start to talk about melted, or flooded, assets.
The government’s Green Finance Strategy suggests all listed companies and large asset owners should align their activities with the TCFD recommendations by 2022.
By making them mandatory in time for COP26, the UK would be a global leader - demonstrating that we are serious about “profit with purpose”, and preparing global investments for the new normal.
I recently helped form the Coalition for Climate Resilient Investment, launched at the UN Climate Summit by John Haley, chief executive of Willis Towers Watson.
The coalition is a private sector led initiative bringing together organisations, including the UK government, to better integrate climate risks into decision-making.
It is now supported by companies with over 5 trillion dollars in assets, including our own Environment Agency Pension Fund.
The Environment Agency Pension Fund is small in global financial terms.
But, it is exemplary because it is showing larger pension funds around the world that you can put in a strong financial performance while influencing organisations to reduce emissions and increase their resilience.
The climate crisis means that everyone has a lot to do in the next 30 years, but…
I am inspired by examples of leadership in business.
I am excited bv the increasing volume of public pressure – so evident in London this week.
I am encouraged by the government’s net zero commitments.
And, I am very, very pleased that the Environment Agency is rolling up its sleeves and getting on with it.
Tackling the climate emergency is the biggest challenge facing humankind, and every day our organisation has to deal with its effects. Alongside working with communities to plan and adapt for the unavoidable impacts of climate change, we must also take action as an organisation to reduce our own contribution to this existential threat.
We are under no illusion about the scale of the challenge that we have set ourselves, but this is the level of ambition that it is needed if we are to preserve our planet for future generations.
Thank you very much.