This article appeared in Responsible Investor
In his recent Reith Lecture, Mark Carney, the former Governor of the Bank of England, gave a passionate call to arms for the world to urgently transition to net zero carbon emissions. He articulated how finance will play a crucial part in the solution – by employing the three Rs – Reporting, Risk and Return.
Carney’s argument can be seen in the wider context of ESG investing – which, for most of my working life, has been marginal in finances, but now about 40% of investors profess to be “ESG Aligned”.
One view of ESG is that it captures non-financial risks and hence ensures an improved risk/return profile. However, Carney’s ambition for the 3 Rs – that they contribute to avoiding climate change – represent a marketing view of ESG, that it delivers returns whilst ‘doing good’. Both of these views are flawed, but the latter is more dangerous.
It is important to distinguish between our need to transition to net zero carbon emissions and other ESG issues. To get to net zero we broadly know what we have to do sector by sector; which will be a massive engineering and coordination task. This contrasts with other ESG themes which encompass a wide range of concerns requiring a diverse range of actions. Unfortunately to address climate change, Carney’s 3R strategy for finance is inadequate.
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