Financial markets and institutions can help provide insurance against those risks, but great care is needed to ensure such cover is provided appropriately: too little, and households, companies and lenders will go under-covered; too much, and insurers may be unable to follow through on their commitments.9 But the most important force for internalising these externalities will be public policy – on climate regulation, carbon pricing and taxing, and legal liability. Such policy ‘privatises’ the social cost on specific companies and sectors of the economy, and creates powerful opportunities for those first to innovate climate-positive technologies. I will not have more to say on the priorities for future policy in this area today,10 but it is safe to say that these steps will only intensify as governments follow through on the sort of mid-century net-zero commitments legislated in law by the UK last year, and recently by China. The second factor impeding financial market pricing of climate risk has been the long horizon over which that risk has historically been thought likely to crystallise. Financial markets do not have a great track record pricing such longer-term phenomena, particularly when their scale and incidence is also uncertain – a failing 8  To take just one example amongst many, ‘Make My Money Matter’ was formed by Richard Curtis and Jo Corlett to drive change in pension fund investment: https://makemymoneymatter.co.uk/.
From a business management perspective, this point is obvious: to be useful in shaping strategy, a metric has to be something with a direct influence on investment decisions. And from a financial markets perspective, it has to be relevant to understanding risk and return. A lack of meaningful, consistent metrics makes it hard, or impossible, for investors to construct viable portfolios by comparing climate performance across firms. And that, in turn, dampens the incentive of those firms to improve and disclose their climate performance in the first place. 23  https://www.fsb-tcfd.org/wp-content/uploads/2019/06/2019-TCFD-Status-Report-FINAL-053119.pdf 9  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  9  Chart 4: Correlations between environmental scores from different rating providers24  Key Each matrix displays correlation coefficients between Environmental ratings given by five rating providers (labelled P1 – P5 in the charts) on a sample of 924 firms (2017 data). Right: Correlation coefficients between aggregate Environmental ratings. Below: Correlation coefficients between ratings of a selection of more granular environmental categories.