This is particularly important for capital markets, because a climate asset’s value will be determined far more by where it is going, than by where it has been. Faced with the choice between assets from two companies, one with relatively low current emissions but no investment plans, and another with relatively higher current emissions but aggressive and credible future plans to lower them, an asset allocation strategy based exclusively on current 24 25  Results drawn from https://mitsloan.mit.edu/ideas-made-to-matter/why-esg-ratings-vary-so-widely-and-what-you-can-do-about-it https://www.researchgate.net/publication/342550204_Mind_the_gap_Machine_learning_ESG_metrics_and_sustainable_investment 10  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  10  metrics would not only underperform an alternative strategy that takes account of forward looking information, it would also risk failing to fund the very investments needed to tackle climate change. The biggest rewards will fall to those who are first to spot a heavy polluting company on its way to becoming credibly green. Forward looking disclosures can take many forms. At the highest level, they may set out issuers’ climate targets, and their chosen strategies for meeting them. They may give specific descriptions of investment projects. Or they may involve model-based projections of future performance.
And adaptation to structural change to the economy will mean putting capital into new businesses to replace those whose business models are no longer viable. Failure of risk transfer markets in things like directors’ and officers’ indemnity and – yes – business interruption would have a cooling effect on this necessary investment. So if a protection gap were to emerge through the reactions of insurers and insured to what they have learned about contract uncertainty, we should worry about the wider impact that that might have on economic recovery. I do see a risk of a protection gap. The pandemic has highlighted risks around unintended exposures in insurance contracts and unexpected links across risk areas under extreme circumstances. Most acutely on business interruption insurance – where we have seen vastly different interpretations of how policies should respond to the restrictions placed on businesses as a result of Covid-19, and the sums involved have perhaps militated against either insurer or insured settling for a compromise outcome to claims. The high profile of disputes over business interruption claims has done nothing to dent the popular caricature of an industry that is happier to accept premiums than to pay claims. This matters: it could have an impact on demand for policies, if businesses perceive them not in practice to offer the cover they need – not just in business interruption, but in indemnity policies that cover non-specific perils.