| By Alastair Marsh "Once climate change becomes a defining issue for financial stability, it may already be too late." That was Mark Carney's warning to UK insurers back in 2015, when he laid out what he called the "Tragedy of the Horizons." A twist on the classic economic problem of excess individual consumption known as the tragedy of the commons, Carney's theory was that the short time horizons in which most financial actors (including central bankers) operate means they will have little reason to act on climate change unless encouraged or cajoled into doing so. "The catastrophic impacts of climate change will be felt beyond the traditional horizons of most actors – imposing a cost on future generations that the current generation has no direct incentive to fix," said Carney, who was then governor of the Bank of England and chair of the Financial Stability Board. (Today he is prime minister of Canada.) Fast forward 10 years and it would appear Carney's warning has not been heeded, at least not in Washington. Bloomberg News reported exclusively this week that in a meeting of the FSB on June 11, Michael Kaplan, the Treasury's interim undersecretary for international affairs, said climate should only be a focus of the influential watchdog if there's proof of an imminent financial stability risk. His comments drew instant pushback from senior officials from central banks and finance ministries, with some officials raising their voices. The FSB chair briefly suspended the meeting until tempers cooled. (Officials for the Treasury, the FSB and other institutions present at the meeting declined to comment.)  The US Treasury building in Washington, DC Photographer: Al Drago/Bloomberg For Matt Scott, who previously established and led the Bank of England's Climate Hub and is now executive director of the UK Centre for Greening Finance and Investment, time horizon is not the only complicating issue in the climate risk conversation. The tension between self interest and serving the greater good is also a central problem here. "There's a distinction between the financial risks facing companies today and the system-wide risks that will crystallize over the longer-term, and the public conversation on climate risk often conflates or confuses the two," said Scott. "For an individual firm, the lowest risk scenario today may well be one where there is no transition. Whereas to deal with the long-term threat, it's in the collective interest of firms to play their part by leaning into, and supporting, the transition." Unfortunately, the opportunity to create the structures in which individual companies and investors are incentivized or compelled to act in the collective interest may well have now passed, according to Michael Sheren, a former senior advisor at the Bank of England with a focus on sustainable finance and climate risk. He says the period of peak enthusiasm for taking action on climate that followed Carney's speech and went at least as far as the COP26 climate summit in Glasgow in 2021, has now passed and forcing change today will be much more difficult. "We should have locked down mandatory climate risk reporting and disclosure and moved quickly to put in place incentives, both carrots and sticks, to drive real economy decarbonization while the wind was still at our back," he said. "Those in the know understand we are speeding way past two degrees, bar any currently unforeseen technology that would alter that pathway, while everyone else either have their heads in sand or are living and investing for the moment and leaving the solutions to someone else." This month's heated disagreement at the FSB "reflects a deeper confusion between financial stability and planetary stability," says Lisa Sachs, the head of Columbia University's Center on Sustainable Investment. On the face of it, the US Treasury's position that climate should only be a focus when its deemed an imminent risk to financial stability is "not an entirely unreasonable position," since most climate-related disasters experienced in the US have largely been absorbed by the financial markets without resulting in systemic stress. But that is far from the full picture, she said.
"The US Treasury is probably right that climate-related financial stability risks are unlikely to be imminent, but that narrow accuracy underscores the perversity of the discourse: by the time climate risks are imminent for financial markets, it will be far too late to avert catastrophic planetary and economic consequences," said Sachs. "What's truly dangerous is not the US position on financial stability—it's the broader failure of US leadership to confront the reality of climate risk and its alarmingly complacency about the macroeconomic and planetary risks facing its own people and the world." Read more details on the clash within the Financial Stability Board on Bloomberg.com. | 
