Read it again. Or read it for the first time.
While it features the most cited line in all of sustainable finance, the Tragedy of the Horizons speech by Mark Carney, given this week 10 years ago, is more than a one-line stand. It remains one of the most clear-eyed expositions of the materiality of climate change for the insurance and finance sector.
A decade later, it is striking to see it anticipate the emerging stresses from climate change to economies and financial markets: the threat of insurance gaps, social risks from climate change, food security and political shocks.
In many respects, the horizon has arrived. And – as Carney predicted – it is a tragedy.
But reading the speech again this week in preparation for this column, what stood out was not the eloquence of the famous repurposed phrase (“tragedy of the horizons”), or the boldness of its foresight, but the meekness of its retort.
The speech effectively announced what would become the Task Force on Climate-Related Financial Disclosures (TCFD). It also suggested the need for climate stress-tests.
That’s it.
The way to overcome the tragedy of the horizons – in the words of Carney – would be to “manage what you measure”.
Never has a speech been so sharp in its diagnosis of a cancer and so dull in the incision designed to remove it.
That is not a critique of the TCFD or the disclosure regimes that it begot. While I am notoriously sceptical when assessing the impact of traditional disclosure frameworks on mobilising capital, I have many friends who can regale me with countless anecdotes of disclosures changing corporate practice.
And while it is not my impression that, 10 years on, we enjoy comparable, forward-looking, and actionable data across a meaningful sample of companies, the data landscape has undoubtedly transformed for the better (although dare I credit the revolution in asset-level data with some of this?).
The problem is not with disclosure and whether it’s a good idea or not. It is that Carney’s vision didn’t meaningfully go beyond measurement.
Beyond disclosure
I understand the political straitjacket Carney found himself in 2015 and the need for coalition building within the Financial Stability Board framework that constrained his agenda.
And one may be inclined to look at progress since then and share fellow Canadian Drake’s sentiment: “Started from the bottom, now we’re here!”
But the problem is that Carney described a cancer in 2015: A myopic financial sector structurally unable to integrate long-term risks.
Measuring these risks doesn’t change the fact that they are long-term risks and unless incentives change, no, they won’t get managed.
It may seem like in the current environment, increasing the ask of financial regulators to regulate is like singing Drake’s “Problems” into the storm. If Carney didn’t feel like he could in 2015, how can we in 2025?
But the tragedy of the horizons issue is not just a climate issue. A more long-term financial sector would have been better prepared for the covid-19 pandemic, and will be better prepared in the era of polycrisis.
Overcoming the tragedy of the horizons remains both a welfare and a financial stability issue.
And so financial regulators will have to solve for this, sooner or later.
This involves building more systemic financial resilience in the private sector. The good news, we are not short of ideas!
Italy, for example, is introducing mandatory climate business interruption insurance to address the growing exposure to climate change.
Even if mandatory insurance may go to far for some, there are clear regulatory options to strengthen this insurance instrument in a way that better protects policyholders. Force majeure clauses similarly are a legal landmine waiting to happen that could benefit from regulatory clarification.
Rules limiting share buybacks and mandating corporate rainy day funds, similar to the capital requirements imposed on financial institutions, would undoubtedly reduce the likelihood of socialised risks. Even if companies ignore long-term risks, they help ensure that when those risks inevitably arise, balance sheets are ready for them.
Then there are concrete financial incentives. The recent reform of collateral requirements by the European Central Bank designed to take into account climate factors could expand to incentivising more long-term instruments.
Finally, if central banks want to regulate long-term risks, they actually need to begin the hard work of not just simulating or stress-testing them, but actually monitoring them.
Of course, beyond regulatory initiatives, the financial sector will only be more long term if asset owners drive more long-term behaviour.
There are many ideas. My favourite is the need to break the tyranny of market-cap weighted benchmarks in favour of long-term benchmarks that take into account heterogenous discount functions and different definitions of the “market”, and could help reduce a range of bad short-term incentives ranging from reporting to index hugging.
Of course there are other mechanisms to drive more long-term thinking, including adjusting mandates to require minimum long-term investment research budgets.
Carney described a future where disclosure would yield a virtuous cycle of exposing the cost of doing business in a time of climate change, smoothing price adjustments, and creating a positive feedback loop.
But 10 years later and what feels like a million new data points for investors to choose from, we are, I fear, still far from that vision. And unless we do more than measure, that won’t change!
Hyman Minsky, the economist that inspired Carney’s other famous turn of phrase (“Climate Minsky Moment”), described in his 1992 paper A Financial Instability Hypothesis a financial sector successively divorcing itself from economic fundamentals (Hey Magnificent Seven, sound familiar?). A financial sector that forgets the past, as if whatever comes is “God’s plan”.
The Tragedy of the Horizons speech boldly reminds us that in finance we do not just forget the past, but are blind to the future, trading in euphoria as if tomorrow never comes.
The tragedy of the tragedy of the horizons speech is that it did not lay out a bolder vision for how to overcome that myopia.
Jakob Thomä is co-founder of Theia Finance Labs (formerly Two Degrees Investing Initiative), research director at Inevitable Policy Response and professor in practice at University of London SOAS.
