It’s hard to exaggerate the influence of Mark Carney’s now almost 10-year-old speech, The Tragedy of the Horizon, in mainstreaming the financial risks of climate change and the concept of “stranded assets”.

“We don’t need an army of actuaries to tell us that 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,” he said.

Carney’s words made the mainstream news, and were referenced in responsible investment reports and shareholder proposals at oil giants. In 2020, one of the world’s largest asset managers, State Street Global Advisors, published research on designing effective portfolios for climate-risk management titled “Avoiding the tragedy of the horizon”.

At Responsible Investor, we often joke that there was a time where literally anything said on climate and sustainability by a central banker or anyone remotely involved in finance policy and regulation would be news.

Carney’s 2015 decision to very publicly state his position on climate risk, and use the speech as a springboard for what became the Taskforce on Climate-related Financial Disclosures (TCFD), helped change this.

Notably, his ultimate call to action 10 years ago was for disclosures. The final words of his speech were: “With better information as a foundation, we can build a virtuous circle of better understanding of tomorrow’s risks, better pricing for investors, better decisions by policymakers, and a smoother transition to a lower-carbon economy.

“By managing what gets measured, we can break the tragedy of the horizon.”

What came shortly after, however, in terms of policy action around climate and wider sustainability disclosures, is what’s now being so fiercely contested – and rolled back, including by sustainability leaders such as the EU.

Which brings us to another anniversary, namely that of when Mario Draghi one year ago set out in blunt terms how the EU must change to boost growth and competitiveness.

“If Europe cannot become more productive, we will be forced to choose. We will not be able to become, at once, a leader in new technologies, a beacon of climate responsibility and an independent player on the world stage… This is an existential challenge.”

To become more productive, Europe must “radically change”, he said – and part of this (alongside many more suggestions in a 400-plus page report) was reducing the burden imposed on European companies by sustainable finance regulation such as the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD).

We all know what happened next – and we’re still waiting for the conclusion.

Pragmatism and hindsight

In a “one-year on” speech last week, Draghi welcomed progress such as the EU Omnibus process to simplify sustainability disclosures, but more broadly expressed frustration and called for faster change.

The need to decarbonise featured prominently, but Draghi noted that “as we press ahead with decarbonisation, the transition must also be flexible and pragmatic”.

We hear a lot about pragmatism in the climate and sustainability space. Carney’s 2015 point, that what gets measured gets managed, has long been a responsible investor slogan – but one we hear repeated less frequently.

And in more recent years, complaints have mounted about information overload and a resource drain. This, many say, takes time away, at corporates and investors alike, from action that could drive real-world decarbonisation.

While investors still want some type of comparable corporate disclosures – particularly on climate – it’s clear the reporting push is now extremely challenged.

When things get hard, it’s difficult not to turn to hindsight. What could have avoided a regulatory rollback on disclosures specifically and, ultimately, the battle between climate and competitiveness in the EU and elsewhere?

One idea was brought forward in the audience Q&A at an EFRAG outreach event last week on the ongoing simplification of the European Sustainability Reporting Standards (ESRS). An audience member put in the Q&A chat something along the lines of, “Why don’t we just select the 10-15 most important disclosures?”

It might sound simplistic, but perhaps this person has a point? A proposal of a dozen or so mandatory disclosure points for all large companies (how to define “large” is a different story…) might not have been caught up in the ESG backlash and red tape cuts to the extent we see today.

The list of disclosures would likely be extremely hard to find political agreement on – but climate would almost certainly dominate it, and rightly so, given that analysis of the first 100 CSRD reports shows virtually all large companies say climate change is material to them.

While the European Commission’s ambition to set out “detailed” standards across ESG issues and “bring sustainability reporting on a par with financial reporting” was broadly welcomed in 2021, this has since become politically unpalatable, and many investors also want simpler and fewer disclosures.

Transition vs physical risks

More broadly, of course, the transition risks Carney warned of 10 years ago have not yet materialised.

However, a large chunk of his speech actually addressed physical climate risk. Here, things have moved faster than he seemed to anticipate.

He said at the time: “In some extreme cases, householders in the Caribbean have found storm patterns render them unable to get private cover, prompting mortgage lending to dry up, values to collapse and neighbourhoods to become abandoned. Thankfully these cases are rare.”

Insurance cover issues are no longer so rare, and physical climate risks are clearly, and for obvious reasons, climbing the agenda of investors and other financial institutions.

Draghi’s competitiveness agenda is fairly light on specific details surrounding physical climate risks, resilience and adaptation – although the threat of extreme weather events is flagged, as is the need to mobilise financing for climate resilience and adaptation.

Meanwhile, the European Commission has just finished a broad consultation on climate resilience and, of course, Draghi’s former employer, the European Central Bank (ECB), started assessing banks’ preparedness for physical climate risks some years ago.

It brings to mind something a (very!) senior stakeholder told me on the sidelines of PRI in Person last year – that the strong focus on transition risk, as opposed to physical risk, by the financial sector and policymakers had been “misguided”.

If we need a new North Star for climate risk management and decarbonisation efforts in the financial sector, it will likely sound less punchy than The Tragedy of the Horizon (although RI has commissioned an expert to pen an alternative speech fit for 2025 – keep an eye out for it) or “what gets measured gets managed”.

Perhaps it will need to combine the triple cocktail of real-world change, pragmatism and resilience to physical risks.

Elza Holmstedt Pell is deputy editor of Responsible Investor