Along with physical and liability risks, insurers face threats from the re-pricing of investments in fossil fuels in the move toward a lower carbon economy, Carney said. U.K. insurers, alone, manage almost 2 trillion pounds ($3 trillion).
“The exposure of U.K. investors, including insurance companies, to these shifts is potentially huge,” Carney said, noting research suggesting current modeling in the industry may be under-pricing risk by 50 percent if current weather trends become normal.
The key danger is that changes in policy leave oil drillers and coal miners with stranded assets -- reserves that have little value because the fight against climate change will require them to be left in the ground. While disputed by energy companies, the issue has been gaining attention in the past year and is a focal point for a round of United Nations talks on global warming due to culminate in December.
At most, just over a quarter of fossil-fuel reserves can be used if warming is to be limited to 2 degrees Celsius above pre- industrial levels, scientists convened by the UN have concluded. The so-called carbon budget compatible with the 2-degree goal goal would be used up in about two decades at current levels of fossil-fuel consumption.
“A wholesale reassessment of prospects, especially if it were to occur suddenly, could potentially destabilize markets, spark a pro-cyclical crystallization of losses and a persistent tightening of financial conditions," Carney said. "The speed at which such re-pricing occurs is uncertain and could be decisive for financial stability."
Risks will be minimized if companies and investors begin adjusting early and policy follows a predictable path, the governor said.
In an echo of the push to increase information disclosure following the financial crisis, Carney suggested that the G-20 could set up an industry-led group, a Climate Disclosure Task Force, to design a voluntary standards for detailing emissions by those companies. The G-20, whose member states account for around 85 percent of global emissions, is in a prime position to lead the initiative on this, he said.
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