Green swans | News

Green swans

By Alistair McIntosh, CEO HQN

Zut alors! Once again, the French have thrown a spanner in the works. As soon as Boris drags us out of the EU and into a world of cheerfulness, what does the Banque de France do? It dampens the mood good and proper. They’ve dreamed up a new type of stress testing that they call “green swan”. What’s that? I hear you say. Do you remember black swan stress tests? These are big crises that almost nobody saw coming. A good example is the great financial crash. Well, a green swan event is like that but triggered by climate change. And it could be a lot more serious. You cannot print money to save the planet.

What are they worried about? We’re losing lives to floods, droughts and pollution. And this seems to be getting worse. So, of course that’s the first point the bank makes.

But their actual day job is to work with other central banks to keep the economy stable, so they have a lot to say on this too.

If we keep having floods and fires insurance companies will be in trouble. They simply won’t be able to cover the risks. When we switch away from carbon, what happens to all the oil and gas in the ground? It stays there and wipes trillions off the value of companies. One way and another GDP could plummet, and no bank likes to see that.

The bank has some startling things to say about modelling. They repeat the mantra that very few people can spot a crisis on the horizon, but we’re all wise after the event. OK, even the rosbif can follow that. But all of a sudden, the bank plunders the canon of the great French philosophers and pulls out their trump card. Yes, folks: welcome to the epistemological break! Bachelard came up with the notion but Althusser and Foucault took it a lot further. At long last, my much-derided sociology degree comes into its own.

So, what’s an epistemological break? Now, I won’t do this justice. In a nutshell, it’s a colossal breakthrough in thinking. The most common example people give is Einstein’s Theory of Relativity. It was a leap away from Newton and changed how we view the world.

The bank is saying that climate change is so profound we need an entirely new way of thinking about risk. And, moreover, the old ways of modelling will put us on the wrong course.

Moving on, they say that if we can’t predict the risk it then follows that we can’t pluck a mitigation off the shelf. Yes, that makes sense. Then they try and cheer us up some more. No matter what you do to take carbon out of your homes, someone else can stuff you. If they keep burning gas that climate emergency will still happen, even if you do hit your zero target.

So, what do we do? Is it time to give up? Not at all. The bank has given us a stern warning about the perils of climate change and the folly of simplistic responses. Here’s what I would do:

Put your own house in order. Move as quickly as you can to get carbon out of your stock. You’ll need to build in some bunce for trial and error. The first attempt at a new heating system will probably go wrong. That’s life.

Lobby for funding. The Banque de France knows the state will need to put cash in here. Can we do the same in the UK? Green swan shows it’s tricky to estimate the actual costs. We’ve been here before, sort of. By the late ‘80s a lot of our council stock was shot. What did we do? Some bright sparks came up with stock transfer and ALMOs. Can we do something like this again to plug the gap? It’s going to be costly as it bites at the same time as the work to make homes safe after Grenfell. And that cladding was in part a botched attempt to go green.

Keep modelling and practicing. Yes, the bank is highly critical of the way some go about modelling. And if you do it by rote, you’ll come a cropper. They make good points about the desperate attempts to cobble together a mitigation for each and every risk. Maybe it’s time to put the crayons and traffic lights away? Too many risk frameworks give fake assurance.

But used the right way stress testing can actually help you deal with climate change. Some years ago, we asked a FTSE finance director who’d been through a covenant crisis for advice. He told us that you’ll never predict the risk that scuppers you, but you can train the top team to be resilient in the face of a crisis.

So, I’d scour the world for information on climate change and plug scenarios into your models. Then I’d use that as an exam paper for the board. Ask them how they would tackle the problems you put to them. Constant, arduous practice is the best way to get ready for a crisis. Allez les verts!