Canadian economist Mark Carney has been on the front line of each of the major economic shocks of the past 20 years: credit crisis, climate change, and COVID-19. As governor of the Bank of Canada from 2008 to 2013, and the Bank of England from 2013 to 2020, he wrestled with the legacy of deregulation in the wake of the global financial crisis, and supported the economy through Brexit and the coronavirus pandemic. Now, as UN special envoy on climate action and finance, and vice-chair and head of ESG at Toronto-based Brookfield Asset Management, he is a key global player in the economic transition to net zero in the lead-up to the United Nations Climate Change Conference of the Parties (COP26) in November.
Carney, 56, distills a career’s worth of thinking on these issues in a wide-ranging new book, Value(s): Building a Better World for All. Prior to joining the public service, the Harvard- and Oxford-educated economist spent 13 years at Goldman Sachs. Part history of money, part lessons on leadership, and part discussion of what markets can and can’t do well, the 500-plus-page Value(s) lays out a framework for business leaders, investors, and policymakers as they embark on a green recovery. It’s also the latest rebuke of unfettered capitalism and free-market fundamentalism offered up by a high-profile figure from the world of finance.
The book’s core subject—the tension between market-determined value and human-led social values—provides a foundation for what Carney calls “mission-oriented capitalism.” He argues against an economy in which “the price of everything is becoming the value of everything.” His vision is in line with prevailing trends in business, in which corporations and markets make returns for shareholders, but whose core purpose is to “improve our lives, expand our horizons, and solve society’s problems, both large and small.”
In a June 2021 interview with strategy+business from his home office in Ottawa, Carney spoke about the shape of the recovery and how businesses can contribute to a purposeful future.
S+B: As a former central banker with a global economic perspective, what do you think the recovery looks like from where we stand today?
CARNEY: Let’s break it down a bit. Firstly, in countries that are getting on top of COVID-19 and starting to reopen, we expect to see a strong recovery in the short term. It’s a bounce back fueled by pent-up savings, pent-up demand, and an initial few quarters of strong growth.
In parallel, we have emerging and developing economies struggling to get to the same place, underscored by the humanitarian need to get control of the virus globally. These are the elements of the so-called K-shaped recovery, in which advanced economies and China are diverging from the rest of the world.
Then the question becomes, OK, where do we go from here? And how is growth sustained, particularly given the rewiring of the economy needed for the fourth industrial revolution and the shift toward net-zero sustainability?
S+B: You are working on the challenge of financing the green transition, finding the funds necessary to build a global zero-emissions economy and deliver on the goals of the Paris Agreement. How would you quantify the scale of what is needed?
CARNEY: People have dimensioned this. For example, the International Energy Agency (IEA) has said it will take US$5 trillion a year of investment to reach our climate goals. Others have estimated around the $3.5 trillion range. In infrastructure investment, we’re seeing roughly $2.5 trillion annually, which means we need between $1 trillion and $2.5 trillion more per year as it currently stands.
These are enormous numbers. But one consideration that is often forgotten is that companies, on average, fund two-thirds to three-quarters of their investment internally. It’s funded out of cash flow. Sometimes these numbers are thought about only in terms of external finance.
Another important point is that if something is going to cost that much, there’s obviously a tremendous incentive to make it cost less. My bet is that lots of energy will go into getting these costs down. When you’re talking about spending $150 trillion between now and the end of 2050, if I can get 1% of $150 trillion, I’m happy, right?
S+B: What initiatives are you currently developing to streamline this funding in your role for the United Nations?
CARNEY: A large part of my focus is to make sure that the private financial sector has the same orientation on these issues, so that funding is available when companies and organizations are investing in something that’s going to reduce their carbon footprint.
We launched the Glasgow Financial Alliance for Net Zero (GFANZ) [in April 2021], with $70 trillion on the balance sheet. [GFANZ brings together more than 160 firms from the leading net-zero initiatives across the financial system to accelerate the transition to net-zero emissions by 2050.] We’re going to make that bigger and we’ll get more people involved. It gives you a sense of how quickly this mainstreamed. One of my messages to the business community is that you can make strategic decisions on climate and expect that the financing will be there for you.
S+B: What are your challenges in terms of global access to this capital investment, given the K-shaped recovery you’ve observed?
CARNEY: For a number of developing economies, in addition to global health challenges, we have a buildup of more debt, as well as less policy [with respect to] these issues in certain jurisdictions. This complicates the initial pump-priming we’re talking about. And certainly, the numbers today would indicate that almost a decade of economic convergence between the developing world and the advanced world has been erased through the pandemic.
However, there are some positive notes. The IEA says that roughly two-thirds of the energy investment required is in the emerging and developing world, which could be the catalyst for investment in these countries.
So, creating the conditions for capital to flow into these areas is a big challenge in my role with the UN in the lead-up to COP26. We want to develop some of those missing markets. We’re looking at using so-called blended finance, in which you’re blending multilateral development finance with private-sector finance. And we are also looking at potentially creating a market for carbon offsets, which would really be investments from advanced-economy companies that have net-zero plans in emerging and developing economies.
S+B: So, we have cause to be optimistic?
CARNEY: As I write in the book, I’m optimistic about sustainability and the road to net zero in the sense that it provides an opportunity to realign our social values and value in the market. The book goes into quite a lot of detail about what is achievable in the financial sector, and the policies that would be consistent with those goals.
These include developing consistent metrics for firms’ ESG conduct and ensuring that executive pay is in line with long-term performance. It’s also crucial to instill both values-based leadership, to drive this transformation, and effective governance and policy, by leveraging the social solidarity we saw develop over the pandemic.
S+B: You were an early advocate for talking about climate change in the financial sector. What advice do you have for incorporating ESG into the heart of businesses and organizations? For instance, should banks have climate change specialists on their boards?
CARNEY: I helped launch the Taskforce on Climate-related Financial Disclosures [at the Financial Stability Board] in 2015, which is on its way to becoming the basis for mandatory climate disclosure standards [for companies, banks, and investors, and for providing information to stakeholders]. It includes certain climate metrics as well as looking at governance of climate risk. The obvious point is that organizations should have a board-level committee with specific responsibility for overseeing climate risk, and a specific director who oversees that work within the company.
I’m optimistic about sustainability and the road to net zero in the sense that it provides an opportunity to realign our social values and value in the market.”
In terms of the board composure, you’ve got to have expertise in climate, just as you do in other areas. It doesn’t necessarily have to be a climate scientist, per se, but certainly someone who understands climate scenario analysis.
There’s a basic question all companies now must ask themselves: how do they need to adapt, if countries are going to meet their climate goals? We have 130 countries saying they’re going to get to net zero, with the objective being less than two degrees, preferably to 1.5 degrees Celsius, compared to pre-industrial levels. If I’m on a board, I’m thinking about what my business looks like in a world characterized by the combination of regulation, carbon pricing, moratoriums on certain investments, emerging technologies, and changing consumer preferences.
S+B: In addition to investment in green innovation and transformation, should banks and investors divest from carbon-heavy assets such as fossil fuels?
CARNEY: It would be very odd to want to be in the position to take the risk of stranded assets and loss—in essence, to be exposed to a world where we don’t deal with climate change in a timely manner. I said this the other day at a Bank for International Settlements event: “You don’t want a financial institution that’s going to fail if society succeeds.”
The technical point is that as part of the green transition, there are a series of potentially quite large assets that will be stranded. The question for boards, investors, and banks is: what’s the terminal value of their assets? It’s a question relevant whenever there are large technological shifts in the economy, or, for instance, when there are large fluctuations in the price of oil. Questioning the useful life of a variety of assets, as opposed to the point at which they give up the ghost, is a process that has begun in the financial community. But in my judgment, it’s got a long way to run.
S+B: The argument for stakeholder capitalism, the idea that companies exist not simply to make money for shareholders but also to make a meaningful contribution to society, is growing quickly in the business community. How do you see this evolving?
CARNEY: I saw the mainstreaming of a lot of these issues while I was writing the book, particularly as the weight of evidence became stronger. I think there is now a general recognition of the need for an alignment of stakeholder value, or said a different way, of purposeful companies.
The point I would make is that being carbon- and climate-competitive is going to be an increasingly important determinant of shareholder and stakeholder value. For a broad range of businesses, getting on the path to net zero will be one of their top three strategic issues—if not the top strategic issue—depending on the sector. The message is that business is very much part of the solution to climate change. We’re not going to get there without innovation, investment, and energy in business.
S+B: Another key theme in your career has been the challenge of the fourth industrial revolution, the ongoing automation and digitization of traditional jobs and processes across sectors of the economy. What priorities do you advocate to policymakers?
CARNEY: The fourth industrial revolution will bring big distributional shifts to those who are tech-savvy, and those who aren’t; those who are in certain jurisdictions, and those who aren’t—as these things always do. In short, this is about digital transformation and inequality, and in my judgment it’s necessary to act so that as many people as possible can take advantage of the revolution now. Change the social welfare system. Change the fundamental structure of the tax system. Change the way we do mid-career training for people. Set up free trade for small and medium-sized enterprises. Change the whole financial payment system in real time.
It’s doable as an agenda—but it’s not modest. I would argue that if those types of changes are not made, it’s likely that as a consequence, we will move through a period with more dislocation of unemployment.
S+B: You observed the erosion of trust in institutions firsthand, specifically within financial services, a sector that was seen by many as failing us during the global financial crisis. How do you view this challenge considering the relatively good performance of the sector through the pandemic?
CARNEY: I was governor here in Canada during the financial crisis, and we had a relatively good crisis. [Canada was the only G7 country not to have to bail out its banks.] The system worked, and the financial sector—banks in particular—improved during this time, along with people’s views of them.
But when I traveled to the UK, and certainly when I got there as governor, the loss of trust and the anger that was felt against the big banks and the financial-services industry was visceral. [The UK economy suffered its deepest recession since World War II as a result of the financial crash.] Many people were appalled when they saw that these “masters of the universe” were treating themselves very well, but clearly didn’t really know what they were doing.
The consequence is that it will take a very long time to rebuild. In any sector, trust is built through repeated and demonstrated performance. This is especially true for finance, which doesn’t have a deep reservoir of goodwill at the best of times. But I do agree with the second part of your premise, which is that the financial sector has performed well during the pandemic, as it should have. It was part of the solution, not part of the problem, which is a good start.
S+B: What practical steps do you advocate to rebuild trust in institutions?
CARNEY: I’ve spent most of my life in finance. To be trusted, you’ve got to be competent, you’ve got to be resilient, you’ve got to be able to withstand shocks. And, crucially, you need to constantly think about those you’re serving, as opposed to getting caught up within finance itself. That’s why I underline that value of solidarity in the book.
On the practical side, the financial reforms I’ve enacted were based on making more capital available, through liquidity and aligning incentives for financiers. But we also held back bonuses for up to seven years for senior executives, making them responsible for ensuring that their employees had been adequately trained, given the resources.
However, there’s a limit to reforms. You can’t legislate virtue. There’s a cultural element related to whether you view yourself in a senior position as a custodian of your institution. Are you part of the system? Are your actions [advancing] things that go beyond your time, and beyond your specific institution? Building that sense of responsibility takes time. And it must be demonstrated over time for people to really trust you and the system.
S+B: You argue that the current crisis of trust in business and government is in part a crisis of leadership. How did you approach this challenge as a central banker?
CARNEY: I make the distinction in the book between transactional and transformational leadership. There are some circumstances that are well suited for transactional leaders, but arguably, we’re in a time when we need transformational leaders.
When I reflect on my time as a leader, this means having a sense of purpose and a mission to carry out. To go back to the stakeholder–shareholder question, if the mission is just to maximize profit, then it doesn’t tend to work. Better is when the mission provides a solution for society or is aligned with other stakeholders. At the Bank of England, my job involved traveling around the UK, meeting with smaller firms, smaller groups, and charities. It was an accountability exercise, but it was also important to have a feel for something tangible behind the numbers. You’re not going to make a decision on the basis of one citizen’s advice bureau or charity, but you’re going to have a better perspective of what the economy is really like. And that’s true within any organization. It’s the same reason that leaders in North America have what we call “brown bag lunches” with a cross-section of their organization. You meet the people who are in roles you wouldn’t otherwise see, and you get their perspective.
In other words, transformational leaders need to bring others along, not just to implement their solutions, but to help find a solution to the big challenges that they have.
S+B: What are some of the other attributes of a purposeful leader that you have learned in your career at the top of finance?
CARNEY: It may sound a little odd, but I do focus on humility in the leadership chapter. It’s one of the values that I’m emphasizing. Not the [cloying humility and insincerity] of [Charles Dickens’s] Uriah Heep, but humility with a purpose. Recognizing this goes back to the custodian point, that being in a leadership position is not an end in itself.
An example of this is when we were working on changing how we made decisions at the Bank of England and we wanted to make sure that more people participated. According to our statute, people on the committees make the decisions [about monetary policy]. But you’ve got all these smart, hardworking people on the way up who do all sorts of analysis. You want them to be making a clear recommendation and influencing the decision in a way that’s tangible to the purpose.
We felt we needed to change how we did things for that to be the case. We went to distributing shorter memos before meetings. In meetings, we made sure all the memo authors were in the room, and we changed the way we held discussions. As I say in the book, we lifted a lot of this from conversations that I had with the head of Amazon in Europe. I learned that that’s how they made certain types of transformational decisions.
The final point I’d make is that as a leader, to achieve bigger objectives, you need to combine the ambition of the objective with humility. You may not know exactly how to get there, but you’re going to trust and work with people in a way that draws out the best of them to accomplish your goals.