September 29, 2015 9:46 pm

The governor of the Bank of England has thrown down the gauntlet to the fossil fuel industry with a blunt warning that investors face “potentially huge” losses from climate change action that could make vast reserves of oil, coal and gas “literally unburnable”.

In a sweeping assessment of the financial risks posed by global warming, Mark Carney acknowledged there was a danger the assets of fossil fuel companies could be left “stranded” by tougher rules to curb climate change.

“The exposure of UK investors, including insurance companies, to these shifts is potentially huge,” he told a Lloyd’s of London dinner on Tuesday night, explaining 19 per cent of FTSE 100 companies were in the natural resources and extraction industries.

“The challenges currently posed by climate change pale in significance compared with what might come,” he said. “Once climate change becomes a defining issue for financial stability, it may already be too late.”

The governor did not suggest the BoE would itself attempt to enforce stricter climate risk regulations for financial institutions.

But his comments are still likely to irk fossil fuel industry executives confronting climate campaigners who argue the risk of so-called stranded assets shows why investors should divest from fossil fuels.

Several oil and gas companies, including Royal Dutch Shell, say the concept overlooks projected demand for energy, especially in fast-growing developing countries.

The prospect of tougher global climate action has grown as delegates from nearly 200 countries prepare to broker a UN climate change accord in Paris in December.

It is still far from clear if the agreement will deliver the cuts in global greenhouse gas pollution that scientists say are needed to ensure global temperatures do not rise more than 2°C from pre-industrial times, a goal governments have already agreed to meet.

But Mr Carney said scientists had calculated the “carbon budget” the world could afford if it is to meet the 2°C target, and it amounted to between one-fifth and one-third of the world’s proven reserves of oil, gas and coal.

“If that estimate is even approximately correct it would render the vast majority of reserves ‘stranded’ — oil, gas and coal that will be literally unburnable without expensive carbon capture technology, which itself alters fossil fuel economics,” he said.

“A wholesale reassessment of prospects, especially if it were to occur suddenly, could potentially destabilise markets,” he said, echoing warnings from the Carbon Tracker think-tank in London that pioneered the stranded carbon assets idea several years ago.

Mr Carney was speaking as the BoE’s Prudential Regulation Authority, published a report identifying potential climate risks for the UK insurance industry it supervises, which manages nearly £2tn in assets.

Mr Carney told the Lloyd’s of London dinner that suggestions that banks and insurers should face new requirements to encourage low-carbon investment were “flawed”.

Instead, he said the Financial Stability Board, an international body monitoring the global financial system that Mr Carney chairs, may recommend G20 countries make it easier for investors to compare the “carbon intensity” of different assets.

He suggested a “climate disclosure task force” could be set up to create a voluntary standard for the information companies producing or emitting carbon should disclose.

Information about companies’ carbon footprints would give investors a better idea of potential risks at a time when scientific evidence was showing that eventually, “climate change will threaten financial resilience and longer term prosperity”, Mr Carney said.

“While there is still time to act, the window of opportunity is finite and shrinking.”