The real tragedy of the horizon

Ten years ago today, as Governor of the Bank of England, Mark Carney warned of the ‘tragedy of the horizon’: that by the time climate risks fully hit markets, it would be too late to act. Climate advocates seized the narrative of financial risk, expecting that when faced with impending economy-wide losses, financial institutions would steer capital toward activities that mitigate the underlying risk. A decade later, the field of climate finance is mired in confusion, politicization, and misdirected efforts.

Casting climate change as a financial risk in order to motivate capital allocation was a fundamentally flawed premise for two core reasons.

First, planetary climate risk and financial risk differ in important ways, including in scope and timeframe. Assessing financial risk focuses financial institutions on the climate crisis to the extent that it impairs asset values, earnings, and economic or financial stability, not on the immediate and devastating impacts on livelihoods, food systems, water supplies, health, and global stability. Climate advocates have seized the framing of climate risk as financial risk but then are exasperated when financial institutions’ assessment of their financial risk differs from the scale and immediacy and profound global planetary impacts of climate change.

Second, the financial risk narrative presumes that if financial institutions appreciate the long-term financial risk, they will reallocate finance in ways that mitigate the underlying climate risk. This misunderstands how financial markets respond to risk and what drives financial decision making. NBIM, for example, recently estimated that 19% of the present value of its US equity portfolio is at risk under current climate policy trajectories but explicitly stated that its mandate limits its ability to act more aggressively.

This underscores a fundamental truth: finance follows markets; it doesn’t create them. What matters far more than long-term financial risk is the appetite for, and ability to address, immediate project-level risks, such as offtake, market, technology, and currency risks. Indeed, where investable markets exist — such as in solar, EVs, and digital infrastructure — finance has flowed. But where transitions are still perceived as risky or unstructured, finance remains sidelined.

Our dominant approaches to engaging the financial sector confuse and conflate how financial institutions assess risks, current and future, how they respond to risk, and the set of legal and other mandates within which they operate. Net zero targets, transition plans, and portfolio alignment metrics have proliferated, but they neither help financial institutions assess and understand evolving risks nor do they create the coordinated investable markets needed to finance decarbonization at scale.

A reset is overdue. There is no doubt that climate-related financial risks are real, accelerating, and still underestimated. Mounting physical climate impacts are already disrupting global supply chains, infrastructure, and insurance markets. Risk assessment, distribution, and management are important. Investors must anticipate how climate change will affect assets; insurers have a role to price and share risk; and central banks and financial supervisors require new assessments to understand how unprecedented and non-linear climate impacts will affect the economy. These are essential and prudent functions. But financial losses are just a shadow of the broader social, economic, and planetary consequences already unfolding; the financial sector absolutely must be engaged, but they do not have the tools or mandate to coordinate the necessary transformations.

Importantly, financing regional and sectoral transition pathways is eminently doable. It requires understanding their technological components — such as infrastructure, supply chains, and fuel systems — and their institutional enablers, including regulations, mandates, market structures, and procurement models. From there, public and private actors can design financing frameworks that integrate risk-mitigation tools and appropriate sources of capital. Creating investable markets opens innumerable investment opportunities in electrotech, transport, and other high-growth sectors.

Nowhere is clarity more critical than in emerging markets and developing economies (EMDEs), where roughly 85% of the world’s population lives, more than 700 million of whom lack access to any electricity, and where the Earth’s climate will largely be determined. These countries account for less than 20% of clean energy investment despite representing 70% of global need. Their financing challenges are not intrinsic; they are structural. High costs of capital, limited access to long-term financing, currency volatility, and the under-supply of risk-mitigation instruments all hold back investment. These barriers are solvable, and solving them is not only critical for achieving global climate goals but also presents some of the most promising growth opportunities for investors.

The tragedy is not just on the horizon; it is here. And the solutions are here too, if we focus on the right levers. That means distinguishing risk management from capital mobilization, addressing the structural barriers that prevent EMDEs from accessing affordable finance, deliberately coordinating public–private frameworks that create investable markets, and complementing private markets with public finance. That is the only way to mitigate planetary climate risks today, and reducing the financial risks on the horizon.

This article is also published on LinkedIn. illuminem Voices is a democratic space presenting the thoughts and opinions of leading Sustainability & Energy writers, their opinions do not necessarily represent those of illuminem.

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