Alexa Mazzarello/The Globe and Mail
If Thomas More was the man for all seasons, Mark Carney might be the man for all crises—the financial ones, at least. History will record that Carney, born in the Northwest Territories 56 years ago, rode good fortune and intellect from the margin of the world, through Harvard, Oxford, Goldman Sachs and the Canadian department of finance, into the middle of the most tumultuous economic events of recent times. As Governor of the Bank of Canada, he had an intimate view of the financial crisis of 2008-09. As Governor of the Bank of England, he helped steer that country’s financial system through the 2016 Brexit referendum and its immediate fallout. And he was still there as the first tremors of the COVID-19 pandemic were being felt. At every stage, he helped mitigate the damage. Now back in the corporate world, having parlayed his status as the UN special envoy for climate action and finance into the leadership of Brookfield Asset Management’s environmental, social and corporate governance investment strategy, Carney has produced a book. At a dense 531 pages, Value(s): Building a Better World for All covers a vast range of issues, from the history of money and the foundations of the modern financial system to the banker’s experiences at the lip of the world’s economic abyss. It also offers a detailed blueprint for purpose-driven leaders who see the value in doing good while doing well in a world beset by existential challenges. With much to discuss, Carney spoke to us via Zoom from his home in Ottawa.
How does it feel to be back in Canada?
It’s great. We’ve been back in Ottawa since mid-August. Same house we left. Like everything, though, it’s strange, because for a substantial proportion, it’s been semi-lockdown, if not full lockdown. I’ve bumped into very few people in the six months I’ve been home. It’s minus 15. You gotta call someone up and meet them for a socially distanced walk. But it’s good to be back and feels...integrated.
You led the Bank of England for seven years. How do you think it changed in those years?
My utility was as an outsider. Effectively, the system had failed there. Most of the major banks had been rescued, and a series of scandals emerged in the market. It’s hard to change a 325-year-old institution steeped in history. But there were a couple of advantages. One was, things hadn’t worked that well. Secondly, the structure had changed. Prior to the crisis, the Bank of England was like the Bank of Canada. It had monetary policy responsibility as a sort of educated-observer role on the financial system, but no power on the financial system. George Osborne’s reforms were to make it the bank regulator, the regulator of insurance, the regulator of all the financial market infrastructure. It’s changed a lot because of bedding down those reforms; that was part of the job. And culturally within the organization—the diversity of the personnel, how decisions were made. All central banks are hierarchical, but the Bank of England, being the second oldest, was as hierarchical as you can get. That needed to change. And I think it has shifted a long way.
Now you’ve landed at Brookfield Asset Management. Why Brookfield?
I had taken an interest in sustainability as a moral imperative and fundamental issue, so I wanted to do something to advance that. Secondly, I’ve known the senior partners, I’ve known Bruce Flatt, for 25 years. I have immense respect for them personally, but also for what they’ve done with the organization. And there was a unique coming together, because they were thinking about their impact-investing strategy. I’m thinking about climate, putting actions to my words, if you will. I’ve been doing it as a regulator, but this is a chance to address sustainability from an opportunity perspective with one of the biggest private owners of renewables in the world. Brookfield understands decarbonization. It understands how to transform companies. It’s got global reach. And when it focuses on something, it really focuses on it. So, the opportunity to set up a strategy to accelerate the transition toward a net-zero economy was very attractive.
How do you define impact investing?
In effect, impact investing has a double bottom line. It’s looking at contributing measurable social and environmental good, alongside a financial return. The impact funds that exist, anchored in sustainable development goals, have targeted investment that improves clean water or gender parity in education or soil health or the oceans. My view was, if we’re gonna do something there, why don’t we take on the biggest issue, which is climate? Go to where the emissions are, take companies and assets and reduce their emissions, and put them on this trajectory to net zero. It’s relevant to the set of issues I’m trying to tease out in my book, Value(s).
The book walks us through a number of crises you experienced firsthand. You’d just started as Bank of Canada governor when the financial crisis began. What was your worst day, personally?
From the spring of 2008 through to Lehman Brothers, I didn’t know when the meltdown was gonna come, but I knew this was imploding. You could prepare for what was coming, but you couldn’t stop it. One of the challenging things was the emergency rate cut in October 2008. At the time, it was an election campaign. And wrongly, I was concerned that us cutting rates, when the narrative was that everything was fine, would be seen as political. And then I had a small epiphany: Wait a minute—if the only reason I don’t do it is because it’s in the middle of an election campaign, then that is political. And of course, as I detail in the book, if anything, it helped the government, as it turned out.
In the aftermath, do you think enough was done to hold people accountable?
I don’t think the system was set up to hold people accountable. The accountability was basically centred on criminal activity. I mean, massive incompetence—you should also be held to account for that, and for not acting with a sense of responsibility for your institution, and some sense of responsibility for the system, as well. I have to say, when I was Governor, the major Canadian financial institutions took a series of decisions—and we were part of those decisions, encouraged some of them—that, to their credit, were in the interest of the system, not just their own institution.
Are there enough protections in place to prevent that kind of thing from happening again?
There are many more protections. Financial history suggests you never should say there’s enough. I think we’re a lot farther down the road that a large institution could fail without bringing the system down. And it would be quite valuable if that happens, in terms of the lessons it would teach to others.
You say that the way to prevent a crisis like this is not more regulation. Why?
Did I say that? I don’t think I said that.
You wrote that it promotes a culture of complying with the letter of the law, not the spirit of the law.
Yes, you’re right. So, there are two broad approaches to regulation. And the pendulum swings back and forth between light touch—”let the market take responsibility”—to very strong regulation that tries to anticipate every contingency. And, of course, you can’t anticipate every contingency. Look, I’m a believer in regulation in the financial sector. As in all things, there are degrees. If I’m running a 50,000-person bank, those people should understand what they should and shouldn’t do. There should be a compliance effort. There should be protections in place. And there should be accountability if things go wrong in terms of somebody’s compensation being clawed back after the fact. And after the fact is important, because sometimes it takes three years for the risk to crystallize, for the scandal to come out. And that’s part of this accountability mechanism. It also changes the horizon of the individuals. They’re not just trying to get through to the year end, take their bonus and potentially walk. No, they’re gonna live with the decisions that are made for years.
China is starting to adopt some of the shaky debt practices that got us into trouble. How concerned are you that China could be the source of the next financial crisis?
You see similar dynamics in place in many jurisdictions. It has been a concern the past several years. Most crises have their origin in fundamentally positive developments. So, you have a Chinese growth miracle, you have fintech innovations, which spread new financial products to a much broader set of people. These are, by and large, positive developments. But they can take on an extrapolative characteristic, which builds up leverage, trees grow to the sky, you borrow on the anticipation of future profits, and those risks build. Three or four years ago, a number of aspects of the Chinese shadow-banking sector were not dissimilar to the asset-backed commercial paper sector in Canada, the SIVs in the U.S.—a point that, in my role on the Financial Stability Board, we and others made to the Chinese. They’ve taken a number of measures since, which have reduced those risks. But they are there, and we all have to be vigilant.
Let’s move to COVID-19. How do you think the pandemic might change our values?
There were revealed values in COVID-19. Canadians and others—people who had relatively low personal risk—made the choice to take measures seriously in the interest of others. Secondly, you had this wave of volunteerism come out. There’s lots of evidence that virtue begets virtue. Charity begets charity. It also put a real spotlight on the inequities in our society. This is a crisis that has affected racialized Canadians worse, it has affected women worse, it has affected the least well-off worse. On every metric, it has widened those fissures. So, the expectations around fairness and equity in society, I think, have shifted. And then two other things have been reinforced. First is resilience. We did not have—in Canada, the U.K., elsewhere—resilient protections for this type of event. And secondly, sustainability. It’s reinforced the issues around the need to address climate change.
We’ll get to climate in a second. In the book, you talk about being worried about the amount of public debt and purchases by central banks. What concerns you the most?
I definitely agree with the stance that the major central banks have taken in terms of support. The pandemic is a huge disinflationary, if not deflationary shock, and so the right monetary policy response was in the direction they’ve taken. As well, I’d agree, given that they have fewer and fewer options to provide stimulus when needed, that the shift in the Fed’s reaction function toward this flexible average inflation targeting—so they’d have a bit of an overshoot coming out of this—is also something that’s supported for a durable recovery. We’re gonna get a quick bounce back as things reopen. The question is, does it extend? And I think the Fed’s policy will help it extend. On fiscal, one of the core things I’m trying to say is, just because rates are low and you can borrow a lot of money and spend it doesn’t mean you should. And while there’s an important role for fiscal support here, there’s also a need for discipline and making sure it has the impact it needs to.
You mentioned the inequalities the pandemic has surfaced. Where do you stand on the notion of guaranteed basic income?
Governments have taken extraordinary steps to support individuals and companies, as a bridge toward the return to a normal economy. In the U.K., the deficit, basically, will be cut in half when the economy returns to normal. In other words, the government is standing in for the activity that would otherwise be there. It underscores the importance of a safety net. Whether a guaranteed basic income is the first, best use of limited fiscal capacity is an open debate. We’re going through what’s often called the fourth industrial revolution. In parallel, we’re getting these big structural changes that will come with the move to sustainability, and income support alone is not going to support a worker into those new roles. Maximizing the prospects of employment, as opposed to only dealing with the consequences of unemployment, is important. To govern is to choose, and choosing the balance on that is critical.
Let’s move to climate. Big picture, how do we marshal the forces of commerce to get to net zero? Is it about making it somehow profitable to reduce emissions?
The first thing is being absolutely clear on the objective. It seems we needed a Swedish teenager to point out the basic climate mess in a way that was digestible. But if you understand we have a limited carbon budget, it means that certain investments today will not be fully depreciated by the time we have to be at net zero. Secondly, recognizing that if the world’s gonna get to net zero, it means every company in every sector—it’s a rewiring of the economy. So the question you ask yourself in a business is, do I plan to be around in the next decade? Or am I gonna run my business off and redeploy the capital somewhere else? Or do I think I’m separate from society, and I don’t care that this is what society wants? Those are your only three options.
Your question, in that context, is about profitability. And this is a critical point. As we shift to “This is what society wants,” solving the problem becomes profitable. And it’s not just because the carbon price is going to rise over time. It’s also because consumers are increasingly focused on sustainability. It’s because the providers of capital are increasingly repricing the provision of capital based on whether you’re perceived as part of the solution or part of the problem. All of that is driving toward profitability.
You anticipate the formation of what you call a new “transition” asset class. Can you define that?
It’s taking assets that are not on the path to net zero and putting them on that path. It’s judging companies and assets on whether they are profitable in a low-carbon economy. The reason to call it a transition as opposed to a green asset class is because, in many respects, green is the destination. There are a series of industrial processes where they can take out a lot of the emissions, begin their transition toward net zero, and preserve and extend that carbon budget
Is the onus on political leaders or on business leaders to manage the coming challenges?
As in many of these things, it is shared. I think there is an onus, though, on the political side to really grasp the scale of the change and what’s needed. The fourth industrial revolution is going to involve a series of mid-life, mid-career adjustments. Are we going to integrate our education system and our social support system to that big retraining that’s coming? Those are fundamental government questions. Then with industry, one of the questions is, how do we use AI? I use this phrase in the book: Are we digital by default, or are we digital by design? And are we consciously looking to empower jobs with knowledge or to replace those jobs? And then a meeting of the two, when you look at something like the trade architecture. I’ll use the example of Shopify, which creates an entrepreneurial platform for small and medium-sized enterprises. They can be part of what could be a sort of globalization for SMEs. And then all of a sudden you have something that is reducing inequality. It’s reinforcing dynamism in the economy, and it’s knitting together the system. Shopify and companies like that, for all their brilliance, can’t do it by themselves. Governments can’t do it by themselves, ‘cause they don’t have the brilliance. But working together and recognizing these bigger forces is part of how we could accomplish it.
Do you see yourself being a participant in this process on the business or political side? Is there one you would prefer?
I mean, you know, right now I’m focused on sustainability, both in terms of the work for the UN and for Brookfield. Pretty healthy set of challenges there. Part of what I was trying to do with the book is to get some of these ideas out there.
So you’re not ruling out a political role in the future?
[Laughs] I’m not sure that was in the transcript, but I said what I said.
No, I’m asking.
Oh, is that a question? Okay. Look, Trevor, you’ll be the first to know. You and everyone else.
Part of your job as a bank governor was to anticipate the future. So I want to cast forward 30 years and ask you five rapid-fire questions. First, in 30 years, is there more economic inequality or less?
More, unless we act.
Does physical money exist?
As an anachronism.
Have we experienced another financial crisis?
Yes.
Have China and India surpassed the U.S. as economic superpowers?
[Carney is silent for 14 seconds] No.
It took you a while.
I’m not fully convinced. The easy answer is yes. The weight of demography and history would suggest that would be the case. But I don’t think it’s a forgone conclusion for positive reasons that could happen in the U.S. but are not assured.
And have we achieved net-zero emissions?
Yes.
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