Episode Transcript
Speaker 0 00:00:01 Hello everyone. This is Kesa Shrine, and today we're going to focus on exploring key trends that will dominate the E S G space in fourth quarter, 2020 and beyond. We continue seeing dramatic events like wildfires, deadly hurricanes, and record summer temperatures. Also, for those of us in the US there is the preparation of the elections, the presidential elections, where the topic of climate transition is coming to the forefront as part of the candidate's discussions To talk about three core themes that may set the agenda in this space is Barnabas X global sales readiness director for sustainable finance at Refinitiv Barney. Thank you for joining us today, and congrats on your new role.
Speaker 1 00:00:47 Thank you guys. Happy to be here again.
Speaker 0 00:00:50 So, Barney, we know that like regions, like the EU have extensive green recovery plans, which could also become a reality in the US if the Biden Harris campaign wins. Responsible investor pointed to a document stating that EU member states want 37% of a 312 billion Euro recovery budget invested in green projects. What are your thoughts, Barney, on that? Is that something that could truly help economies bounce back from economic recession and prevent other major crises and climate emergencies?
Speaker 1 00:01:23 Yeah. Um, so just to start this year, I believe, um, there were already kind of two challenges, uh, that the governments and, and of course the EU among them had to solve. And one was the sort of the transition to climate neutrality by around two, uh, 2050. Uh, the other one was the digital transition. And to that, there was of course the addition of the, uh, economic downturn, uh, created by the Covid 19, uh, situation or pandemic. It's, it's unfortunate it's way bigger than a situation. So the, um, the, the proposal that that you mentioned is, is basically talking about the recovery and res, uh, resilience facility, the R R F, which is a key, uh, instrument to the European, uh, recovery fund. And what it states is that the member states must, uh, outline national investment plans that are basically solving for these three challenges.
Speaker 1 00:02:25 So they have to be servicing, uh, the recovery, the transition to digital, and the transition to carbon neutrality. And this is the, this is, I'm guessing this is a response to the call of not making this recovery just a recovery, but a just recovery. And, um, and to that, whether, whether I believe that would help or not, what, what it'll do is we'll definitely add to the decentralization of infrastructure and really help, uh, prepare the, uh, societies for, for, for the transition. If you, if you think about it, COVID, uh, covid 19 already made a lot of people stay home, and as per fact, made the whole economy more decentralized. If you think about the, uh, the technology that is underpinning the climate transition, that's also, you know, solar panels being, et cetera, et cetera, these are also decentralized systems.
Speaker 0 00:03:28 I, I love what you're saying there, the, the decentralized systems. If we have, we look at this from a US lens, do you think that this would be the same outcome for those in the us?
Speaker 1 00:03:38 Yes and no. I'm, I mean, obviously there are couple of studies, um, that already state that, um, from ground up going to, uh, a couple of organizations, the transition in climate neutrality has already happened. In fact, uh, there is a study that states that, uh, by 2030 from these ground up innovations and coalitions, 25% decre, uh, decrease in, in, in CO2 emissions could be achieved, which is huge. Although that also states that, um, if there was a federal assistance of this, that that number would be around, uh, 49, 50% by 2030. And given the magnitude of US emissions, which is around five gigatons, uh, that kind of percentage different would actually constitute to a size of emission reduction of the total annual emission of Japan. So, um, to your question, yes, it's already, it's already ongoing. For example, if you, if think about it, compared to a very low statistic of figures a couple of years ago, nowadays there are 33% of the Americans living in cities or communities where there is a hundred percent com. Uh, there is a commitment to a hundred percent renewable energy sources. So there is this bottom up, but, you know, bottom up approach. And of course, there are the Googles and the Amazons who are, who are committing to, not only to climate neutrality, but, uh, negative carbon, but obviously it's how far they go with our federal assistance.
Speaker 0 00:05:23 So if we take it a look at the outside of the us going back to Europe specifically, we all, you know, that the European Commission president's proposing the EU reduced greenhouse gas emissions by at least 55% by 2030, which is from 1990 levels instead of the 40% cut agreed to six years ago before the Paris Agreement. Do you think this target is feasible?
Speaker 1 00:05:44 Uh, just to put this into perspective, I mean, uh, right now the, um, the current state of emissions in the European Union is about, uh, 4.9 gigatons, which is 23% below the, the 1990 levels. If you think about it, this kind of 55% is an additional 30 ish percent reduction, which considering the more evolved technologies, and of course, the, uh, the serious federal, if I, if I, about the, a federal entity, whether they're not. But that kind of backing definitely adds to the feasibility of, of these things. And by the way, the, these kind of communications, I think go beyond feasible or not, obviously we wanna, we wanna avoid this kind of greenwashing or for force promises by, by governing entities. But if you think about it that these board pledges mm-hmm. <affirmative>, what they do is actually really convince the financial market participants that, okay, this is the serious stuff. There is not going to be any achievements being done without structural changes. So that actually encourages the financial market participants to go forward, uh, and anticipate structure or changes. I, for example, the ending of a, uh, 5.2 trillion as subsidy market, which they cannot tap into anymore, um, <affirmative> and start to start to think about how to do investments in those requirements. For example, in the energy sector, it's, uh, 3.5 trillion that investments that have to go into the energy sector alone, um, per annum up until 2030. So these are quite big numbers, uh, at hand.
Speaker 0 00:07:29 So if we're looking, you talked a little bit earlier about market participation, and I know that some folks would say that it might not be possible to achieve significant targets without some of the biggest nations on board. Um, one example might be the US leading the Paris Agreement. What is your thought about how these things can be achieved when you don't have all participants who are really working in concert?
Speaker 1 00:07:53 Yeah. Um, I, I mean this is, this is sort of referring back to the state's, uh, question that you asked before. I think the pivotal point already, already happened. So there is no turning back. Uh, even if you, uh, don't really support everything from a top, I think what should be really avoided, and luckily this is, this is not the situation elsewhere, like in the states and where, where sort of there is a religion about climate denial, and in some cases we see serious actions against the transition to climate neutrality, like the D O l, uh, released earlier and, and, and the latest, uh, s e c announcement on curbing, uh, voting rights, uh, or proposals to voting. So, um, if there is nothing actively going against this transition, uh, I think there is already changes happening. And, and of course, if there is the, uh, federal hub going with it, the significance of these changes can be, can be even bigger. Uh, don't get me wrong, uh, uh, this, this problem wouldn't solve itself. So this is, I, I'm, I nowhere near saying that, but what I'm saying, if you don't actively go against stopping this process, it'll automatically accelerate somewhat. And of course, if you put a top-down approach to it, it'll accelerate in a pace that's required to reach the goals.
Speaker 0 00:09:16 So, just in, in shifting gears just a bit here, we're talking about regions and countries wanting to know how, what's the process for starting a transition bond? How does that even come into effect? And this specifically within various regions that would like to be gay and transition bonds or create them?
Speaker 1 00:09:34 Yeah, just going back one, one step and, um, I think, um, the significance of the transition bonds comes into play when, when we think about the green bonds. Um, so we did a study ourselves, definitive, did an, uh, a remarkable study, which has basically collated all the green financing for the first half of, uh, 2020. Uh, so ECM markets, DCM markets, syndicated loans, m and a actions, et cetera, et cetera, that are linked to some sort of sustainability. And, and the total value of that for the first half was about 300 billion u uh, US dollars. So if you extrapolate that to 2020, uh, for a whole year, that should be around, uh, 600, 650, um, us, billion US dollars. If you look at another study, which was, uh, released by the Rainforest Action Network, the amount of, uh, financing that went into fossil fuels, uh, I'm, I'm talking about tar sands, offshore oil, arctic oil, et cetera, et cetera.
Speaker 1 00:10:35 So the really dirty stuff by 35 per, uh, 35 banks, uh, constituted to 735 billion US dollars in 2019. You see, even though we have achieved a lot on green financing, there is so much financing that is, that is going into the dirty industries without any consideration. Um, that is, you know, that is, that cannot be overlooked. And the, the transition and the transition bonds or this transition financing would aim to, to make sure, or, or facilitate even these dirty industries to, to turn somehow, uh, cleaner. So, uh, it would require, so that the notion of the, um, the transition bond, for example, identifies five principles for, uh, for ambitions transition. Mm-hmm. <affirmative> one is the, um, all goals and, uh, uh, need to be, uh, you know, in line with the one, one and a half degrees, um, target or, uh, the other one is that it, um, has to be established.
Speaker 1 00:11:40 The transition has to be established by sci uh, science that offsets don't work. And, um, and you have to, uh, you have to assess every technological assessment or, uh, annuity in order to assess whether you can transit into, into a lower carbon intensive operations or not. And the fifth one, which is very important, is it talks about actions, not pledges. So you don't pledge anymore. And if you don't do, if you don't fulfill that pledge, then nothing happens. You actually have to show with your actions that, that that transition is happening and you have to be penalized if you don't mm-hmm. <affirmative>, for example, sustainability linked bonds, uh, are those kind of instruments.
Speaker 0 00:12:25 Wow. I'm sure a lot of organizations and entities would appreciate that. Actions, um, definitely are what can get us to the next step here. So there was a recent report from the Bank of International Settlements, Switzerland based central banking organization, and they claim that there is no link between green bonds and companies reducing their carbon emissions. What are your thoughts on that?
Speaker 1 00:12:47 <laugh>? Obviously, um, you know, the picture is a little bit more complicated than that because, uh, because of course this, this number defers from, uh, industries to, or sectors to sectors. For example, industrials and real estate, green bonds issue achieved lower carbon emissions than, than the ones who didn't. But of course, there are industries like the utility sector where, where this wasn't, this wasn't true. Um, obviously what you have to take into account is that, that green bonds are project financing vehicles. So you have to check, you know, what is the ratio or the relationship between these, uh, clean projects, uh, versus the BAU projects. And apparently these green projects were so small, um, compared to the B A U projects that they didn't move the needle when, when they were sort of executed up on, and by the way, green bonds are quite new, so they, they're kind of maturity is still way out. So, uh, assessment, complete assessment is, is still to be seen. But, um, but you, uh, but it's important to mention that, you know, that this kind of transition financing when you actually make, uh, the issuer accountable to not acting, I sort of creating a sustainability default, so to say that would help taking these more seriously and avoid greenwashing as such.
Speaker 0 00:14:14 We know, Barney, these conversations are not complete unless we talk about regulation, right. What's going on the regulatory side as well as corporate disclosure standards. You know, we can't really skip also talking about EU green taxonomy more broadly. What does the trend for creating national and regional taxonomies mean for green finance? If we're looking at it from a perspective of the regulations, or if we're looking at it from just a corporate disclosure standard perspective.
Speaker 1 00:14:43 I think the very important thing is that the first internal, uh, international framework, um, that is both comprehensive and works in practice, we'll have that kind of, uh, leverage and, and, and, and, and pro to acceptance. And, um, the EU action plan for, um, for sustainable finance is, is basically ticking a lot of boxes in this respect. So it's, um, it's comprehensive enough because it's actually stretches across the whole, uh, investment value chain. You know, uh, it, it talks about taxonomy. I e keeps definitions of different things, uh, labels. It also talks about benchmarks. It, it targets us, um, you know, disclosures for financial, uh, market participants. It, uh, targets incorporating sustainability and financial advising. And it also incorporates, uh, the, um, the disclosure by corporate. So it's, it's a, it's a very comprehensive framework. Of course, the puzzles of this big framework are coming to live at different sta at different stages.
Speaker 1 00:15:51 So we saw the N FFR D, you know, uh, launch, um, in the beginning of the year. Then we saw the U benchmarks regulation entering into fourth in June. And, and of course the next one is the SF d r in, uh, March next year. So it, it has different puzzles, but it's very comprehensive. It's also descriptive enough. It, for example, creates, uh, a, a good framework identifying what is a economic activity that is, uh, environmental sustainable, for example. And it's flexible enough as well. So it doesn't, for example, in the S F D R, um, it doesn't prescribe minimum thresholds. It just prescribes disclosure on portfolio and an entity level. And of course, the market will decide whether as per debt, uh, disclosure, whether the 25% of, let's say, sustainable, uh, revenue streams is enough or not in, in, in case of a corporate or, or in case of a, a, you know, an, an investment vehicle.
Speaker 1 00:16:49 And of course, it's global enough, uh, because it's applicable to any sort of investment activities that are, that are pursued in the European Union. So, um, if you are an American, uh, investment manager and you have clients in Europe, you have to look into this framework, and it's early enough as well. You know, I mean, unfortunately, uh, there is no federal serious federal regulation pro, uh, transition in the states. Although China has really made their pledge, uh, to the, to the 2060, uh, carbon, uh, neutrality. They, they didn't, they don't really have a comprehensive legislature framework. Whereas Europe has, um, a framework which is, which is slowly and steadily coming to life. So I would believe that, um, this would make the European legislation, uh, quite sticky and accepted, especially that this kind of trends that, that this, uh, regulatory framework sets is flowing directly into other networks like, uh, like the Ngf s network for greening the, uh, financial system, which is basically a network of, uh, central banks and monetary authorities across the globe. And, um, and, and, you know, they will adapt and benchmark against this regulation. Mm-hmm.
Speaker 0 00:18:11 <affirmative> and Barney, this is great information. I mean, everything from, at the top of the call talking about our transition, not just toward climate, but also digitization, how that has really impacted, um, all of the efforts that we're doing, particularly over the last six months. So progress in that area, digitization as well as climate transitioning. Also that plans that are calling for strategy are great, but how more of these organizations and regions are calling for actions as well as the strategy behind it. Also achieving targets can countries, um, do it when there are some key players that are missing and really how regions can work together to achieve these targets. Um, working together as countries that are involved here. Also, climate bonds, the fact that they vary and different types yield different results. So we shouldn't despair because some climate bonds, um, may not yield the results that the, that folks hope they yield, but just really recognizing the differences between all of them. Great information. Barney Global Sales Readiness Director for Sustainable Finance. Refinitiv, thank you so much for joining us.
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