Climate crisis requires action now - OMFIF
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Summer 2019
Vol.10 Ed.3
Climate crisis
requires action now
BTN_Q3.19_001_cover.indd 4 27/06/2019 14:11
Invested in the future.
You don’t thrive for 230 years by standing still.
As one of the oldest, continuously operating financial institutions
in the world, BNY Mellon has endured and prospered through every
economic turn and market move since our founding over 230 years
ago. Today, BNY Mellon remains strong and innovative, providing
investment management and investment services that help our clients
to invest, conduct business and transact in markets all over the world.
To learn more, visit bnymellon.com
©2019 The Bank of New York Mellon Corporation.
Untitled-2 1
AS_0319_3793_print.indd 1 29/03/2019 09:20
3/28/19 2:34 PM
Contents
Summer 2019 Vol.10 Ed.3 10
4 ABOUT OMFIF Worldview
5 LEADER 26 CHINA’S BOND MARKET TOO BIG TO IGNORE
6 REVIEW / AGENDA Jianwen Zhang
27 FED POLICY REQUIRES RADICAL REALIGNMENT
Cover: World on fire Darrell Delamaide
12 CLIMATE CRISIS REQUIRES ACTION NOW 28 ASSET TOKENISATION COULD SOON TAKE OFF
Sarah Breeden Carlo Cocuzzo
13 CENTRAL BANKS DEMONSTRATING Inquiry
6 COLLECTIVE LEADERSHIP
Gary Smith 30 CALLING AN END TO
‘CLIMATE KABUKI’
14 ELECTRIC CARS PICKING UP THE PACE Julian Frazer
Bhavin Patel
31 OMFIF ADVISERS
15 WATER INFRASTRUCTURE NETWORK POLL
INVESTMENT CRITICAL Ensuring sustainable
Kat Usita investing
16 RAPID GROWTH IN RESPONSIBLE 34 BECOMING A ‘MARKED
30
INVESTMENT MAN’ IN MONTENEGRO
Frances Barney Steve Hanke
17 FROM CONVERSATION TO ACTION
Rakhi Kumar
18 MAINSTREAMING ENVIRONMENT RISK
Ma Jun 26
19 SMART, SUSTAINABLE SPENDING
Makhtar Diop
20 THE HIGH PRICE OF GROWTH
Danae Kyriakopoulou
22 IMPOSSIBLE COST
Summer 2019
Vol.10 Ed.3
OF CLIMATE INERTIA
OMFIF analysis
Climate crisis
requires action now
Money matters
24 DECELERATION ANGST IN ADVANCED
ECONOMIES
BTN_Q3.19_001_cover.indd 4 27/06/2019 14:11
Juan Castañeda and Tim Congdon
Cover picture: Xinhua/
Shutterstock
OMFIF.ORG SUMMER 2019 BULLETIN 3
BTN_Q3.19_003_Contents text TC.indd 3 28/06/2019 11:51
About OMFIF
Dialogue on world finance
and economic policy
The GPI interactive databank allows THE Official Monetary and Financial Institutions Forum is an independent think tank for central
users to view six years of data of banking, economic policy and public investment – a non-lobbying network for best practice in
the full GPI top 750 ranking by worldwide public-private sector exchanges. At its heart are Global Public Investors – central banks,
assets under management, their sovereign funds and public pension funds – with investable assets of $36tn, equivalent to 45% of
global distribution, filter by type of world GDP.
institution, region, and chart changes With offices in London and Singapore, OMFIF focuses on global policy and investment themes –
in various trends such as AUM. particularly in asset management, capital markets and financial supervision/regulation – relating to
central banks, sovereign funds, pension funds, regulators and treasuries. OMFIF promotes higher
To access the databank for free and standards, performance-enhancing public-private sector exchanges and a better understanding of
get your complimentary copy the world economy, in an atmosphere of mutual trust.
of the 2019 GPI go to omfif.org/gpi
Interactive Membership
maps Membership offers insight through two complementary channels – Analysis
and Meetings – where members play a prominent role in shaping the
agenda. For more information about OMFIF membership, advertising or
subscriptions contact membership@omfif.org
Charts Analysis
OMFIF Analysis includes commentaries, charts, reports, summaries of
meetings and The Bulletin. Contributors include in-house experts, advisers
network members and representatives of member institutions and academic
and official bodies. To submit an article for consideration contact the editorial
Ranking team at analysis@omfif.org
Meetings
OMFIF Meetings take place within central banks and other official
institutions and are held under OMFIF Rules. A full list of past and
forthcoming meetings is available on www.omfif.org/meetings. For more
information contact meetings@omfif.org
OMFIF Advisers Network
The 173-strong OMFIF advisers network, chaired by Meghnad Desai, is
OUT made up of experts from around the world representing a range of sectors:
NOW monetary policy; political economy; capital markets; and industry and
investment. They support the work of OMFIF in a variety of ways, including
contributions to the monthly Bulletin, regular Commentaries, seminars and
other OMFIF activities. Membership changes annually owing to rotation.
OMFIF.ORG
BTN_Q3.19_004-005_About_Leader.indd 4 28/06/2019 12:46
Leader
Official Monetary and Financial Institutions Forum
30 Crown Place, London, EC2A 4EB
Living in a world on fire
United Kingdom
I
T: +44 (0)20 3008 5262 F: +44 (0)20 7965 4489
www.omfif.org @OMFIF n 1992 Al Gore, perhaps the most
famous politician-cum-climate
BOARD activist, published Earth in the
David Marsh, Chairman Balance, his first book on global
Phil Middleton, Deputy Chairman
warming. He wrote, ‘We can believe
Jai Arya
Edward Longhurst-Pierce in the future and work to achieve
John Plender it and preserve it, or we can whirl
Lauren Roberts
Peter Wilkin blindly on, behaving as if one day
there will be no children to inherit
ADVISORY COUNCIL our legacy.’ In the 27 years since its
Meghnad Desai, Chairman
Mark Sobel, US Chairman
release, countless communiqués and
Louis de Montpellier, Deputy Chairman reports have been issued promoting
Frank Scheidig, Deputy Chairman ‘sustainable’ investment and
Xiang Songzuo, Deputy Chairman
Hani Kablawi, Deputy Chairman transitioning to a ‘green’ economy.
Gary Smith, Deputy Chairman And yet, more than half the
Otaviano Canuto, Aslihan Gedik,
Robert Johnson,William Keegan,
carbon exhaled by the burning
John Kornblum, Norman Lamont, of non-renewable fuels has been
Kingsley Moghalu, Fabrizio Saccomanni, emitted since Gore penned those
Niels Thygesen, Ted Truman,
Marsha Vande Berg, Ben Shenglin, Chair, words. By dint of either ignorance or
OMFIF Economists Network apathy, we are continuing to ‘whirl
EDITORIAL TEAM blindly on’ towards catastrophe.
Danae Kyriakopoulou, Chief Economist & Our imprudence means warming
Director, Research
Simon Hadley, Director, Production
this century of between 1-2 degrees Celsius is all but assured. The cost
Julian Frazer, Senior Editor in potential lives lost in that case is already harrowing. Unless manifest
Julie Levy-Abegnoli, Subeditor changes are made, the figure could easily exceed four degrees.
Kat Usita, Deputy Head of Research
Bhavin Patel, Senior Economist & Head of The only way seriously to transform the global economy is through urgent
Fintech Research policy action. Thankfully many influential policy-makers – including two
William Coningsby-Brown, Assistant
Production Editor
of the contributors to this magazine, Sarah Breeden of the Bank of England
Pierre Ortlieb, Economist and Ma Jun of China’s Green Finance Committee – understand the urgency
Chris Papadopoullos, Research Assistant of climate action. The Central Banks and Supervisors Network for Greening
Darrell Delamaide, US Editor
the Financial System, of which 36 major bodies are members (with the US
MARKETING Federal Reserve conspicuous by its absence), illustrates well the increasing
Chris Ostrowski, Director, Commercial
Partnerships attention that world leaders are paying to the damage climate change is
Stefan Berci, Communications Manager wreaking.
James Fitzgerald, Marketing Manager
The challenge that policy-makers face is nothing short of renovating
Strictly no photocopying is permitted. It is illegal to modern capitalism so that it no longer unduly rewards the extraction of
reproduce, store in a central retrieval system or transmit,
electronically or otherwise, any of the content of this fossil fuels, and phasing out nations’ reliance on dirty energy in favour
publication without the prior consent of the publisher.
While every care is taken to provide accurate information, of renewables. Continuing down the current path – which can lead
the publisher cannot accept liability for any errors or
omissions. No responsibility will be accepted for any loss
only towards a loss of life several orders of magnitude greater than that
occurred by any individual acting or not acting as a result experienced in the second world war, the bloodiest event in human history –
of any content in this publication. On any specific matter
reference should be made to an appropriate adviser. is unconscionable.
Company Number: 7032533. ISSN: 2398-4236
OMFIF.ORG SUMMER 2019 BULLETIN 5
BTN_Q3.19_004-005_About_Leader.indd 5 28/06/2019 12:46
Review: April
»5 April, London »10-11 April, Washington and New York
‘Huge disentanglement’ US and Europe:
over Brexit Overcoming barriers
OMFIF and Hessen Trade & Invest convened two
THE UK is undergoing a ‘huge roundtables to discuss the consequences of political
process of disentanglement’ developments in Europe, investment opportunities in
over Brexit, according to Ivan Germany, and the future of EU-US trade relations.
Rogers, former UK permanent
representative to the EU, speaking
»3 April, Singapore
at an OMFIF-State Street Global
Advisors seminar. He said it was
‘too late for a genuinely bipartisan
Implications of Brexit
approach’ on Brexit from Prime
Minister Theresa May.
on Asia
OMFIF and the British
Chamber of Commerce in
Singapore convened a panel
of high-level speakers to
discuss the implications of
Brexit for Singaporean and
Asian stakeholders, from
the decisions of private
business attempting to
mitigate risk, to the effect
on existing and future
»13 April, Washington trading relationships.
More diversity is needed »16 April, London
in central banking Finance and climate:
‘IT IS DISHEARTENING
to see a lack of women
‘Distant thunder’
at the top levels of
sovereign funds as well
as at central banks of
various countries,’ said
David Marsh, representing
OMFIF at an IMF gender
diversity leadership
panel. He noted that
there has recently
been a decline in WORLD finance needs more data, more disclosure and better
female central bank risk management to master climate change challenges, the Bank
governors, quoting of England’s Sarah Breeden told an OMFIF meeting in London
research from OMFIF’s focused on ‘greening’ the Belt and Road initiative. ‘We can hear
‘Gender Balance Index’. distant thunder,’ she said. ‘We cannot wait for the storm to hit.’
6 BULLETIN SUMMER 2019 OMFIF.ORG
BTN_Q3.19_006-009_Review.indd 6 28/06/2019 11:59:25
May
»3 May, London »30 May, New York
De Guindos rejects Risks in
‘national champions’ maturing credit
LUIS DE GUINDOS, vice-president
of the European Central Bank,
rejected ‘national champions’ in
European banking in a wide-ranging
OMFIF City Lecture in London. In
remarks seen as opposing the now-
abandoned link-up between Deutsche
Bank and Commerzbank, he said he AT AN OMFIF roundtable Fabio Natalucci,
favoured cross-border mergers. deputy director of the International
Monetary Fund’s monetary and capital
markets department, outlined the main
findings of the IMF’s global financial
stability report, drawing attention to the
major risk areas for the future.
»30 May, London
China Railways
and financial
»13 May, London
Economic outlook and challenges stability
for East Asia
HOE EE KHOR, chief
economist at the
Asean+3 Macroeconomic
Research Office,
discussed the economic
outlook and challenges
for East Asia at an
OMFIF roundtable.
These include regional
economic integration, A DEFUNCT 1907 Chinese Imperial
the impact of China’s Railways loan certificate at an OMFIF
economic slowdown lunch demonstrates the virtues of
and related trade financial stability, discussed by David
risks, developments in Marsh and John Adams (OMFIF), Jianhai
the region’s financial Zhu (Agricultural Bank of China) and
markets and the Elisabeth Stheeman, highlighting her
influence of global work on the Bank of England Financial
financial conditions. Policy Committee.
OMFIF.ORG SUMMER 2019 BULLETIN 7
BTN_Q3.19_006-009_Review.indd 7 28/06/2019 11:59:31
June
GPI 2019 launches June London
»11 June,
Available for download at: omfif.org/gpi2019 Economic
»12 June, Singapore
outlook in Brazil
Singapore’s
infrastructure plans
SINGAPORE is expanding initiatives
to finance sustainable infrastructure
in Asia, including increasing the
flow of bankable products,
according at Heng Swee
Keat, deputy prime
minister and finance BRAZIL has seen a marked change
minister, outlining of political leadership, with major
measures at the launch consequences for the country
of OMFIF’s Global Public and Latin America. This breakfast
Investor 2019 at the briefing covered the economic
Singapore stock exchange. climate in Brazil, projected growth
in the country and expected fiscal
and monetary reforms.
»19 June, London
Future of China »11 June, London
‘city clusters’ Brexit:
The London launch of GPI 2019 was Constitutional
hosted by Barings. Presentations were
given on emerging market urbanisation, implications
with special emphasis on China and the
scale of infrastructure and real estate
development accompanying its shift
towards a consumption-led economy.
»13 June, Singapore
Sustainable economic
development PHILIP RYCROFT, former
permanent secretary for
OMFIF convened a group of global public investors the Department for Exiting
and market practitioners to discuss the growth of the the EU, gave his take on the
insurance-linked securities market. They discussed how state of UK politics including
to address climate-related issues by increasing uptake domestic policy consequences
of risk-transfer mechanisms such as catastrophe bonds and business planning for the
and other insurance-linked securities. different Brexit scenarios.
8 BULLETIN SUMMER 2019 OMFIF.ORG
BTN_Q3.19_006-009_Review.indd 8 28/06/2019 11:59:35
Agenda
»Monday 8 July, St. Louis
Modelling the macroeconomy
in risky times
A workshop to outline various ways of capturing risk in
macroeconomics organised jointly by the National Institute
of Economic and Social Research, OMFIF Foundation,
Centre for Macroeconomics, Federal Reserve Bank of
St. Louis and Olin School of Business.
»Tuesday 9-Wednesday 10 July, St. Louis
Assessing priorities and implications
for society, politics and economics
A seminar with the Federal Reserve Bank of St. Louis and
the OMFIF Foundation to look ahead to the next 10 years
in finance, covering themes such as the future of central
banking, economic inequality, sustainable investment, global
governance and the role of technology in employment and
education.
»Tuesday 15 October, New York
»Tuesday 10 September, London
Global Public Investor 2019 US launch
Strong performance in a volatile A seminar for the US launch of Global Public Investor 2019,
regional environment the publication devoted to public sector asset ownership and
management around the world. The meeting focuses on the
The Chilean economy remains one of the strongest in Latin key issue of sustainability and aims to share best practice
America. This roundtable assesses Chile’s economic outlook,
among investors.
its monetary and macroeconomic policy, as well as regional
challenges and opportunities.
»Friday 18 October, Washington
»Monday 23-Tuesday 24 September, Norway Launch of Absa Africa Financial
Asset and risk amanagement forum Markets Index
A seminar to focus on recent macroeconomic and financial Now in its third year, the Absa Africa Financial Markets Index
developments, as well as the challenges and opportunities for records the openness to foreign investment of countries
public sector investment management. The aim of the forum is across the continent. The index is the premier indicator of the
to examine best practice, promote higher standards and achieve attractiveness of Africa’s capital markets, which can be used
interactive dialogue. by investors and asset managers around the world.
For details visit omfif.org/meetings
OMFIF.ORG DECEMBER 2018 BULLETIN 9
BTN_Q3.19_006-009_Review.indd 9 28/06/2019 11:59:38
Cover: World on fire
Gabi and Jonah Frank flee as fire
threatens their home in Malibu,
California, US, November 2018. The
fire destroyed dozens of structures
and forced thousands of evacuations.
Picture: REUTERS/Eric Thayer
10 BULLETIN SUMMER 2019 OMFIF.ORG
BTN_Q3.19_010-023_coverStory.indd 10 28/06/2019 12:00Living in
a world
on fire
Climate-related catastrophes are
occurring more frequently and with
greater severity. Unless crucial and
wide-ranging policy changes are made,
all parts of the world will suffer the
grim consequences. →
OMFIF.ORG SUMMER 2019 BULLETIN 11
BTN_Q3.19_010-023_coverStory.indd 11 28/06/2019 12:00Cover: World on fire
Climate crisis requires action now
Financial system needs to support an early and orderly transition
Sarah Breeden on the financial system through ‘stranded setting out how the banks and insurance
Bank of assets’ that turn out to be worth less than companies we regulate need to develop
England expected. The estimated losses are large an enhanced approach to managing the
– $1tn-$4tn when considering fossil fuels financial risks from climate change.
alone, or up to $20tn when looking at a Our expectations cover governance,
C limate change poses significant risks
to the economy and to the fi nancial
system, and while these risks may seem
broader range of sectors.
Even at the bottom end of these ranges,
losses represent a material share of global
risk management, scenario analysis and
disclosure. They are designed to ensure
firms take a strategic approach with clear
abstract and far away, they are in fact financial assets. A climate ‘Minsky moment’, accountability. It should be holistic, forward-
very real, fast approaching, and in need where asset prices adjust quickly with looking, embedded in business-as-usual risk
of action today. Studies show that average negative feedback loops to growth, seems management, but grounded in the long-term
global incomes could be reduced by as much possible. That underlines why the financial financial interests of the firm.
as one-quarter by the end of the century system needs an early and orderly transition We have deliberately not been prescriptive
if limited or no action is taken to reduce if risks are to be minimised. And why we need in our expectations, recognising that our
carbon emissions. But global averages mask to change course now. understanding of this risk is immature but
significant differences across regions and that it needs action now. Over the next year
sectors. And most estimates are conservative The Bank taking action or so, as tools and expertise develop, we will
– particularly since the models are partial, The Bank of England is considering the embed more granular requirements into our
heavily dependent on assumptions, and implications of climate change for its own policy, to bring industry in line with our
do not capture well the nonlinearities that operations, taking account of the financial evolving expectations.
are a key feature of the most recent climate risks while ensuring the purpose of its core The Bank supports the disclosure of
analysis. operations as a central bank is preserved. climate risks by firms in line with standards
In principle, these risks can be avoided. And more broadly the action, or lack of set out by the Task Force on Climate-related
The scale of transition is significant, but it action, of individual institutions will be Financial Disclosures. Disclosure by firms
need not create substantial costs across the critical in determining whether climate- is critical if the financial system is to be
global economy as a whole. related risks are well managed. able to weigh risks and direct investment
Studies have focused on the impact from The Bank was the first regulator in the accordingly. It must be forward-looking,
the transition to a carbon-neutral economy world to publish supervisory expectations speaking to future risks and opportunities
and not just current emissions. In my
opinion, we will not be able to disinvest our
way to a carbon-neutral economy.
This is just the start. To be able to judge
whether we are sufficiently well prepared
‘Climate risks may and whether a change in course or greater
financial resilience is required, we need
seem abstract and to consider the position of the system as a
far away, but they whole.
are in fact fast Measuring future risks
approaching.’ Measuring these future risks from climate
change to the economy and to the financial
system is a complex task. Different physical
and transition effects need to be translated
12 BULLETIN SUMMER 2019 OMFIF.ORG
BTN_Q3.19_010-023_coverStory.indd 12 28/06/2019 12:00into economic outcomes and financial risks
looking ahead over many decades. To simplify Central banks demonstrating
that challenge, we need to focus not on
what will happen but what might happen.
To do that we can use scenario analysis –
collective leadership
data driven narratives that help anchor our Gary Smith prevent global warming above the two
assessments of risk. Barings degrees Celsius maximum target rise set
Using scenario analysis to paint a picture by the 2015 Paris climate agreement, with
of the risks of continuing along the current the banking system required to play a key
climate trajectory creates clear strategic role: ‘If some companies and industries fail
imperative to act. Considering a scenario
where our climate goals are met highlights
the changes that will be needed to support
T he Bank of England asserts it is the
world’s first financial market regulator
to publish supervisory expectations for the
to adjust to this new world, they will fail to
exist.’
Among its recommendations the
a transition to a carbon-neutral economy. management of the financial risks that may communiqué urges central banks and
Both expose the customers, sectors and result from climate change – for all of the supervisors to integrate climate-related
geographies that are vulnerable to physical banks and insurance companies under its risks into financial stability monitoring
and transition risks and therefore highlight purview. and prudential supervision, where
the areas where action is required. Sarah Breeden, executive director at the regulatory expectations should be
By taking different decisions today, Bank, spoke at an OMFIF seminar earlier established and guidance provided to
participants in the financial system are able this year and cautioned that insurance financial firms. The paper highlighted
to minimise their future risks. But while companies might be perilously exposed to that the financial risks created by
necessary, that may not be sufficient to weather-related events, such as heatwaves, climate change are analytically difficult
deliver a financial system that is resilient droughts and floods. Similarly, banks that to measure, but are unprecedented and
to climate risks. Instead, we need also to have lent to companies reliant on burning require immediate action.
consider this risk at the system level. fossil fuels run the risk of financial losses The NGFS recommendations are
To that end, the Financial Policy in the event assets become stranded during designed to demonstrate collective
Committee and the Prudential Regulation a transition to other fuel sources. Copycat leadership, which in turn is expected to
Committee will stress test the UK financial pressures are significant in the rarefied foster a greener financial system. Over the
system for resilience against different world of central banking; expect other next year, the network plans to develop a
climate pathways. The Prudential Regulation regulators to follow the Bank of England’s number of technical documents, including
Authority will ask UK insurers, as part of its lead. a handbook on climate and environment-
market-wide insurance stress tests this year, At the end of April the Banque de related risk management for supervisory
to consider how their businesses would be France and Bank of England issued a joint authorities and financial institutions;
affected in different physical and transition communiqué as members of the Network for voluntary guidelines on scenario-based
risk scenarios. Greening the Financial System. They wrote, climate risk analysis; and best practices
The investment needs to finance this ‘As financial policy-makers and prudential for incorporating sustainability criteria
transition are significant – an estimated supervisors we cannot ignore the obvious into central bank portfolio and reserves
$90tn by 2030. This presents substantial physical risks before our eyes. Climate management.
opportunities for the financial sector change is a global problem, which requires Current NGFS members include, among
to develop new products and services to global solutions, in which the whole others, the central banks of France, the
mainstream green finance. To support financial sector has a central role to play.’ UK, China, Singapore, Australia, Malaysia
that goal, there is a need to develop new The governors of the two central banks and New Zealand, as well as Japan’s
standards and classifications to identify urged other financial regulators around the Financial Services Agency and the Bank for
which economic activities contribute to the world to carry out climate change stress International Settlements. This list is very
transition to a carbon-neutral economy. tests to reveal risks in the system, while likely to grow. The US Federal Reserve is
Sarah Breeden is Executive Director for also calling for more collaboration between currently conspicuous by its absence.
International Banks Supervision at the nations. In other words, to copy them. Gary Smith is Member of the Barings
Bank of England’s Prudential Regulation The pair warned that a ‘massive Investment Institute and Deputy
Authority. reallocation of capital’ was necessary to Chairman of the OMFIF Advisory Council.
OMFIF.ORG SUMMER 2019 BULLETIN 13
BTN_Q3.19_010-023_coverStory.indd 13 28/06/2019 12:00Cover: World on fire
Electric cars picking up the pace
Public policy must bolster technological advances and consumer trends
Bhavin Patel the required level of adoption. supporting cleaner transport are unlikely to
OMFIF China, the world’s No. 1 carbon emitter, materialise in the near term at the federal level.
accounted for half of global electric car sales One major barrier to entry has been the
in 2018. Policy changes in the country have high purchase cost of electric vehicles. Related
T ransforming the automotive industry,
which accounts for almost 20% of
global greenhouse gas emissions, is crucial
both spurred electric vehicle purchases and
disincentivised the purchase of combustion-
based automobiles.
equipment and battery replacements can prove
expensive, and insurance premiums for electric
cars are typically higher than for traditional
if countries are serious about achieving the Manufacturers in China have quotas on vehicles. The usability and practicality of the
central goal of the 2015 Paris climate accord the number of zero-emission vehicles they batteries in electric vehicles have also been a
of keeping the global average temperature must produce. If a manufacturer fails to meet concern for consumers considering entering
increase to below two degrees Celsius above their targets, it must pay for credits, which the market for the first time.
pre-industrial levels. Curtailing production of are bought from overachieving competitors. But technological advances are allowing
fossil fuel-reliant engines will prove essential. Moreover, local authorities in several cities manufacturers to improve the lifespan, cost,
At the end of 2018 the global stock of electric have introduced legislation restricting the efficiency and capacity of electric vehicle
cars on the road reached 5m. Of these, 2m were purchase of nonelectric vehicles. batteries. Additionally, the increasing size
added in 2018 alone, signalling an acceleration Under the ‘Made in China 2025’ plan, Beijing of the automotive battery industry and the
in the adoption of greener forms of transport. has set targets for its domestic manufacturer opening of China to international suppliers
According to the United Nations, global to sell 3m electric vehicles per year, up from will lead to economies of scale in production,
greenhouse gas emissions must fall to at least the current 1m. Draft regulation published last spurring competition both on price and quality.
55% of current levels to meet the temperature year revealed that the central government is Vehicle sharing and co-ownership schemes
targets set by the Paris agreement. Benchmarks considering seriously a complete ban on new have aided adoption where costs have acted as
disseminated by the International Energy sales of combustion engines. a barrier. The electrification of public transport
Agency calculate that 15% of all cars will need likewise allows for more people to access
to be electric by 2030 to help meet current Abetting adoption greener vehicles without themselves incurring
climate change targets. This will require Policy-makers in the European Union are the high costs of electric cars.
modelling similar supply-side policies targeting Fiscal inducements such as subsidies, grants
manufacturers. In October 2018, the European and tax incentives at the point of purchase can
Parliament voted in favour of an EU-wide increase the number of new consumers in the
‘Emissions must fall to at carbon reduction target of 20% for new cars market. Other policies – such as the provision
least 55% of current levels and vans by 2025 and a 40% reduction by 2030. of preferential parking, road-toll rebates and
to meet the targets set by Zero- and low-emission vehicles should make
up 20% of new sales by 2025 and 35% by 2030,
access to low-emission zones – can also make
electric vehicles more attractive for users.
the 2015 Paris accord.’ with car manufacturers incurring penalties if China has a green number-plate scheme that
they miss these targets. affords preferential treatment in major cities.
The US, the second largest global car As important as technological advances
industry growth of 30% per year, which appears consumer, has not affirmed any formal and evolving consumer trends are to lowering
achievable by current rates. strategies for increasing electric vehicle barriers to entry for electric vehicles,
However, despite the surge in electric adoption. President Donald Trump’s meaningful changes to public policy remain the
vehicles over the last couple of years, the withdrawal from the Paris agreement and the most critical component if we are to curtail the
overall market size compared to the traditional repeal of several electric-friendly pieces of dangerous projected increase in global average
automotive industry remains less than 1%. legislations, including a review of automobile temperatures.
A mixture of ambitious policy changes and emission standards and the defunding of the Bhavin Patel is Senior Economist and Head
technological advances is needed to stimulate Clean Power Plan, indicate that any US policies of Fintech Research at OMFIF.
14 BULLETIN SUMMER 2019 OMFIF.ORG
BTN_Q3.19_010-023_coverStory.indd 14 28/06/2019 12:00Water infrastructure infrastructure are available, representing a
growing subset of the green bonds market.
investment critical
Blended finance is crucial in improving
the bankability of water projects. This brings
together official development assistance
with private or public sector funding, with
Blended finance makes projects more bankable the aim of pooling resources for sustainable
development. The structure has been around
for decades, but only in the last few years has
blended finance become widely used in the
Data on water investments are limited, investing landscape. The sense of urgency
Kat Usita
making financial modelling difficult and that is helping to channel private investment
OMFIF
costly. While all kinds of infrastructure are into funding gaps has made blended finance
capital-intensive and have lengthy payback an important part of the infrastructure
periods, water infrastructure’s sensitivity to financing toolbox.
W ater is sometimes considered a public
good, with governments traditionally
funding its supply and distribution.
changing environmental conditions makes it
more difficult to quantify related risks. Long
droughts can threaten water supply and sharp
The pipeline of bankable water investment
deals tends to be short and fragmented.
Development institutions can provide official
Individuals’ right to water and sanitation is spikes in rainfall can strain flood control development assistance not only in the form
universally recognised. Yet in the modern mechanisms, even when infrastructure is
world, this natural resource has always adequately built and maintained. Global
been the subject of disputes, exclusions and warming compounds these challenges as
rivalries. weather patterns become more volatile. 'Throughout history,
Globally, there are communities that still
have limited or no access to clean water. First-mover advantages
water crises have triggered
Although around 71% of the Earth’s surface is People expect the water infrastructure conflicts and created
water-covered, the freshwater supply makes being built today to last decades and meet
security threats.'
up only a miniscule fraction and is unevenly the needs of seemingly ever-growing and
distributed throughout the world. As rapidly-urbanising populations. While it is
universal access has yet to be achieved, and in possible to estimate future needs based on
the light of the increasingly intense struggles current growth trends, it is harder to assess of grants and guarantees, but also through
that climate change presents, private financial risk related to water infrastructure technical assistance to help governments
investment must find its way to financing in the context of a finite freshwater supply identify and market financially viable water
water infrastructure. and growing climate unpredictability. For investment opportunities.
Private sector investment in water these reasons water has been less attractive The investment incentives go beyond
infrastructure struggles with the same issues for investors looking to venture into financial, social and development goals.
as other infrastructure sectors. Different infrastructure. Water, like any natural resource, can become
types of facilities carry varying degrees of Yes the scarcity of attention presents political. Throughout history, water crises
risk that can be difficult to measure in a an opportunity, especially as freshwater have triggered conflicts and created security
standardised manner. Infrastructure that itself becomes more scarce. The sector is threats. The ‘Water Conflict Chronology’, a
falls under the broad category of ‘water’ less crowded with investors than energy or comprehensive record of water-related violent
covers a range of end-goals: providing access transport, which tend to attract the most disputes, lists 655 incidents dating back
to drinking water; enabling the irrigation private sector attention because of the greater to 3,000 BC, with more than 40% of these
of agricultural land; facilitating wastewater availability of data and ‘bankable’ projects. occurring after 2010. As the climate continues
treatment; controlling floods; and generating In water and water-related initiatives, to change, tapping private investment to
hydropower. Each of these objectives there is still plenty of room to take first- overcome water-related challenges will be
necessitate building structures that carry mover advantage, especially through direct more necessary than ever before.
unique risks defined by specific locations and investments. For the more wary, familiar Kat Usita is Deputy Head of Research at
contexts. instruments such as project bonds for water OMFIF.
OMFIF.ORG SUMMER 2019 BULLETIN 15
BTN_Q3.19_010-023_coverStory.indd 15 28/06/2019 12:00Cover: World on fire
Rapid growth in One of the main challenges for ESG
investment is the ability for investors and
responsible investment
asset managers to analyse their investments
against sustainability factors. Technology is
becoming an enabler; data and data analytics
can be used to measure the non-financial
Need for informed decision-making frameworks performance of investments.
Earlier this year, BNY Mellon launched
a reporting service that enables clients to
Frances Barney A number of jurisdictions – so far primarily track their equity portfolio investments
BNY Mellon Asset in Europe – require institutional investors based on ESG factors and United Nations
Services to disclose how they integrate ESG into the Global Compact principles. This can support
investment process. The implementation the analysis of risk/return associated with
in early 2019 of the new European Union sustainable investing, help asset owners
I nvestor appetite for responsible investment
is accelerating. According to the Global
Sustainable Investment Alliance, $30.7tn
directive on institutions for occupational
retirement provision – known as IORP II –
calls for greater attention to and disclosure
perform investment manager due diligence,
and inform conversations with stakeholders
interested in ESG.
was invested sustainably at the beginning of of ESG factors in the investment process for So far, ESG investment has focused mostly
2018, a 34% increase on 2016. A recent EY pension schemes. on equities, but there is growing interest
survey of institutional investors found that More end-investors want a say in how in fixed income ESG – green bonds, social
97% evaluated the non-financial disclosures their savings can drive societal impact. They bonds, sustainability bonds and social impact
of target companies when making investment want transparency into how their pension bonds, as well as corporate bonds. Providers
decisions. plans invest in ESG assets. The European – including BNY Mellon – are developing
Generational change is inherently slow Commission’s high-level expert group services to enable investors to score fixed
moving, but its effect on society’s attitudes to recommended that pension funds ‘should income against ESG criteria. This is likely
the wider, non-financial impact of investment consult beneficiaries on their sustainability to appeal to institutional investors, such as
decisions are becoming increasingly apparent. preferences and build those into their insurers and pension funds, with significant
Studies have shown younger generations to investment strategy’. As various pension fixed income holdings.
be significantly more interested than their plans and related associations debate this All investments have multiple non-financial
parents and grandparents in responsible recommendation, a spectrum of viewpoints impacts. A development project might score
investing. As they age, they are expanding is emerging. Mainly, institutions want more positively for societal impact due to the
their share of global investable assets, in part guidance on how to provide ESG transparency creation of well-paid jobs, while scoring
through intra-generational transfer. They to end-investors. Others want more freedom negatively for its environmental impact.
are having a growing sway over institutional on how and whether to implement measures Institutional investors are a diverse group
investors’ investment strategies, both directly to provide information transparency to end- with different priorities for ESG. Inevitably,
as trustees, managers and end-users, and investors. they will take varying views of any investment.
through their influence on governments and We are still at the early stages of developing
regulators. ESG integration the evaluation frameworks and information
A growing body of research suggests services to make informed ESG-based
Supportive regulation that consideration of ESG factors in the investment decisions. Investors’ priorities are
The regulatory environment – which investment analysis process – known as ESG unlikely to converge significantly. One thing
previously discouraged pension plan integration – can enhance returns. Assessing most can agree on is that ESG investment
administrators and other institutional how companies manage things like waste analytics will continue to be a fascinating and
investors from considering environmental, management, community engagement and fast developing area.
social and governance investment options or business ethics can support the investment Frances Barney is Head of Global Risk
even analysis – is now in some cases fostering and risk analysis process. In sustainable Solutions at BNY Mellon Asset Servicing.
actively transparency and ESG considerations. investing, ESG integration is now more The views expressed herein are those of
Regulatory and industry bodies are mobilising popular than negative screening among the author only and may not reflect the
to promote ESG among institutional investors. investment managers. views of BNY Mellon.
16 BULLETIN SUMMER 2019 OMFIF.ORG
BTN_Q3.19_010-023_coverStory.indd 16 28/06/2019 12:00From conversation to action
Climate-orientated approach crucial to investment strategy
Rakhi Kumar European Union has introduced legislation fossil fuel reserves, or companies in key
State Street such as the non-fi nancial reporting directive. industries with significant climate-related
Global Advisors This calls on companies to include business- risk exposure. This is implemented as a
specific disclosure on environmental standalone screen or in combination with
matters and other environment, social and other investment approaches.
F or decades, experts have warned that
the physical, economic and regulatory
risks posed by climate change could
governance data in a new non-fi nancial
information statement. The EU has also
revised the shareholder rights directive to
Another way is through mitigation,
in a two-pronged approach that targets
specific net carbon reduction goals. First, by
mean significant losses for investors. require institutional investors and asset reducing the carbon intensity of a portfolio
Consequently, investors have been debating managers to develop an engagement policy by a desired percentage while staying within
how to interpret and measure climate risk in that strengthens shareholder engagement a specified tracking error range against a
their portfolios and how to safeguard their and promotes long-term sustainability. specific benchmark. Second, by increasing
investments. Several key developments have In 2018 the European Commission exposure to companies generating ‘green’
helped move this debate from conversation published an action plan on sustainable revenues from low carbon opportunities.
to action. fi nance. The proposed rules would apply Mitigation and adaptation is a new
First, the physical impact of climate to asset owners, managers, insurance frontier in climate investing that targets
change is manifesting clearly. Extreme distributors, investment advisors and other carbon reduction and provides exposure to
weather events have become more frequent. market participants. They aim to reorient businesses adapting to climate change. This
For example, the impact of prolonged capital flows towards sustainable investment may involve reducing exposure to fossil fuel
drought caused by climate change on the to achieve sustainable and inclusive assets and ‘brown’ revenues and increasing
agriculture sector could reduce Australia’s growth. They are also intended to manage exposure to ‘green’ revenues and to
GDP by one percentage point over two fi nancial risks stemming from climate companies that are adapting their business
years. Moreover, the economic risk that change, resource depletion, environmental models to climate risks and opportunities.
climate change poses is quantifiable. A degradation and social issues. Moreover, the Asset stewardship is an inextricable
report published in November 2018 by rules seek to foster transparency and long- part of any climate investment approach.
13 US government agencies warned that, termism in fi nancial and economic activity. It allows for continuing engagement with
without steps to address global warming, The Commission has set up a technical companies about the risks and opportunities
annual losses in some US sectors could reach expert group to develop actions relating to presented by climate change, even if
hundreds of billions of dollars by 2100. ESG taxonomy, benchmarks, disclosures and investors do not express their view explicitly
fi nancial advice. Some of these have been in their portfolios.
Regulatory landscape accepted by European bodies, which should The appropriate approach for a particular
Some governments, especially in Europe, lead to secondary legislation. investor depends on considerations such
have sought to operationalise the as their investment and climate-related
commitments they made through the Climate investing objectives and risk tolerance. The challenge
2015 Paris climate agreement. European As climate science and data availability around fi nding reliable data in this field
policy-makers are seeking to ‘mainstream’ improves, investment approaches are persists. Therefore, investors must consider
sustainability into existing legislative evolving to help meet specific objectives. which managers offer a truly climate-
frameworks. They are embedding explicit Investors can express their climate oriented approach that will meet their
requirements on the fi nancial services sector commitment in several ways. One example regulatory and investment obligations.
to assess, disclose and mitigate long-term is exclusionary screening. This entails Rakhi Kumar is Head of Environmental,
climate-related risks. targeting meaningful carbon reduction Social and Governance Investments and
In line with its 2030 climate targets, across asset classes by screening out Asset Stewardship at State Street Global
including a 40% reduction in emissions, the companies with high emissions and Advisors.
OMFIF.ORG SUMMER 2019 BULLETIN 17
BTN_Q3.19_010-023_coverStory.indd 17 28/06/2019 12:00Cover: World on fire
Mainstreaming environment risk
Financial institutions grasping severity of climate threat
Ma Jun of climate change are estimated to result in market and credit risks using stress testing
China Green Finance losses of $1tn-$4tn in the world’s energy sector and scenario analysis. The NGFS has so far
Committee alone. The global economy more broadly could identified 28 institutions that have conducted
lose up to $20tn. More research is needed ERA analyses.
to understand how these impacts translate While an increasing number of financial
T he frequency and impact of severe damage
to assets caused by environmental stress
has risen in recent years. Financial institutions
into systemic risks for financial markets,
particularly taking possible chain reactions –
so-called ‘second order effects’ – into account.
supervisors and financial firms have recognised
the significance of ERA for ensuring financial
stability and the resilience of financial
and regulators have become increasingly institutions to environmental and climate
concerned that environment- and climate- Call to action risks, its application remains limited. This
related risks could become genuine sources This growing concern was reflected in the G20 is due in part to a lack of awareness of
of financial risk. Institutions are starting to green finance study group’s 2017 synthesis such risks and the absence of green and
understand better the physical and transition report, which called for financial institutions brown taxonomies. Further barriers include
channels through which environmental to conduct environmental risk analysis as a inadequate environmental and climate
risks enter the financial system. As a result, major part of greening the financial system. data (due partly to poor disclosure), limited
environmental risk analysis is becoming a In late 2017, eight central banks and financial capacity to develop analytical models, and the
popular practice among financiers and policy- regulators formed the Network for Greening lack of consistent assumptions on stress test
makers. the Financial System, which aims to identify, scenarios.
Physical risks include a rise in sea levels and quantify and regulate financial risks stemming The NGFS published its first comprehensive
extreme weather events, caused or exacerbated from climate change and environmental report in April. It focused on climate-related
by climate change. They destroy physical damage. As of April 2019, the NGFS had grown risks as a source of financial risk and issued
assets like real estate in coastal areas and to 36 members. Its supervision workstream, recommendations to central banks, supervisors
lead to increases in non-performing loans, which I chair, reviews the supervisory practices and policy-makers on ERA.
as well as heavy insurance losses. Insurance for integrating environment and climate risks The fact that central banks and supervisors
market Lloyd’s of London estimates that the into microprudential supervision. It takes from 36 countries are calling for action on
20 centimetre rise in sea level at the tip of stock of the current institutional disclosure ERA suggests it is becoming a core part of the
Manhattan since the 1950s increased insured frameworks for environmental and climate global effort to green the financial system.
losses from Hurricane Sandy in 2012 by 30% in information, and examines risk differentials Many regulators are likely to issue specific
New York alone. between ‘green’ and ‘brown’ assets. guidance and instructions for financial firms to
Transition impacts relate to the adjustment The Bank of England and a few other better understand and disclose environmental
to a greener, low-carbon economy. For European central banks and supervisors have and climate risks. Once implemented, these
example, there may be a sharp decline in attempted to quantify the financial risks from actions will create a much better environment
demand for coal-fired power generation as climate and environmental exposure through for financial institutions to conduct ERA and
renewable energy prices become even more the use of ERA, deploying both quantitative develop tools to manage such risks. With
competitive. This will undercut new and and qualitative methods. However, the NGFS leading the way, I expect ERA will
existing coal-fired power plants, resulting in integration of climate- and environment- become a widespread practice among financial
stranded assets in the coal mining and coal- related factors into prudential supervision institutions.
fired power sectors. is still limited. At the firm level, banks, asset Ma Jun is Special Adviser to the Governor
Moreover, tougher environmental policies, managers and insurance companies have of the People’s Bank of China, Chairman
such as those enforced in China in recent developed or employed ERA methodologies of China’s Green Finance Committee,
years, may cause more and more polluting provided by third-party research institutions and Chair of the Network for Greening
companies to default on their loans as they are for assessing environmental and climate risk the Financial System’s Supervision
forced out of the market. The transition risks exposure. They analyse their implications for Workstream.
18 BULLETIN SUMMER 2019 OMFIF.ORG
BTN_Q3.19_010-023_coverStory.indd 18 28/06/2019 12:00Smart, sustainable spending
Focus on quality and resilience for filling infrastructure gaps
Makhtar Diop the way they are spent. This is regrettable. goals to avoid expensive stranded assets
World Bank Efficiency and demand management policies later. In this scenario, countries would invest
can help to close service gaps much more in renewable energy and combine transport
cost-effectively than new infrastructure planning with land-use planning. They would
investments alone. develop railway systems attractive to freight
T he discussion around infrastructure
financing is rife with numbers that are
difficult to comprehend – trillions of dollars
But the infrastructure finance equation is
not just about trillions. On the human side,
1.2bn people live without electricity, 663m
and deploy decentralised technologies in rural
areas, such as mini-grids for electricity. Even
if developing countries are collectively close
per year, in gaps per sector, or in regions. lack improved drinking water sources, 2.4bn to the 4.5% spending goal, this does not apply
These large amounts can be paralysing, lack improved sanitation facilities and 1bn live necessarily to individual countries, including
especially when there is no clarity on how more than two kilometres from an all-weather many sub-Saharan countries.
they relate to current spending or even what road. These figures mean that children cannot The scenario-based approach demonstrates
exactly would be financed. One implication study well once the sun sets. People cannot that a country’s infrastructure spending price
seems consistent: more spending is needed. reach hospitals quickly. Vital water sources tag depends on its ambition and efficiency. A
The United Nations’ sustainable development become spreaders of disease owing to lack of country with a modern infrastructure base
goals and the urgency of action on climate adequate sanitation. and strong infrastructure-related policies
change add further impetus to the push to may need half this amount of outlay. In other
increase spending on infrastructure. Sustainability within reach scenarios – with similar ambitions but without
The question of how much is needed According to a new report by the World Bank, supportive policies – the price tag may double.
should always be accompanied by ‘for what’. ‘Beyond the Gap: How Countries Can Afford A clear message from the research is
the Infrastructure They Need while Protecting that the focus should be on the service gap,
the Planet’, developing countries could not the investment gap. Improving service
achieve their sustainable infrastructure goals requires typically much more than just
‘The focus should be by spending 4.5% of GDP per year. This would capital expenditure. Ensuring that resources
provide countries universal access to water, are readily available for infrastructure
on the service gap, sanitation and electricity. Such a programme maintenance is a perennial challenge,
not the investment would achieve better mobility, food security and requires more attention. The policy
and flood protection, while staying on track to recommendations coming from this research
gap. Improving service limit the temperature increase to two degrees will be important to governments around
requires typically much Celsius. Infrastructure investment paths the world as they look at their infrastructure
more than just capital compatible with full decarbonisation by the
end of the century need not come at a higher
needs and sustainability ambitions.
Infrastructure has a direct impact on
expenditure.’ cost than more polluting alternatives. the quality of life, business, jobs, and the
The new data show that developing environment, but too often funding has been
countries spend between 3.4%-5% of GDP seen as an insurmountable challenge. We are
on infrastructure, with a central estimate calling for a global rethink on infrastructure
That answer lies with individual countries’ of around 4%. This means closing the spending. It is achievable. To get there, we
contexts, growth aspirations and social and infrastructure gap – sustainably and smartly – must focus on quality and more resilient
environmental objectives. may be more attainable than once thought. investments, based on countries’ individual
This emphasis on spending can work There are some important caveats. The needs and ambitions – and not simply
against the goal of sustainable infrastructure spending goal of 4.5% of GDP represents a emphasise more money.
services, as it focuses attention on the need to preferred scenario whereby countries adopt Makhtar Diop is Vice-President for
raise funds rather than on the need to improve policies accounting for long-term climate Infrastructure at the World Bank.
OMFIF.ORG SUMMER 2019 BULLETIN 19
BTN_Q3.19_010-023_coverStory.indd 19 28/06/2019 12:00You can also read
