WEBVTT - Did we get climate finance all wrong? 0:00:00.120 --> 0:00:04.000 Welcome to zero. I am Akshadrati this week? Did we 0:00:04.080 --> 0:00:19.319 get climate finance wrong? It's been ten years since the 0:00:19.320 --> 0:00:21.919 Paris Agreement and the world has spent more than ten 0:00:22.040 --> 0:00:25.880 trillion dollars trying to cut emissions, and yet, as you 0:00:25.920 --> 0:00:28.880 all know, it's not been enough. The world needs to 0:00:28.920 --> 0:00:32.720 spend a lot more. The trouble is with government pursus 0:00:32.800 --> 0:00:36.239 tight and tightening, most of it will have to come 0:00:36.280 --> 0:00:40.400 from private sources, and so far the attempts, which have 0:00:40.520 --> 0:00:45.440 mostly involved nudging and cajoling financial institutions, haven't really worked. 0:00:46.600 --> 0:00:49.680 So have we got our approach to climate finance wrong? 0:00:50.600 --> 0:00:54.920 Lisa Sachs thinks so. She's the director of Columbia University's 0:00:55.080 --> 0:00:58.840 Center on Sustainable Investment, and if she is right, we 0:00:58.880 --> 0:01:02.520 are in deeper trouble than we think. The current climate 0:01:02.520 --> 0:01:05.399 finance regime was born just months before the Paris Agreement 0:01:05.520 --> 0:01:08.280 was signed. It was created by a speech given in 0:01:08.319 --> 0:01:12.360 September twenty fifteen by then Bank of England Governor McCartney, 0:01:13.080 --> 0:01:16.120 the same McCartney who is now Prime Minister of Canada. 0:01:16.920 --> 0:01:21.720 Climate change is a tragedy of the horizon. We don't 0:01:21.760 --> 0:01:24.200 need an army of actuaries to tell us that the 0:01:24.240 --> 0:01:28.120 catastrophic impacts of climate change will be felt beyond the 0:01:28.160 --> 0:01:32.520 traditional horizons of most actors. It will impose costs on 0:01:32.600 --> 0:01:36.640 future generations that the current one has little direct incentive 0:01:36.800 --> 0:01:37.279 to fix. 0:01:38.640 --> 0:01:41.480 The speech title The Tragedy of the Horizons made the 0:01:41.480 --> 0:01:45.720 case that financial institutions must take climate action more seriously 0:01:45.920 --> 0:01:50.240 and act urgently, for if they wait till it's obvious 0:01:50.320 --> 0:01:53.720 that climate change is going to have disastrous consequences on 0:01:54.000 --> 0:01:57.960 financial stability, it will be too late to prevent deep 0:01:58.000 --> 0:02:01.680 damages to the global economy. And Carnie's answer to that 0:02:01.760 --> 0:02:05.040 problem has led to the current regime of corporate climate 0:02:05.120 --> 0:02:10.520 plans and financial institutions setting net zero goals. But emissions 0:02:10.520 --> 0:02:14.200 from these companies or banks have mostly not fallen in 0:02:14.240 --> 0:02:17.600 line with the targets they've set. Neither has there been 0:02:17.639 --> 0:02:22.000 a drastic reduction in lending that these financial institutions make 0:02:22.080 --> 0:02:25.400 to fossil fuel companies, something that must occur if the 0:02:25.440 --> 0:02:29.480 world is to avoid catastrophic heating. That's why Lisa's answer 0:02:29.720 --> 0:02:34.160 that climate finance has it all wrong is worrying, because 0:02:34.520 --> 0:02:38.520 finance underpins every discussion about how to implement climate solutions. 0:02:39.080 --> 0:02:42.000 So this week on Zero, I ask Lisa why she 0:02:42.040 --> 0:02:45.640 thinks Carneie's approach to climate finance isn't working and what 0:02:45.760 --> 0:02:49.560 financial institutions should be doing instead. By the way, if 0:02:49.560 --> 0:02:52.520 you have feedback for Zero or get suggestions, please write 0:02:52.520 --> 0:02:59.720 to Zero pod at Bloomberg dot net. Lisa, welcome to 0:02:59.720 --> 0:03:00.000 the show. 0:03:00.000 --> 0:03:01.680 Oh, thank you so much. 0:03:01.800 --> 0:03:05.040 So we celebrated the tenth anniversary of the Paris Agreement 0:03:05.200 --> 0:03:08.480 and plenty was talked about, but I think there was 0:03:08.560 --> 0:03:12.920 a bigger anniversary, at least for you, that was celebrated 0:03:12.960 --> 0:03:16.080 a few months before that. I'm talking about a speech 0:03:16.160 --> 0:03:21.040 that a former Bank of England governor gave here in 0:03:21.080 --> 0:03:25.320 London in September twenty fifteen. Tell us about that speech 0:03:25.360 --> 0:03:27.080 and why it's such a big deal. 0:03:27.320 --> 0:03:30.120 Yeah, thank you, and actually I'm coming to you right 0:03:30.160 --> 0:03:32.079 now from the Bank of England. So what a way 0:03:32.120 --> 0:03:35.400 to commemorate that speech ten years ago? That was Mark 0:03:35.440 --> 0:03:39.320 Carney's speech called the Tragedy of the Horizon, and Mark 0:03:39.360 --> 0:03:45.480 Harney was warning, especially the financial community, that climate risk, 0:03:45.720 --> 0:03:48.440 which we already knew of course ten years ago, well 0:03:48.600 --> 0:03:50.440 well before that, we knew it to be a major risk, 0:03:50.960 --> 0:03:54.120 was going to be a financial risk. But in the future, 0:03:54.520 --> 0:03:57.360 that's the tragedy of the horizon. So we better wake 0:03:57.480 --> 0:04:00.440 up to it today and address it today to TechEd 0:04:00.480 --> 0:04:04.120 the future financial system. And that speech, at least how 0:04:04.120 --> 0:04:07.480 it was interpreted, has defined how the finance sector has 0:04:07.520 --> 0:04:12.600 approached and how the climate community has approached climate finance 0:04:12.640 --> 0:04:13.480 for the past decade. 0:04:13.600 --> 0:04:16.000 And it is a powerful speech, especially making it at 0:04:16.040 --> 0:04:18.840 a time when the Paras Agreement hadn't been signed. So 0:04:18.880 --> 0:04:22.440 he says, look, by the time you feel the impacts 0:04:22.520 --> 0:04:25.200 on your balance sheet, it will be too late to act, 0:04:25.240 --> 0:04:28.720 and you will suffer losses for much longer than if 0:04:28.800 --> 0:04:31.640 you start to act now. That's the first part of 0:04:31.680 --> 0:04:35.359 the speech, really well made case. Most people don't recall 0:04:35.400 --> 0:04:38.480 the second part of the speech, which was okay, so 0:04:38.640 --> 0:04:40.960 I'm telling you you've got this risk that you're not 0:04:41.080 --> 0:04:44.800 considering right now, and the way to address that risk, 0:04:45.160 --> 0:04:48.279 Carnie said, was to try and get companies to disclose 0:04:48.360 --> 0:04:52.839 information about their climate risk, about their emissions, allowing these 0:04:52.839 --> 0:04:57.560 investors to then take those risks on their balance sheets 0:04:57.560 --> 0:05:00.520 and thus as a result start to put money toward 0:05:00.640 --> 0:05:04.280 solutions that will tackle the problem. Is that happening. 0:05:04.800 --> 0:05:08.279 It is happening. And it's not tackling the problem. I 0:05:08.320 --> 0:05:14.279 think the fundamental misunderstanding of financial risk is that by 0:05:15.320 --> 0:05:19.840 getting better information and managing financial risk that the economy 0:05:19.960 --> 0:05:25.040 will reallocate capital towards solutions. That was the mistake everything 0:05:25.040 --> 0:05:29.000 else about what he was saying that as climate risk 0:05:29.080 --> 0:05:33.000 and climate impacts intensify, the financial sector will feel it, 0:05:33.040 --> 0:05:36.640 but on a delayed trajectory. That's correct. But by the way, 0:05:36.680 --> 0:05:39.760 we're already seeing some effects in the economy and some 0:05:39.800 --> 0:05:42.960 effects in some financial assets, so we better be attentive 0:05:43.000 --> 0:05:45.360 to and manage those risks. But if we want to 0:05:45.400 --> 0:05:48.360 reduce the underlying risks, it is a different set of 0:05:48.400 --> 0:05:49.479 mechanisms altogether. 0:05:50.160 --> 0:05:55.240 But the translation of that problem became the structure of how, 0:05:55.360 --> 0:05:57.920 at least for the past decade, the world has been 0:05:58.040 --> 0:06:00.760 trying to tackle this problem. And we don't even need 0:06:00.800 --> 0:06:02.760 to get to the political side of you know, right 0:06:02.800 --> 0:06:07.240 wing populism or policy changes. It's really the basic logic 0:06:07.440 --> 0:06:12.479 of the operation came from the speech. Came from the 0:06:12.520 --> 0:06:15.680 Paris Agreement. Right we had a target under the Paris 0:06:15.760 --> 0:06:19.200 Agreement that wanted to keep temperatures below one point five 0:06:19.200 --> 0:06:22.880 degrees celsius. That was translated by scientists as the world 0:06:23.000 --> 0:06:26.080 needs to reach net zero by twenty to fifty carbon 0:06:26.120 --> 0:06:30.880 dioxide emissions, and then corporations took that on heart, saying, well, 0:06:30.960 --> 0:06:32.800 that means all of us, at least the big ones, 0:06:33.120 --> 0:06:36.640 all need to get to net zero, and that would 0:06:36.680 --> 0:06:39.960 allow investors, who also have not just their own emissions 0:06:40.000 --> 0:06:43.000 from their little operations and offices and flying around, but 0:06:43.200 --> 0:06:46.840 like major emissions that are connected to them financing these 0:06:46.960 --> 0:06:49.400 corporations to go, Yes, we need to be net zero, 0:06:50.880 --> 0:06:54.320 and we didn't make very much progress. What went wrong? 0:06:54.400 --> 0:06:57.560 Because that feels like a clear logical pathway that the 0:06:57.560 --> 0:06:58.919 world should have followed exactly. 0:06:58.960 --> 0:07:01.320 Well, I hope that ten years on we really can 0:07:01.360 --> 0:07:05.320 take stock about whether that theory of change held or 0:07:05.360 --> 0:07:08.920 what we got wrong about it. What is needed to 0:07:09.080 --> 0:07:14.080 transition any system and our economy in this case, which, 0:07:14.120 --> 0:07:17.200 by the way, the transition that's needed is a compelling 0:07:17.240 --> 0:07:20.800 case economically and for energy resilience and affordability and security. 0:07:20.840 --> 0:07:25.080 This is hardly even about climate now, but that's changing 0:07:25.200 --> 0:07:28.520 the real economy. Instead, if we look at this as 0:07:28.560 --> 0:07:32.040 a financial risk, then the set of tools that we 0:07:32.120 --> 0:07:35.160 have to engage in that is financial regulation, which are 0:07:35.200 --> 0:07:39.520 disclosures and risk assessments. That is not how you change 0:07:39.520 --> 0:07:42.400 the real economy. So that was I think where the 0:07:42.480 --> 0:07:47.560 split was. Then there are other underlying fallacies in what 0:07:47.600 --> 0:07:50.880 you just described. I'll say one basic one, which is 0:07:50.920 --> 0:07:56.200 that the concept of net zero being an atmospheric concept 0:07:56.480 --> 0:08:01.360 cannot be achieved by individual entities setting their own net 0:08:01.440 --> 0:08:04.640 zero targets, which is the direction we went in, because 0:08:05.080 --> 0:08:09.440 individual entities are part of systems, energy systems, transport systems, 0:08:09.480 --> 0:08:14.000 built environment, and they can't shape those systems on their own. 0:08:14.200 --> 0:08:16.200 They can influence them, but they can't shape them on 0:08:16.240 --> 0:08:19.160 their own. So setting a net zero target for an 0:08:19.280 --> 0:08:22.880 entity is a fallacy. It's impossible, and it has led 0:08:22.920 --> 0:08:28.640 to a lot of accounting maneuvers and disclosure oddities to 0:08:28.840 --> 0:08:34.560 try to project some reductions that are disconnected from what's 0:08:34.559 --> 0:08:38.160 happening in the real economy and the real atmospheric concentrations. 0:08:39.080 --> 0:08:42.320 So what is the solution then, if companies should really 0:08:42.360 --> 0:08:45.600 not be aiming for net zero but they should be 0:08:45.640 --> 0:08:48.560 trying to shape the system, Well, we know they can 0:08:48.679 --> 0:08:51.960 because they have labbying powers, etc. But they've never lobbied 0:08:52.040 --> 0:08:55.880 for green policies. They've lobbied for their self interest. Now 0:08:55.920 --> 0:08:58.840 you're asking them to change the system in the interest 0:08:58.880 --> 0:09:01.720 of the rest of the world, and you're asking them 0:09:01.760 --> 0:09:04.240 to lobby in the interest of the rest of the world. 0:09:05.040 --> 0:09:07.000 That is not something they're set up to do anyway. 0:09:07.160 --> 0:09:10.200 So what could be an alternative that would allow for 0:09:10.240 --> 0:09:11.840 corporations to be a part of the solution. 0:09:12.640 --> 0:09:15.360 Believe it or not, I will tell you as someone 0:09:15.480 --> 0:09:20.440 I think I am probably more existentially concerned about climate 0:09:20.520 --> 0:09:23.439 change than anyone, and yet what I think is the 0:09:23.559 --> 0:09:26.400 solution set I do think is in the self interest 0:09:26.520 --> 0:09:30.120 of economic actors. And when I talk to companies and 0:09:30.160 --> 0:09:34.199 the financial institutions, what I'm saying to them resonates more 0:09:34.280 --> 0:09:39.200 than this structure that we've created that misunderstands incentives and 0:09:39.280 --> 0:09:43.440 possibilities and levers the different institutions have. So I just 0:09:43.480 --> 0:09:46.200 want to say that what you've described as being difficult, 0:09:46.280 --> 0:09:48.680 I don't think is so difficult. So what I would 0:09:48.720 --> 0:09:51.760 say is, first of all, what Mark Carney described as 0:09:51.800 --> 0:09:57.360 financial risk, that's true. So every entity and financial institution 0:09:57.800 --> 0:10:03.640 should understand real evolving climate risk, which there are. That's 0:10:03.880 --> 0:10:07.520 prudent risk management. That doesn't solve the climate crisis. But 0:10:07.559 --> 0:10:11.920 it is true that we are facing extreme heat, floods, 0:10:12.320 --> 0:10:16.400 heat that affects labor productivity. The insurance prices are going up. 0:10:16.679 --> 0:10:19.880 So there are real effects in the economy of climate 0:10:19.960 --> 0:10:23.200 change that should be managed from a risk management perspective. 0:10:23.240 --> 0:10:26.079 And by the way, companies better do that too, because 0:10:26.120 --> 0:10:29.440 companies that are in flood zones or that rely on 0:10:29.920 --> 0:10:33.760 supply chains from regions that are very vulnerable, so from 0:10:33.840 --> 0:10:37.040 good risk management that is important, but we should not 0:10:37.160 --> 0:10:39.839 conflate that with the solution set. The reason why I 0:10:39.840 --> 0:10:42.480 think the solution set is in the interest of companies 0:10:42.520 --> 0:10:46.160 and of the financial sector is that now more than ever, 0:10:46.600 --> 0:10:52.400 the transitions that are necessary to create efficient, secure, resilient, 0:10:52.600 --> 0:10:57.520 affordable energy systems that can support new types of industry 0:10:57.720 --> 0:11:02.560 and industrial innovation, and built environments that are efficient and 0:11:02.600 --> 0:11:06.840 can have cost savings. All of this actually is compelling 0:11:07.000 --> 0:11:12.319 for economic reasons. These are financiable. Sometimes they're so obviously 0:11:12.360 --> 0:11:16.160 financiable that finance is driving them. The largest installed solar 0:11:16.160 --> 0:11:18.800 capacity in the US is in Texas, not because anybody's 0:11:18.880 --> 0:11:22.280 lobbying for climate policies in Texas, but because the economics 0:11:22.640 --> 0:11:25.720 makes solar capacity the most compelling, and we see that 0:11:25.920 --> 0:11:28.840 in all parts of the world that there are clean 0:11:28.920 --> 0:11:34.280 solutions now that are already the more affordable solutions where 0:11:34.320 --> 0:11:39.440 they're not yet financiable is because we need to create 0:11:39.679 --> 0:11:44.800 the market and connect users, the downstream consumers with the producers, 0:11:44.920 --> 0:11:47.440 and adjust the utilities and the way that the grids 0:11:47.440 --> 0:11:50.679 are managed to be able to optimize these benefits. As 0:11:50.720 --> 0:11:55.240 one example, if different industries can save money by storing 0:11:55.320 --> 0:11:58.720 some of their own energy and having better demand response, 0:11:59.080 --> 0:12:02.360 that's saving for the industry, but the utility needs to 0:12:02.400 --> 0:12:06.160 be able to manage that flexibility on the grid. When 0:12:06.200 --> 0:12:11.280 we can solve those market structures in these solutions become 0:12:11.840 --> 0:12:15.679 compelling for the companies and compelling from the finance perspective. 0:12:15.920 --> 0:12:19.400 That has certainly played out in the renewable sector rit large, 0:12:19.440 --> 0:12:22.760 not just solar, but win also batteries and now increasingly 0:12:22.840 --> 0:12:26.160 electric cars. You know, plenty of developing countries now have 0:12:26.840 --> 0:12:29.880 more electric car sales in their share of new vehicles 0:12:29.920 --> 0:12:34.360 sold than many of the most developed economies. That's happened 0:12:34.920 --> 0:12:40.679 through a set of government coordinating mechanisms where there's been 0:12:40.800 --> 0:12:43.040 either a target set to try and reach a certain 0:12:43.040 --> 0:12:46.520 amount of renewables in the grid, initially to there being 0:12:46.679 --> 0:12:49.520 incentives in terms of subsidies, which is the sort of 0:12:49.679 --> 0:12:52.480 formula that the US uses mostly to try and fund 0:12:52.520 --> 0:12:56.440 these technologies that the governments think the world needs but 0:12:56.559 --> 0:13:00.000 are expensive and need to start to compete with the alternative. 0:13:01.440 --> 0:13:04.640 But we are now also in that place where given 0:13:04.720 --> 0:13:08.800 the politics and given the policy changes, people are looking 0:13:08.840 --> 0:13:14.040 towards investors as the driver of change because these financial 0:13:14.080 --> 0:13:17.920 risks are real. So last year, Norge's Bank Investment Management, 0:13:18.000 --> 0:13:20.840 which is the world's largest manager. You know, all the 0:13:20.840 --> 0:13:23.880 oil money that Norway has earned has gone into this 0:13:24.240 --> 0:13:27.319 huge part that the government uses for all sorts of things, 0:13:27.679 --> 0:13:31.360 invests in pretty much every investable company in the world 0:13:31.400 --> 0:13:34.200 with like one or two percent of their stake, said 0:13:34.240 --> 0:13:38.040 last year that they believe the financial sector's conventional approach 0:13:38.080 --> 0:13:42.840 to estimating the physical risk of climate change is hugely 0:13:43.000 --> 0:13:46.480 understating the problem. So they're kind of confirming what Conny 0:13:46.559 --> 0:13:49.880 said ten years ago and saying it in twenty twenty 0:13:49.880 --> 0:13:53.319 five with greater urgency. So when they were asked, okay, 0:13:53.440 --> 0:13:58.559 then what should NBIm do as a result of understanding 0:13:58.679 --> 0:14:03.360 this US risk, shouldn't they be investing more aggressively in 0:14:03.440 --> 0:14:07.480 climate solutions? They said, no, that's not their mandate. The 0:14:07.520 --> 0:14:12.120 mandate comes from the Norwegian government and it currently is 0:14:12.160 --> 0:14:14.960 not the government's mandate. So what is the solution here? 0:14:15.040 --> 0:14:17.760 Is it to go back and try and essentially create 0:14:17.840 --> 0:14:21.200 a political movement that would put the right leaders in government. 0:14:22.080 --> 0:14:24.400 I think the solution is easier, but that that's a 0:14:24.560 --> 0:14:27.720 perfect example of what the solution is not. That was 0:14:27.760 --> 0:14:33.000 a perfect example that even though financial risk may be real, 0:14:33.480 --> 0:14:36.200 that that in and of itself is not the motivation 0:14:36.760 --> 0:14:41.000 to go finance new solutions. And whether the mandate comes 0:14:41.000 --> 0:14:43.480 from the government of Norway or from beneficiaries that are 0:14:43.520 --> 0:14:47.320 expecting returns on their portfolio, anyone invested in the markets 0:14:47.400 --> 0:14:51.560 is expecting financial returns. They don't want their companies to 0:14:51.640 --> 0:14:54.480 go out and be financing things that might be loss 0:14:54.480 --> 0:14:57.360 makers or that will be loss makers because there's no 0:14:57.480 --> 0:15:00.720 market for them. They want to be maximizing the risk 0:15:00.720 --> 0:15:04.040 adjusted returns in the current economy. And by the way, 0:15:04.120 --> 0:15:07.320 let me just note that as long as our consuming 0:15:07.440 --> 0:15:12.480 sectors consume fossil fuels, the demand for fossil fuels will remain. 0:15:12.840 --> 0:15:16.240 The solution is not to say stop financing the fossil 0:15:16.240 --> 0:15:20.120 fuel sector. The solution is phase out the demand by 0:15:20.160 --> 0:15:26.040 making the alternatives cheaper, more affordable, more accessible, which is happening. 0:15:26.560 --> 0:15:29.360 As we do that, even more the demand for fossil 0:15:29.400 --> 0:15:32.440 fuels phases out and then the financing stops. So we 0:15:32.480 --> 0:15:36.640 should understand the levers. So what is the solution now 0:15:36.680 --> 0:15:40.160 more than ever, as I was saying, the investments that 0:15:40.200 --> 0:15:45.760 are needed to create a clean, efficient economy, are billions, 0:15:45.960 --> 0:15:51.680 if not trillions of dollars of investment opportunities that Norges 0:15:51.760 --> 0:15:55.840 Bank and other financial institutions will want to invest in 0:15:56.040 --> 0:16:01.720 when we make them financible. That is the challenge, which 0:16:01.760 --> 0:16:03.840 I don't think is such a big challenge, but it 0:16:03.880 --> 0:16:06.680 is also the solution set. So what can the finance 0:16:06.680 --> 0:16:11.160 sector do because they can't lead on making markets that 0:16:11.200 --> 0:16:15.960 don't exist financiable, but they have unique expertise in understanding 0:16:16.200 --> 0:16:20.000 what is financiable. How do they perceive different types of 0:16:20.120 --> 0:16:25.600 risk market risk, off take risk, technology risk, political risk, 0:16:25.960 --> 0:16:30.440 regulatory risk, construction risk, so that we can in the 0:16:30.480 --> 0:16:34.440 real economy, using other types of tools, the export credit 0:16:34.440 --> 0:16:38.640 agencies and the development banks that have concessional finance and 0:16:38.760 --> 0:16:43.960 guarantee mechanisms and other risk sharing tools can address the 0:16:44.080 --> 0:16:48.240 risks so that they become financiable by the private sector 0:16:48.480 --> 0:16:51.120 with real returns. That's why I think that this is 0:16:51.160 --> 0:16:55.960 in the financial sector's interest to help create these financiable investments. 0:17:00.040 --> 0:17:02.840 After the break, I ask Lisa whether China's approach to 0:17:02.840 --> 0:17:06.560 climate finance can be reproduced in Western countries. And if 0:17:06.560 --> 0:17:09.040 you're enjoying this episode, please take a moment to read 0:17:09.080 --> 0:17:12.800 and review the show on Apple Podcasts, Spotify, and YouTube. Recently, 0:17:12.880 --> 0:17:16.760 Liney Chevri wrote simple but deep. I love the analysis 0:17:16.800 --> 0:17:32.800 of this podcast. Thanks Lina. The biggest place where finance 0:17:32.880 --> 0:17:36.760 is not flowing a must flow is developing countries where 0:17:37.280 --> 0:17:42.080 we know the opportunity of having cleaner energy and the 0:17:42.160 --> 0:17:46.200 benefits are far greater as a result, and the risks 0:17:46.240 --> 0:17:50.720 of actually investing from an investor perspective are also greater. 0:17:51.200 --> 0:17:53.040 So how do you solve that problem? 0:17:53.160 --> 0:17:54.919 Yes, that is what I spend a lot of my 0:17:55.040 --> 0:17:59.359 time thinking about. Not only are the clean energy opportunities 0:17:59.440 --> 0:18:05.320 in emerging markets huge, but frankly so much infrastructure development 0:18:05.600 --> 0:18:10.359 in emerging markets, in clean industry, in mobility solutions, in 0:18:10.359 --> 0:18:14.280 information and communication technologies, the digital hubs. These are great 0:18:14.359 --> 0:18:19.000 investment opportunities. But emerging markets are perceived as risky, and 0:18:19.359 --> 0:18:24.760 when they are risky, either by mandate, some institutional investors 0:18:24.800 --> 0:18:28.919 cannot invest in them, or even those who aren't driven 0:18:28.920 --> 0:18:31.760 by mandate, the private credit markets don't want to invest 0:18:31.840 --> 0:18:34.800 in places that are risky. So we are trying to 0:18:35.119 --> 0:18:38.879 unpack that risk because some of the risk is a 0:18:38.920 --> 0:18:42.399 misperception of risk by not understanding because people are not 0:18:42.480 --> 0:18:46.520 familiar with emerging markets. Some of the risk are real risks. 0:18:46.760 --> 0:18:51.320 Risks like currency risk because the developing countries borrow in 0:18:51.400 --> 0:18:55.160 hard currency but they have their revenues in their own currency, 0:18:56.760 --> 0:19:00.400 or some types of political risk if the utilities may 0:19:00.400 --> 0:19:05.280 not be reliable off takers, or liquidity risks because when 0:19:05.560 --> 0:19:09.399 debt becomes due, developing countries don't have large reserves like 0:19:09.440 --> 0:19:13.080 the developed countries do. So each of these risks has 0:19:13.600 --> 0:19:16.679 determinants factors that are leading to these risks. If we 0:19:16.760 --> 0:19:20.520 can understand why these risks exist in emerging markets, we 0:19:20.600 --> 0:19:23.560 can solve them structurally, We can solve them with new 0:19:23.800 --> 0:19:27.679 risk sharing tools, and we can help investors understand that 0:19:27.800 --> 0:19:31.560 some of the perception is actually not correct. 0:19:32.040 --> 0:19:34.400 Is there an example of a place where that's happening. 0:19:34.200 --> 0:19:37.960 Yes, So one recent publication that starts that helps, but 0:19:38.119 --> 0:19:40.720 much more needs to be unpacked, is that after a 0:19:40.720 --> 0:19:45.560 lot of advocacy, the development finance community released their data 0:19:45.680 --> 0:19:49.720 on default rates across their portfolios and it's called the 0:19:49.840 --> 0:19:52.959 GEMS database. And what the GEMS database showed is that 0:19:53.040 --> 0:19:57.480 the default rates in low income countries is much lower 0:19:57.520 --> 0:20:02.800 than what their risk ratings would imply. That was already helpful, 0:20:03.119 --> 0:20:05.720 it needs to be much further unpacked because this is 0:20:06.359 --> 0:20:11.000 financing from development finance institutions, which of course has more 0:20:11.040 --> 0:20:16.400 protections than private investment does. But private investment can co 0:20:16.480 --> 0:20:20.320 invest with development finance and benefit from those guarantees. And 0:20:20.480 --> 0:20:23.840 in developed countries too, a lot of financing is benefits 0:20:23.840 --> 0:20:27.040 from public sector guarantees or supports, So we need to 0:20:27.160 --> 0:20:29.400 unpack that. But that's at least one area. 0:20:29.480 --> 0:20:32.640 But all of this request coordination and coordination often comes 0:20:32.680 --> 0:20:36.600 from governments. When it cannot because of the politics or 0:20:36.680 --> 0:20:40.560 because of their physical capacity. Who else can step in? 0:20:40.720 --> 0:20:45.240 Yeah? Absolutely, so many other actors can step in. The 0:20:45.760 --> 0:20:50.720 appropriate financing stack or the financing solutions to d risk 0:20:51.160 --> 0:20:54.040 can involve a number of different financial entities that have 0:20:54.080 --> 0:20:58.720 an interest in coordinating with other financial entities. So yesterday 0:20:58.720 --> 0:21:02.960 I was at a wonderful workshop up on export credit 0:21:03.000 --> 0:21:06.240 agencies and the role that export credit agencies can play 0:21:06.320 --> 0:21:10.040 in de risking critical investments. But export credit agencies have 0:21:10.119 --> 0:21:15.000 an interest in collaborating with other development finance institutions, the 0:21:15.080 --> 0:21:20.080 multilateral development banks, with local commercial banks that can bring 0:21:20.080 --> 0:21:24.479 additional local currency finance. So even different actors within the 0:21:24.480 --> 0:21:29.280 financial sector, not one financial entity that wants to make 0:21:29.320 --> 0:21:32.199 a market, but to work with the other types of 0:21:32.240 --> 0:21:35.320 financial actors to create a financing stack. 0:21:35.520 --> 0:21:40.240 And development banks are big, there are many, but they 0:21:40.280 --> 0:21:43.719 are not as big as private financial institutions are. There 0:21:43.760 --> 0:21:46.920 examples where private and financial institutions have stepped up. 0:21:47.000 --> 0:21:49.719 There are, they're not enough because and I think this 0:21:49.800 --> 0:21:52.280 goes to the question of the perception, because the more 0:21:52.400 --> 0:21:54.920 data that we can have that shows what good investments 0:21:54.960 --> 0:21:56.760 there are, the more that we'll see. But there are 0:21:56.880 --> 0:22:00.440 a few. The way that the private sector usually comes 0:22:00.440 --> 0:22:04.119 in to emerging markets where there really are assessed risks, 0:22:04.160 --> 0:22:08.200 whether they are real or perceived, is together with an 0:22:08.480 --> 0:22:12.040 entity that can take on that first risk or that 0:22:12.080 --> 0:22:14.080 can help to de risk it. So there are co 0:22:14.200 --> 0:22:19.560 investments with development finance institutions or blended finance vehicles where 0:22:19.720 --> 0:22:24.040 either a philanthropy or a other type of catalytic fund, 0:22:24.040 --> 0:22:28.359 a guarantee mechanism, or a development finance institution, or in 0:22:28.400 --> 0:22:31.639 the case of Singapore, the monetary authority puts in some 0:22:32.040 --> 0:22:37.440 initial capital and on that basis the traditional institutional large 0:22:37.480 --> 0:22:41.359 private investors feel more confident because there's a mechanism to 0:22:41.400 --> 0:22:44.240 take on the first loss. One region in which I'm 0:22:44.359 --> 0:22:46.680 quite interested in what this could look like is in 0:22:46.760 --> 0:22:51.600 Southeast Asia, which from a climate perspective for the world, 0:22:52.040 --> 0:22:55.480 is a very important region. It has the second largest 0:22:55.600 --> 0:23:00.000 growth in energy demand after India. If that energy demand 0:23:00.000 --> 0:23:06.119 and is met with clean energy, that will save the planet, 0:23:06.240 --> 0:23:09.240 and if it's not, then that will lead to massive overshoot. 0:23:09.359 --> 0:23:13.280 From the region's perspective, actually the driver of the clean 0:23:13.400 --> 0:23:16.840 energy transition is not climate. It's that to meet their 0:23:16.880 --> 0:23:22.320 growing energy demand in the most resilient, secure, affordable, independent 0:23:22.760 --> 0:23:26.440 way and to support the growth of clean industries within 0:23:26.640 --> 0:23:30.639 their economy and by the way, to decrease congestion in 0:23:30.680 --> 0:23:34.879 their roads and to clean their air. They have an 0:23:34.920 --> 0:23:41.760 interest in an integrated clean grid that requires connecting different 0:23:41.840 --> 0:23:47.440 sources of clean energy generation, which is located throughout Southeast 0:23:47.480 --> 0:23:51.800 Asia with all throughout the region, because in order to 0:23:51.880 --> 0:23:56.359 make the clean energy reliably available and affordable, you need 0:23:56.400 --> 0:23:57.959 to be able to move it from where it is 0:23:58.000 --> 0:23:59.800 to where it's needed. And by the way, the country 0:23:59.800 --> 0:24:04.320 that this the most is Singapore, because Singapore can't generate 0:24:04.359 --> 0:24:08.240 its own clean energy, so its ability to truly decarbonize 0:24:08.280 --> 0:24:12.880 its economy will depend on its being able to reliably 0:24:12.920 --> 0:24:16.560 secure adequate clean energy from the region. So the whole 0:24:16.640 --> 0:24:20.919 region knows that they will benefit from a clean integrated 0:24:21.040 --> 0:24:23.760 energy system. Why hasn't that happened. 0:24:24.160 --> 0:24:25.840 Yeah, well, I mean that seems like it's in their 0:24:25.840 --> 0:24:26.520 self interest. 0:24:26.680 --> 0:24:29.119 It's in their self interest, and it's a great investment. 0:24:29.720 --> 0:24:33.320 This is going to be a huge energy market. One 0:24:33.400 --> 0:24:36.359 basic starting point is that until this year, there wasn't 0:24:36.400 --> 0:24:39.000 even a scenario in the region for what does this 0:24:39.080 --> 0:24:41.719 clean energy system look like. So if you were an 0:24:41.840 --> 0:24:44.760 energy investor and you wanted to go invest in the 0:24:44.800 --> 0:24:47.720 fastest one of the fastest growing energy regions in the world, 0:24:47.960 --> 0:24:51.280 from an investment perspective, it's not even clear where you 0:24:51.359 --> 0:24:54.960 make that investment because there's no scenario. Then the cost 0:24:54.960 --> 0:24:57.879 of capital, as we were discussing in emerging markets is 0:24:58.000 --> 0:25:02.000 very high for clean energy. When the cost of capital 0:25:02.040 --> 0:25:07.760 is high, the levelized cost of energy is higher than 0:25:07.840 --> 0:25:11.280 fossil fuel production. So on a competitive basis, clean energy 0:25:11.480 --> 0:25:15.679 is not competitive only because of the higher cost of 0:25:15.720 --> 0:25:18.280 capital in emerging markets. And then the final point I 0:25:18.280 --> 0:25:21.600 would say is that for an integrated energy system, if 0:25:21.640 --> 0:25:25.359 you have cross border infrastructure, then the investors need some 0:25:25.720 --> 0:25:29.040 assurance that they're going to be able to trade power 0:25:29.080 --> 0:25:30.919 across borders. How do you do that when you have 0:25:30.960 --> 0:25:35.159 different energy systems, different markets or so on. So until 0:25:35.160 --> 0:25:38.919 this year, there wasn't a plan. Now we're putting we're 0:25:39.160 --> 0:25:43.200 supporting the wonderful institutions in the region, especially the Ausion 0:25:43.280 --> 0:25:46.440 Center for Energy and the Member States, to say, oh, 0:25:46.480 --> 0:25:48.280