WEBVTT - Why investors avoid developing countries, and how to change that: Moving Money 0:00:00.240 --> 0:00:03.800 Welcome to zero I am Aksha Tarti this week. How 0:00:03.800 --> 0:00:19.759 to unblock the private money taps. The world is pouring 0:00:19.800 --> 0:00:23.239 money into the clean energy transition at an unprecedented rate. 0:00:23.840 --> 0:00:26.200 Last year, more than two trillion dollars was invested in 0:00:26.239 --> 0:00:30.280 low carbon technologies, according to bloombergenf Over half of that 0:00:30.480 --> 0:00:34.600 went into renewable energy and grid infrastructure. Another third went 0:00:34.640 --> 0:00:39.040 into electric cars. This year, those investments might slow down 0:00:39.080 --> 0:00:42.000 in the US, but the signs remained bullish in other 0:00:42.080 --> 0:00:45.640 parts of the world. In developed countries, the private sector 0:00:45.760 --> 0:00:48.479 is leading the charge, with hundreds of billions of dollars 0:00:48.600 --> 0:00:52.160 each year flowing to profitable clean tech opportunities and large 0:00:52.200 --> 0:00:56.160 scale projects. Meanwhile, only a tiny trickle of private capital 0:00:56.200 --> 0:00:59.880 goes to developing countries, with investors scared off by unfamiliar, 0:01:00.680 --> 0:01:04.679 volatile exchange rates, and markets that at times seem too risky. 0:01:05.560 --> 0:01:08.360 At COP twenty nine in November last year, all countries, 0:01:08.560 --> 0:01:11.120 even the US, agreed to triple the money that goes 0:01:11.160 --> 0:01:14.440 from rich countries to poor countries, reaching three hundred billion 0:01:14.480 --> 0:01:18.759 dollars annually by twenty thirty five. But the United Nations 0:01:18.800 --> 0:01:21.440 experts have found that the finance gap is closer to 0:01:21.640 --> 0:01:25.960 one point three trillion dollars each year. The upcoming COP 0:01:26.000 --> 0:01:29.080 thirty presidency is working on a roadmap that will hopefully 0:01:29.160 --> 0:01:32.240 fill that void. And while we don't have the specifics yet, 0:01:32.520 --> 0:01:34.840 we know that most of that gap will have to 0:01:34.880 --> 0:01:37.679 be filled by the private sector. So how do we 0:01:37.800 --> 0:01:41.759 unlock private capital for developing nations where clean energy investments 0:01:41.800 --> 0:01:45.640 are most needed. For this episode of Moving Money, we're 0:01:45.680 --> 0:01:49.360 welcoming back avin Ashbasod, special advisor on climate risks to 0:01:49.480 --> 0:01:53.400 the President of the Inter American Development Bank. In this episode, 0:01:53.480 --> 0:01:56.080 he shares his ideas on how to de risk investments, 0:01:56.240 --> 0:02:05.840 attract private capital, and accelerate the clean energy transition globally. Avinash, 0:02:06.000 --> 0:02:07.040 welcome back to the show. 0:02:07.320 --> 0:02:07.640 Thank you. 0:02:07.720 --> 0:02:10.640 Actually, when we typically talk about climate finance, we end 0:02:10.720 --> 0:02:13.760 up talking about rich countries versus poor countries. But there 0:02:13.919 --> 0:02:16.919 is a third group that we don't consider often, which 0:02:17.040 --> 0:02:20.200 is private industry. One of the things that you have 0:02:21.240 --> 0:02:24.240 suggested could be a solution for getting private investors to 0:02:24.320 --> 0:02:28.919 invest in developing countries is to get a currency exchange guarantee, 0:02:29.200 --> 0:02:33.200 because rich investors with dollars or pound don't find it 0:02:33.240 --> 0:02:35.839 as attractive to invest in a roupe year rand, which 0:02:35.880 --> 0:02:39.480 is fluctuating quite a lot. But if you could provide 0:02:39.600 --> 0:02:43.399 a funding guarantee that would ensure that that exchange rate 0:02:43.520 --> 0:02:47.440 is fixed, then that could be a much more attractive proposition. 0:02:47.880 --> 0:02:49.800 Now that was just an idea when we talked about 0:02:49.840 --> 0:02:52.839 it last time around on this podcast. You've actually put 0:02:52.840 --> 0:02:55.639 it into action. Tell me more about how it's working. 0:02:56.080 --> 0:02:58.800 So yes, indeed, we launched with the Government of Brazil, 0:02:59.240 --> 0:03:04.200 Ministry finals and the Central Bank a FX liquidity facility. 0:03:04.360 --> 0:03:09.280 It's just started. We're looking for investors, but the platform 0:03:09.360 --> 0:03:12.560 is established. Now let me just make one step backwards. 0:03:12.600 --> 0:03:15.800 I think you described this very well. We have a 0:03:15.840 --> 0:03:20.920 trillion dollar target, maybe six hundred seven hundred billion of 0:03:20.919 --> 0:03:24.400 that one trillion, so sixty or seventy percent could come 0:03:24.440 --> 0:03:29.120 from the private sector investing in things that generates a revenue, 0:03:29.240 --> 0:03:32.600 most of which looks like mitigation. So the farmers make money, 0:03:32.680 --> 0:03:36.840 hydroelectric power stations make money. Now they're actually the private 0:03:36.880 --> 0:03:40.240 sector is doing this in rich countries. Eighty one percent 0:03:40.760 --> 0:03:44.280 of mitigation is funded by the private sector in rich countries. 0:03:44.440 --> 0:03:46.960 So it's not like this is something that can't be 0:03:47.120 --> 0:03:51.160 funded commercially and you got to blend it with public money. 0:03:51.200 --> 0:03:55.240 It's being funded, it's commercially viable stuff, but it's not 0:03:55.320 --> 0:04:00.960 happening in developing countries because the private investors feel that 0:04:01.120 --> 0:04:05.680 the country risk, the currency risk, not something they're experts in, 0:04:06.200 --> 0:04:09.640 is large and they don't have an ability to absorb 0:04:09.760 --> 0:04:14.040 that risk very well, and so they stay away. 0:04:14.320 --> 0:04:14.920 At the moment. 0:04:15.040 --> 0:04:18.640 What happens is there's a bit of a market structure 0:04:18.760 --> 0:04:23.760 problem in finance. So, as your listeners will know today, 0:04:24.400 --> 0:04:28.279 investors don't say they will find the best investments in 0:04:28.320 --> 0:04:31.400 the world. They've all been specialized. So you go to 0:04:31.520 --> 0:04:35.359 a global infrastructure fund or a global energy fund or 0:04:35.440 --> 0:04:39.719 global renewables fund, and that fund sells to its investors 0:04:40.360 --> 0:04:43.400 that they're experts in this sector. They don't say, oh, 0:04:43.560 --> 0:04:48.800 we're experts in currencies, we're experts in hedging. They say 0:04:48.800 --> 0:04:52.440 we're experts in infrastructure, and that's why they get the money. 0:04:52.480 --> 0:04:55.080 So then they say, all these other risks we are 0:04:55.080 --> 0:04:57.600 going to farm out to somebody else, And so they 0:04:57.600 --> 0:05:00.320 go to the banks, and the banks say currency risk 0:05:00.640 --> 0:05:04.039 in Brazil for twenty five years for your solo farm. 0:05:04.240 --> 0:05:06.800 The problem is that's long term and the banks are 0:05:06.800 --> 0:05:11.720 short term. The problem is Brazil is highly pro cyclical. 0:05:12.000 --> 0:05:15.560 When in the upcycle many emojory markets are doing well, 0:05:15.680 --> 0:05:19.480 so are the banks. But in the downcycle, all of 0:05:19.520 --> 0:05:24.320 these risks collide together. The countries have a bad time, 0:05:24.560 --> 0:05:27.039 the banks have a bad time. So the banks know this, 0:05:27.160 --> 0:05:29.560 and they're saying, well, you know when you need money, 0:05:29.680 --> 0:05:31.680 when I need money, so I'm going to charge you 0:05:32.640 --> 0:05:35.720 a lot for me providing you a guarantee on the 0:05:35.720 --> 0:05:40.160 currency side. So we've come in, we being the Inter 0:05:40.200 --> 0:05:44.159 American Develoment Bank and part of the Multilateral Development Bank 0:05:44.240 --> 0:05:48.440 system and saying, well, we've got a triple A rating 0:05:49.320 --> 0:05:51.880 and we need to make sure we're using the benefits 0:05:51.920 --> 0:05:53.880 of that triple A rating. And one of the benefits 0:05:53.920 --> 0:05:57.919 of that is in the downcycle, when people are fleeing risk, 0:05:58.480 --> 0:06:02.640 they're flying into our instruments because they're looking for safety, 0:06:02.640 --> 0:06:05.599 and we represent safety. So that's a perfect time for 0:06:05.760 --> 0:06:10.760 us to lend to renewable energy projects the dollars they 0:06:10.760 --> 0:06:11.680 may need. 0:06:11.400 --> 0:06:12.600 To pay their investors. 0:06:13.120 --> 0:06:18.039 So our commitment to lend dollars to good projects when 0:06:18.080 --> 0:06:19.600 they need in the down. 0:06:19.480 --> 0:06:21.240 Cycle means that they don't. 0:06:21.600 --> 0:06:23.760 They no longer need to go to the banks and 0:06:23.800 --> 0:06:27.640 ask for expensive hedging. They've got this pre commitment and 0:06:27.839 --> 0:06:30.880 we are lending, you know, only in the down cycle 0:06:31.000 --> 0:06:34.200 when people are coming to us anyway, and we are 0:06:34.279 --> 0:06:38.400 picking the right projects, we're picking the right countries, and 0:06:38.440 --> 0:06:41.240 so we've limited our risks. So we've launched that with 0:06:41.360 --> 0:06:44.440 a backing of five point two billion dollars. So this 0:06:44.520 --> 0:06:47.560 isn't a five million dollar pilot. This is a serious 0:06:47.760 --> 0:06:50.640 Some serious money is behind this, and we're working with 0:06:50.680 --> 0:06:53.839 some new investors on potentially coming in. Some of the 0:06:53.839 --> 0:06:57.839 investments are actually not things we expected as an interesting 0:06:58.240 --> 0:07:01.840 biodiversity type investment. So that is looking at the waste 0:07:01.839 --> 0:07:08.640 products of sugar cane processes. Those byproducts are currently poured 0:07:08.680 --> 0:07:12.040 into the rivers and the sea, creating all kinds of pollution, 0:07:12.440 --> 0:07:14.600 and they could be turned into something more useful than 0:07:14.600 --> 0:07:18.120 where we're working with one investor on that, and they're 0:07:18.120 --> 0:07:21.000 a foreign investor and they are looking at the need 0:07:21.320 --> 0:07:24.320 to not have to hedge the foreign exchange of that investment. 0:07:24.760 --> 0:07:28.040 And then another idea that you are currently working on 0:07:28.160 --> 0:07:32.160 haven't yet launched, is to figure out how foreign investors 0:07:32.160 --> 0:07:35.680 can go into developing countries, but perhaps not directly down 0:07:35.720 --> 0:07:40.560 to the project level, but perhaps through local banks, because 0:07:40.600 --> 0:07:42.960 you're right, right now, most of the money that is 0:07:43.000 --> 0:07:46.600 going in the energy transition on reducing emissions is going 0:07:46.640 --> 0:07:49.600 in rich countries, whereas most of the money that we 0:07:49.760 --> 0:07:52.640 need needs to go in developing countries, and so we 0:07:52.720 --> 0:07:55.720 need to solve that problem. How exactly is it that 0:07:55.800 --> 0:07:59.200 going to banks will make that happen rather than going 0:07:59.240 --> 0:08:00.240 directly to project. 0:08:00.800 --> 0:08:03.760 One of the things I've enjoyed about getting older is 0:08:03.800 --> 0:08:05.800 a realization of what matters. 0:08:05.520 --> 0:08:07.440 Is listening rather than speaking. 0:08:07.920 --> 0:08:12.040 When I was thirty years younger, I used to think, 0:08:12.240 --> 0:08:14.520 you know, the triumph of a meeting was I spoke 0:08:14.640 --> 0:08:17.560 all the time. And now I realize you have to 0:08:17.640 --> 0:08:20.280 listen all the time. And so I'm listening to all 0:08:20.320 --> 0:08:22.720 these people who say, oh, I would love to invest 0:08:22.760 --> 0:08:25.920 in emerging markets, I'd love to invest in climate, I'd 0:08:25.920 --> 0:08:29.280 love to invest in biodiversity. But the risks are the 0:08:29.360 --> 0:08:32.320 risks of going here, and the risks of will I 0:08:32.360 --> 0:08:36.160 get the permit, will I be able to construct, will 0:08:36.200 --> 0:08:38.120 I get all of these things. I'm listening to this 0:08:38.200 --> 0:08:40.880 and thinking, hmm, okay, how do we come up with 0:08:41.160 --> 0:08:44.080 ways of the risking? And then I'm looking at some 0:08:44.200 --> 0:08:47.240 numbers and I realized, well, the banks in Latin America 0:08:48.480 --> 0:08:53.800 own around thirty to forty billion dollars of assets today 0:08:54.640 --> 0:08:59.000 on their balance sheets, they've leant thirty to forty billion 0:08:59.040 --> 0:09:05.400 dollars in projects that are actually producing a revenue. So 0:09:05.720 --> 0:09:08.959 the best thing for foreign investors to do is to 0:09:09.080 --> 0:09:13.040 buy those things that are ready there. They're ready performing, 0:09:13.200 --> 0:09:17.160 They don't need to deal with permitting risk, construction risk. 0:09:17.800 --> 0:09:23.880 These are instruments already performing. Now it seems less sexy 0:09:24.200 --> 0:09:28.720 to be buying something that's already there. There's no origination pioneer. 0:09:29.240 --> 0:09:31.000 But so what we say is, okay, we're going to 0:09:31.040 --> 0:09:35.040 create a fund that will buy the performing assets in 0:09:35.080 --> 0:09:40.560 the banks today, but at a premium, on condition that 0:09:40.640 --> 0:09:44.120 the banks reinvest the money that they've got from selling 0:09:44.200 --> 0:09:48.120 their loans into the same sector. So this allows us 0:09:48.160 --> 0:09:51.720 to do is to double the investment very quickly. And 0:09:51.760 --> 0:09:53.480 the way to think about this is it's a little 0:09:53.520 --> 0:09:55.840 bit like, you know, I'm an economist that I know 0:09:55.920 --> 0:09:59.200 no actual science, so it's always a marvel when I 0:09:59.240 --> 0:10:02.959 discover something hid like fluid mechanics. So you know, you 0:10:03.600 --> 0:10:07.559 get you get the water going uphill by creating a vacuum, 0:10:07.679 --> 0:10:10.560 you get water going uphill in a pipe by creating 0:10:10.559 --> 0:10:12.240 a vacuum at the top. So what we'll be doing 0:10:12.320 --> 0:10:15.360 is creating a vacuum at the top. We're moving all 0:10:15.360 --> 0:10:19.920 of the loans, existing loans of performing renewable energy projects, 0:10:20.320 --> 0:10:23.880 creating this vacuum at the top, allowing the same banks 0:10:23.880 --> 0:10:26.439 that originated the first loan to go out looking for another. 0:10:26.679 --> 0:10:28.680 And the reason why this is important actually that is 0:10:28.679 --> 0:10:31.319 the banks are saying in Latin America and in India 0:10:31.360 --> 0:10:33.960 another place where the banks have a lot of these acids, 0:10:34.679 --> 0:10:37.800 we've done this, it's fine, but we're now running out 0:10:37.800 --> 0:10:41.520 of runway to do any more. We're you know, we've 0:10:41.559 --> 0:10:45.200 got concentration limits, We've got a limited amount of savings 0:10:45.280 --> 0:10:49.079 there is. And so by coming in and creating that vacuum, 0:10:49.559 --> 0:10:51.920 we're giving them the space to do more as well 0:10:51.960 --> 0:10:54.960 as the need to do more. And so I think 0:10:54.960 --> 0:10:57.200 that's a way in which we can go from thirty 0:10:57.200 --> 0:11:01.240 billion dollars invested in renewables in Latin America to sixty 0:11:01.280 --> 0:11:03.760 billion in a couple of years, and then one hundred 0:11:03.760 --> 0:11:05.520 and twenty billion in a couple of years time, and 0:11:06.000 --> 0:11:08.520 two hundred and forty billion in a few years after that. 0:11:08.640 --> 0:11:11.160 So I think that that is a way that we 0:11:11.200 --> 0:11:14.480 can really accelerate. You have all of these ideas about 0:11:14.800 --> 0:11:19.160 accelerating in brand new projects, in brand new logations that 0:11:19.320 --> 0:11:22.480 investors have never been before, and the reality is they're 0:11:22.559 --> 0:11:23.600 too afraid to go. 0:11:23.840 --> 0:11:27.480 Trying to invest in performing assets is exactly what finance does. 0:11:27.760 --> 0:11:30.200 And so why is it that you have to come 0:11:30.280 --> 0:11:33.360 up with this idea and why isn't finance already doing it? 0:11:33.679 --> 0:11:37.480 We are quite right, ninety seven percent of finance is 0:11:37.800 --> 0:11:44.040 refinancing something that it's a sad reality, and finance loves 0:11:44.080 --> 0:11:48.240 to refinance and refinance over and over again. So I 0:11:48.240 --> 0:11:50.920 actually think that we when we get this fund up 0:11:50.920 --> 0:11:53.200 and running, people are going to come to it. Now, 0:11:53.520 --> 0:11:55.800 the reality is today someone has to do this hard 0:11:55.840 --> 0:11:59.960 work because these loans, you know, they're not defined as renewable. 0:12:00.160 --> 0:12:02.400 So some of that to go round, go into these 0:12:02.440 --> 0:12:05.120 bank ballot sheets and say here's the thing that I'm 0:12:05.120 --> 0:12:09.280 prepared to buy and filter them out and one fund 0:12:09.320 --> 0:12:12.960 that needs to do us At the moment, there is 0:12:13.080 --> 0:12:16.720 no capital market in which this is happening in these countries, 0:12:16.920 --> 0:12:19.000 But I'm going to take it to a capital market 0:12:19.440 --> 0:12:23.040 in which would want that an international capital market that 0:12:23.080 --> 0:12:25.840 I'm not going to have a portfolio of performing loans 0:12:26.120 --> 0:12:29.360 in a wide variety of countries in renewable energies. I 0:12:29.480 --> 0:12:33.640 believe we'd be able to package that into an instrument 0:12:34.040 --> 0:12:38.320 that the investors in the capital markets internationally will want. 0:12:38.480 --> 0:12:40.960 And if I can then sell on the loans that 0:12:41.000 --> 0:12:45.320 I have bought, having packaged them into nice packages that 0:12:45.360 --> 0:12:48.120 investors are looking for with the right degree of diversification 0:12:48.360 --> 0:12:52.120 and the right degree of spread of credit, I will 0:12:52.120 --> 0:12:56.080 then have money that could go and reinvest by buying 0:12:56.120 --> 0:12:58.400 some new loans. And so we do think that this 0:12:58.520 --> 0:13:03.239 has scalability because I think my first point of departure 0:13:03.559 --> 0:13:05.680 in this space a few years ago with the bridge 0:13:05.720 --> 0:13:09.160 shown initiative, was about how do we move the needle. 0:13:09.320 --> 0:13:14.440 There's no shortage of clever, small ideas. How do we 0:13:14.480 --> 0:13:17.640 come up with a small number of big ideas that. 0:13:17.679 --> 0:13:18.360 Move the needle? 0:13:23.320 --> 0:13:26.280 After the break, can carbon markets become the big idea 0:13:26.360 --> 0:13:29.200 to move the needle? Or are they forever stuck in 0:13:29.240 --> 0:13:32.520 the doldrums. By the way, if you've been enjoying this episode, 0:13:32.559 --> 0:13:34.640 please take a moment to rate and review the show 0:13:34.800 --> 0:13:38.400 on Apple Podcasts and Spotify. It helps other listeners find 0:13:38.440 --> 0:13:52.360 the show. So we've talked so far about currency exchange 0:13:52.360 --> 0:13:56.079 guarantees as an idea trying to get loan portfolios in 0:13:56.120 --> 0:13:59.960 developing countries sold to international investors and freeing up care 0:14:00.000 --> 0:14:03.760 capital in developing countries to do more green stuff. But 0:14:03.800 --> 0:14:06.960 there are other private sector instruments that do exist, and 0:14:07.040 --> 0:14:10.679 they exist at pretty large scale. So green bonds are 0:14:10.720 --> 0:14:15.840 one where basically an investor buys into the bond which 0:14:15.880 --> 0:14:20.800 is targeted for use in green stuff. So it could 0:14:20.840 --> 0:14:24.160 be building a renewable energy project, it could be building 0:14:24.200 --> 0:14:27.960 even adaptation projects sometimes are funded by green bonds, and 0:14:28.040 --> 0:14:31.320 that's hundreds of billions of dollars on an annual basis. 0:14:31.920 --> 0:14:37.280 Calling it green hmmm, doesn't make it green, And I 0:14:37.360 --> 0:14:42.840 think that to me, the impact of that market, the 0:14:42.880 --> 0:14:47.920 force of that market, is a function of how lower 0:14:48.360 --> 0:14:51.880 is the infrast rate on that money. So I've called 0:14:51.920 --> 0:14:54.760 something green, I'm going to use it for green purposes 0:14:55.000 --> 0:14:59.040 and as a result, I can get money in the 0:14:59.080 --> 0:15:04.000 marketplace at fifty basis points less one hundred basis points less, 0:15:04.400 --> 0:15:08.640 and that's important because that means I could do more stuff, 0:15:08.880 --> 0:15:12.320 more of this stuff. Right, The reality is the green 0:15:12.520 --> 0:15:19.120 premium sometimes awkwardly called the gremium, is a few basis points. 0:15:19.680 --> 0:15:21.720 And I look at that and I think that's really 0:15:22.280 --> 0:15:26.320 two possible reasons why. Firstly, maybe people don't trust my 0:15:26.400 --> 0:15:30.120 definition of green, and we need better definitions of green. 0:15:30.280 --> 0:15:32.720 In economics, we're always saying that things are caused by 0:15:33.280 --> 0:15:36.880 lack of information transparency, and so any economists hearing this 0:15:36.920 --> 0:15:40.240 will say, ah, you have an information problem. No one 0:15:40.200 --> 0:15:45.280 already believes that it's green. The other alternative is there 0:15:45.360 --> 0:15:48.920 isn't a market for someone to accept a lower return 0:15:49.840 --> 0:15:54.440 for doing something green. And I fear that that is 0:15:54.520 --> 0:15:57.600 even more important, and that certainly seems to have been 0:15:57.640 --> 0:16:00.600 the case in the last few years when interest rates 0:16:00.640 --> 0:16:01.080 shut up. 0:16:01.280 --> 0:16:05.040 And at the same time, there have been two things 0:16:05.040 --> 0:16:09.720 that happen simultaneously. There's been backlash against ESG environmental social 0:16:09.760 --> 0:16:13.080 governance on a political level in places like the US, 0:16:13.760 --> 0:16:17.360 but outside the US, but there isn't a political backlash. 0:16:17.560 --> 0:16:20.320 Investors have been moving away from ESG investments because they 0:16:20.320 --> 0:16:25.680 can make money in just normal interest linked derivatives. 0:16:25.080 --> 0:16:26.440 Like exactly right. 0:16:26.520 --> 0:16:32.640 And it suggests that this issue is cyclical rather than linear, 0:16:33.280 --> 0:16:35.440 so that there will be a time in the future, 0:16:35.480 --> 0:16:38.520 the interest rates come down again and we should probably 0:16:38.560 --> 0:16:42.080 issue some more more green bonds then, because, as you say, 0:16:42.120 --> 0:16:44.800 when interest rates were very low, remember the zero interest 0:16:44.840 --> 0:16:47.960 rate policy zup. It seems such a long time ago, 0:16:48.000 --> 0:16:50.880 but actually only a few years ago. Then people began thinking, well, 0:16:50.880 --> 0:16:53.320 I'm not getting much cash from my bond, I might 0:16:53.320 --> 0:16:55.160 as well to get something else as well, right, And 0:16:55.280 --> 0:16:59.840 so there was a whole explosion of social impact investing. 0:17:00.880 --> 0:17:02.560 And these other instruments. 0:17:03.320 --> 0:17:07.120 It has, as you say, really declined, and I think 0:17:07.160 --> 0:17:10.560 that decline is because people can now get decent rates 0:17:10.560 --> 0:17:13.800 of return and they're not bothered about getting something extra. 0:17:14.359 --> 0:17:16.680 I think that that we're in that environment for the 0:17:16.720 --> 0:17:19.080 next few years. I don't think going back down to zero, 0:17:19.119 --> 0:17:21.520 but they will go back down low at some point 0:17:21.560 --> 0:17:24.200 in the future, and we should issue those instruments again. 0:17:24.240 --> 0:17:28.240 But it's not therefore a reliable or at the moment's 0:17:28.240 --> 0:17:29.159 scalable solution. 0:17:29.480 --> 0:17:31.439 Why is there a lack of demand for green bones? 0:17:31.960 --> 0:17:35.720 Isn't it clear now with these global climate goals that 0:17:35.760 --> 0:17:38.760 we have to be investing in these places and smart 0:17:38.800 --> 0:17:41.679 investors try and get to the place where the trends 0:17:41.720 --> 0:17:43.879 are where future money is to be made, and the 0:17:43.920 --> 0:17:45.920 earlier you get in, the more money you can make. 0:17:46.119 --> 0:17:50.080 But remember the equation here is not someone saying I'm 0:17:50.080 --> 0:17:53.520 going to do some smart investing. I'm thinking about the 0:17:53.600 --> 0:17:57.159 fact that in the future this thing I'm doing is 0:17:57.200 --> 0:17:59.440 going to be valued better, It's going to be seen 0:17:59.480 --> 0:18:02.240 as important, and therefore I will get a higher rate 0:18:02.240 --> 0:18:05.600 of return. This equation is different. This is like saying, 0:18:05.640 --> 0:18:08.720 accept a lower rate of return because you're doing something good, 0:18:09.119 --> 0:18:13.399 and unfortunately, for whatever reason, that market does not seem 0:18:13.440 --> 0:18:16.399 to be there. They're not people lining up to accept 0:18:16.400 --> 0:18:20.320 a lower rate of return for doing good, and indeed, 0:18:20.400 --> 0:18:25.879 in some places some pension fund trustees are being taken 0:18:25.920 --> 0:18:30.160 to court saying that their job is to maximize rates 0:18:30.160 --> 0:18:31.360 of return for their members. 0:18:31.640 --> 0:18:35.280 The other idea that has been floated by clever financial 0:18:35.280 --> 0:18:38.680 people is that green bonds as they had been defined, 0:18:38.760 --> 0:18:41.120 because they are restricted for that money to be spent 0:18:41.200 --> 0:18:44.919 on green activities, are perhaps a too restrictive instrument, and 0:18:45.000 --> 0:18:48.280 perhaps that lower interest rate is not good enough. So 0:18:48.320 --> 0:18:52.280 they created another instrument called a sustainability linked pond, where 0:18:52.560 --> 0:18:55.400 the bond's money can be used for whatever a corporation 0:18:55.600 --> 0:18:58.359 or a country wants it to use, except the interest 0:18:58.440 --> 0:19:02.840 rate would be tied to the goals that the company 0:19:02.920 --> 0:19:08.159 or the country has, and now bond investors get to 0:19:09.359 --> 0:19:13.119 essentially drive whether the country or the company actually meets 0:19:13.119 --> 0:19:16.200 those goals, because if it doesn't, then the interest rate 0:19:16.440 --> 0:19:19.479 that the bond investors get paid rises and the company 0:19:19.520 --> 0:19:22.560 or the country has to pay more. And that instrument 0:19:22.720 --> 0:19:25.240 took off like a rocket over the past few years. 0:19:25.240 --> 0:19:28.280 It's about one hundred million dollar market. We did an 0:19:28.280 --> 0:19:31.080 investigation looking at how some of those goals were not 0:19:31.200 --> 0:19:34.639 strong enough and that kind of halted the growth of 0:19:34.680 --> 0:19:38.280 the market, but it's still a pretty robust market. All 0:19:38.320 --> 0:19:41.439 the people I've spoken to have said fundamentally, it is 0:19:41.520 --> 0:19:46.360 an interesting instrument, but there is an information problem that 0:19:46.520 --> 0:19:49.480 once sorted, it will rise again. What do you think 0:19:49.520 --> 0:19:51.360 about sustainability link ponds. 0:19:51.640 --> 0:19:55.240 I think that, as with green bonds, there are some 0:19:55.280 --> 0:20:00.600 people out there who are prepared to accept a or 0:20:00.800 --> 0:20:07.600 changed interest rate based around sustainability. Government donors can be 0:20:07.680 --> 0:20:10.479 part of that, philanthropists can be part of that, and 0:20:10.520 --> 0:20:14.840 I believe that we need these instruments to tap that interest. 0:20:15.640 --> 0:20:20.800 Is there a mass marketplace for that, I'm not sure. 0:20:21.160 --> 0:20:23.920 I don't think I've seen evidence to say it is. 0:20:24.440 --> 0:20:27.960 And in my current job at the Inter American Development Bank, 0:20:28.000 --> 0:20:31.879 we're finding lots of opportunities to tap into a particular 0:20:32.000 --> 0:20:36.199 donors interest and create a bond around that. So, for example, 0:20:36.320 --> 0:20:40.280 that the current thing we're looking at is a loan 0:20:40.800 --> 0:20:44.120 to adapt all schools in Latin America and the Caribbean 0:20:44.200 --> 0:20:47.600 to enable them to deal with extreme heat. There's lots 0:20:47.600 --> 0:20:50.720 of donors concerned about that. I mean, kids are not 0:20:50.840 --> 0:20:54.480 going to be able to learn in forty degrees integrade. 0:20:54.480 --> 0:20:57.200 It's going to have a huge impact on their future, 0:20:57.359 --> 0:21:02.520 their potential. The American government and the British government, and 0:21:02.600 --> 0:21:06.240 the French and German and the Qataris and others are 0:21:06.280 --> 0:21:10.000 concerned enough about that to say, oh, I will back 0:21:10.040 --> 0:21:14.159 an instrument that funds the change of these schools. And 0:21:14.200 --> 0:21:17.720 once you've certified, because certification is important in all these 0:21:17.760 --> 0:21:21.960 processes that the school has now adapted, I will pay 0:21:22.520 --> 0:21:27.639 some interest and therefore can reduce the cost for the country. 0:21:27.680 --> 0:21:30.520 So I think that those things. It's great that if 0:21:30.560 --> 0:21:34.679 I can tap into a particular demand, I can do more. 0:21:35.080 --> 0:21:38.399 But I think that is there a massive market of 0:21:38.640 --> 0:21:42.800 ordinary retail investors who want to do that, I'm not sure. 0:21:43.160 --> 0:21:45.040 I think also going to have some issues and we're 0:21:45.080 --> 0:21:52.400 seeing this with debt swaps. Is the more bespoke they are, interesting, sophisticated, 0:21:52.960 --> 0:21:56.440 the less liquid they are, and so that can mean 0:21:56.480 --> 0:22:00.280 that they're not as helpful. And what I mean that 0:22:00.359 --> 0:22:03.040 is that liquidity is partly about people understanding that. Right, 0:22:03.080 --> 0:22:06.800 So I've got a marketplace and my coupon has every 0:22:06.840 --> 0:22:10.160 single coupon in this marketplace has got some different link 0:22:10.440 --> 0:22:13.800 based on something else, some other metric that's hard for 0:22:13.920 --> 0:22:18.760 investors to understand, and so that reduces the potential marketplace 0:22:18.800 --> 0:22:21.560 who are buying and selling these instruments. And if those 0:22:21.600 --> 0:22:24.320 markets are small, they're going to have less liquidity and 0:22:24.400 --> 0:22:26.560 be more costly. Yeah, And that sort of makes sense 0:22:26.600 --> 0:22:28.760 to me from an equity perspective, which is a much 0:22:28.760 --> 0:22:32.479 simpler market because you're looking at a company like Apple 0:22:32.600 --> 0:22:35.320 and you're seeing, oh, they're going to produce a new iPhone, 0:22:35.359 --> 0:22:38.080 and that's about the information you need because people love 0:22:38.240 --> 0:22:40.760 a new iPhone, and so you're going to bet that 0:22:40.960 --> 0:22:42.639 Apple's going to make more money and you buy the 0:22:42.640 --> 0:22:45.359 stock in the price rises and you're happy. But in 0:22:45.400 --> 0:22:49.880 these sustainability linked instruments, You're going to have to think, oh, 0:22:50.720 --> 0:22:55.600 this Indian electric company is going to be reducing its 0:22:55.600 --> 0:22:59.639 emissions by two hundred and fifty million tons by twenty thirty, 0:22:59.800 --> 0:23:02.240 and that is going to be its goal. And that's 0:23:02.280 --> 0:23:06.240 just already that is too much information for any normal 0:23:06.320 --> 0:23:09.280 person to think about and deciding with it to sell 0:23:09.320 --> 0:23:13.440 that bond, to buy another bond. Because there's a Korean 0:23:13.480 --> 0:23:16.560 company who's got a similar target, but for a different 0:23:16.640 --> 0:23:20.160 years and a different it's hard for investors to really 0:23:20.240 --> 0:23:23.160 understand how they're getting in the best deal. To use 0:23:23.200 --> 0:23:25.959 the power of the market to drive good deals and 0:23:26.000 --> 0:23:27.440 good investments. 0:23:27.680 --> 0:23:30.800 There's another private sector instrument that has got a lot 0:23:30.800 --> 0:23:35.080 of backing at COP twenty nine. Article six rules would 0:23:35.080 --> 0:23:38.120 agree this Article six sits under the Paris Agreement. It's 0:23:38.160 --> 0:23:43.720 supposed to be a way for countries to trade carbon credits. 0:23:43.920 --> 0:23:47.600 So Norway could be buying carbon credits from Indonesia and 0:23:47.840 --> 0:23:52.359 reducing its own emissions from its balance sheet, while Indonesia, 0:23:52.840 --> 0:23:56.800 which has many for USTs, even now gets to make 0:23:56.880 --> 0:24:00.879 money and perhaps put it to an energy transition investment fund. 0:24:01.280 --> 0:24:03.800 But companies could do it to a Microsoft that wants 0:24:03.800 --> 0:24:06.440 to reach carbon negative by twenty thirty could be buying 0:24:06.480 --> 0:24:09.880 the same forest credits from Indonesia. We've had, at least 0:24:09.880 --> 0:24:13.760