Speaker 1: Hello, and welcome to another episode of the All Thoughts podcast.
Speaker 1: I'm Tracy Allaway and I'm Joe. Wisn't thal Joe? How
Speaker 1: many E s G press releases do you get in
Speaker 1: a day? What would you say? All? All half of
Speaker 1: my inbox? I don't like making fun of PR people
Speaker 1: too much because it's sort of cheap. You know, journalists
Speaker 1: always wind about PR people. But half of my inboxes
Speaker 1: cryptocurrencies experts who want to tell me about cryptocurrencies, and
Speaker 1: the other is people who want to tell me about
Speaker 1: some sort of thing with sustainable investing a k A
Speaker 1: E s G. Yeah. I kind of love how it's
Speaker 1: two extremes of the Barbell right. It's cryptocurrencies taking up
Speaker 1: a bunch of electricity and then at the other end,
Speaker 1: sustainable finance. But I wouldn't necessarily blame the PR people
Speaker 1: because there is this huge industry that has cropped up
Speaker 1: and grown around e s G. For those that don't know,
Speaker 1: it stands for Environmental, Social and Corporate governance. And I
Speaker 1: think we've had something like five hundred billion dollars worth
Speaker 1: of money raised by companies and governments for e s
Speaker 1: G projects. We've had more than eight hundred billion flowing
Speaker 1: into e s G funds, and as our inboxes can
Speaker 1: attest to, we've had, you know, hundreds of new e
Speaker 1: s G funds launched recently. There is certainly a lot
Speaker 1: of money in it. And you're right, we can't blame
Speaker 1: the pr people. It's not their fault that there's just
Speaker 1: so much money marketing funds. They're just going where, you know,
Speaker 1: doing what the clients say is really not the people's fault.
Speaker 1: There's a big there is a very big push behind
Speaker 1: all things e s G, both of the private side
Speaker 1: companies wanting to make themselves eligible for E s G investing,
Speaker 1: green bonds, et cetera. Just a huge part of this
Speaker 1: sort of a finance conversation right now. Yeah, but I'm
Speaker 1: kind of glad you brought up the cryptocurrency parallel, because,
Speaker 1: just like the crypto market, e s G is relatively
Speaker 1: new and it's sort of finding its footing, and there's
Speaker 1: been quite a lot of talk about how to align incentives,
Speaker 1: how to get definitions right, what exactly is a green investment,
Speaker 1: and in many ways there's a lot of disagreement, and
Speaker 1: it's still kind of like the wild West totally, and
Speaker 1: you know, there's still like there's a lot of ambiguity.
Speaker 1: It seems like, I mean, part of it is like, well,
Speaker 1: how much you want to invest with your values? How
Speaker 1: much is it that using certain E s G screens
Speaker 1: you can actually do better? Because in theory, the company
Speaker 1: operating with more sustainable practices could or should some according
Speaker 1: to some practitioners, actually deliver better returns. What are the
Speaker 1: trade offs? But I don't think like any of these
Speaker 1: answers are like settled science by any stripe. No. But today,
Speaker 1: in order to offset all the press releases that are
Speaker 1: floating out there, we are going to be focusing on
Speaker 1: I don't want to say the downsides of e s G,
Speaker 1: but maybe areas of potential improvement. Um, that's probably a
Speaker 1: good way of putting it. And we are going to
Speaker 1: be speaking to Danielle good Boor. She's a professor of
Speaker 1: economics and macro finance at UE Bristol and also a
Speaker 1: very vocal critic of E s G on Twitter. Daniella,
Speaker 1: thanks so much for coming on, Thank you for inviting me.
Speaker 1: So I guess my first question is what's the purpose
Speaker 1: of E s G Because it sounds kind of obvious
Speaker 1: like we're going to pour a bunch of money into
Speaker 1: good or green projects that are going to change the world.
Speaker 1: But is it that you're supposed to be investing in
Speaker 1: good companies or is it that you're investing in companies
Speaker 1: and then trying to engage with them to change their behavior.
Speaker 1: So I would say that my interest in E s
Speaker 1: G comes from observing the broader political context in which
Speaker 1: E s G investment as a reason in which this
Speaker 1: wall of the s G funds. To just describe a
Speaker 1: sort of come about. To describe the political context, I
Speaker 1: would like to start with a quote from a private
Speaker 1: equity lobbyist that was discussing the Biden infrastructure plan, and
Speaker 1: he said something along the lines of this is a
Speaker 1: very traditional government in spending on infrastructure plan. It's like
Speaker 1: an old funded through the government approach. And what we
Speaker 1: were expecting was Biden to put private finance in the
Speaker 1: in the driving seat, to partner with private finance through
Speaker 1: public private partnerships, and to tap into the huge pools
Speaker 1: of capital, particularly s G capital, standing by and looking
Speaker 1: for sort of sustainable investments and sustainable projects. And the
Speaker 1: way in which this complaint was framed that Biden shows
Speaker 1: old style government investment instead of a partnership with private
Speaker 1: finance signals to me the importance of thinking about the
Speaker 1: rise of E S G and what is the purpose
Speaker 1: how should we think about its limitations through the lengths
Speaker 1: of what I call macro finance regimes, that is, the
Speaker 1: configuration of policies and institutions used by governments, central banks
Speaker 1: and private finance to design the low carbon transition, that is,
Speaker 1: a transition towards a low carbon economy. And I would
Speaker 1: guess since two thousand and fifteen, the year of the
Speaker 1: Paris Agreement, and also the year of the Addis Ababa
Speaker 1: Financing for Development Conference, we have seen what I would
Speaker 1: describe as two broadly distinctive macro financial regimes that promise
Speaker 1: to generate investments in the order of about USD five
Speaker 1: to seven trillion annually that are necessary for the low
Speaker 1: carbon future. And there is a big finance regime team
Speaker 1: and a big green state regime that we often discussed
Speaker 1: as a green New Deal kind of arrangement. So when
Speaker 1: private equity companies and asset managers were complaining that Biden
Speaker 1: had abandoned about the Biden Plan, they were complaining to
Speaker 1: me that they had abandoned this big finance regime that
Speaker 1: was dominant until then in global policy forums like the
Speaker 1: G twenty, the United Nations, in multilateral development banks, the
Speaker 1: Conference on Climate Change, the Global Investor for Sustainable Development Alliance,
Speaker 1: which was a consensus that private finance needs to needs
Speaker 1: to be in the driving seat for us to achieve
Speaker 1: the SDG and the organization commitments by by twenty thirty.
Speaker 1: So this is I want to stop at this point
Speaker 1: because I just want to really make sure we stress it.
Speaker 1: And this is super interesting. And so what you're describing
Speaker 1: is that for years there's been this consensus among leaders
Speaker 1: that when they set out, say like climate goals or
Speaker 1: other environmental goals, that there's a big role for the
Speaker 1: finance industry for private money to be employed directed in
Speaker 1: such a way that it goes towards investments in all
Speaker 1: these areas, whether it's in technology or something like that.
Speaker 1: And perhaps some of the anxiety now as we think
Speaker 1: about when I guess you could say maybe green New
Speaker 1: Deal thinking, although there is no green New deal, but
Speaker 1: green New Deal thinking is much more about let's just
Speaker 1: have the public fisk, let's just have public spending invest
Speaker 1: in this. And it's sort of like I guess you
Speaker 1: could say it sort of cuts out the opportunities in
Speaker 1: some ways for private financial profit exactly. I mean, it
Speaker 1: doesn't necessarily cut them out, because you could say, well,
Speaker 1: you know, private finance was still by the government, the
Speaker 1: bonds issued by governments to finance the green carbon transition.
Speaker 1: It definitely sort of sort of goes against this idea
Speaker 1: that private finance needs to be in the driving seat,
Speaker 1: an idea that that comes with the E s G
Speaker 1: push over the last five to seven years. So what's
Speaker 1: the implication of that. Are you suggesting that as more
Speaker 1: of these projects are undertaken by governments, does that mean
Speaker 1: that the E s G pool is going to start
Speaker 1: shrinking or there's going to be fewer opportunities or is
Speaker 1: it still just going to keep growing as we described
Speaker 1: in the intro. That's that's a very interesting question in
Speaker 1: the sense that it very much depends which avenue governments
Speaker 1: will decide to take, whether they go for big, big
Speaker 1: public investment, which I I somehow doubt. I think the
Speaker 1: by the Infrastructure plan is is somehow an oddity in
Speaker 1: sort of uh in high income countries, I would guess,
Speaker 1: especially after the COVID nineteen crisis there is because we
Speaker 1: still rely very much on this powerful macro fiction of
Speaker 1: the last fourth years that governments have limited fiscal space
Speaker 1: and that it should not rely on independence cent central
Speaker 1: banks to maintain borrowing costs. Law. Then the idea, the
Speaker 1: question comes, if governments cannot produce the trillions in green investment,
Speaker 1: these have to come from somewhere else, and that will
Speaker 1: be private finance. And that's where you get the sort
Speaker 1: of back of the envelope calculations that you were described earlier,
Speaker 1: and they run something like this. You have thirty three
Speaker 1: and eighty trillions U S dollars in financial assets worldwide.
Speaker 1: Around the hundred trillion belong to institutional investors and asset managers,
Speaker 1: and probably thirty trillion more or less have already a
Speaker 1: sustainability level label attached to them. So five to seven
Speaker 1: trillions annually. It's not at large, but what it requires,
Speaker 1: and I think this is very important to bear in mind.
Speaker 1: What it requires is for private private public finance to
Speaker 1: crowding private finance. In other words, for the state to
Speaker 1: help private finance invest in infrastructure projects. And this is
Speaker 1: I think an important political project that goes hand in
Speaker 1: hand with the rise of V s G S because
Speaker 1: it says that when the state has to de risk investments,
Speaker 1: particularly infrastructure investments for private finance, and that goes into
Speaker 1: steps one is to allow private finance to identify sustainable
Speaker 1: asset classes via E s G metrics and then to
Speaker 1: de risk private flows into the E s G sort
Speaker 1: of sustainable assets. Right, and to give you the example
Speaker 1: of the G twenty infrastructure as an asset class, which
Speaker 1: the Biden administration is already supporting through its International Climate
Speaker 1: Finance Plan, the idea and the G twent infrastructure as
Speaker 1: an asset class is that the private sector does not
Speaker 1: build ports or high speed trains, or renewable energy plans
Speaker 1: or hospitals because there are very important risks to projects
Speaker 1: cash flows. There might be sufficient demand, there might be
Speaker 1: currency depreciation, climate risks, fossil fuere subsidies for the poor.
Speaker 1: To what the state needs to do is to step
Speaker 1: in and to de risk the public private partnerships or
Speaker 1: these partnerships between the state and private finance. By assuming
Speaker 1: risk the demand falls or the few your governments might
Speaker 1: increase policies like minimal minimum wages or new climate regulations
Speaker 1: such as an increase in carbon price, and I think
Speaker 1: this to me, this turn towards the state as an
Speaker 1: instrument of the risking for private finance explains to a
Speaker 1: significant extent that dramatic growth that we have seen in
Speaker 1: sustainable finance products in the last years. It's a it's
Speaker 1: a global political appetite for a market driven approach to
Speaker 1: development and to climate. This is this is super fascinating already.
Speaker 1: I mean, I'm thinking, you know, like one of the
Speaker 1: themes that we talked about on this podcast a lot
Speaker 1: is like, are we sort of like entering a I
Speaker 1: guess post neoliberal period and thinking about the economy. And
Speaker 1: we've talked about it a lot with monetary and fiscal
Speaker 1: policy and this idea of handing off control of the
Speaker 1: economy from the technocrats at the central banks to the politicians,
Speaker 1: uh and the government, but we haven't really explored it
Speaker 1: from like the climate angle. But it really is the
Speaker 1: same conversation. It really dovetails with this very nicely, this
Speaker 1: idea that yes, there were these climate priorities that many
Speaker 1: governments and large companies had set out, but it was
Speaker 1: very much done within this framework of yes, but it's
Speaker 1: we're gonna it's we're gonna turn it into a market opportunity.
Speaker 1: And so this choice, as you as you put it,
Speaker 1: this choice to de risk the projects of sustainable finance
Speaker 1: for the private sector is what is this sort of
Speaker 1: like seed or the kernel for what is this omnipresent
Speaker 1: boom in I guess s G investment vehicles? Yes, I
Speaker 1: would very much agree in the sense that I think
Speaker 1: if you, if you trace the importance of h G
Speaker 1: in general is that it is a private taxonomy for
Speaker 1: identifying green or sustainable assets and in a sense distinguishing
Speaker 1: them from from dirty assets. Right. There are a couple
Speaker 1: of issues to consider there. I think one is that,
Speaker 1: although we tend to applaud in some ways, the fact
Speaker 1: that technocratic central banks or at least working closer with
Speaker 1: governments in order to design, say the green transition or
Speaker 1: to to respond to the COVID nitey in pandemic. To me,
Speaker 1: the question is when government technocrats to sort of take over.
Speaker 1: Do they take over to design public investment in green
Speaker 1: infrastructure and green industries, or do they take over to
Speaker 1: design and to negotiate the risking in public private partnership contracts.
Speaker 1: And there are very different physical implications for both, and
Speaker 1: In this one of the papers that I've written on
Speaker 1: what I call this Worlds three consensus, I look at
Speaker 1: the hidden physical costs of the riskings and they can
Speaker 1: be quite significant. We have examples in the European Union,
Speaker 1: we have examples in because trees in the Global South,
Speaker 1: like like Nigeria Orghana, where we can see that it
Speaker 1: doesn't sort of relying on the private sector to drive
Speaker 1: the sustainable agenda doesn't mean that the state is not
Speaker 1: putting fiscal resources on the line. It is in a
Speaker 1: sense and the risk to me there is that it's
Speaker 1: sort of privatizes profits and its socializes laws. Daniel, can
Speaker 1: you explain that a little bit more? How does the
Speaker 1: government de risking the space actually results in fiscal expenditure.
Speaker 1: So let me give you, for example, the example of
Speaker 1: ghanas some COFA offshore gas project where the state signed
Speaker 1: a public private partnership contract with a couple of French companies.
Speaker 1: And in that in PPP contract there is a very
Speaker 1: clear specification of who assumes what risks and the state assumes.
Speaker 1: For example, in this contract Demander skin that says that
Speaker 1: it car is a level of cash flows for the
Speaker 1: private investor Stern for the private operator in the case
Speaker 1: of this Ghanian project, because the state agreed to do
Speaker 1: risk and demand or in other words, to provide a guarantee,
Speaker 1: then according to the i m F, it now pays
Speaker 1: about five hundred million annually for power power generation capacity
Speaker 1: that it cannot use because the infrastructure the greed is
Speaker 1: not performed enough to sort of absorb this. And there
Speaker 1: are many other examples in PPP contracts everywhere, because the
Speaker 1: logic is, if you want to direct or to escort
Speaker 1: private finance into sustainable assets, you need to change the
Speaker 1: risk reworld profile right to align it better with their
Speaker 1: preferred the risk reward profile. Then the state says, okay,
Speaker 1: I will guarantee a certain level of demand I will pay,
Speaker 1: or if a future government decides to, for example, increased
Speaker 1: minimum wages, or if it decides to put a carbon price,
Speaker 1: the state absorb some of the risks of the private
Speaker 1: investment in order to guarantee a constant stream of cash flow. Well,
Speaker 1: why is this not just a problem of making these
Speaker 1: guarantees better, demanding more demanding, you know, setting the standards
Speaker 1: for what the projects need to accomplish. I mean, it
Speaker 1: seems like it's it's easy to imagine bad projects where
Speaker 1: the state comes in and create some buffer de risks
Speaker 1: for the private sector, and then the private sector doesn't deliver.
Speaker 1: Why not just get better at making sure the private
Speaker 1: sector delivers better if it's going to be eligible for
Speaker 1: these sort of guarantee the backstops of the state. I
Speaker 1: think that's a that's a very legitimate question, and historically
Speaker 1: the critic towards these the risking PPPs has come from
Speaker 1: from the empirical reality in the European Union and in
Speaker 1: countries around the world that have been used p pps
Speaker 1: for infrastructure investorment. Remind us what p P stand for,
Speaker 1: a public private partnership, right, it is the kind of
Speaker 1: it is the kind of arrangement that black Rock, for example,
Speaker 1: uh called for the Biden administration to use in order
Speaker 1: to involve the private sector in infrastructure investment. And the
Speaker 1: experience with p pps in Europe and elsewhere is in
Speaker 1: general an experience of a lot of very high costs
Speaker 1: for the state that would have in other words, that
Speaker 1: it would have been cheap or if the state did
Speaker 1: it by basically spending directly, as the Biden administration plans
Speaker 1: to do with its infrastructure plan. So that's one issue
Speaker 1: us it has been very costly for for the public purse,
Speaker 1: and I guess the second issue is, as you describe it, Joe, well,
Speaker 1: maybe we can find a better way of governing these
Speaker 1: projects to make sure that the distributions of risk works better,
Speaker 1: and the World Bank has done a lot of sort
Speaker 1: of efforts into that direction, but to my mind, we
Speaker 1: haven't had yet a successful or many successful examples where,
Speaker 1: particularly in the Global South, but also in Europe where
Speaker 1: these distribution of risks work works better for the public person.
Speaker 1: That's one thing. And the second one, which for the
Speaker 1: europe euro European audience perhaps it resonates better, is that
Speaker 1: once you organize public services through p pps, then basically
Speaker 1: you're saying that the users have to pay a fee
Speaker 1: in order to access them. And that is the case
Speaker 1: for highways, that is the case for trains where it's
Speaker 1: but it's also the case for health services, for education,
Speaker 1: for nature as an asset class. The idea is to
Speaker 1: use these PPPs everywhere. So in a sense there is
Speaker 1: also a question of the public good here, whether the
Speaker 1: government governments around the world are not equipped to provide
Speaker 1: or to meet at a social contract with its citizens
Speaker 1: by providing good quality public services through public investment as
Speaker 1: opposed to imposing user fees and UH and the risking
Speaker 1: typically investments there the more important sort of the bigger
Speaker 1: issue and brings ads back to the way the topic
Speaker 1: of the S G S. I think there is also
Speaker 1: a question of systemic greenwashing that that the rises with
Speaker 1: this kind of the risking parodigm. I wanted to I
Speaker 1: wanted to pick up on exactly this point because you
Speaker 1: mentioned this idea of the technocrats stepping in and de
Speaker 1: risking E. S G. And Joe described how one of
Speaker 1: our big themes for the year is this idea of
Speaker 1: a bigger role for the government um in terms of
Speaker 1: fiscal stimulus and everything else. But another theme, or a
Speaker 1: sub theme of that, I should say, is that the
Speaker 1: devil is in the details, right, And even if you
Speaker 1: agree that the government should actually do more designing, that
Speaker 1: policy can be fraught with loads of disagreements, and it
Speaker 1: can be very difficult and maybe even not as efficient
Speaker 1: or productive as it should have been. So how is
Speaker 1: that playing out in the E S G space? So
Speaker 1: I would say, in the space it plays out, and
Speaker 1: I think that they in the technocratic detail is very important.
Speaker 1: It's it's crucial is who decides or according to what
Speaker 1: rules or taxonomy is we call them taxonomy is in
Speaker 1: this space, according to what taxonomy is do we decide
Speaker 1: whether investments and products or green or or dirty. And
Speaker 1: there is a broad agreement in regulatory circles that industry
Speaker 1: led s G approaches open the door too systemic green waship.
Speaker 1: That is, in a sense, maybe if I give you
Speaker 1: the example of Total, the French oil and gas company,
Speaker 1: because I think it's a powerful example. If you take
Speaker 1: sustain Analytics, which is one of the s G which
Speaker 1: is one provider of e s G ratings, Analytics rates
Speaker 1: Total as having e s G risks at a medium level.
Speaker 1: It rates Exton high and Chevron as having severe e
Speaker 1: s G risks. And if you look at Total, well
Speaker 1: you'd say it has a nature based solution unit that
Speaker 1: promises to invest in natural carbon scenes in order to
Speaker 1: sequesters or two from its operations. Right. However, if one
Speaker 1: looks closer at what Hotel has been doing over the
Speaker 1: last few years, then this rate ranking of medium e
Speaker 1: s G risks looks to me a lot like green washing.
Speaker 1: For example, in Congo, Total wants to exploit oil there,
Speaker 1: and it says well, in order to compensate, we will
Speaker 1: create a natural carbon sing of forty thousand hectors. But
Speaker 1: this involves first destroying a local natural savanna ecosystem and
Speaker 1: replacing it with what non native trees I think acacia
Speaker 1: trees that can be commercially exploited. So if you're an
Speaker 1: institutional investor, right then you hold Total shares or bonds,
Speaker 1: you can say, well, this is a company that is
Speaker 1: carefully planning its transitional to fossil fuels because of stain analytics,
Speaker 1: s G ratings tells me so. But what I see
Speaker 1: is that Total probably use is it's green finance ratings
Speaker 1: in order to as a cover to burn more fossil
Speaker 1: viewers while destroying local forests for commercial exploitation. And I
Speaker 1: think that brings me to the idea of this double
Speaker 1: materiality that we that not we, but regulators discuss when
Speaker 1: they talk about taxonomys of green and dirty finance. And
Speaker 1: the idea of double materiality is that the climate crisis
Speaker 1: poses risks for institutional investors, right and in this case,
Speaker 1: Total looks looks looks less risky for the institutional investor
Speaker 1: because of its sustain analytics s G rating. But when
Speaker 1: that investor decides to include totally its portfolio, what it does,
Speaker 1: in fact is it lends to a fossil fuel company
Speaker 1: that is worsen in the climate crisis. So totals actions
Speaker 1: in Congo are making the climate crisis words. And that
Speaker 1: is the the idea of double materiality that has been
Speaker 1: at the core of regulatory debates. And I think I
Speaker 1: don't think it can be solved by relying on private
Speaker 1: metrics like s G. It needs a ablic that son
Speaker 1: on me. It needs the technocrats to say this is
Speaker 1: green or this is sustainable, and this is not. I
Speaker 1: just want to very briefly, this is so weird because
Speaker 1: I have like this very brief story, which is like
Speaker 1: I studied abroad in a spring of two thousand in Geneva,
Speaker 1: and that was like the peak of like neoliberal optimism
Speaker 1: in the world is all gonna be great and and
Speaker 1: geos and stuff. And I actually, uh did a like
Speaker 1: little paper for like my semester on tensions that were
Speaker 1: emerged would emerge between at the time the Kyoto Protocol
Speaker 1: about climate change and the Convention on Biological Diversity and
Speaker 1: exactly what you described, and I never thought I would
Speaker 1: think about that, like little like paper that I wrote
Speaker 1: at the end of my semester of my sophomore year
Speaker 1: in college about that. But I'm glad to see that
Speaker 1: actually twenty one yeah, twenty one years later, that that
Speaker 1: is actually relevant and I kind of understand that tension
Speaker 1: between decarbonization and damaging sort of natural ecosystems. I guess
Speaker 1: that's just a comment, but I'm not thank you for
Speaker 1: bringing that up. I never thought I would think about that. Again,
Speaker 1: Thank you, Joe. Yes, I guess regulatives think think about
Speaker 1: this another sort of more sustained basis, but maybe you
Speaker 1: should send them your age. I'm going to come in
Speaker 1: with a question now, which is which? Actually I'm just
Speaker 1: going to repeat my first question because I think this
Speaker 1: gets to the point Danielle is making about, you know,
Speaker 1: the need for someone to decide what actually is green
Speaker 1: and what isn't. I think it comes down to confusion
Speaker 1: over exactly what E s G is supposed to be.
Speaker 1: So getting back to that first question, is it supposed
Speaker 1: to be that you're investing in good companies or projects
Speaker 1: or is it supposed to be that you're engaging with,
Speaker 1: you know, maybe polluting companies in the hopes that they
Speaker 1: change their behavior. I don't think we've figured out out yet.
Speaker 1: I think it depends who you ask, right, I think
Speaker 1: for for the governments and regulators in general, the idea is,
Speaker 1: and you can think about the European Union Sustainable Finance
Speaker 1: Initiative and the taxonomy that comes with it, the idea
Speaker 1: is that they would like investors to think about the
Speaker 1: ways in which they're lending to companies may have an
Speaker 1: environmental impact, or may have or or may reproduce or
Speaker 1: accommodate corporate practices in uh sort of social and governance
Speaker 1: areas that are not aligned with the public standards. So so,
Speaker 1: to my mind, for regulators, it is important to accelerate
Speaker 1: the shift in financial flows away from carbon activities towards
Speaker 1: green activities. Now, what does that mean in practice? And
Speaker 1: that goes to your second question is should we rely
Speaker 1: on on these investors to sort of try to this
Speaker 1: link corporations. I think that's a more difficult question to answer,
Speaker 1: because it is true that we have seen experiences every
Speaker 1: here and there, and there is a lot of public
Speaker 1: pressure from civil society organizations to make sure that for example,
Speaker 1: black Rock flex is its muscle in order to make
Speaker 1: sure that the companies where it's a shareholder or where
Speaker 1: it holds shares on behalf of its investors improve their practices.
Speaker 1: But to me, the question that raises then is if
Speaker 1: investors have to assess the E s G behavior on
Speaker 1: the basis of private ratings, is it possible to have
Speaker 1: arbitrage in the sense of you can go and choose
Speaker 1: a highest rating from whichever provider gives it to you,
Speaker 1: and there are some perverse incentives in there, and then
Speaker 1: you don't have to do very much right And and
Speaker 1: that somebody who believes that the climate crisis is very real,
Speaker 1: I am concerned about the idea that we we have
Speaker 1: to rely on private financial institutions in order to drive
Speaker 1: our climate agenda and to ensure the corporations go towards
Speaker 1: low carbonativities. Awareness of climate change, discussion of climate change
Speaker 1: these days is at extraordinary levels, has talked about all
Speaker 1: the time, literally every day, pretty much. How much of
Speaker 1: that has been driven by the fact that profit motivated
Speaker 1: companies have had an incentive to put this out in
Speaker 1: the public consciousness. I mean, you mentioned black Rock. You
Speaker 1: know there's numerous companies that see big dollars in this
Speaker 1: had it not been for the huge profit motive, could
Speaker 1: it be possible in your view that in the year
Speaker 1: we wouldn't be talking about climate as much. I think
Speaker 1: we have to recognize that the private financial institutions have
Speaker 1: taken on the sustainability agenda in in a sort of
Speaker 1: comprehensive way, and and it to to some of the
Speaker 1: it has been surprising. But I would I guess sort
Speaker 1: of the big public pressure comes from, you know, young
Speaker 1: citizens everywhere in the world mobilizing in the Fridays for
Speaker 1: future and governments responding to this public pressure to act
Speaker 1: on climate. So I wouldn't say that it is the
Speaker 1: private financial sector that sees profit making opportunities that has
Speaker 1: been driving it, but there certainly are responding to what
Speaker 1: they see as a future where the state might possibly
Speaker 1: become much stronger in flexing its green regulatory muscle. And
Speaker 1: and here where the question of green washing becomes even
Speaker 1: more important, because I can see that in the near
Speaker 1: future governments will will go away from or will move
Speaker 1: beyond what we have now as the status quo, which
Speaker 1: is in the Central Banks Task Force for Financial Disclosure,
Speaker 1: for example, the status quo is we have to ask
Speaker 1: for disclosure of climate risks and for disclosure of exposures. Okay,
Speaker 1: but I guess a year from now, our two years
Speaker 1: from now, if you look, for example, of the European
Speaker 1: Central Bank, who is undertaking a review you of its
Speaker 1: monetary policy operations, you could see a state that says,
Speaker 1: I'm going to increase capital requirements on dirty assets you're holding,
Speaker 1: or I'm going to subsidize green assets by reducing capital
Speaker 1: requirements or reducing haircuts on the collateral that banks are
Speaker 1: using in order to borrow from central banks. So in
Speaker 1: a sense that the rise of edg its is not
Speaker 1: simply about profits, but it's also about a strategic positioning
Speaker 1: to respond to what I think is very possible a
Speaker 1: future where central banks in particular and regulators are taking
Speaker 1: the question of green washing more significantly and the question
Speaker 1: of green carbon bias in their own own operations more seriously.
Speaker 1: Because that's a future where if you are not able
Speaker 1: to provide some sort of green label for the assets
Speaker 1: that you're holding, it might be much more expensive to
Speaker 1: hold them, or you might end up with a lot
Speaker 1: of strended assets. So how do you actually build a
Speaker 1: consensus around green labels and the actual definition, because it
Speaker 1: does feel like we are in this weird moment where
Speaker 1: a lot of governments have recognized that climate change is
Speaker 1: a concern and clearly something needs to be done about it,
Speaker 1: but there does seem to be very very little official
Speaker 1: consensus around what exactly those policies should be and what
Speaker 1: a green investment should actually look like. Yes, that is
Speaker 1: a trillion dollar question in some ways because it points
Speaker 1: to the political difficulties in agreeing on say a global level.
Speaker 1: But even if you look at the European Union and
Speaker 1: the European Union level, the European Union for a while
Speaker 1: sort of itself as a leader in the green finance agenda,
Speaker 1: particularly because the Trump administration wasn't interested in participating, right,
Speaker 1: So they said, okay, we'll come up with a public taxonomy,
Speaker 1: the sustainable finance taxonomy. This will identify activities that are sustainable,
Speaker 1: and then we will use will take this at a
Speaker 1: global level and create some form of coordination that says
Speaker 1: this is a public standard of green, and it's it's
Speaker 1: not supposed to be a public standard of brown. Because
Speaker 1: the European Commission has parked the question or sorry, what
Speaker 1: is what are the activities it sort of doesn't deal
Speaker 1: with it for for now, but at least it says
Speaker 1: this set of activities are green. But if you look
Speaker 1: at the political debate and negotiations around the European taxonomy
Speaker 1: over the last couple of years, your question Tracy becomes
Speaker 1: very relevant because what we have seen is conflict between
Speaker 1: member states of what kind of activities should receive the
Speaker 1: label green and and most recently a civil society organizations
Speaker 1: that were involved walked out because the European Mission, at
Speaker 1: the pressure of several several members states, said that he
Speaker 1: was contemplating including natural gas, which is a fossil fuel,
Speaker 1: as a sustainable activity, and that is sort of stretching
Speaker 1: it by miles in terms of credibility of a public taxonomy,
Speaker 1: and that is an strategic opening, I guess for for
Speaker 1: private E s G ratings, because you know, at least
Speaker 1: private finance can produce some some ratings and some risks.
Speaker 1: And yeah, if you have in house E s G desks,
Speaker 1: and most large institutional investors would have them, you can
Speaker 1: do a lot of due diligence. So in I'm not
Speaker 1: very optimistic that there will be a sort of public,
Speaker 1: global public standard. This is super interesting to me. I mean,
Speaker 1: I keep seeing in this conversation parallels between thinking about
Speaker 1: sustainability and climate and the environment with the discussion of
Speaker 1: say like inflation and labor and the handoff from central
Speaker 1: banks to governments, because you know, I'm thinking about like
Speaker 1: in the one of the critics of sort of like
Speaker 1: post Kanzian economics, and people will say, well, you know,
Speaker 1: like maybe are maybe the traditional models for forecasting inflation
Speaker 1: are really terrible, but at least we have models. At
Speaker 1: least we have models, and uh, you know, that's sort
Speaker 1: of the critic. At least we have something that on
Speaker 1: paper looks very elegant about some trade off between employment
Speaker 1: and inflation. And it kind of feels like there's like
Speaker 1: something similar going on with thinking about a sustainability where
Speaker 1: you can say, okay, well, the private sectors matrices for
Speaker 1: thinking about what's sustainable they don't really work, they're not
Speaker 1: very good, but at least they exist and at least
Speaker 1: there's something on paper that everyone can look at. Whereas
Speaker 1: when we try to like get to something that's like
Speaker 1: seemingly more democratic, we know that the existing models don't exist,
Speaker 1: but sort of governments have a harder time even putting
Speaker 1: something on paper even if what the private sector makes
Speaker 1: doesn't work. Does that make sense that that parallel, I
Speaker 1: mean it does to me in the sense that this
Speaker 1: is in the in the case that you described around inflation,
Speaker 1: we are seeing sort of old orthodox is dying so
Speaker 1: kind of slow for our taste, whereas in in the
Speaker 1: sustainable finance space there is a new orthodox emerging. But
Speaker 1: the political momentum, or the ability of elected politicians to
Speaker 1: provide public solutions is not has not sort of materialized yet,
Speaker 1: so to me in a sense the question of will
Speaker 1: we have a lot of a lot more E s
Speaker 1: G over the next years, Yes, definitely a lot more
Speaker 1: there will be, I guess better, at least for the
Speaker 1: European Union. The European Union now has a directive for disclosure,
Speaker 1: where if you want to sell the financial products as
Speaker 1: environmental or social, you need to provide a narrative of
Speaker 1: what they call principal adverse impacts or pies. I think
Speaker 1: it's quite funny that that they are described like that,
Speaker 1: But what they say is, well, you need to convince
Speaker 1: us that your E s G products or true truly
Speaker 1: s G. So there is more scope for sort of
Speaker 1: monitoring closely the extent of greenwashing, so you don't buy
Speaker 1: s gds that have Chevron or or to telling them.
Speaker 1: But whether that is ambitious enough for the scale of
Speaker 1: the low cartment transition, I am a bit skeptical, right, Well, Danielle,
Speaker 1: it's sort of been a disheartening subject to talk with
Speaker 1: you about, but I suppose it is an important topic.
Speaker 1: And this idea that even though we agree something needs
Speaker 1: to be done on climate change, we haven't actually agreed
Speaker 1: on the individual policies is very very critical to actually
Speaker 1: doing something about it and getting it right. So thank
Speaker 1: you so much for coming on. Thank you. It was
Speaker 1: a pleasure to bring not so good news, but there
Speaker 1: is always optics some reality and that was great. That
Speaker 1: was the best, most interesting conversation I've had about E. S.
Speaker 1: G Ever and I in all seriousness, and it's actually
Speaker 1: really helping me like think about this, and I really
Speaker 1: do think the sort of like parallels and the expectations
Speaker 1: of this sort of last several decades and how that's
Speaker 1: informed are thinking on financing climate initiative. It's just like
Speaker 1: a very useful framing. So that was great, great, Thank you,
Speaker 1: so Joe. I think the fact that we managed to
Speaker 1: have an interesting conversation about E s G is sort
Speaker 1: of an accomplishment in its own right because a lot
Speaker 1: of these sorry, a lot of these takes are really
Speaker 1: repetitive though, and sort of make the same point over
Speaker 1: and over and over and are very press release ee.
Speaker 1: But you're absolutely right, there are tons of overlaps between
Speaker 1: what's happening in E s G right now and that
Speaker 1: big theme of you know, the handover to government's overall. Yeah,
Speaker 1: you're just thinking about like this expectation that's existed for
Speaker 1: so long that like markets must play a role, that
Speaker 1: like sure, governments can have initiatives and goals and endeavors
Speaker 1: and all that stuff, but that you know, ultimately markets
Speaker 1: must be our vehicle to get there, and how embedded
Speaker 1: that is. And then when you like sort of like okay,
Speaker 1: we're gonna address climate change, we're going to have this
Speaker 1: backstop then for market investors, and then we're gonna have
Speaker 1: this versioning moment, it really makes sense why ultimately that
Speaker 1: led to our clug inboxes basically, Yeah, And in the meantime,
Speaker 1: it does really feel like we are sort of in
Speaker 1: this awkward phase where we have a patchwork of regulations
Speaker 1: which leads to a bunch of different incentives. And I
Speaker 1: have to say one of my favorite examples of that
Speaker 1: um I think it was from City Group back in
Speaker 1: ten maybe, but they were looking at funding costs for
Speaker 1: European energy companies and they found that they were on
Speaker 1: average more expensive than US energy companies because European investors
Speaker 1: cared more about E s G. And we're punishing the
Speaker 1: European energy companies. So that's like a skewed outcome, right,
Speaker 1: The US energy companies who are doing less for clean
Speaker 1: energy get rewarded, while the European companies who are actually
Speaker 1: trying to do something end up getting punished because Europe
Speaker 1: and the US are sort of on different speeds or
Speaker 1: different levels when it comes to E s G. You know,
Speaker 1: one of the things when we talked to Stephanie Kelton
Speaker 1: about m M T and the one of the points
Speaker 1: she made, which I think is very powerful, is not
Speaker 1: that like it changes the politics per se, because different
Speaker 1: political factions have different priorities. But we can have a
Speaker 1: more honest debate if we sort of recognize that the
Speaker 1: constraints on government spending aren't what we were told, and
Speaker 1: so you can sort of like tell this story and
Speaker 1: Danielle have basically said it where if everyone believes that, okay,
Speaker 1: there is this sort of like strong limit to what
Speaker 1: governments can spend, then you basically have to create a
Speaker 1: big role for private capital in financing UH sustainability initiatives
Speaker 1: and private markets. But if you if you remove that
Speaker 1: expectation and you sort of say, you know what, the
Speaker 1: government actually has a lot more fiscal flexibility than we thought,
Speaker 1: you can start to conceive of investments into sustainability, into
Speaker 1: climate that are totally public focused, where there's not as
Speaker 1: much fear of like, oh where is the money going
Speaker 1: to come from? And I do think you see this
Speaker 1: shift then, which you know, you get from like this
Speaker 1: sort of like the E s G Thinking to the
Speaker 1: Green New Deal thinking, which is very much about just
Speaker 1: put it on the government's balance sheet. And you can
Speaker 1: see then why private actors would be very anxious about it.
Speaker 1: You know, there's black Rock on one hand and then
Speaker 1: there's Greta the teenager talking about climate on another hand.
Speaker 1: But you could kind of make the argument that it
Speaker 1: isn't this sort of like continuous thing, it's actually like
Speaker 1: a very like big break. It's sort of like rethinking
Speaker 1: it and this sort of like the Greta vision is
Speaker 1: much more threatening to all the money in the space
Speaker 1: the teenager talking about climate that's how you describe. Yeah, yeah, well,
Speaker 1: I mean like it does feel like it's a break right,
Speaker 1: Like it's like a different thing. I totally agree. And
Speaker 1: the interesting thing now is going to be to watch, um,
Speaker 1: what actually happens to the E S G industry in
Speaker 1: private finance that has cropped up. So you know, do
Speaker 1: they partner with governments um in the way that Danielle
Speaker 1: was describing, or do they start shrinking and these hundreds
Speaker 1: and hundreds of new funds find themselves squeezed out by
Speaker 1: public investment or does some fun just pay Greta a
Speaker 1: bunch of money and we get a Greta. It's yeah, Uh,
Speaker 1: that would actually work, wouldn't it. You could even have
Speaker 1: Greta as the ticker. Okay, Well, on that note, uh,
Speaker 1: should we leave it there? Let's leave it there. This
Speaker 1: has been another episode of the All Thoughts podcast. I'm
Speaker 1: Tracy Alloway. You can follow me on Twitter at Tracy
Speaker 1: Alloway and I'm Joe Wisn't though. You can follow me
Speaker 1: on Twitter at the Stalwart and you should Follow our
Speaker 1: guest on Twitter, Daniello Gabor She's at Daniello Gabor, and
Speaker 1: follow our producer Laura Carlson. She's at Laura M. Carlson.
Speaker 1: Follow the Bloomberg head of podcast, Francesca Levi at Francesca Today,
Speaker 1: and check out all of our podcasts under the handle
Speaker 1: at podcasts. Thanks for listening, a