Speaker 1: Welcome to Kobe Time, a podcast series on Markets and
Speaker 1: Economies from Devi Group Research. I'm chief economist, welcoming you
Speaker 1: to our 103rd episode
Speaker 1: in the past year or so. I've spent quite a
Speaker 1: bit of time reading up on the signs of climate change,
Speaker 1: the tech to deal with it and the critically important
Speaker 1: issue of climate finance. I've done a bit of writing
Speaker 1: on that as well. And recently, I've done quite a
Speaker 1: bit of collaboration with our guest today,
Speaker 1: Helga Muko is the Chief sustainability Officer at D BS.
Speaker 1: He is responsible for developing the bank's overarching sustainability framework.
Speaker 1: He also chairs the group Sustainability Council which comprises of
Speaker 1: senior D BS leaders across business and support units. Helga
Speaker 1: represents D BS in several global and regional working groups
Speaker 1: such as the World Business Council for sustainable Development, the
Speaker 1: industry advisory panel of the ASEAN S joint sustainable financing
Speaker 1: working group
Speaker 1: and the ma s convened Green Finance Industry task force.
Speaker 1: So quite a few hats you wear Helga. Welcome to
Speaker 1: Cope Time. Thanks
Speaker 2: a lot for having me. I appreciate
Speaker 1: it. I've been looking forward to this conversation and we
Speaker 1: have a lot to cover Helga. Uh let's start by
Speaker 1: setting the basic foundation. Let's talk about the current state
Speaker 1: of climate finance. What kind of money is needed to
Speaker 1: make meaningful change in this green transition?
Speaker 2: Absolutely. Let's do that before I jump into climate finance.
Speaker 2: One setting the scene point around this, what do we
Speaker 2: need it for? So if we just consider that climate
Speaker 2: change is ultimately driven by accumulated greenhouse gas emissions that
Speaker 2: be put up into the atmosphere. And we've done quite
Speaker 2: a lot of that in the past. Looking forward,
Speaker 2: we have another roughly 400 gigatons of greenhouse gas emissions
Speaker 2: that we can put in the atmosphere until we hit
Speaker 2: this famous 1.5 C scenario. So global temperatures will rise
Speaker 2: by 1.5 C as compared to pre industrial levels. And
Speaker 2: that's quite significant. It's not just a technical number, it
Speaker 2: actually has real world impacts. So 400 gigatons roughly we
Speaker 2: have left until we get there. If we don't change
Speaker 2: the way we play live and work today,
Speaker 2: we are roughly emitting 50 gigatons or thereabouts per annum.
Speaker 2: So simple math, we have around eight years or so
Speaker 2: left until we hit that famous 1.5 C limit. And again,
Speaker 2: this 1.5 C, it's not just a technical number, it
Speaker 2: has a real impact on the communities, especially here in Asia.
Speaker 2: So that simply means
Speaker 2: we have a lot to do in a very, very
Speaker 2: short time frame. So ultimately, you can consider this within
Speaker 2: another industrial revolution, only this time at the speed of
Speaker 2: the digital transformation. So we need to completely rewire the
Speaker 2: way we organize our life, rewire, the way we organize
Speaker 2: our economies lightening quickly. So action matters and it matters
Speaker 2: at scale and at speed.
Speaker 2: So what do we now need in order to finance
Speaker 2: that stuff really, really quickly, there are all sorts of
Speaker 2: different studies out there from think tanks, science and industry groups.
Speaker 2: But if I simplify this a little bit, then one
Speaker 2: study tells us we need roughly nine trillion us D
Speaker 2: per annum
Speaker 2: to invest in our energy systems and land use systems
Speaker 2: per annum per year between now and 2050 the nine
Speaker 2: trillion you can break down. So a certain amount of
Speaker 2: money we already spend today, we spend a certain amount
Speaker 2: of money on existing energy infrastructure, which also by the
Speaker 2: way includes fossil fuels because we can't switch them off
Speaker 2: tonight and also already existing investments in clean tech.
Speaker 2: But we need an additional. So out of the total
Speaker 2: of nine, we did an initial 3.5 trillion to invest
Speaker 2: in our energy systems and land use systems. So these
Speaker 2: numbers are quite staggering three
Speaker 1: and a half millions like India's GDP.
Speaker 2: Yeah. Isn't that amazing? If you break it down into
Speaker 2: GDP numbers per annum, then for a country like India,
Speaker 2: we would need roughly a little bit more than 10%
Speaker 2: of GDP per annum
Speaker 2: to invest in the existing energy infrastructure a little bit
Speaker 2: in the old, also fossil fuel infrastructure, but mainly of
Speaker 2: course into the new one in other countries of Asia.
Speaker 2: It might be around 9% of GDP in China. It's
Speaker 2: a bit less, it's only 5%. But the numbers are
Speaker 2: really staggering. So we need a lot of money at
Speaker 2: a very, very short, within a very short period of time.
Speaker 1: Big numbers. So
Speaker 1: are we generating that money is serious money being deployed?
Speaker 1: Where do we see the most momentum? And more importantly,
Speaker 1: where is the money coming from?
Speaker 2: Absolutely. So the answer is yes, but and I'm going
Speaker 2: to give you a very simple number at the end.
Speaker 2: But let me first highlight a couple of challenges. So
Speaker 2: what prevents us from accelerating the allocation of capital to
Speaker 2: the extent we need to? And there are a couple
Speaker 2: of those challenges. Number one is policy certainty.
Speaker 2: So if you want private sector to unlock Capex to
Speaker 2: put money on the table, to build new infrastructure and
Speaker 2: if you want private capital providers to finance that you
Speaker 2: want to know what is the direction of travel.
Speaker 2: So here government can play a really, really critical role,
Speaker 2: not only setting out net 0 2050 targets but going much,
Speaker 2: much deeper. How do we actually want to accomplish this? Singapore?
Speaker 2: Does this actually very, very well. We have created industry
Speaker 2: round tables where we all come together
Speaker 2: in one room and discussing how are we decarbonising Singapore.
Speaker 2: But we need to see much more of that on
Speaker 2: a global scale to create policy certainty. And for example,
Speaker 2: in Europe, they have decided on a stick regulation regulation regulation,
Speaker 2: including a carbon price
Speaker 2: in the US different approach. They use the carrot, one
Speaker 2: of the biggest checks in corporate history where they said
Speaker 2: we have now this inflation reduction Act where they support
Speaker 2: um the investments in clean tech and so on and
Speaker 2: so forth. In Asia. We don't yet have this on
Speaker 2: a micro scale as such. So we need more of that.
Speaker 2: The second key challenge is we actually spoiler alert don't
Speaker 2: have a lack of capital. I actually think we have
Speaker 2: enough capital in the system from private and public sector combined.
Speaker 2: The problem very often is that the risk return profiles
Speaker 2: of these new products or new projects that we need
Speaker 2: to do are a bit challenging for providers of private
Speaker 2: capital like ourselves. We do a lot, but we could
Speaker 2: do even more. And there are some solutions that are
Speaker 2: going to talk about maybe uh in a bit. A
Speaker 2: third challenge is um tradeoff decisions, especially in Asia.
Speaker 2: We need to be mindful that we not only need
Speaker 2: to tackle the climate crisis, but there are billions of
Speaker 2: people we need to take care of as well. We
Speaker 2: need to have socio economic development, we need jobs and
Speaker 2: all these types of things and they are interconnected issues.
Speaker 2: We need to be quite mindful around that agenda and
Speaker 2: then another one is simply capacity building.
Speaker 2: Uh Sometimes we sit in a, in a banking room
Speaker 2: and we look at power point slides and we know
Speaker 2: all the numbers, but we still need people to actually
Speaker 2: do it. We need a plumber, we need an engineer,
Speaker 2: we need a mechanic to repair an ev we need
Speaker 2: bankers and all this. So capacity building is a key
Speaker 2: issue as well. So if I draw a line, there
Speaker 2: are all these challenges and we tackle some of them
Speaker 2: quite well. Some of them maybe not yet. Well, but
Speaker 2: if I look at numbers,
Speaker 2: it was a yes but answer right that I started with.
Speaker 2: So last year, it already was very clear that we
Speaker 2: are investing more and more in renewable energy. For 2023
Speaker 2: the I A the International Energy Agency expects that we
Speaker 2: invest roughly $1.7 trillion in clean tech
Speaker 2: and we invest roughly one trillion in fossil fuels. So
Speaker 2: that's a total of 2.7 trillion. Remember my, my nine trillion,
Speaker 2: the positive news is this number is going up and
Speaker 2: you see a tilt in the ratio.
Speaker 2: So a number of years back for every dollar we
Speaker 2: spend on fossil fuels, we spend roughly a buck on
Speaker 2: clean tech. Now for 2023 the I A expects we
Speaker 2: spend a buck on fossil fuels and 1.7 bucks for
Speaker 2: renewables and clean tech more broadly. That's great news. We
Speaker 2: just need to get this up probably to 1 to 4.
Speaker 2: So for every buck on fossil fuel, we probably need
Speaker 2: four bucks in clean tech. So this is my yes
Speaker 2: but answer. So money is flowing. Not yet at the
Speaker 2: scale we need and not at the ratio we need,
Speaker 2: but we are slowly seeing momentum.
Speaker 1: Would it be safe to say that most of the
Speaker 1: funding has to come from the private sector?
Speaker 2: I think if you look at the numbers that I
Speaker 2: mentioned at the beginning, the the the volumes are staggering. Yeah. Right.
Speaker 2: So in my humble view, the answer is yes also,
Speaker 2: but we need very often public money as a catalyst.
Speaker 2: So we call this, for example, blended finance transactions. So
Speaker 2: let's say there's a renewable energy project in a country
Speaker 2: somewhere in Southeast Asia and maybe the risk return profiles
Speaker 2: for a variety of reasons is not really conducive to us.
Speaker 2: So can we create a blended finance structure where you
Speaker 2: get a bit of
Speaker 2: public money in, for example, as a first loss piece
Speaker 2: or as an equity piece or whatever to ultimately crowd
Speaker 2: in private capital and depending on what leverage ratio. So
Speaker 2: for one buck of public money, how much bucks of
Speaker 2: private capital do you get you then ultimately get to
Speaker 2: the solution? So I think it's a combination
Speaker 2: but the majority will have to come from private sector. Yes,
Speaker 2: I think
Speaker 1: these sort of first loss protections can be very useful.
Speaker 1: Uh I've seen this not just on the E part
Speaker 1: of the ESG side but the S and the G
Speaker 1: side as well. So like gender related funding, a lot
Speaker 1: of times you get an aid agency from Australia or
Speaker 1: Europe or the US come up with the first trench
Speaker 1: protection and that sort of galvanizes other investors to come in. So,
Speaker 1: of course, it makes total sense that it will happen
Speaker 1: on the climate change side as well. Um You mentioned
Speaker 1: the phrase uh blended finance. So let's break that down
Speaker 1: a little bit.
Speaker 1: Uh There are all sorts of ways to fund a project.
Speaker 1: So I'm sure there are all sorts of ways to
Speaker 1: fund the climate uh transition project as well. So we've
Speaker 1: got bonds and blended finance and grants, carbon credits. Give
Speaker 1: us a sense of, you know, which one is big
Speaker 1: these days, which one is cashing momentum and what they
Speaker 1: are actually.
Speaker 2: Absolutely. Let me maybe describe two broad categories here. One
Speaker 2: category is what are the activities and assets we are
Speaker 2: financing and the second one is what are the instruments
Speaker 2: we're using to do? So.
Speaker 2: So on the first one, what are the assets and activities?
Speaker 2: Let me be a bit simplistic. So if you look
Speaker 2: at everything that needs to be financed, it's almost like
Speaker 2: a traffic light system
Speaker 2: So there's the dark green stuff, think of electricity generation
Speaker 2: by renewable energy. We all know it's clean. We all
Speaker 2: know we need to do much, much more of that.
Speaker 2: On the other side, the red traffic light, let's call
Speaker 2: it dark, dark brown, think of electric electricity generation by power.
Speaker 2: It's really, really dirty and no matter how much effort
Speaker 2: you put in, there's never going to be a commercial
Speaker 2: viable solution to make it clean or cleaner. So we
Speaker 2: don't want to do it. So the only question is
Speaker 2: when do we stop doing it?
Speaker 2: But there's this gigantic pile in the middle, the ember
Speaker 2: power of the traffic light which we call transition. So
Speaker 2: it's stuff that is potentially brown light brown or whatever
Speaker 2: the shade of brown might be. But with the right
Speaker 2: efforts and the right technology, you can make it ultimately clean. Now,
Speaker 2: having this traffic light on our minds, the world has
Speaker 2: come together and we have broadly agreed on what is
Speaker 2: this dark green stuff and what is this brown, dark
Speaker 2: brown stuff? So we're good on that. So money is
Speaker 2: flowing there and we're flowing into the green stuff and
Speaker 2: we see money flowing out of the dark brown.
Speaker 2: The issue in the middle is that we have not
Speaker 2: yet come together as a global planet and agreed upon
Speaker 2: what is a credible transition. What is a credible transition
Speaker 2: activity and so on and so forth, work is being done.
Speaker 2: So it's not that nothing has been done, but there's
Speaker 2: no global agreement and we really need to unlock this
Speaker 2: because more than 90% of our economic activities today are
Speaker 2: in this orange bucket. So we don't tackle this.
Speaker 2: We're not gonna save us on this planet. So that's
Speaker 2: one area of looking at it. This transition is really
Speaker 2: a key focus area and then looking at the various instruments,
Speaker 2: I mean, there are use of proceeds instruments where I
Speaker 2: give you money and you can only use that money
Speaker 2: for a specific purpose, like you're financing a green building
Speaker 2: or you're financing uh an electric vehicle and so on
Speaker 2: and so forth. There are other instruments which we call
Speaker 2: sustainability late,
Speaker 2: I give you money and you can use it for
Speaker 2: whatever you want to do. It's a general corporate purposes facility,
Speaker 2: for example. However, the interest rate on this financing is
Speaker 2: not fixed. So depending on your performance versus pre agreed
Speaker 2: uh sustainability KPIS, the interest rate might go up and down.
Speaker 2: Um And there are many, many other types of financing.
Speaker 2: There are of course loans, there are bonds, there are
Speaker 2: trade facilities. Um There are carbon credits which we also
Speaker 2: think is a very important tool in the toolkit to
Speaker 2: unlock capital, uh and so on and so forth. So
Speaker 2: they're actually a wide variety of instruments that we can deploy.
Speaker 2: You mentioned, blended finance and why is blended finance so
Speaker 2: important I mentioned at the start. One of the key
Speaker 2: challenges we have is the risk return profile of certain projects.
Speaker 2: So we are a fairly sizable bank here in the
Speaker 2: Asia Pacific region. And we are financing a lot more
Speaker 2: than half or around half of our power portfolio is
Speaker 2: already in renewable energy. But also we sometimes face situations
Speaker 2: where we struggle with a risk return. So blended finance
Speaker 2: is in simple terms,
Speaker 2: you have a bucket of public money and you have
Speaker 2: a bucket of private money, put it together. And ultimately,
Speaker 2: by combining it the way that Everest cost of capital
Speaker 2: comes down and you attract private capital by virtue of
Speaker 2: having the public money in there. It's a very, very
Speaker 2: important way of unlocking more capital flows. Uh It's by
Speaker 2: the way, a product that we've known for decades,
Speaker 2: so many of these instruments actually are not new, blended
Speaker 2: finance for sure, not right. So the only question is
Speaker 2: if you go back to the very start of our conversation,
Speaker 2: eight years left until we hit the 1.5 C, how
Speaker 2: can we scale it at speed? That is really the
Speaker 2: key question. So we have all of those. So for example,
Speaker 2: in blended finance, it's really all about can we agree
Speaker 2: on a certain template
Speaker 2: and then we do it again and again and again,
Speaker 2: we're not renegotiating and starting with Adam and Eve, but
Speaker 2: really doing it on the base of a template. I
Speaker 2: know it's a bit simplistic because every country is different,
Speaker 2: every asset is different, but we need to really scale
Speaker 2: blended finance to unlock the capital. We need
Speaker 1: Hilda. If I think about this issue from the private
Speaker 1: sector's perspective, of course, the fact that whether it is
Speaker 1: measurement of KPIS or even the measurement of the environmental
Speaker 1: degradation that are happening, private sector is still not fully
Speaker 1: on board with it, taxonomy and uh uh metrics, different jurisdictions,
Speaker 1: different things. So they want some degree of hand holding
Speaker 1: from the public sector to your point, you can lower
Speaker 1: the cost of funding of a project by putting some
Speaker 1: public money in the bucket.
Speaker 1: But if I look at it from the public sector's perspective,
Speaker 1: it would be like, well, econ 101 tells me that
Speaker 1: I just need to get the pricing right. So I
Speaker 1: will just do heavy carbon taxing and the private sector
Speaker 1: can figure things out.
Speaker 1: Why hasn't that approach worked? Is it because we don't
Speaker 1: have a very good way to trade carbon yet? Or
Speaker 1: there are other rigidities that I have not thought through,
Speaker 1: but maybe you can help us understand.
Speaker 2: Yeah, absolutely. So if we look at the entire world
Speaker 2: a bit more than 20% of global greenhouse gas emissions
Speaker 2: are now subjected to a carbon price that can be
Speaker 2: either in the form of a tax. Like here in Singapore,
Speaker 2: we have
Speaker 2: carbon tax or a what we call a cap and
Speaker 2: trade scheme like we have in the European Union, we
Speaker 2: have these instruments in China, we have it in certain
Speaker 2: states in the US, for example, in California, but we
Speaker 2: don't have it on federal level in the US. So
Speaker 2: around 80% plus or miners are not covered by a
Speaker 2: carbon tax. So the question is very valid and a
Speaker 2: really good one. The only
Speaker 2: answer I have is it's probably a political will situation
Speaker 2: because coming back, especially in Asia Pacific, talking about the
Speaker 2: just transition, the interconnectedness of issues, how hostile situations can become,
Speaker 2: I can only assume it's politically sometimes really, really difficult
Speaker 2: to implement these measures given the implications it has, right?
Speaker 1: And I think, you know,
Speaker 1: not necessarily, you know, I'm keen on defending the profession
Speaker 1: of economics too much. So ideally, yes, a price on
Speaker 1: carbon should be able to internalize a lot of externalities.
Speaker 1: But in real life, whether it is a political issue
Speaker 1: that you talk about or just a matter of, you know,
Speaker 1: sort of measuring the impact and putting the right price,
Speaker 1: not that straightforward as we have seen with carbon exchanges
Speaker 1: around the world, including Europeans Union's experience and China's experience
Speaker 1: with putting a tax on carbon.
Speaker 1: You just mentioned the phrase just transition to unpack that
Speaker 1: because we got a bit of a loaded phrase during
Speaker 1: the cop meetings. We hear a lot about it, particularly
Speaker 1: from developing countries. There's some degree of impatience. I'll give
Speaker 1: you one example, I was in Indonesia recently and it
Speaker 1: seemed to me it was very clear that the government
Speaker 1: or the government officials there who were at that meeting
Speaker 1: basically expected a lot of grant money from the West
Speaker 1: because they feel that's the best thing for the West
Speaker 1: to do, having polluted the world. Now, they're putting all
Speaker 1: this pressure on developing countries. So
Speaker 1: break down the just transition concept for us a bit.
Speaker 2: So in simple terms,
Speaker 2: it's not only about climate,
Speaker 2: we have 17 United Nations Sustainability Development Goals. That's a
Speaker 2: bit the north star of how we look at sustainability.
Speaker 2: So what does it mean? It means we probably have
Speaker 2: around 9 billion people by 2050 thereabouts. So sustainability would
Speaker 2: mean that these 9 billion people can live well.
Speaker 2: Now what does live well mean it means you have
Speaker 2: food on the plate, it means you have access to
Speaker 2: fresh water and fresh air. It means you have access
Speaker 2: to medical services, you have shelter and all these types
Speaker 2: of things. But secondly, we also need to assure that
Speaker 2: the way we do this
Speaker 2: is within planetary boundaries so that the people that are
Speaker 2: very young today or not even yet born can also
Speaker 2: live well. So this is this intergenerational fairness which humans
Speaker 2: in my humble view have always struggled with it in history.
Speaker 2: So humans have been extraordinary in the things we have done,
Speaker 2: but very often intergenerational unfair. So sustainability bringing it back
Speaker 2: means that 9 billion people plus live well
Speaker 2: with all the things I mentioned.
Speaker 2: But we also do it in a way that future
Speaker 2: generations can live well. That to me is a simple
Speaker 2: concept of sustainability. So if you take an action, for example,
Speaker 2: on climate,
Speaker 2: you need to be mindful of the implications it might
Speaker 2: have on the other sustainability goals. So that's a simple
Speaker 2: fact around the just transition. And I think one thing
Speaker 2: that's not often talked about is this intergenerational fairness thing.
Speaker 2: So you're not only doing it today, but you're actually
Speaker 2: doing it for good. So that's to me the simple
Speaker 2: way of looking at it. Sure.
Speaker 1: So this thing that we see all these activists basically
Speaker 1: saying that, you know, the US and Europe have polled
Speaker 1: the world for a century.
Speaker 1: China began only 2030 years ago. India is about to
Speaker 1: join the party. How can we tell these countries to
Speaker 1: stop following the growth paradigm that their Western counterparts did?
Speaker 1: Where is the justice in that? Because we also want
Speaker 1: to live well to your point that within 10, 2030 years,
Speaker 1: we want to achieve all the SDGS. So from your perspective,
Speaker 1: this this ethical question that what is the burden for
Speaker 1: a developing country which is not responsible for pollution
Speaker 1: but still needs to do its share of adjustment.
Speaker 2: Let me put first some facts around your statement around
Speaker 2: historical contributions because there are numbers to this. So science
Speaker 2: tells us. And when I say science, I refer to
Speaker 2: the IPCC report. So every seven or so years, a
Speaker 2: huge number of scientists comes together and writes, ultimately reports
Speaker 2: on the state of climate.
Speaker 2: And in the most recent iteration in 2022 there was
Speaker 2: a report again being published and on page two or sorry,
Speaker 2: on page 10 of the third working paper, you will
Speaker 2: find a graph that tells you that globally historically accumulated
Speaker 2: greenhouse gas emissions, 39% of these arose from Europe and
Speaker 2: North America. So roughly 40% of all the greenhouse gas
Speaker 2: emissions that are already up there
Speaker 2: originate from these two regions. That is the historical responsibility
Speaker 2: that we are always talking about. And actually even still today,
Speaker 2: if you calculate greenhouse gas emissions on a per capita basis,
Speaker 2: then still Europe today is much dirtier than various parts
Speaker 2: of Asia, which by the way is not too surprising
Speaker 2: because of course, you see that more developed nations typically
Speaker 2: have higher greenhouse gas emissions, economic
Speaker 1: activity, more
Speaker 2: emissions. Exactly. Right. So that's just I wanted just to
Speaker 2: give you a fact around these historical obligations. Now, looking
Speaker 2: forward ultimately doesn't matter, right. A ton of carbon is
Speaker 2: a ton of carbon is a ton of carbon. We
Speaker 2: have 400 gigatons left. So finger pointing doesn't really help
Speaker 2: us anyhow. So we need to really come to a
Speaker 2: solution together. But I think what it means is that
Speaker 2: of course, in Asia, you see a lot of population growth,
Speaker 2: you see an amazing GDP growth. So in terms of
Speaker 2: future sources of emissions, it's very clear we probably gonna
Speaker 2: account for more than half global greenhouse gas emissions very
Speaker 2: very soon.
Speaker 2: So taking these two things into account historical responsibility, but
Speaker 2: also how the future will look like. I think we
Speaker 2: simply need some help from developed nations. Acknowledging the fact
Speaker 2: of what happened in the past, which science tells us,
Speaker 2: you know, is a matter of fact. So what I
Speaker 2: would see is
Speaker 2: the developed nations providing know how and capital for developing
Speaker 2: nations to accomplish this trust, just transition one template that
Speaker 2: I really like is this just energy transition partnership, Jack.
Speaker 2: So it arose at COP 26 in Scotland. And the
Speaker 2: basic idea is that G7 countries provide money to a
Speaker 2: developing nation for empowering that developing nation to transition to
Speaker 2: a lower carbon society. It started with South Africa. Now
Speaker 2: we are discussing it with Indonesia and Vietnam, both of
Speaker 2: which is in our backyard and maybe India is the
Speaker 2: next one. So again, the basic idea
Speaker 2: is G7 provides capital and hopefully know how and these
Speaker 2: countries are better equipped to transition, giving them also some
Speaker 2: breathing space to buffer the implications on for example, certain
Speaker 2: social dimensions that we discussed, right, for example, certain jobs
Speaker 2: because let's not forget in this transition to a low
Speaker 2: carbon society, they are going to be winners and losers.
Speaker 2: Yeah, if I break it down, if you are a
Speaker 2: 50 year old engineer at a coal power plant, it
Speaker 2: is very unlikely that you overnight become a solar PV
Speaker 2: engineer or a mechanic that can repair electric vehicles. So
Speaker 2: it is simply a fact. So we need to make
Speaker 2: conscious choices. How can we support them? How can we
Speaker 2: take them along? So by way of having these templates,
Speaker 2: the just energy transition partnerships, jet P, I think I
Speaker 2: got the name wrong at the start.
Speaker 2: Um We actually have a nice template on how we
Speaker 2: could actually move forward to accomplish this. Maybe just
Speaker 1: transition. One clarification on TP is uh we're talking about
Speaker 1: debt capital or grants.
Speaker 2: Uh it can take different forms, but ultimately, it's a
Speaker 2: certain pool of capital that is provided uh to really
Speaker 2: uh facilitate the transition. It's not really defining the instrument
Speaker 2: uh as such, right,
Speaker 1: I've seen, for example, the IMF now has a climate
Speaker 1: change Trust fund and a few countries around the world
Speaker 1: have taken in that money. It's, it's still debt capital,
Speaker 1: that extremely low interest rate with a very long advert period.
Speaker 1: So almost free money if you will. Um
Speaker 1: So the key question around climate finance is the biggest
Speaker 1: source of finance in the world which are banks. And
Speaker 1: you and I work in one of those uh tell
Speaker 1: us about what banks have been doing the last decade
Speaker 1: or so and how optimistic or energized. You are by
Speaker 1: banks role in transition and climate transition.
Speaker 2: Absolutely. Let's first maybe establish that we really need ecosystem change.
Speaker 2: And what I mean by that is that all of
Speaker 2: us need to come together. It's government,
Speaker 2: it's regulators, it's the real world uh players like the
Speaker 2: private sector, companies, the finance sector and all of us
Speaker 2: embedded in the community at large, we really all need
Speaker 2: to come together. Why we have these eight years left, right?
Speaker 2: So no one of us in this ecosystem can do
Speaker 2: it alone. So everyone has a distinct role to play
Speaker 2: and banks, I would say have at least two critical roles.
Speaker 2: One is simple, the simple in in in theory is
Speaker 2: the reallocation of capital. So you reallocate capital away from
Speaker 2: polluting activities towards low carbon
Speaker 2: activities. That's one thing. The other one is really innovation.
Speaker 2: We can also foster innovation. It's not only uh technological
Speaker 2: innovation in the field of renewable energy or energy efficiency
Speaker 2: or the production of steel or the production of cement,
Speaker 2: we can also be innovative. How can we be innovative?
Speaker 2: For example, with regards to financing structures, we mentioned blended
Speaker 2: finance where we can actually really tweak it here and
Speaker 2: there to make it work to really scale it at speed.
Speaker 2: Uh We can be innovative in finding digital solutions to
Speaker 2: empower our retail customers to be more aware around sustainability
Speaker 2: and to also take conscious choices which in aggregate can
Speaker 2: have an impact. We also always think beyond our client base.
Speaker 2: So for example, we are a proud founding shareholder of
Speaker 2: Climate Impact Xcix, which is a Singapore headquartered but global
Speaker 2: carbon market and exchange, which has set up platforms that
Speaker 2: facilitate the buying and selling of high
Speaker 2: equality integrity are carbon credits. So there are a lot
Speaker 2: of things we can do in the field of innovation ourselves.
Speaker 2: So capital, innovation both very, very critical and it needs
Speaker 2: to work in tandem with the other ecosystem partners. And
Speaker 2: I very loosely mentioned earlier that Singapore is doing this
Speaker 2: very well. So if I double click on that in Singapore,
Speaker 2: the Prime Minister's office in Singapore in coordination with other regulators.
Speaker 2: For example, the MA S which is our financial regulator
Speaker 2: convenes and brings people together in a room, government regulator,
Speaker 2: private sector, finance sector to really discuss how are we
Speaker 2: gonna do this because this interplay of these players is
Speaker 2: really very important now ground that Singapore is a bit smaller.
Speaker 2: Uh and maybe the political situation in Europe and in
Speaker 2: the US is a little bit more complex, I understand,
Speaker 2: but it's actually a really interesting template on how you
Speaker 2: could do it. Just get everyone in the ecosystem into
Speaker 2: a room,
Speaker 1: putting politics aside. I mean, I'm being told by my
Speaker 1: colleagues in the US that regardless of what happens in
Speaker 1: Washington DC by and large US, banks, us, corporate sectors
Speaker 1: are moving in a single direction toward green transition toward
Speaker 1: climate finance and that is not going to change regardless
Speaker 1: of the political cycle. Are they being too optimistic?
Speaker 2: I hope not is the answer. So I think, I
Speaker 2: hope the train left the station
Speaker 2: and why do I think the train has left the station?
Speaker 2: Let's first look at a couple of numbers
Speaker 2: right now. We have more than 90% of global greenhouse
Speaker 2: gas emissions covered by nation states as net zero pledges.
Speaker 2: So we now have 140 plus countries that have net
Speaker 2: zero pledges by a certain time frame. Are they perfect? No,
Speaker 2: but we are really getting there.
Speaker 2: We have in the private sector now, more than 5000
Speaker 2: Corporates that have either already implemented or committed to implement
Speaker 2: science based decarbonisation targets around 25% of that by the
Speaker 2: way is, sits, sits in Asia and then if you
Speaker 2: look at the finance sector, we have for example G
Speaker 2: fans which is a
Speaker 2: of financial institutions from different areas. So insurance companies, pension funds, banks,
Speaker 2: asset managers, asset owners, etcetera that in totality right now
Speaker 2: have an A am of around $150 trillion. So government,
Speaker 2: private sector, finance sector, everything is moving. Look at the
Speaker 2: community at large when I was very young,
Speaker 2: I didn't have gray hair back then. In Germany. We
Speaker 2: were all, you know, huddling in the lower ground. We
Speaker 2: were all like lower, we were young teenagers and we
Speaker 2: discussed this book. The Limits of Growth was actually written
Speaker 2: in the seventies sponsored by the Club of Rome.
Speaker 2: But the eighties were a bad time to discuss sustainability.
Speaker 2: The Soviet Union just collapsed and everybody looked at the
Speaker 2: US and that was kind of the role model, profit maximization.
Speaker 2: Uh growth, growth, growth was key and sustainability was a
Speaker 2: bit brushed to the side. Fast forward, 35 plus years,
Speaker 2: the awareness in the community at large is quite staggering
Speaker 2: and you can slice and dice the community. Of course,
Speaker 2: in different areas, the younger people for sure are very,
Speaker 2: very much aware of what's going on and also more
Speaker 2: and more willing to do something about it. Of course,
Speaker 2: I know it's different between developed countries and developing countries
Speaker 2: uh and so on and so forth because there are
Speaker 2: different considerations and constraints. But I think the awareness in
Speaker 2: the community large also rising. So I think the train
Speaker 2: has left the station and what I really like about
Speaker 2: the Inflation Reduction Act, I think it's actually a genius
Speaker 2: piece of work
Speaker 2: and it's a genius piece of work because it got
Speaker 2: support from a vast amount of Republicans, right?
Speaker 2: Because ultimately, firstly, the name is quite amazing Inflation reduction Act,
Speaker 2: which of course is, is a good sell, right. But secondly,
Speaker 2: it actually creates job jobs in the US on the ground.
Speaker 2: You can criticize this if you zoom out and you
Speaker 2: have a super national view, that's a fairly heavy industrial
Speaker 2: policy piece that they have implemented. So you can be
Speaker 2: very critical about this from outside of the US. But
Speaker 2: within the US, it will probably generate jobs. And I
Speaker 2: find it hard to believe
Speaker 2: that if there was a Republican president, that they would
Speaker 2: pull it back if there are actually jobs being created
Speaker 1: 100% been sort of looking at the implementation of this
Speaker 1: uh Ira. So Washington DC is basically making states compete
Speaker 1: states that have easier regulation hurdles for implementing some of
Speaker 1: these green projects, get the contract. And right now it's
Speaker 1: the red states that are actually winning more of the
Speaker 1: contracts because the blue states tend to be a little
Speaker 1: more regulation heavy and a little more,
Speaker 1: you know, thoughtful into whether they want to take this
Speaker 1: money and the permits and that sort of stuff. So
Speaker 1: I was reading an interview about of the Governor of
Speaker 1: California and Gavin Newsom. He's expressing frustration that some of
Speaker 1: the money that should be. California is going to Texas
Speaker 1: and other places. Here we go to that competition and
Speaker 1: surely that would not change if Washington DC scene were
Speaker 1: to change. Uh Absolutely,
Speaker 1: I want to talk about coal momentarily, but before I
Speaker 1: go there, um you talked about the role of banks
Speaker 1: in general. Can you use a little flavor about the
Speaker 1: banks in China? Because you know, without China's progress,
Speaker 1: we're not going to be able to make any meaningful
Speaker 1: change on green transition, given their size and scale and
Speaker 1: industrial footprint. How is Blender finance, climate change, finance and banks,
Speaker 1: you know, all working out in China?
Speaker 2: I think when we talk about the banks in China,
Speaker 2: they are, of course, the big ones are all state owned.
Speaker 2: I think we actually need to talk about what's happening
Speaker 2: on government level because this is really definitely very interconnected.
Speaker 2: And
Speaker 2: when I talk to people outside of Asia, my maybe
Speaker 2: slightly naive or superficial commenters don't worry too much about China.
Speaker 2: I actually believe if you look back at history, if
Speaker 2: the Communist Party says they will deliver something,
Speaker 2: they typically deliver it. So my feeling actually is that
Speaker 2: China is very strategic in the way it approaches sustainability. Yes,
Speaker 2: there's a lot of coal. Yes, they might even add
Speaker 2: a few coal power plants but they are investing so
Speaker 2: heavily in renewable energy.
Speaker 2: Last year, they increased renewable energy generation by 26%. And
Speaker 2: this additional generation was roughly half of the world's edition
Speaker 2: in that area. The Chinese are very smart around electric vehicles,
Speaker 2: the entire value chain around this and I could go
Speaker 2: on and could go on. So I think they are
Speaker 2: very strategic. I think they also see it as a
Speaker 2: important domestic policy tool. So I wouldn't be too concerned
Speaker 2: about China as superficial as this might sound and the
Speaker 2: banks will simply be there also to facilitate that. Do
Speaker 2: we see Chinese banks as vocal as maybe European banks
Speaker 2: or also ourselves. For example D BS, we have one
Speaker 2: of the most comprehensive and ambitious decarbonization targets for our
Speaker 2: lending and financing activities.
Speaker 2: Yeah, we have those targets by 2030 all of which
Speaker 2: are science based, very, very detailed. How are we going
Speaker 2: to do this? Um Not many banks in China are
Speaker 2: even remotely on these types of levels, but I would
Speaker 2: still claim it's all interconnected and ultimately they will deliver
Speaker 2: what the government is saying they're going to do. And
Speaker 2: I have great confidence actually that they're going to deliver.
Speaker 1: So I also think that in the case of China,
Speaker 1: they are so pragmatic in terms of what is needed
Speaker 1: to grow.
Speaker 1: Uh and the fact that they have a huge debt burden,
Speaker 1: they have a dysfunctional property sector and the banking system
Speaker 1: is not the sound is either that a ready made
Speaker 1: engine of growth is climate transition. So whether it is,
Speaker 1: you know, redoing their urban grid or the ev uh
Speaker 1: ecosystem that you talked about or renewable energy generation, whether
Speaker 1: it's wind or nuclear or solar,
Speaker 1: it's like if they want to grow at four or 5%
Speaker 1: that's the only viable area that they have left. So
Speaker 1: there's a convergence of interest and what is right for
Speaker 1: the world. So, yeah, I think I I share your
Speaker 1: perspective on China very much um recently, uh the last
Speaker 1: two months to be precise every Friday, you and I
Speaker 1: met virtually sometimes in person and we talked about coal
Speaker 1: and banks roles in it and we wrote a paper
Speaker 1: so share with our audience what we wrote about and
Speaker 1: what are the bottom lines in that paper? First
Speaker 2: and foremost, I am so happy that you now know
Speaker 2: how a sustainability professional feels
Speaker 2: because you have ups and you have downs. Sometimes you
Speaker 2: read about hard facts and data and you really get
Speaker 2: a bit down and think I get God, is this
Speaker 2: even possible? But then you also look at acceleration of
Speaker 2: efforts or some positive news and it lifts you up again.
Speaker 2: But it's literally a cycle, isn't it that we had
Speaker 2: in those couple of weeks? So why did we write
Speaker 2: about coal
Speaker 2: at the very start of our conversation, I talked about
Speaker 2: the 400 gigatons of greenhouse gas emissions. We have left
Speaker 2: until we hit the 1.5 C uh temperature limit. Now,
Speaker 2: if we leave coal untouched and right now, we have
Speaker 2: around 5000 operational coal power plants in Asia Pacific, 86%
Speaker 2: of which measured by our capacity are in China and
Speaker 2: in India. And then we have other countries like Indonesia
Speaker 2: also fairly, fairly significant. So if we leave them untouched,
Speaker 2: then two thirds
Speaker 2: of our carbon budget will be exhausted just by the
Speaker 2: coal power plants. So we haven't yet talked about the
Speaker 2: mobility sector. We haven't yet talked about production of steel
Speaker 2: and cement and all those types of things, two thirds
Speaker 2: gone just because of the coal power plants. So that's
Speaker 2: not even your entire energy system. It's one portion within
Speaker 2: the energy system. So if you invest a lot in
Speaker 2: clean tech and we have to do this, it's mission critical,
Speaker 2: you're not gonna meet the schools
Speaker 2: and the Paris goals are just as a reminder to
Speaker 2: keep temperature rises to well below two degrees Celsius.
Speaker 2: So what we wrote about ultimately is a bit, why
Speaker 2: do we have to do this and how are we
Speaker 2: gonna do this? And phasing out coal is unbelievably complex
Speaker 2: on at least three levels. The first one is how
Speaker 2: do we assess
Speaker 2: a certain opportunity? For example, there are risks like leakage.
Speaker 2: If we phase out a coal power plant in Northern Sumatra,
Speaker 2: what prevents the government from building a new one in
Speaker 2: East Java or I could name any other country for
Speaker 2: that matter? Or a company that operates a coal power
Speaker 2: plant agrees to phasing out a coal power plant in
Speaker 2: one country but
Speaker 2: build a new one in another country. So there are
Speaker 2: all sorts of what we call leakage risks. So how
Speaker 2: do we assess a certain opportunity? What are the commitments
Speaker 2: on country level on company level? How do we assess
Speaker 2: a specific asset, the specific coal power plant? Is it
Speaker 2: worth a while? How can we really do it? So
Speaker 2: it's really, really, really complex. So let's assume we've done
Speaker 2: all of this. We have a great project. Then the
Speaker 2: next one is, well, we can't just shut down coal,
Speaker 2: can we?
Speaker 2: So if we are really, really successful in phasing out
Speaker 2: fossil fuels, but at the same time, we're not rebuilding
Speaker 2: renewable energy, then people don't have access to affordable energy.
Speaker 2: And earlier I talked about 17 UN SDGS. One is
Speaker 2: we need to have access to affordable clean energy. So
Speaker 2: you need to do this right away, but that's not
Speaker 2: always easy. So a coal power plant might be in
Speaker 2: a geographical location where there is no wind or solar potential.
Speaker 2: So how do you deal with these situations? There are
Speaker 2: solutions but I'm just saying it is something to need
Speaker 2: to be looked after. And the third one is there
Speaker 2: are also other social dimensions, right? I think you very
Speaker 2: nicely wrote about the implications on jobs
Speaker 2: and the entire ecosystem that is built around coal power
Speaker 2: plants in various countries. Entire communities depend on that coal
Speaker 2: power plant. So if you shut it down, many, many
Speaker 2: people will lose the jobs, kids might not be able
Speaker 2: to go to school anymore because the parents lost the job.
Speaker 2: So how do we deal with that? So all of
Speaker 2: this I think can be solved, but it's really, really complex.
Speaker 2: And that's ultimately what we wrote about.
Speaker 1: You also were adamant that we include something that you
Speaker 1: alluded to earlier. The intergenerational aspect. Why is it that
Speaker 1: critical in the context of coal? Is it because we
Speaker 1: are sort of fixated on the potential job losses? And
Speaker 1: we're not thinking about the dividend that can come from many,
Speaker 1: many generations of clean air.
Speaker 2: Yeah, I think that's exactly it. I think very often
Speaker 2: when we talk about interconnectedness or dilemmas, we have a
Speaker 2: very static approach. So you take action a let's say
Speaker 2: you shut down a coal power plant. And the implication
Speaker 2: is b for example, certain people lose the job.
Speaker 2: But if you think about dynamically over a longer period
Speaker 2: of time, the implications on health by air pollution, water stress,
Speaker 2: the carbon emissions and so on and so forth on
Speaker 2: future generations, the costs are immense. So if you were
Speaker 2: to take them into account and ultimately calculate the NPV today,
Speaker 2: then actually you see that taking action today
Speaker 2: um is becoming ever more convincing. So we talked a
Speaker 2: little bit about this intergenerational fairness, which as I mentioned
Speaker 2: earlier is not a stronghold for human beings. Generally, we've
Speaker 2: always struggled a little bit with that.
Speaker 1: Let me ask you one technical question.
Speaker 1: A bank has given loans to a coal company. The
Speaker 1: coal company's plant is actually not that old. It's only
Speaker 1: four or five years old and it has like a
Speaker 1: 10 year amortization depreciation schedule for that asset. So now
Speaker 1: if we want to target some sort of a 2030
Speaker 1: net zero emer, we probably need to phase that coal
Speaker 1: plant out earlier.
Speaker 1: So who's gonna be left catching that bill? The bank
Speaker 1: doesn't want to lose its investment and the asset owner
Speaker 1: doesn't want to lose their investment
Speaker 2: either. That's a very important question, of course, because the
Speaker 2: way we approached it in this paper that we recently
Speaker 2: published under the umbrella of G. So again, GF is
Speaker 2: this collection of financial institutions globally and together with HS BC,
Speaker 2: we led a work stream on how should we do this?
Speaker 2: And our paper was complimentary to, to that consultation paper
Speaker 2: that we published, right.
Speaker 2: And one key consideration was financial viability, like how do
Speaker 2: we structure this in a way that we incentivize everyone
Speaker 2: to do the right thing because it's really hard to negotiate,
Speaker 2: for example, hair cuts or, or things like this. But
Speaker 2: here one critical element indeed is this blended finance structure.
Speaker 2: So if I simplify this a little bit, we need
Speaker 2: a new pool of capital and this new pool of
Speaker 2: capital has a lower return requirement than the existing pool
Speaker 2: of capital that finance the existing core power plant.
Speaker 2: So this differential in these two allows you to actually
Speaker 2: shut it down earlier, you are satisfied with less future
Speaker 2: cash flows arising out of power purchase agreements. Um But
Speaker 2: in order to do this new package, you then need
Speaker 2: different layers of capital, you need
Speaker 2: public potentially public money or multilateral development banks. Like for example,
Speaker 2: the Asian Development bank is very, very active in the Spain.
Speaker 2: And then one really interesting lay of capitalist philanthropic capital.
Speaker 2: So they are actually big global philanthropies foundations in the
Speaker 2: world that actually
Speaker 2: support these types of financing. And then if you merge
Speaker 2: it all together, you can create these lower return requirements
Speaker 2: and actually make it work. One other option is a
Speaker 2: highly contentious topic, but we think worthwhile looking at the
Speaker 2: generation of carbon credits that might arise out of this action,
Speaker 2: the action is a phase out core. Yeah, so there's
Speaker 2: not gonna be
Speaker 2: more greenhouse gas emissions because I shut the coal power
Speaker 2: plant actually down. We can translate this and it needs
Speaker 2: to be transparent, it needs to be credible and all
Speaker 2: these types of things. But we can create a methodology
Speaker 2: based on which we say, OK, we saved quotation mark
Speaker 2: this volume of greenhouse gas emissions because we shut down early.
Speaker 2: We allow carbon credits to be generated. You can sell
Speaker 2: them in the market
Speaker 2: and actually generate additional revenue. So that could be a
Speaker 2: very interesting construct as well. And given the contentious nature
Speaker 2: of carbon credits, uh we just need to make sure
Speaker 2: it's the right methodology, it's credible and everyone really is
Speaker 2: very clear on how we can do this, but that's
Speaker 2: roughly the the idea. Absolutely
Speaker 1: fasting. That sounds really, really cool. Um Finally, Hilda, I
Speaker 1: want to talk a little bit about our backyard, Singapore.
Speaker 1: You talk to government officials you talk to your peers
Speaker 1: in the banking and financial industry. And also I believe
Speaker 1: sometimes you meet with uh students and young Singaporeans and
Speaker 1: hear about their vision for uh Green Singapore. What's your
Speaker 1: sense of this society and this government's journey toward the
Speaker 1: green
Speaker 2: transition? Yeah, absolutely. So Singapore has actually been on a
Speaker 2: very
Speaker 2: nice journey when it comes to sustainability. If we go
Speaker 2: a little bit back in time, the government just a
Speaker 2: little while ago said we want to be net zero
Speaker 2: sometime in the second half of the century, then they
Speaker 2: accelerated it and said we want to be net zero
Speaker 2: by or around 2050 then they accelerated further and say
Speaker 2: no 2050 we're gonna be uh net zero. So from
Speaker 2: government point of view, there's a huge focus
Speaker 2: and an acceleration of targets and so on and so forth.
Speaker 2: So that's actually very, very promising. We are also blessed
Speaker 2: in Singapore by having extremely smart regulators. I think the
Speaker 2: MA S hands down is probably the best financial regulator
Speaker 2: I could think of very strategic always thinking in ecosystems.
Speaker 2: How can we bring everybody together? What are the future?
Speaker 2: So solutions, how we address our problem statements. That is
Speaker 2: quite amazing.
Speaker 2: Also in the society at large, I mentioned before I
Speaker 2: stepped in here that I had the honor and pleasure
Speaker 2: um recently with the minister to be on stage and
Speaker 2: we were grilled by a couple of 100 of young
Speaker 2: people that ultimately questioned. Are we doing enough? And they
Speaker 2: were really pushing very, very hard. So I can see,
Speaker 2: especially in the younger part of society, there's definitely growing awareness.
Speaker 2: So it's all sounds very positive, right? But let's be
Speaker 2: also honest, we don't really have an excuse. Singapore is
Speaker 2: a very rich country
Speaker 2: because of an amazing, amazing economic success story ever since
Speaker 2: it was founded in 1965 probably an economic success story
Speaker 2: that is unmatched in the world to be very honest,
Speaker 2: build on extremely smart people doing this extremely well and
Speaker 2: we have very good education, right?
Speaker 2: So we have a lot of capital. We have really
Speaker 2: a lot of smart people, so we really got to
Speaker 2: do it. If Singapore can't accomplish that, then I would
Speaker 2: be very pessimistic about the world. But I'm optimistic that
Speaker 2: Singapore will actually further advance and also act upon its targets.
Speaker 1: Well, on that somewhat optimistic note, he weel thank you
Speaker 1: so much for your time and insights. Thanks
Speaker 2: a lot.
Speaker 1: So grabbing me, great, great chat.
Speaker 1: Um Thanks to our listeners as well. Koby Time was
Speaker 1: produced by Ken Delbridge at spy studios, Daisy Sharma and
Speaker 1: Violet Lee provided additional assistance. All 103 episodes of Coby
Speaker 1: Time are available on youtube as well as on all
Speaker 1: major podcast platforms including Apple Google and Spotify. As for
Speaker 1: our all research publications and webinars are concerned, you can
Speaker 1: find them by Googling Devis research library. Have a great day.