In the latest in SIFMA’s podcast series, SIFMA president and CEO Kenneth E. Bentsen, Jr. and CEO of the Global Financial Markets Association (GFMA) is joined by Allison Parent, Executive Director of GFMA, and Roy Choudhury, Managing Director and Partner at Boston Consulting Group (BCG), to discuss the new report GFMA wrote in collaboration with BCG, “Climate Finance Markets and the Real Economy: Sizing the Global Need and Defining the Market Structure to Mobilize Capital.”

The report is based off interviews conducted this year with more than 100 market participants globally, including financial leaders, non-financial corporates, and asset managers, and outlines the current state of the climate finance market, capital demands to meet policy goals, and recommendations to adapt our market structure to meet that capital demand.

Transcript
Edited for clarity

[Ken Bentsen] Thank you for joining us today for this episode in SIFMA’s podcast series. I’m Ken Bentsen, President and CEO of SIFMA and CEO of the Global Financial Markets Association. GFMA represents the common interests of the world’s leading financial and capital markets participants and provides a collective voice on matters that support global capital markets. The GFMA is the global arm of AFME in Europe in the UK, ASIFMA in Asia, and SIFMA in the U.S.

GFMA has long focused on the issue of climate finance, and our member firms have increasingly committed capital and resources to the development of the sector to meet policy goals and client demand. We’re here today to talk about the new report GFMA wrote in collaboration with the Boston Consulting Group, Climate Finance Markets and the Real Economy: Sizing the Global Need and Defining the Market Structure to Mobilize Capital.

This report follows on various workstreams undertaken by the GFMA since 2015, most recently a survey of leading financial services firms conducted in 2019. The report is based off interviews conducted this year with more than 100 market participants globally, including financial leaders, nonfinancial corporates, and asset managers, and outlines the current state of the climate finance market, capital demands to meet policy goals, and recommendations to adapt our market structure to meet that capital demand.

I’m pleased to be joined today by Allison Parent, Executive Director of GFMA, and Roy Choudhury, Managing Director and partner at Boston Consulting Group, to discuss all of this. Allison and Roy, welcome.

So, let’s get started. In short, the report provides a roadmap for how to accelerate the evolution of climate finance and define the roles capital market participants can play to facilitate this transition. What was the impetus for producing this report? Why now?

[Allison Parent] This report was meant to build upon the collective action of our members with their clients, and then the other studies that are out there, to try and provide a point in time kind of reflection on where the market structure is today and where it needs to be to truly support the transition to climate finance and transition pathways of our clients and the demands of our investors.

[Ken Bentsen] As we noted, the report is quite substantive, clocking in at I think 170 pages and is based on, as I mentioned, interviews conducted with more than a hundred market participants. I know it’s a challenge to summarize, but what are the key takeaways from the report?

[Roy Choudhury] Good question. So, as you mentioned, we interviewed a range of market participants, including banks, asset managers, nonfinancial corporates, and international standard setting bodies. There were key themes that we consistently heard, which show up as takeaways in the report. The first is the need for global public sector leadership, and there are many facets to that leadership that we highlight in the report. We did hear the need for consistency of carbon pricing framework at a high enough level to really direct the flow of capital to finance climate change.

We also heard the stability of public policy and legislative solutions to really support the growth of the climate finance markets and that there has been significant developments and growth in the green bonds and green lending market, but that’s not going to be sufficient to finance the investments that are needed. We would need scaling up across all asset classes, particularly around equity. Just given the early stage of some of these technologies, equity will play a critical role.

I think the third important takeaway is the critical need and importance of Asia. We estimate that about $66 trillion of investment will be needed in Asia. So, Asia is going to be a critical part of the solution. Also if you combine that with the early state of maturity and scale of capital markets in Asia, this becomes a particularly important challenge.

[Ken Bentsen] Getting more granular, the Paris Accord sets ambitious growth rates for the climate finance market. You talked a little bit about this in terms of product or structure, but talk about the investment per year that this report estimates will be required for the climate market to achieve the level set in that accord.

[Roy Choudhury] Yep. So, there are many investment needs that are out there. Where I think this report is distinctive is we really break the investment needs by industry sectors, by region, and then each of the decarbonization levers.

So, as part of this report, we have estimated a total investment need of $100 trillion to $150 trillion over the next three decades. That roughly translates into a $3 trillion to $5 trillion investment need per year. We also highlight that this investment need is unlikely to be linear. So, the inability to take action over this next critical decade could lead into a significantly higher investment need in the future.

In the report, we also highlight the need for a range of asset classes, not just fixed income securities. So, we break the investment need by fixed income securities, equity, and bank intermediate lending, in addition to structured product securitization and derivatives, which will all play a very important role.

The biggest investment need we have is in power and electrification as a decarbonization lever, which is probably not surprising. That is the most significant investment lead from a decarbonization lever perspective. From a region, we believe Asia will be a significant chunk, as I highlighted earlier, around $66 trillion.

[Ken Bentsen] Achieving that pace and scale of growth and climate finance will require fundamental changes to the current financial market structure to enable the needed efficiency transparency and scalability to address climate risk.

This necessitates concerted and coordinated action by all stakeholders: the public sector, as you mentioned; real economy sectors in the banking and capital market sector; private and institutional investors and asset managers; and the social sector to support the development of a climate finance market structure. As such, can you walk us through some of the core recommended actions the report lays out to make this a reality?

[Roy Choudhury] I think one of the key recommendations for the public sector is really a legally enforceable, comprehensive, and sufficiently high level of carbon pricing. We believe it to be foundational to really direct the capital flows. The second recommendation we have for the public sector is really the mobilization of public capital through blended finance solutions. So, a partnership between public and private financing solutions is going to be quite important.

Finally, for the public sector, we highlight really the need for incentive structures and accommodate fiscal policies to really support all of this.

[Allison Parent] I would build on that and say that the report also emphasizes the importance across policy initiatives to need to be sector, region, and even corporate specific. One of the key risks identified to the efficient scaling of the climate finance market is the need for policy makers and the broader society to consider the role that financial market participants currently serve supporting the broader economy and the economic policy frameworks that underpin that will need to align with Paris agreement targets.

Currently, many counterparties utilizing low GHG emission business models are economically uncompetitive due to the absence of carbon pricing and there are also counterparties where the sector counterparty or the region have yet to identify viable transition pathways to a low GHG business model.

Once the level playing field and the transition pathway questions have been addressed, this will unlock the pipeline of investment and financing opportunities for banks and capital market participants with the financing proceeding on an economically sound basis, which is super important.

In the report, in addition to the 12 recommendations, we do a deep sector dive across 10 sectors representing 75 percent of the carbon footprint. The final section of the report is called A Call to Action, and the reason it’s a call to action is because it needs a concerted and coordinated action to help mitigate substantial mispricing and potential financial stability risk, which would undermine the long run ability of the financial system to direct finance to fully support the Paris line transactions. So, the recommendations should be read collectively and emphasize on the need for action sooner than later to really try and meet the objectives of the Paris Accord.

[Ken Bentsen] So, Roy and Allison, this is a great summary. There’s so much in this report. As I said, it’s quite a document and I commend it to all of our listeners. But before we go, Allison, what’s upcoming for GFMA in the space and how is the organization planning on using this report?

[Allison Parent] Yeah, that’s a great question. We have already shared it with some of our partners in the regulatory community that are actively looking at these challenges and these issues. I know our members will be using it in talking to their clients to help identify what’s happening in the market structure. We’ll be working with our members in 2021 on how do we try and move forward and take proactive action to address these constructive recommendations.

There’s one recommendation that we had in the report that is a very live debate right now- that’s around disclosures. I think this report helps us build on the work that’s been done to date. It emphasizes the importance of data that is necessary to drive the metrics, which is tied to this question of disclosures. Our disclosure recommendation emphasizes the importance that the disclosure should be focused on decision relevant climate data and the need for the regulators to appreciate as we move forward that this very much is a regional sector specific and even for disclosure, as a corporate specific issue.

This ties to the question on taxonomies. There’s a lot of discussion about taxonomies in the last few years. And the reality is, we’re at that stage where to make the transition pathways really work, we need to be thinking about taxonomies in a constructive way in kind of a sector specific.

So, we’re hopeful that these sector deep dives that we’ve done here will help the regulators, the industry, as well as the real economy, appreciate the different drivers and incentives that are necessary to really help identify efficient transition pathways to address the Paris Accord agreement.

[Ken Bentsen] Well, with that, thank you very much, Allison and Roy, for joining me today. Great report and great to be talking about it. To read the report and learn more about GFMA’s work related to sustainable finance, visit https://www.gfma.org/global-market-policies/sustainable-finance/. Thank you for being with us today.

[Roy Choudhury] Thank you.

[Allison Parent] Thank you.

Ken Bentsen is president and CEO of SIFMA and CEO of the Global Financial Markets Association.

 

 

 

Roy Choudhury is Managing Director and Partner at Boston Consulting Group.

 

 

Allison Parent is Executive Director of GFMA.