Speaker 1 00:00:07 Hello everyone, and welcome to the first episode of the London Stock Exchanges D C M Deep Dive series, A quarterly examination of key issues affecting fixed income markets globally. I am delighted today to be joined by an expert in advising governments across a range of issues, pensions, climate change, biodiversity, and more importantly, an old colleague, a friend, and a mentor, Fiona Stewart. Fiona, it's a pleasure to have you.
Speaker 2 00:00:37 Absolutely lovely to see you, sre.
Speaker 1 00:00:40 And Fiona is here to talk about our thought leadership piece on supporting emerging markets on their transition goal and helping mitigating climate risk. But before we started on the subject itself, Fiona, I thought I would ask you, as you're coming out of the World Bank Spring meetings, you've just shared the Coalition of Finance Ministers against Climate Change, or is it for climate action? Either one. Um, if our listeners were a fly on the wall in that meeting, what would they be hearing, particularly from the emerging markets at this time?
Speaker 2 00:01:13 Yeah, no, it was a great meeting actually. So the, the, the coalition of, uh, climate ministers for, for climate Action, as you say, it's a positive group, um, going from strength to strength, they've now got over 70 countries joined, and the meeting had, um, over 60 countries actually either live or, or with, uh, recordings. So it was a really strong, um, presentation from the members showing their growing interest in the ministries of finance in the topic. And so we, we focused this time a lot on the concept of, of carbon policy and carbon pricing. Um, and obviously particularly the challenge, uh, very difficult to be a minister of finance right now is this intertemporal challenge of the long-term commitments towards the climate policies that they're putting in place versus the short-term energy security and how to react to that. So these intertemporal challenges, I think, are one of the big challenges for the ministries at the moment that really came out strongly, um, during the meeting and very much sharing experience and lessons between the group is what they're for.
Speaker 2 00:02:16 Um, the other topic I think came up, I was very interested to hear more and more at the ministerial, but also sort of around Washington at the, at, at that week is adaptation. So there's been a lot of focus on the mitigation side to date, but I think a lot of recognition that we need to do more on adaptation and adaptation was really, I think coming up the policy agenda. So, and that's something that the, the coalitions launched a new, um, work stream on. So definitely adaptation I thought was in the air a lot, um, during Washington that week.
Speaker 1 00:02:47 That's, that's great to hear. And we were very positive about the messages coming out of Glasgow in November last year with the establishment of gfas and the number of financial institutions that that signed up. And it really felt that finance was coming together behind the agenda that was set in Paris. But given some of the challenges, Fiona, that we've seen this year, particularly around the, the geopolitical situation, the, the human tragedy which is unfolding in Ukraine and Russia, and where we are seeing the dynamic head in terms of rates, in terms of inflation, supply chain issues, food security issues, are other messages you're hearing similar to the ones that we heard last year, or has the dynamic around the importance of climate change and 2050 targets slightly shifted, you feel, given the challenges this year?
Speaker 2 00:03:37 I think there's a lot of, um, intention and commitment to stay to these long-term challenges. But I think if anything, obviously, um, in incredibly important, um, short-term issues, which, which ministers in our countries need to address very urgently. Obviously the food security is one that's o of great concern, but it, they only, if anything, heen the, the connection between the short term and the long term and between all these issues, the climate impact on, uh, the food security, the biodiversity, uh, impact from climate and on climate, and how that link links to the food security issues. So I think this, this concept of interconnectedness is really coming through. Um, and therefore the, the commitment and the intention to really stick with the longer term goals, i, I really feel is there. Um, but balancing that with the really urgent needs that are for many, um, sadly really growing in many of our, uh, client countries at the moment.
Speaker 1 00:04:34 Yeah, I think, I think it's interesting, you, you talk about that interconnectivity and I mean, I was going through an report by the I P C C that was, came out recently about, uh, estimates looking at 1.5 degree, uh, heating from pre-industrial levels, uh, being reached as early as 2034. Um, and in my hometown of Delhi, we're going through a heat wave at the moment where average temperatures are around 46, 47 degrees, average temperatures, not the extremes. Um, you traveled around a Fiona speaking to governments a lot. I hear you were in Kenya a few weeks before. Uh, what are you hearing about kind of real life impacts in the short term that the climate crisis is happening, uh, today?
Speaker 2 00:05:17 Absolutely. It's very much, you know, our emerging market countries that are on the front line of the, the risks and the impact from the emerging mark, uh, from the climate change, um, whether it's the small island states, whether it's you say some of the region that you know very well. So this is happening now. It's being felt now in our client countries. This is not a long-term I issue, this is happening right now. So, um, the, the, uh, clients are the ones who are hit earliest and hardest, but they're also in many ways the ones that are less able to cope and most need the financing. Um, and so, you know, we've heard from the, the O E C D, for example, saying that the, the, the financing needed to meet the SDGs, the Paris Accords before the Covid crisis was about 2.5 trillion a year.
Speaker 2 00:06:01 They think that's now gone up to 4.2. And you know, most of that is gonna be needed in the emerging markets. A lot of that is going to be needed in the emerging markets. But these are the countries as, as you know, well, and your audience knows well, have, have, have a challenge for access to, to finance. So how we make sure that the, the international financial architecture, the type of instruments that, you know, you are working on, we are working on are there, so that we really get the capital channeled to the countries, um, that need it most to meet the SDGs and the Paris Accords. It's a really important, um, challenge and issue that we all need to be very aware of. Definitely,
Speaker 1 00:06:39 I think quite quite rightly said, Fiona and I was reading an estimate by, uh, the McKinsey Global Institute, which put the scale of investment required, uh, to meet the Paris Agreement goals and achieve NetZero, uh, along a two degree trajectory to be around 9 trillion. So look, estimates vary from 2 trillion to 9 trillion, but I think we recognize that that goes way beyond the balance sheets of the world banks, the eib bs, the MDBs of the world. So public markets have to play a role in this, um, in that way. You, you wrote a blog about a year and a half ago in the midst of the pandemic, um, which I, I love the title because it's the strap line of the LSEG as well, at least the first bit of it is, which which was titled My word is My Bond Linking Sovereign Debt with National Sustainability Commitments. Uh, what was the idea behind that and what are you hearing from long-term investors like pension funds and given your background in the pension space about what they want to see from ministries of finance, heads of funding of Domos going forward, heading towards 2050?
Speaker 2 00:07:46 Yeah, so, um, two things, what I would say we're doing quite a bit of work on this idea of, of sovereign level reporting. So, um, do you need a T C F D for sovereigns? Um, is a question in that, uh, a lot of the, um, analysis that's being done at the moment on the emerging markets is exactly on this risk that the climate faces to them and to their economies and to their societies. But I think a lot of the really good work the countries are doing in terms of the mitigation policies, the adaptation is not necessarily getting across, um, as well as it could. And so we are trying to work on how can we help the countries really get across the messaging about what they're doing in terms of the upstream policies that they're putting in place to address these challenges going forward.
Speaker 2 00:08:33 And we are hearing from the pension funds, the d mos, uh, are telling us that they're getting asked these questions just like any other issuer more and more, what does the E S G mean for sovereign bonds? What does it mean for you as an issuer on a national level? Um, and so we're trying to think through how we can help DMO really get across, um, the good policies and the practices and the adaptation, um, measures that they're taking. And if we can put that into some sort of framework drawing on a lot of the, the, you know, the adaptation plans, et cetera, the data they have, but it may be in other places around the ministries on elsewhere in the government, put that together in a framework that investors understand and investors know. Um, and we think that could really help the emerging markets get the positive opportunity message across, um, to counter and to, to, to balance the risk assessment that's already being done. And do you think so, so that's one strand of work. Sorry.
Speaker 1 00:09:31 No, that's, that's, that's all right. Do you do, do you think, Fiona, that goes beyond, uh, frameworks that we've seen in public markets, like green bond frameworks or sustainability bond frameworks in terms of reporting? Is it more about investor engagement or is there just a sh too much noise around the margins in terms of what sovereigns are doing and articulating that to, to investors?
Speaker 2 00:09:54 So I think it goes, it's part of, um, the green bond frameworks. Green budgeting is actually is excellent that's happening and is coming into many countries, but it's to give a package a way of really putting, um, broader policies, upstream policies and, and and really communicating them. And a lot of things like the adaptation plans, the environment ministries are doing, they're communicating to the environment, um, universe, but not necessarily to the finance universe. So it's a way of really getting that really good messaging of upstream policy across to the markets. And one thing we are doing at, at the bank, we're also working more and more on this sort of whole economy approach to climate. Again, trying to get out of silos and really mainstream this across our lending and across the activities that we do at the bank. Um, and these sort of reporting frameworks like I, I think can really, can really help get that across for countries to really communicate what they're doing.
Speaker 1 00:10:46 And are there any examples, Fiona, of your work that come to mind? Any transactions that you've seen? We've seen quite a few milestone transactions here at the lse, but are there any pieces of work that come to mind as case studies when you talk to issuers who perhaps haven't yet gone about issuing a strategic level green financing framework or plan or issuing a green or sustainability bond in the market that kind of come to mind?
Speaker 2 00:11:11 So I think there's a few. So ourselves, actually I think the bank's quite interesting cuz we are now saying that, um, obviously we are an issuer. Um, the World Bank does a lot of issuance of, of our bonds into the market and we say that all our issuance is sustainable, that's a dna as as a bank is that all of our issuance goes towards sustainable development. So that's a very interesting approach into a reporting that we are doing and a treasury team are doing in terms of the reporting that the bank is doing. Um, then on the country level, I think there's the usual, you know, uh, suspects like New Zealand are doing extremely interesting reporting frameworks for their own, um, sustainability climate policy. Um, I think there's countries like that we can really look to and learn from. And then I think there's really interesting examples, and I think the way that we are moving and almost blending between, um, a use of proceeds bonds, so label bonds like green bonds, sustainable bonds, and these very new instruments.
Speaker 2 00:12:06 I think there's a big trend in the market towards, um, performance related instruments. These sustainability linked instruments which are growing fast in the corporate market. We obviously saw the first one in Chile on a sovereign level, but actually having indicators and outcomes that you measure and someone like Benin I thought was really interesting. The Benin bond that they did, their s D G bond, it was a use of proceeds in the sense that the bond will go towards um, S D G projects, but they have a really interesting reporting framework that they're going to also measure outcomes. So I think there's a big trend here of moving towards really performance measurements and impact, which I think is the next phase for the markets, and I think a very important and encouraging one.
Speaker 1 00:12:52 Yeah, I think you're, you, you're right, Fiona, in, in, in some senses the E S G bond market is now in its, it's teenage years. It's been, what, 15 years since the World Bank and the E I B did. Its first green bonds. The market has reached 1 trillion in size in terms of the amount of issuance on an annual basis. And, and now the market is really finding its identity both in terms of marrying the issue level strategy, as you said, you know, setting targets which are aligned with the NDCs and bringing that in an instrument and also perhaps potentially combining that with a use of proceeds model, something that we can look at in the future. I just came out of a meeting, uh, with another counterpart on, uh, in within the multilateral development banking space where they talked about the concept of an ESG double header, a KPI P aligned metric along with the user of proceeds model.
Speaker 1 00:13:40 But you mentioned a few, uh, and I just wanted to reiterate a few examples that we've seen. So Chile of course, did the first sustainability linked bond within the sovereign space. It was a 2 billion issuance. It was tied to its, uh, commitments to reduce, uh, emissions from a 2020 baseline to 2030 on an annual basis, uh, as well as the proportion of electricity that was aligned to renewable energy. Um, and Mexico has also done SDG aligned bonds, uh, where the entire budgetary framework is aligned to an SDG framework. You mentioned UNE as well. Uh, all these issuances are listed on the London Stock Exchange, and you can find the case studies online. But digging deeper into the KPIs, we've seen KPIs normally associated with quite naturally emissions. Right. Do you think there's an opportunity over here, and I'm very interested to hear about the world of the, the work of the World Bank over here to bring a different sort of KPI into the mix, whether it be biodiversity related, carbon sequestration, social impacts and metrics. Is that part of the conversation yet?
Speaker 2 00:14:55 Yes, very much so. And we've been looking at these, um, how do you set a A K P I framework that's, that's, that's robust and what is a stretch target for a country? Um, we've been looking at that and put out an initial little framework for that, and we, we'll be doing some more work on that going forward. But I think inevitably, um, I think it was good chili started with the, the, the low hanging fruit, if you like, of, of emissions. That's when you know the market and all of us are more comfortable. We know how to measure. Um, there's more standard ways of doing so it's linked to NDCs very sensible place to start. Absolutely. And a, and a, and a very good one. Um, I think there's countries that are also then looking at environment and nature, um, which is great if we can get that as the next sort of layer.
Speaker 2 00:15:40 And we looked in a research that we've done. We've, we've laid out some, again, low hanging fruit of indicators that are already there measured on a sort of global basis by third parties, um, that could be used. Um, obviously land and reforestation is the, the, the obvious one to start. Countries are looking at these. Um, again, it's finding the indicator that's, that's known and, um, and, and robust, uh, is then the, the question. Um, and I think, we'll, we may well see, I expect we will see some nature ones in the next round of these sort of instruments that come out. And then social, I think is the next layer after that. So yes, I think that the framework, the, the principle is a very good one. And I think, we'll, as we get more comfortable with the instrument, um, you'll probably see a, a broadening of the type of KPIs that are used.
Speaker 2 00:16:30 And then we've also been doing work on how do you measure the stretch of the target? What's the, how, what's the ambition, which I think is a really interesting question. And looking, we've been trying to model, for example, taking a modeling approach. So you can look on a, on a GDP basis, on a macro basis, what you would expect from, um, you know, reforestation et cetera is linked to, you know, growth in a country and, and ex and, and existing policies. If you model that out, what would be above what you would expect and be a stretch target. Um, and making sort of some of those sort of maybe modeling techniques to really sort of, um, push countries and to, to say, really help investors think about what is a stretch versus what they would probably on a trajectory be doing anyway. So yes, interesting work we're doing around that to try and really bring robustness and ambition into markets and then hopefully get it rewarded for a, um, emerging markets that are really making these commitments and are, um, really being, um, solid in their ambition.
Speaker 1 00:17:25 Yeah, and look, let's see where the yield environment heads clearly, I think we're at a different point of time in our lives than the last 15 years or since the global financial crisis in terms of what interest rates and inflation we're exposed to across the world. But my final question to you, Fiona, before we wrap up is, is one that I usually ask all our guests, um, short term and long term in, in the future, optimistic or pessimistic, that we can see real change
Speaker 2 00:17:55 <laugh>. So I like to describe myself as a pesto. So I think there's a lot of short term challenges, but I am very optimistic for the long term. So I think there's real, real understanding that we need to change the way that we think about investment, that we really need to think about these systemic risks, um, and that there really are opportunities out there, particularly in the emerging markets, um, to, to address them and to have new business, um, structures, et cetera. So yes, there's a lot of short-term challenge. I think the issue now is to move from my, from the pessimistic to the optimistic is to go from the intention to the action. Um, and that's the cusp I think we're at. Um, I think there's some really interesting, you mentioned some of the deals you've been doing, we've been doing how we take those pilots and those good ideas and start to really replicate them and scale them. So yes, I am long-term optimistic, recognizing the short-term challenges that we all have to face.
Speaker 1 00:18:51 So a, a pessimist, I'm sure I'm gonna use that word in the future. Pessimist, <laugh>. Uh, but thank you so much Fiona, for your time. Uh, it's lovely to speak with you as always, and we are looking forward to actually seeing you in, in London at some point in time in the future. Now, listeners, that brings us to an end to today's episode of DCM Deep Dive. We hope you found this discussion topical and interesting, and what we as the LSC are doing within the sustainable finance space. Uh, do read our thought leadership article focused on emerging
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