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19:52

Guest speaker:

Dr. Barnabas Acs, Refinitiv's Global Sales Readiness Director for Sustainable Finance.

ESG Monthly: 3 Key Trends to Follow in October 2020

Episode 3 | Duration: 19 minutes

What are the 3 key themes in sustainable finance you should know about in October 2020?

  • Keesa Schreane [00:00:01] Hello, everyone. This is Keesa Schreane. And today we're going to focus on exploring key trends that will dominate the ESG space in the fourth quarter of 2020 and beyond. We continue seeing dramatic events like wildfires, deadly hurricanes and record summer temperatures. Also, for those of us in the US, there is the preparation of the elections, the presidential elections, where the topic of climate transition is coming to the forefront as part of the candidates discussions. Will talk about three core themes that may set the agenda in this space is Barnabas Acs, Global Sales Readiness Director for Sustainable Finance at Refinitiv. Thank you for joining us today. Congrats on your new role.  

    Barnabas Acs [00:00:48] Thank you, guys. Happy to be here again.  

    Keesa Schreane [00:00:50] So, Barney, we know that regions like the EU have extensive green recovery plans, which could also become a reality in the US, if the Biden Harris campaign wins. The Responsible Investor pointed to a document stating that EU member states want to have 37 percent of a three hundred and twelve billion euro recovery budget invested in green projects. What are your thoughts, Barni, on that? Is that something that could truly help economies bounce back from economic recession and prevent other major crises and climate emergencies?  

    Barnabas Acs [00:01:23] Yeah. So just to start this year, I believe there are two challenges that the governments and of course, the EU among them have to solve is the transition to climate neutrality by 2050. The other one was the digital transition. And two, that there was, of course, the addition of the economic downturn created by the COVID-19 situation or pandemic. So it's unfortunate. It's way bigger than a situation. So the the proposal that you mentioned is is basically talking about the recovery and recent resilience facility, the IRS, which is a key instrument to the European recovery fund. And what it states is that the member states must outline national investment plans that are basically solving for these three challenges. So they have to be servicing the recovery, the transition to digital and the transition to carbon neutrality. And I'm guessing this is a response to the core of not making this recovery just a recovery, but a just recovery.  

    Barnabas Acs [00:02:46] What what it will do is definitely add to the decentralization of infrastructure and really help prepare the societies for full report of transition. If you think about it, COVID-19 already made a lot of people stay home. And as fair fact, made the whole economy more decentralized. If you think about the technology that is underpinning the climate transition, that's also, you know, solar panels being that cetera, et cetera. These are also decentralized systems.  

    Keesa Schreane [00:03:28] I love what you're saying there with the decentralized systems. If we have to look at this from a U.S. lens, do you think that this would be the same outcome for those in the U.S.?  

    Barnabas Acs [00:03:38] Yes and no. I mean, obviously, there are a couple of studies that already state that from ground up owing to a couple of organizations, the transition in climate neutrality has already happened. In fact, there is a study that states that by 2030, from these ground-up innovations and coalitions, 25 percent decrease in CO2 emissions could be achieved. Which is huge, although that it also states that if there was federal assistance of this, that that number would be around 49, 50 percent by 2030. And given the magnitude of U.S. emissions, which is around five gigatons, that kind of percentage difference would actually constitute to a size of emission reduction of the total annual emission of Japan. So then, yes, it's already ongoing. For example, if you think about it, compared to very low statistical figures a couple of years ago. Nowadays, there are 33 percent of the Americans living in cities or communities where there is a commitment to 100 percent renewable energy sources. So there is this bottom-up approach. And of course, there are the Googles and the Amazons who are committing to not only the climate neutrality, but also the negative carbon. But obviously how far they go without federal assistance.  

    Keesa Schreane [00:05:23] So if we take a look at the outside of the US going back to Europe specifically, we know that the European Commission president is proposing the EU reduce greenhouse gas emissions by at least 55 percent by 2030, which is from 1990 levels, and set the 40 percent cut rate to six years ago before the Paris agreement. These you see this target as feasible? 

    Barnabas Acs [00:05:45] Just to put this into perspective. I mean, right now, the current state of emissions in the European Union is about four point nine gigatons, which is twenty three percent below 1990 levels. If you think about it, this kind of 55 percent is an additional 30 percent reduction, which considering the more evolved technologies and, of course, the serious federal, and so if I talk about the U.S. is a federal entity, whether they are not. But that kind of backing definitely adds to the feasibility of these things. And by the way, the these kind of communications, I think, go beyond feasible or not. Obviously, we want to avoid this kind of greenwashing or for false promises by governing entities. But these board regimens, what they do, is actually really convince the financial market participants that, OK, this is this serious stuff. There are not going to be any achievements being done without structural changes. So that actually encourages the financial market participants to go forward and anticipate structural changes, i.e., for example, the ending of a five point two trillion subsidy market with the can't tap into anymore and start to start to think about how to do investments in those requirements. For example, in the energy sector, it's a three point five trillion that investments that have to go into the energy sector alone per annum up until 2030. So these are quite big numbers at hand.  

    Keesa Schreane [00:07:29] So if we're looking at a little bit earlier about market participation, I know that some folks would say that it might not be possible to achieve significant targets without some of the biggest nations on board. One example might be the U.S. leading the Paris agreement. What is your thought about how these things can be achieved when you don't have all participants who are really working in concert?  

    Barnabas Acs [00:07:53] Yeah, I mean, this is this is sort of referring back to the states question that you asked before. I think the pivotal point or the order that happened, so there is no turning back, even if you don't really support everything from a talk. I think what should be really avoided and luckily this is this is not the situation elsewhere, like in the States and where there's that religion about climate denial. And in some cases, we see serious actions against the transition to climate neutrality, like the DOJ release earlier and the latest FCC announcement on curbing voting rights or proposals to voting. And so if there is nothing actively going against this transition, I think there is already changes happening. And and, of course, if there is the federal have going debated, the significance of these changes can be can be even bigger. Don't get me wrong at this. This problem wouldn't solve itself.  Well, I'm saying if you don't actively go against stopping this process, it will automatically accelerate somewhat. And of course, if you put a top-down approach to it, it will accelerate in a pace that supplier to reach the goals.  

    Keesa Schreane [00:09:16] So just shifting gears just a bit here. We're talking about regions and countries. Want to know how what's the process for starting a transition board? How does that even to come into effect?  

    Barnabas Acs [00:09:35] Yeah. Just going back one one step. And I think the significance of the transition bonds comes into play when we think about the green bonds. So Refinitiv did a remarkable study which has basically calculated all the green financing for the first half of 2020. So ECN markets, DCN markets, syndicated loans, M&A actions, et cetera, et cetera, that are linked to some sort of sustainability. And and the total value of that for the first half was about 300 billion U.S. dollars. So if you extrapolate that to 2020 for a whole year, that should be around six hundred  - six hundred fifty billion U.S. dollars. If you look at another study which was released by the Rainforest Action Network, the amount of financing that went into fossil fuels, I'm talking about tar sands, offshore oil, artic oil, et cetera, so the really dirty stuff, by thirty five banks constituted, to seven hundred and thirty five billion US dollars in 2019. You see, even though we have achieved a lot on green financing, there is so much financing that is that is going into the dirty industries without any consideration. That is that this cannot be overlooked. And the the transition and the transition bonds or is transition financing would aim to make sure or facilitate even these dirty industries to turn somehow cleaner.  

    Barnabas Acs [00:11:17] So it would require that the notion of the transition going, for example, identifies five principles for ambitious transitions. One is the goals - it needs to be in line with the 1,5 degrees target or the other one is that it has to be established, a transition has to be established by science. And you have to assess every technological assessment in order to assess whether you can transiting to into a lower carbon-intensive operations or not. And the fifth one, which is very important, is it talks about actions, not pledges. So you don't pledge anymore. And if you don't fulfill that pledge, then nothing happens. You actually have to show with your actions that that that transition is happening and you have to be penalized if you don't. For example, substainability-linked are those kind of instruments.  

    Keesa Schreane [00:12:25] Well, a lot of organizations and entities would appreciate that. Actions definitely are what can get us to the next step here. So there was a recent report from the Bank of International Settlements, Switzerland-based central banking organization. They say it's no clear there is a link between green bonds and companies reducing their carbon emissions. What are your thoughts on that?  

    Barnabas Acs [00:12:47] Obviously, you know, the picture is a little bit more complicated than that because, of course, this number differs from sectors to sectors, for example, industrials and real estate, green bonds. He sure achieved lower carbon emissions than the ones who didn't. But, of course, there are industries like the utility sector that it wasn't this wasn't true. Obviously, what you have to take into account is that the green bonds are project financing vehicles. So you have to check, you know, what is the ratio or the relationship between these clean projects versus to be new projects. And apparently, these green projects were still small compared to be a few projects and they didn't move the needle. And by the way, green bonds are quite new. So is this a complete assessment? Is it still to be seen? But it's important to mention that, you know, that this kind of transition financing when you actually make the issuer accountable to not acting, i.e., sort of creating a sustainability default, so to say, that would help taking these more seriously, and then avoid greenwashing as such.  

    Keesa Schreane [00:14:14] You know, Barney, these conversations are not complete unless we talk about regulation. Right. And what's going on the regulatory side, as well as corporate disclosure standards. You know, we can't really skip also talking about the EU green taxonomy more broadly. What is the trend for creating national and regional taxonomies mean for green finance? If we're looking at it from a perspective of the regulations, or looking at it from just a corporate disclosure standard perspective.  

    Barnabas Acs [00:14:43] I think the very important thing about this first internal international framework that is both comprehensive and works in practice will have that kind of leverage and proneness to acceptance. And the EU Action Plan for Sustainable Finance is basically ticking a lot of boxes in this respect. So it's comprehensive enough because it actually stretches across the whole investment value chain. You know, it talks about taxonomy. I think its definitions of different things, labels. It also talks about benchmarks. It targets, as you know, disclosures for financial market participants. It targets incorporating sustainability and financial advising. And it also incorporates the disclosure by corporate.  

    Barnabas Acs [00:15:45] Of course, the puzzles of this big framework are coming to live at different stages. So we saw the NFRD launch at the beginning of the year. Then we saw the EU benchmark's regulation entering into force in June. And of course, the next one is the SFDR in March next year. So it has different puzzles, but it's very comprehensive. It's also descriptive enough. It, for example, creates a good framework identifying what is an economic activity that is environmentally sustainable, for example, and it's flexible enough as well. For example, in SFDR, it doesn't prescribe minimum thresholds. It just prescribes disclosure on portfolio and an entity level. And of course, the market will decide better, as per that disclosure of whether than 25 percent of, let's say, sustainable revenue streams. Is enough or not. So in case of a corporate or in case of, you know, and an investment vehicle. And of course, it's global enough because it's applicable to any sort of investment activities that are pursued in the European Union. So if you're an American manager and you have clients in Europe, you have to look into this framework. And it's early enough as well. You know, I mean, unfortunately, there is no federal serious federal regulation, pro transition in the states, although China has really made their pledge to the 2060 carbon neutrality, they didn't have a comprehensive legislative framework. Whereas Europe has a framework, which is slowly and steadily coming to life. So I would believe that this would make the European legislation quite sticky and accepted, especially since this kind of trends that this regulatory framework sets, is flowing directly, into other networks. Like the NGFs, network for greening the financial system, which is basically a network of central banks, among other authorities across the globe. And you know, they will adapt and benchmark against it.  

    Keesa Schreane [00:18:12] Barni, this is great information in everything from the top of the call, talking about our transition not just toward climate, but also digitization, how that has really impacted all of the efforts that we're doing, particularly over the last six months. So progress in that area, digitization, as well as climate transitioning. Also that plans that are calling for strategy are great. But also more of these organizations and regions are calling for actions as well as the strategy behind it. Also, achieving targets, can countries do it when there are some key players that are missing and really how regions can work together to achieve these targets, working together as countries that are involved here. Also, climate bonds, the fact that they vary, and different types yield different results. So we shouldn't despair because some climate bonds may not yield the results that the folks hope it will. But just really recognizing the differences between all of them. Great information. Thank you so much for joining us.