How to finance net zero

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Martin Wolf, Associate Editor and Chief Economics Commentator, The Financial Times: Welcome to a discussion of a really important issue – how we finance net-zero, moving from commitment to action. I'm Martin Wolf, I work at the Financial Times, and I have followed this issue moderately closely for a couple of decades. I think it's a very timely discussion. And we are in one of those phases which have become the dominant experience of the last few years, perhaps even longer than that, or perhaps forever, in which urgent matters of the moment overwhelm what we think of as really important for the long term. So it's I think it's very important that we continue not only to discuss these issues, but translate them from the important to the really urgent column, because otherwise we're going to fail pretty clearly.

So we have a superb panel who will be you'll be hearing from very soon. I'll just introduce them. To my left is Anne Richards, who's Chief Executive Officer of Fidelity International. To her left is Mark Carney, who is United Nations Special Envoy for Climate Action and Finance, and of course, played a very big role in creating the Glasgow Financial Alliance for Net-zero (GFANZ) and whom I of course knew as Governor of the Bank of England. And I congratulated him yesterday on getting out in time! Of course, this mess would not have happened if he'd been there. To his left is Makhtar Diop, who's Managing Director and Executive Vice-President of the International Finance Corporation (IFC), the central institution. And I was reminding him that I spent 10 reasonably happy years in the World Bank in the seventies at the beginning of my supposed career, and of course, at that stage we in the World Bank – he has made the transition, he explained to me – always regarded the IFC with profound suspicion. I'm sure you recognise that Makhtar. To his left is Celine Herweijer, who is the Group Chief Sustainability Officer at HSBC, an institution that has recently been in the news. And finally to her left is David Schwimmer, who's Chief Executive Officer of the London Stock Exchange Group.

So we've got a very broad panel with lots to say on this vital subject and all I'm going to say as an introduction, because you didn't come here to listen to me, was that it's pretty obvious that – if we leave aside the fundamental question of political will – we have three things we need to fix this problem: technologies that work (we've made a lot of progress on that – there are still some pretty important holes and lots of that has been discussed here); incentives, I suspect people will talk about that – do we have the necessary incentives? And finally, but definitely not least, last but not least, money, finance.

And none of these will happen if people don't put money into it public and above all, clearly private money. I've got here an estimate that it will need $50 trillion in incremental investment by 2050. That's actually a it sounds a very large sum. It's not quite as large as it sounds if it's over 30 years. But some of the figures I've seen are larger and I will leave others to decide that. But I've seen double that and Mark will discuss that. This is not trivial sums which will have to be invested to get a return for investors and and the sorts of institutions represented here will play a central role in bringing this about. Now, in my role as moderator, of course, but I'm also a journalist. And it is my role and my duty to be – and in this case I am profoundly sceptical – so I will challenge their assertions about the things that are going to happen. We will talk till about 9:20am or so and then we will have Q&A. This is not a large group. You are, I'm sure, all very informed. And I hope we get some lively questions. Just before we get there, I've made this comment very often – I do know the difference between a question and a statement. Questions can be done in one sentence, I promise you. And please make it a question. And please don't say I've just three questions. It's not fair for the other members of the audience. So with that introduction, I'm going to start with you, Mark, since you represent the United Nations – the world. So how far are we along in fixing this?

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We need an energy transformation on the scale of the industrial revolution at the speed of the digital transformation. And therefore, we need a revolution in finance.

”—Mark Carney UN Special Envoy for Climate Action and Finance

Mark Carney UN Special Envoy for Climate Action and Finance: Thank you, Martin. Thank you all for taking the time and those watching online. First is just on the scale – we need an energy transformation on the scale of the industrial revolution at the speed of the digital transformation. And therefore, we need a revolution in finance. I mean, just to be clear, we need to change mainstream finance. This is not, we're not going to get to net-zero in a niche. I'm on double that number that you quoted in terms of the orders of magnitude that need to be invested.

And if you think about what's the change, with the industrial revolution, what we had was fractional reserve banking, increased leverage and maturity transformation. You had central banks playing a new role, lender of last resort and starting to supervise. And you had an international monetary system that was put together around the gold standard. And the Bank of England at the centre of that (just wanted to get that in there)! Everything was fine with it.

Now what do we need for our financial system? We need to, instead of increased leverage, we need to reduce carbon leverage. Instead of maturity transformation, we need net-zero alignment. And it's not just the banking system, it's the entire financial system. Central banks have a role and supervisors in terms of disclosure, foundational things, and focus on transition risk, not credit risk.

And then we do need a new international financial system and Makhtar can speak to that in terms of roles of blended finance, roles of carbon markets, carbon credit markets offset markets.

Now where do we stand? GFANZ, thank you for mentioning the start – $130 trillion of balance sheet committed to that net-zero alignment, not just 2050, fair share of 50% reduction of the emissions of their clients. So their portfolio, what they've invested in or lent to by 2030, but also bringing it forward from that - five-year decarbonization plans that need to be rolled out and annual reporting. Those commitments made in Glasgow (hence the name) back in November. So what the institutions are doing is working through and developing those decarbonization plans and it won't surprise you that that means engaging with the people they invest in or lend to for their own plans.

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If you're transitioning, you have to align with a pathway along the route to net-zero. Saying you're going to get there in 2050 doesn't do anybody any good.

”—Mark Carney UN Special Envoy for Climate Action and Finance

Last point I'll make by way of introduction is what is coming out in the middle of June for public consultation is very detailed guidance for what is good, what is best practise for financial institution, net-zero plans, what we expect from private companies for their plans, what are the sectoral pathways. Because after all, if you're transitioning, you have to align with a pathway along the route to net-zero. Saying you're going to get there in 2050 doesn't do anybody any good. It's where you're getting to over the course of the next several years for alignment.

And then the last point I'll make, and there's other elements to this, how you phase out stranded assets, etc., last point I'll make by way of introduction is this is about real world decarbonization, not the false comfort of portfolio decarbonization. The easiest thing to do is to sell and walk away, make it somebody else's problem. The only way we're going to get here and your, I wouldn't say scepticism, but your challenge is right, because of the scale of the issue. It requires engagement and putting money behind those companies who have plans to get emissions down.

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This is about real world decarbonization, not the false comfort of portfolio decarbonization. The easiest thing to do is to sell and walk away, make it somebody else's problem.

”—Mark Carney UN Special Envoy for Climate Action and Finance

Martin Wolf: Thank you very much. Your opening fits into something that I've thought and written about a lot, which is, I think, a helpful way of framing it in the biggest picture. My view is that we didn't have an industrial revolution in the 19th century – we had an energy revolution from which industry followed. Namely, the revolution was the shift from essentially direct solar power to fossil fuels. And the energy system has been the core of our rising prosperity ever since. And we basically want to re-engineer the entire energy system in three decades while still having a functioning economy. And I think that gives you a sense of the magnitude of this. And I would like to talk to you Anne as a representative of an important institution that fits into the challenge that Mark has specified. So can you do it?

Anne Richards, Chief Executive Officer, Fidelity International: I don't know, but we're gonna have a damn good go. That's the bottom line. I think credit to Mark I mean, to your introduction of Mark, he is regarded as being a very, very lucky central banker, just going to put that out there. So we're hoping he's going to be as lucky in his role with the transformation that he's trying to engineer on this as he's done an absolutely fantastic job.

And unity is one of the key things that I think we're trying to aspire to. We can't do it as an investment house on our own. Mark can't do it alone. None of the people in this room probably can do it alone. We've got to try and collaborate. And a positive note on that is I see through GFANZ and through some of the other collaborations that we work with, there is a great coalition of the willing to really try, but it's difficult. You don't want every financial institution designing their own framework, you don't want every country designing their own accounting standards. We've got to try and do the things that make it easy for people to do the right things in their business. So that's the first point.

Transition frameworks – Mark touched on this, it's so important we've got to tackle both the demand and the supply side, very much acknowledging that the transition is going to be more painful in certain areas. So as we change the supply of energy that you talked about, as we move to different forms of energy, we've got to try and get the investment into the communities that are going to be most impacted by that so that you create the positive economic, virtuous cycle of jobs and prosperity in those communities. We've also got to tackle the demand side, though, and I think that's where there is still a huge gap. We haven't got the demand side measures, we haven't got the firmness of conviction from governments to create the incentives and the nudges to help people make better choices on the demand side, which will be a huge accelerant in what we're trying to do here.

And then the final point is we spend a lot of time talking about what's going on in listed markets. There's a vast swathe of the world's economy actually is privately held enterprises. It's the SME sector in many, many economies. So we've got to help those parts of the economy do their heavy lifting and make it easy for them to do that heavy lifting so that we can, again, try and get this acceleration and this virtuous cycle going.

Coming back to your initial question, I don't know if we can do it. It's a wicked problem in a social science sense. No one actor can do it alone. And I think the only way we can really have a good shot at doing what we need to do to keep to that magical 1.5°C is if we keep trying to work together and persuade the doubters to play their part in giving this a shot for all the reasons that you mentioned at the outset.

Martin Wolf: So at this stage, I'd like to talk to you Makhtar. This is a point I may have made in many, many presentations. This is, as is the job of journalists, oversimplifying, but essentially this is a developing country issue in the sense that developed countries clearly created the problem, no doubt about that, in the past. But if you look at it where we are now in terms of global emissions and everybody knows all the potential growth in emissions will come from, it will be from emerging and developing countries. What is more, these the people in these countries, the vast majority of humanity, many live very energy poor lives, which has profound implications for their standard of living in many, many ways. So they clearly have a right, and I've written a lot about this recently, to a higher energy future. So there you are in the IFC, where do you fit into that, really the core of the challenge, and how are we going to be able to meet that challenge now?

Makhtar Diop, Managing Director, International Finance Corporation (IFC): Just to respond to the couple of things that have been said, I think first on emerging economies, for me, there is a lot of heterogeneity talking about the low income countries that you have in Africa, talking about the middle income countries which are large emitters amongst those middle income countries, those who are producing coal, for instance, and using it for electricity and those who are only using coal for electricity generation, you have different categories and different instruments that we need to use to address those issues. And I think that the work that Mark has been coordinating, looking at some of the middle income country amongst the 20 largest emitters. We have these different categories, let's take a country like South Africa, Indonesia. The reality is totally different for Viet Nam – mainly a financial issue. They have investment in coal that has an economic life up to 40 years and now they have only 11 years, so they need to buy back those assets. Indonesia is more complicated because there is a social implication, and in South Africa it's the same because you have miners who are producing it. So when we're looking at it, we need to be looking at it holistically. And I think the transition that we are making in thinking about the financing is to go beyond just to getting assets and taking care of assets, but also looking at the broader issues, which are the social implication of it.

The second point I would make is great about not leaving anybody. We are talking about greening the value chain, but most of a big part of the value chain is composed of SMEs in developing countries and the risk that we are facing is that by greening it, we exclude those people from the global value chain and increase the risk of those that we are facing currently. So the work that I see we are trying to do is to see how we can accompany specifically SMEs. It's more complicated because the financial sector, which is trying to set standards in terms of greening the financial sector, has to trace the lending to the sub loans and the loan to these small companies and that is more challenging. So all our work right now is to understand more specific dynamics.

Last point is about working together, it's interesting at COP21 government and NGOs, CO26 private sector [...] COP27 I think everybody agrees that this is the solution. But what we are seeing is that we need to de-risk and blend. So we have instruments for low income countries, for middle income countries – with Mark we are looking at these countries – how to get this large amount of money to be able to blend and de-risk it. And I think the solutions that we have now, with philanthropy coming and working with us, DFIs and also different parties, will help us find a way to de-risk more investment in this area.

Martin Wolf: Thank you very much. That certainly sets out a big agenda to discuss. May I move to you, Celine? So you are representing a very large bank which operates globally, particularly in Asia. So how does this issue and challenge look to you? How does it affect your actual lending operations? A very different sort of function from Fidelity. What do you do about it?

Celine Herweijer, Group Chief Sustainability Officer, HSBC: So I think the first thing is, is there's been a massive shift in our operating environment since we've all made these net-zero commitments. And I want to bring that a little bit to life. And this is all new and we're all learning by doing – this is very nascent, right? So the first thing is when a bank like ours set a net-zero by 2050 commitment, the other thing we also do is have a shorter term, 2030, commitment around our financed emissions. That's the emissions that come from our portfolio of customers. These aren't just targets that we kind of think about in 2030. The work starts today. So we set these targets. It then means we need to adjust our risk appetite, how we do financial planning, our strategic portfolio allocation, and decisions we make at the point of origination as we look at the financed emissions from a deal. Now, how that actually gets brought to life for us - there's this whole new thing of a client transition plan, a whole new ask.

So this year we published in February our targets for oil and gas, and power and utilities sectors, the most carbon intensive ones first, we've got another seven to come next year, but straightaway when we publish those, we have an ask out now to our largest clients in those sectors – hundreds – to say we need your transition plan by the end of the year and if you are in a non-OECD country by the end of the year after that. So now there's a period of really active engagement with our bankers, with our experts to discuss these transition plans. And it's the transition plans where you bring it to life, because it's not just about emissions today – it's where is the capex investment going? What is your strategy to adjust your business model if you're an oil and gas, to a future where you actually have, no longer growth in oil demand, but a decline in oil demands over the decades to come.

And alongside that, we also have to make structural changes to our policies. So we have a coal phase out policy that we launched at the end of last year. This year, we're going to be working very hard on how do we update oil and gas, how do we think about the IEA's recommendations around no new oil and gas reserves? How do we think about the treatment of unconventionals and conventionals? How do we think about methane, given the Glasgow Climate Pact, the important role of methane? We're going to be looking at metallurgical coal, we're going to be looking at deforestation again. So we really have to align our policy framework.

But fundamentally, coming back to your point, Martin, HSBC is very different from a French or even some of the UK banks that have more of a Western exposure. The biggest role HSBC can play and our goal has to be a net-zero global economy, not just a net-zero financed emissions portfolio of HSBC, because that won't help the world. Our goal has to be a net-zero global economy, and that means we have to be involved in the transition finance of the heavy industry in Asia, of the energy sector in Asia. And that means we can't introduce very blunt policy tools or thresholds that might work in the West. We can't say overnight, OK, you can only have 30% or 20% coal in your energy mix, because that would mean we couldn't work. We couldn't finance the large energy, state-owned energy companies in Indonesia or Philippines or Malaysia. And then we couldn't help on the transition. And and that's the biggest carbon wedge impact we can have is helping on the transition in the areas where the emissions growth is the highest.

Just quickly on the other side, we also made a commitment, and many of the banks have made commitments, to unleash capital for the green, the transition. So we have a 1 trillion commitment by 2030. We've got seven and a half years left. And there's challenges with that. There's a lot of challenges because actually the green stuff at the moment is quite hard to finance. On one side of it, you've got the the infrastructure, the project infrastructure long tenure, even if you have a sovereign backing and a high RWA (high risk weighted assets), our bank sheets as a commercial bank aren't used to having lots of long tenured deals on them. So it's difficult for us to get involved in the clean infrastructure finance. So if we want to, which we do want to, we have to make some adjustments. We have to have a culture, a mindset shift, a risk appetite shift for a portion of our balance sheet.

And on the other side, you've got the new stuff, the technologies, our bankers and our credit risk teams aren't used to evaluating - the newer companies. And likewise there you've got lower RWAs, and again, we're going to have to have capital loading on them for the early year. So actually, at the moment, there's a disincentive for us to invest in the stuff we really need to scale and invest in. And so we have to work out how to do that.

And a big thing for us is building that new capability, building that new capability internally of upskilling our frontline bankers with people that can really help advise our bankers internally on what the future of industry looks like.

Martin Wolf: Thank you very much. Very good introduction to the many complicated issues. And finally, David, public markets, what role do they play?

David Schwimmer, Chief Executive Officer, London Stock Exchange Group: As Anne mentioned, it's about a lot more than just public markets, but a critical role for public markets, private markets, policymakers.

London Stock Exchange Group – we're a financial markets, infrastructure and data provider across the trade lifecycle. In that role, we are an intermediary, we are an enabler. And within that space, we spend a lot of time dealing with issuers. We spend a lot of time dealing with investors – the allocators of capital. And a number of my fellow panellists have talked about the the engagement, the dialogue that has taken place already, but also the need for more. So whether it's GFANZ, whether it's Climate Action 100+, a number of other different organisations have attempted to make this a clearer space, a more understandable transition, but we have a lot more work to do from that perspective.

So for example, in our interaction with issuers, there are a lot of issuers out there who do not understand the kind of transformation we are going through, the transformation the world has to go through. And by that I mean a significant change in how capital is allocated, a change in the cost of capital based on sustainability, changing the cost of capital based on transition plans. So we've made big changes and a lot of progress in the last couple of years, but a lot more to do. And I would say similarly, on the investor side, those who have the capital and who are looking to allocate it – they are making enormous demands as part of this transition, and they don't always understand the impact that those demands have on the issuers and the confusion it creates and the challenge that it creates. So there is a disconnect there. That is one thing that I am working on with a number of others in the industry. We have a workstream within GFANZ on real economy transition pathways with a focus on the particularly high emitting sectors: aviation, steel, oil and gas. As Mark mentioned, a number of reports coming out soon. Our report in that particular workstream is coming out in September. To try to bridge this disconnect between those who have the capital and those who are looking for the capital.

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We would like to see governments, policymakers require companies to disclose their revenue broken down by green and non-green sources so that that can help the allocators of capital allocate that capital to the sources that they are looking to invest in.

”—David Schwimmer, Chief Executive Officer, London Stock Exchange Group

A second critical element of this, and there's been a lot of discussion around this, but we're not there yet is disclosure and getting standardised comparable disclosure on a global basis. We've made a lot of progress, but today 40% plus of global, large and mid-cap companies do not disclose their emissions and those that do disclose often their data (because of the lack of standards or a standardised framework) for those who do disclose, they're often wildly inaccurate. So we have a real challenge there in terms of disclosure. And in part due to that, LSEG (London Stock Exchange Group) has called for – we put out a paper on this a couple of weeks ago – we have called for governments to require, on a global basis, publicly traded companies, private sector companies across economies, disclosure of emissions based on a baseline of ISSB work that is coming. We would also like to see a required disclosure of climate transition plans, again across economies on a global basis, and we would also like to see governments, policymakers require companies to disclose their revenue broken down by green and non-green sources so that that can help the allocators of capital allocate that capital to the sources that they are looking to invest in.

And then the final piece of this is, and Mark touched on this in his opening remarks, is that we have to focus on the transition for the big carbon emitters. We can not just green the portfolios. We have been relying on fossil fuels, as Martin, you mentioned, for 200 years. We cannot flick a switch and make this kind of transformation – it will take decades and the allocators of capital need to work with those high emitters in terms of helping to drive that transition. So those are maybe some of the more operating-level developments that we have to focus on.

Martin Wolf: Let's just go through two or three really big issues that arise here. To get some sense from the specific aspects you're each looking at what it looks like as a big picture. So one of the subjects we've discussed in the past, Mark, and I think we should bring in here because it's pretty obvious reasons I come to this in the moment. I'm really concerned about all sorts of ways people arbitrage around this. So the incentive environment and the regulatory environment to make this actually work in the timetable, how far are we from what we need and what needs to be done? And obviously a fundamental role is government policy. Do people come to you and say, yeah, this is a lovely idea, but I can't make money doing this.

Mark Carney: I think that it's fair to say that what happened in COP26 is the private sector moved ahead of governments and there is some closure of the gap between the two but governments need to move much, much faster. Part of that is around, and I'm just going to want to endorse everything that David just said about mandatory disclosure, mandatory net-zero transition plans. That's where we need to go. And that's partly the role of government.

But your core of your question is not that. It is about the incentives and the credibility of those incentives and the clarity around it. Let me give you a few examples quickly of what works and what has the impact. So, yes, it does matter that 90% of global emissions are under some form of net-zero commitment by countries, and that was a third of global emissions last time people got together at Davos. A huge shift there. It does matter those countries, the UK would be an example, EU, Canada is becoming an example, that mark to market their policies relative to their commitments. So they have independent bodies that check the Climate Change Commission - I think that's the name of it in the UK - is probably the best example of this and shows the gap between the policies and the commitments. And the question of course is for the private sector and all stakeholders is, well, are they going to close the gap and then do they have credibility to close the gap? And if so, the financial sector, one of its strengths is it looks forward and it allocates capital in anticipation of that. That's what everyone is doing at the moment, is expecting that some of this gap is going to be closed. Maybe not all of it, but some of it's going to be closed.

So what are the policies that are most effective? And I'll stop with this. They are deep decarbonization policies that are far enough in the future that companies can do something about them but near enough that they have to. So in Canada, the carbon price is legislated to $170 a tonne in 2030. It is now going to be backed up by something called a carbon contract for differences. And that's what's decisive for investment today. It happens to be $50 a tonne today– that's interesting – but $170 is what matters. In the UK and Europe, the end of internal combustion engine vehicle sales in 2035, 2030 in some countries, that's decisive for the auto industry and investment in auto, fuel blends or other examples. So those types of very clear commitments that are anchored probably around 2030 or thereabouts help to focus the mind for the types of investments that are necessary. And then last thing I'll say is that we talk about sectoral pathways, it seems an innocuous phrase, but it's a very important thing because question is, what are you transitioning to as a country, as a financial sector, as companies? And how do you know, how do you mark your homework? How do you know that you're doing a good job? And how do you know the company you're backing with a loan or an investment is sufficiently ambitious given the incentive environment and given what has to be done if we're going to stay on this very narrow pathway to 1.5°C.

Martin Wolf: I think it is true. I'm just remembering this, that more than half of global emissions come from China and the US. That correct? I think it is about half.

Mark Carney: Yeah. Let's say that.

Martin Wolf: I think that's roughly right. But the point is the world, the countries that have actually gone a long way in your direction is still a pretty small share of the world's emissions. I was going come to this with Makhtar. That's a pretty big issue, isn't it?

Mark Carney: I think it is a big issue, although there is some of this progress in China, including with the ETS [emissions trading system], I would say that thus far what has happened is because the EU and the UK are relatively big markets for multinational corporations and they have the greater policy clarity that some other countries have been free riding on the policy leadership - not that it's perfect in the EU and the UK - and they need to catch up.

Martin Wolf: You know, there is this argument that we can't produce anything, but we're very good at exporting regulation and I won't go into that.

Mark Carney: It's a growth industry.

Martin Wolf: It's a global public good. Makhtar, I'd like you to talk a little bit about the cooperation, collaboration between developed high income countries and developing countries, particularly low income countries, which your institution embodies, and what needs to be done to de-risk investment in finance and what role multilateral institutions like yours can play in immensely increasing the flow of investment that will be needed to support the transition and the growth of energy supply in the sorts of countries you're dealing with.

Makhtar Diop: I think that we talked a lot about financial intermediation and capital market, not enough about real sector. And I think that when you talk to the bankers and the financiers, what they tell you - do we have enough bankable projects which have the impact that we want? So the first thing is to really work harder to have a much stronger pipeline.

Secondly, we need to be much more centred on adaptation. Adaptation I think, is a bit of the orphan in that conversation. And we talk a lot about mitigation, and I'm very glad that we have now a commission that [...] will be discussing a little bit the impact of water on climate change, because I feel that would be a big discussion. On the policy front, I think, Mark, you alluded to carbon price and fossil fuel subsidies. We need to continue the discussion on fossil fuel subsidies – it's still there but it's a little bit forgotten right now. But we need to bring back that conversation at the centre.

But thinking about our sector, we have low hanging fruit that we are not really tapping on – gas flaring, we have a huge amount of gas flaring here. And if the regulation were put in place in more advanced economies, we could do something about it. Cooling – if you look at the evolution of the demand in emerging countries, it happens that most of these countries are hot countries. So the demand for cooling would have a deep impact and very little is done about it. In Glasgow we didn't have a panel on cooling.

Third, housing [...] we see urbanisation growing fast in emerging economies. We are working at IFC, on having standards [...] to make sure that we are reducing the consumption of households.

So those are public policies and regulations that can have very much on the demand side, on energy efficiency, because I think that we have a long way to go. There are some countries where we live, where in winter you wear a t-shirt in your house and in summer you have to put a sweater on, I'm not sure that is more efficient way of managing the electricity consumption. So all these kind of things are, for me, low hanging fruit and which have a political cost which is much lower than some of the questions we are talking about.

Lastly is having annual measurement and there, Mark, I fully agree with you. When you look at the first generation of indices, it was nicely defined, longer term, not always very precise in terms of commitment. And we at the World Bank Group and IFC are moving now with CCDRs [Country Climate and Development Reports] which are diagnostic by country where we are trying every year now to say what are the investments needed, where they should be done by the country and to have something that you can measure over time but in a very precise way.

Last thing, measurement, we're talking about measurement issues in listed companies, think about measurement issues in emerging economies. You go to every ministry of environment in developing countries and you ask them how they measure emissions and you leave the meeting with some big questions about the measurement impact. So technical assistance accompanying those countries is important to be able to do the taxonomies that we need to have in countries.

Martin Wolf: Extremely important points, which underline even more the challenges we face. Anne, let me ask you a question I've been meaning to ask somebody like you for some time, which goes something like this. You are a fiduciary. People put money with you not because they profoundly admire your climate goals, but they probably put money with you because they want you to make them rich. And that's your duty in a sense. You don't have a business if you make them poor. So how do you persuade them that your climate goals, the ambitions you have, are consistent with their goals, and keep their money?

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if you look at the client meetings that we're having today and have been having over the last two years, it is almost never that you don't have sustainability raised as part of that conversation.

”—Anne Richards, Chief Executive Officer, Fidelity International

Anne Richards: So, you know, that's actually the core of what we're trying to do as a business. It's a great question. And it's both. Nobody wants to see their long run financial returns sacrificed on the altar of some principles. But they do want to know that the returns that they have made have contributed to rather than damage the planet that we all share, to take it down to its sort of absolute core. And I think it's interesting, if you look back over the last, I would say, four years, now clients are not absolutely unanimous in how they approach this – there are different approaches from different clients. So it's important to say that there are different priorities in different parts of the world and even within different client groups within that. But in general, if you look at the client meetings that we're having today and have been having over the last two years, it is almost never that you don't have sustainability raised as part of that conversation. Whereas if you went back even five years, the SRI, the ESG agenda was a niche and a strand as opposed to a mainstream part of the conversation. So yes, we have a duty to create financial returns for our clients, that's why they hire us, but we have to do it as an and, and so the climate goals, the things that we're aspiring to do with the portfolios, are very much in conjunction with where the clients are telling us, and how they how they expect their money to be looked after. And that's how you bring it together.

Martin Wolf: One of the things that is obvious to anyone who looks at markets from outside is that we're getting a pretty massive reshuffling of companies from public into private holding. And there are some very famous cases, you know them better than I do. So one of the things I've been wondering is whether at the end of your efforts, stock markets and so forth, what we're going to see is all the, as it were, good, respectable, low carbon, non problematic sectors will be with you and you can add up the carbon emissions of the publicly quoted companies in the London Stock Exchange or New York and they'd all look wonderful, and all of the heavy emitters, oil companies, the aviation companies, will be held in some other way, which makes them effectively invisible, in which case we've just reshuffled the ownership of lots of assets and have changed nothing useful by this. How would you respond to that? It's a genuine concern of mine, and I'd be interested in your reaction.

“

If there are disclosure standards, if there are requirements by governments to put better information out on this, it has to be economy wide. It cannot be just for publicly traded companies.

”—David Schwimmer, Chief Executive Officer, London Stock Exchange Group

David Schwimmer: So it should be a genuine concern of yours because in many ways it's already happening. And there's no clean way to describe or define this, but over the last couple of years, we have seen that happening as there has been a focus on what has been referred to as greening portfolios. And whether that's greening investors', public investors' portfolios, or whether that's greening the asset portfolios of publicly traded companies.

We have seen sales of whether it's coal assets or other high emission assets, brown assets, whatever you want to call them, to, in some cases private equity and in some cases state owned businesses that are not being held to these kinds of standards that we are all talking about here. This is why when I was talking earlier, if there are disclosure standards, if there are requirements by governments to put better information out on this, it has to be economy wide. It cannot be just for publicly traded companies, has to be for private, it has to be for state-owned companies. And we are working on this issue. A lot of the big private equity firms, a lot of big pension funds are aware of this issue, are aware of the challenge. Their LPs are focussed on it. And so, again, as with much of what we're trying to do here, it's about building coalitions and getting the best from voluntary behaviour. But it is critical when this does become mandatory, as it should, it has to be mandatory across the economies, across private and public.

Martin Wolf: A very similar question arose about banking, and I couldn't not raise – a former colleague or I don't know where he is now, Stewart Kirk – challenged the model of the bank as I understood it, and I happen to know Stewart very well, he was a colleague of mine, so I'm not at all surprised. But there's an interesting question, which is related to what he said, and I hope you can comment very briefly to clarify your position. Okay, you come along as a lender with all these requirements in your lending of the sort of loans you want to make, and your clients say, well, this is a competitive business, you're a very fine bank. I love my relationship with you for the last 30 years. But I don't want to go through all these hoops. I'm going to go through any one of a number of other major banks in the Asia region, for example. You know the list. So you are not going to make any difference at all. You're just going to reshuffle your portfolio, too. How would you respond to that?

Celine Herweijer: I think the starting point is, you just heard from the entire panel about the the kind of secular risk that we're now facing. And, you know, I won't go and dissect and I can save that for another time the arguments that were were made in that. But I think the starting point for us is: transition to net-zero is one of our four strategic pillars. It's the focus pretty much of every single board meeting since I joined a year ago, every single exec meeting. It's a huge transformation job across the bank. It's a huge capability build. And yes, there are a lot of people in the bank working on this because there's a massive value creation and disruption happening in the economy because of it. And we have to understand and, as Anne said, it's a CEO issue now, any one of our clients it's a top issue that executives wants to want to engage on.

And as I said earlier, when I was talking, I think the reason when it's down to client by client conversations, we're having the conversation around transition. So we're not trying to make a decision ASAP on exit. We're trying to have the engagement process, the conversation, the push, you know, how robust is that transition plan? How quickly are you phasing down your coal PPAs for example? What is your level of capex investment? Is it fast enough? Is it good enough? Who could you collaborate with? So it's that process of engagement with the sectors that are hardest to abate, where the highest emissions are coming from, which is crucial. And if we don't do that, and yes we need policy interventions, but finance does have a critical responsibility to play a role as well. And we're taking that very seriously.

Martin Wolf: Mark, you had a word before I go to the audience.

Mark Carney:. Just very quickly on this issue, it's an important issue. But let me let me put it in context. First, every global systemic bank, with the exception of two in China, is part of GFANZ. Therefore, any leverage for a transaction that goes into the into these dark shadows, they own those emissions, they have to disclose those emissions if they've provided leverage against it, as do a number of other leverage providers. So you know, okay, great, you can take it private and hide, but if you can't leverage it, your return is changed a bit. So that's one element of it.

Second is we need all the big private equity firms in to have the same standards as the public investors. There are some in, they're not all in. They should all be in, just to be absolutely clear.

Thirdly, David's absolutely right, the disclosure has to cover the whole thing, the whole market. The UK is phasing it in its mandatory disclosure, but that has to happen for the world.

And then the last thing which is, and we're putting this out for consultation over the next six months, is, look, there are a lot of stakeholders and I understand why they do this and they stand up and they say, you have to divest, you have to get out of - no coal, no this, no that. Well, who's going to wind it down? Who's going to manage it? What is responsible phasing out of these assets? What is the framework for doing that? What's the time frame? What's the ownership? Do you want the people who are committed to transition to net-zero to have that exposure, ensure that that's wound down? Or do you want to keep the incentives to push it up?

Martin Wolf: So we've run a little over. We can now go to questions...

Audience member: Thanks, Martin. I'm [inaud] Sinha from ReNew Power, which is India's leading renewable energy company and we generate 13 gigawatts of renewable energy. Very pointed question to multilaterals and financial institutions. I think the pace of innovation and our creative finance is limited – we experience that on the ground – the capital structure requirements are different, and I think institutions such as yours can do a lot more to keep up with the growth which is required in the sector for mitigation and adaptation. Can you tell us, is it possible to see you do more to be more innovative as far as green finance is concerned for renewable energy companies?

Martin Wolf: Yes, and the lady there.

Debra McCoy (audience member): Hello. Debra McCoy with Bain and Company. My question is about exchanges. I was interested in the GFANZ that some but not all exchanges have signed up to have net-zero commitments. Could you comment on either market efficiency, potential arbitrage or what do you think about exchanges as intermediaries for that?

Martin Wolf: And I'll take a third question, the gentlemen there.

Slava Solonitsyn (audience member): So my name is Slava. I'm CEO of a company called Mighty Buildings. We're decarbonizing the physical construction process with 3D printing and composite materials. I have a question to private banks. Are there any efforts to share quick gains and programmes to decarbonize industries that are heavy emitters because I think the private sector can do a lot in sharing those. And especially those that are verified.

Martin Wolf: This is about sharing information.

Slava Solonitsyn: Sharing information, building global databases of quick wins and programmes that help decarbonize the real industries, not just without greenwashing or selling of carbon.

Martin Wolf: So I'm going to start with Makhtar and Celine. Are you being sufficiently creative in, particularly in the context of a very major developing country, India, in green finance, does it work well enough?

Makhtar Diop: I think it works. I'll give you a very specific example. Between 2012 and 2018 in Africa, solar cost was in 2012 20-30 cents. With the support of IFC, the last auction at that time was at $0.06. Since then it went down to $0.01. Just to show that the innovation that we brought was transparency, simplifying the contractual process, because one of the big problems you have seen developers facing is time it takes to complete the preparation of a project. So we try to compress as much as possible the time, a standard document, and help a lot on bringing the bidding and the competition and the price down.

In terms of financing, we are using a lot of blended finance [...] using what you call the private sector window, which is basically de-risking. And we are currently working closely with foundations – Rockefeller Foundation, Bezos Foundation – to increase the pot of money available to de-risk the cost of investing in green energy, particularly in low income countries.

So those are the type of innovations that we are having. In addition we are expanding it to other sectors. Blue - we have issued the first blue bond [inaudible] recently because we consider that also an important issue that we need to tackle the climate change conversation. We are also ensuring that we are moving solely from green bonds that we are issuing to social bonds. And very much the question that was asked about how we help countries to transition and companies to transition, because part of this transition is to buy assets but also to help on the social costs of the transition which are linked to moving from carbon intensive activities. So this is a type of innovation. But, you know, we are welcoming new ideas. We love to have new ideas.

Martin Wolf: Celine, anything more on making this less ponderous.

Celine Herweijer: The top line issue is that we're not doing enough of it yet. Anywhere near enough. No one is. If you think about we've got a 40% increase in energy demand by the end of this decade, the amount we need to decline in coal in the energy mix, and now we've got the energy crisis on top. It was already a very unstable transition that we were in, at the moment we need whatever we can do to accelerate capital. So, you know, as I mentioned before, it it's not easy for banks to digest on our balance sheet these large project finance deals even when we have sovereigns backing them. Policy environments are very important.

Take the example of Indonesia, one of the most abundant areas in terms of renewable resource potential, but probably the most difficult geography to finance renewables in at the moment because of a number of different difficult policy things from local content law to contract issues and things. So I think there's a combination of working with policymakers, working with DFIs, Makhtar and I are discussing a lot in terms of what we can do on the blended finance and the innovation around there. But absolutely a huge focus. I think our attention, and our appetite very much, is to scale up what we can do in financing renewables and related infrastructure, grid infrastructure, and also things like hydrogen, which are going to be critical from an energy storage perspective.

Martin Wolf: So, David, the role of exchanges?

David Schwimmer: Deborah's question raises a really important issue that applies to potential arbitrage among exchanges, but it could apply to potential arbitrage amon regulatory regimes in any context. So that is why I, Mark and others, have been emphatic on this point, that if we are putting these rules in place, we have to put them in place on a global basis. And ISSB is pushing down that path in terms of standards. But we will need governments and policymakers to implement them, again, on a global basis. Specifically to the question on exchanges, just to spell out the issue, if the London Stock Exchange has more onerous requirements and other exchanges do not, that leads to issuance in other places by those who don't want to deal with the more challenging standards.

Your specific question was, are all exchanges in GFANZ? So a number of exchanges are in GFANZ, but I should point out GFANZ is a critical alliance here, but it is not the only one. Mark and I were, pre-GFANZ, involved in pulling exchanges together around the world under the auspices of the UN, the UN Sustainable Stock Exchanges Initiative. And we do have exchanges all over the world, it's not everyone, but it is most of the critical exchanges around the world who have signed up to model guidance aligned with TCFD. As the ISSB moves forward, I would expect that we we bring that alignment forward so that there is work across the exchanges to try to avoid that kind of regulatory arbitrage. But we need to avoid it across regulation, not just in the context of exchanges.

Martin Wolf: Do any of you, particularly Mark or Anne, want to comment on information sharing?

Anne Richards: I could have a go at that one, actually, because I was just thinking I think it's a great question and I think it's particularly relevant when you look at fragmented industries. You mentioned construction, I think agriculture is another one. I think policy really helps at a government level in some of these industries. But playbooks help and the development of sector specific playbooks which get quite granular and which then can be disseminated, and it will vary whether it's through trade associations or other mechanisms, but we have to actually drive at quite a granular level right the way down so that you're one step up from subsistence farming, for example, or your small scale housebuilder in a developing country, actually knows how to easily to make good choices that lower intensity in the materials that are used, the way that the buildings are put together, or the way that the crops are actually managed. That they make it easy for them to make good choices because at the moment quite hard.

Mark Carney: Three very quick points on it. One, there is an example on information sharing or common approaches around infrastructure, fast infrastructure, and one of the things GFANZ has done is gone through about 70 different types of approaches to this and said these are the ones we think work best. But for the built environment, I think you were speaking to commercial real estate, it's something, but it's not everything. So we're sharing those best practices, developing that, and also on residential real estate and retrofitting I think is hugely important, there's been some innovation on that.

Secondly, very quickly to the question about renewable and innovation, we do need more innovation at a country level. That's what these JETP partnerships [Just Energy Transition Partnership] - we don't have time to go through, but just if you remember that - and that's going to be a test case for that. And then actually, Martin, I should hand back. So you've got time for more questions.

Martin Wolf: I think, probably just one more question. This gentleman here

Audience member: I'm a member of the Swiss parliament looking at net-zero of Switzerland and also working in [inaudible] looking at net-zero of companies. So my question is, in financing net-zero, where do you see the role of Article 6 and carbon credits in enabling this?

Martin Wolf: Okay. Do you want to comment on that?

Mark Carney: Very quickly, yes. I think the carbon credit market can play an important role. It can give us 10-15% additional carbon budget if done correctly. So it's a huge opportunity. It's not clear that we will have that market at scale. We need high integrity on the supply side. Good work's being done on that. The principles are going to come out, we'll implement that around. And then the question is, on the demand side for companies, what's their responsibility, or is it only when they get to 2040, 2050, and they've done everything they can that they have to offset, so-called offset, or should they compensate for their emissions along that journey? There is several orders of magnitude difference between those two. The latter has the prospect of creating a very large market for carbon credits and offsets, which extend from, as you would know, from nature-based solutions all the way through to breakthrough energy technologies. So the next, I would say, 12-18 months are going to be critical which path we choose.

Martin Wolf: I'll take one more question. Lady there, yes, please.

Zainab Usman (audience member): My name is Zainab Usman, Director of the Africa Programme at the Carnegie Endowment in Washington, DC. My question is mainly for Mark and maybe for Makhtar. How do we expand private capital, private investments for climate action to emerging and developing economies? And I ask this question because Bloomberg had a report a couple of months ago saying that GFANZ has ritual bias. So I'm wondering if one thing that could help would be perhaps a greater clarity of roles amongst different financial institutions. So where development finance institutions such as IFC, etc., play a more de-risking role to allow private investment banks, others be able to operate in emerging markets, would that help?

Mark Carney: Twenty seconds head on. I reject that characterisation on the bias, first point. Second, GFANZ made clear we need to scale an additional trillion dollars a year, the world does, to the emerging developing world if we're going to be on track. And you did this in your opening comments. The issue is, are we going to have structures that include blended finance and very clear elements of what is transition financing in the developing world, which is different than in the advance world, we've made that clear. There's a new approach to this which we're putting out in the next few weeks, and we're working with the MDBs, including very much the IFC which is one of the leaders on this, in terms of how we develop this.

Makhtar Diop: I agree with everything you said. Just add, we need also to think about capital markets in those countries. So part of it is that those capital markets are underdeveloped so it limits their ability to get those financing and intermediation.

Martin Wolf: I have to bring this discussion, which I feel is just beginning to a close. And what I have learnt from this is there's actually been vastly more progress in this area, broadly defined than most people could have imagined a few years ago. And this is, I'm sure, due in significant part to the efforts of all of you.

Second, this is unbelievably complicated, and it's a whole system issue, that's crucial. And the people who are here will play a part but they will they will definitely not determine the outcome. And there are lots of people who aren't, as it were, here and committed, who will play a big part in determining the outcome and are not clear they are committed, and we have to remember that we've got a long way further to go. And while we are making, I think, very substantial progress, we have very, very little time to start this.

So I hope that everybody here will feel encouraged that progress is being made and remain fully aware that it doesn't begin yet to be enough. That's at least what I take away from this. Admittedly, it's what I thought before I came, but these wonderful discussions and the issues that have been raised, which are so clear and so well done, clarify, I think, the sense, which is that, amongst many other things, complacency is an immense danger. So thank the panellists. Thank you for listening and I hope you've enjoyed it.