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00:00Sustainable financing and how we are incorporating ESG principles into helping the world transition into a more sustainable place.
00:11We have a lot of ground to cover, and I want to start with the regulatory environment.
00:17The world we're in today, the regulatory world we're in today, is shifting drastically,
00:23whether you're in Europe under the CSRD, under the Trump administration, the ISSB in Asia.
00:31You sit at a very unique vantage point from your bank to be able to see how all of these different regulatory changes are impacting your issuers and your clients.
00:42Could you talk to me a little bit about sort of what you see as the most impactful changes that are happening right now?
00:48Thank you very much, Olivia, and thank you to Bloomberg and National Bank generally for inviting me to speak.
00:57I think the role of regulation is really about focus on transparency.
01:05So one of the big challenges is that we don't have a global regulatory environment.
01:10We've got the NGFS, the net greening of the financial system, where central banks are coming together,
01:18and they're having a dialogue that at least helps to try and coordinate certain aspects
01:23and how to think about transition and sectors and the kinds of financing that we want to see.
01:30But in terms of the individual bond markets, they're really focusing on their own ideas about transition.
01:37And it generally works well when things are moving in the same direction.
01:43But when you have a big partner that's pulling back a little, there are other bits that are worried about whether or not
01:52they're paying too high a price for the degree of transparency and the push that they're having.
01:57So there's some concern about that.
01:59And we're certainly seeing some potential roadback in Europe on trying to ensure that the cost for corporates and others
02:09in focusing on sustainability is not so high that it's creating an uncompetitive environment in Europe
02:18whilst trying simultaneously to ensure that we still have the momentum and push in the same direction.
02:24And they have a challenge because they're saying, well, perhaps you could disclose less.
02:31And there's a question about who should disclose less.
02:34Is it corporates with, you know, 1,000 employees or 800 or something less than that or something more than that?
02:42But there are also a lot of funds and investors who have their own clients
02:47who are demanding that they understand what is being financed, that it moves in line with their own goals,
02:56not just the goals of things like the Paris Agreement, but broader sustainability goals.
03:03And so there is a sort of tension between the information that they need and want
03:09and that which the certain corporates are going to be able to produce or issuers are able to produce.
03:18And sometimes the data is quite difficult to get.
03:22So there's also a concern about using proxies or other things.
03:29And quite often the types of reporting are so specific,
03:36they don't tell you very much about whether things are moving in the right direction or not.
03:42They tell you a bit about where you are at time zero.
03:46What do you think is the leader right now?
03:48Like, who is the world looking to when it comes to ESG and climate regulatory disclosure?
03:53Well, I think Europe is still very much ahead because it started its EU taxonomy.
04:01It's a very difficult taxonomy to follow.
04:05So there are a lot of assets that are very important to finance for the transition,
04:11which aren't necessarily going to be covered by the taxonomy.
04:16They haven't dealt with all the different areas of investment that we need to see.
04:21And they have quite a lot of sectors, but it may work for certain countries within the EU.
04:30But, you know, the EU has global companies with global projects.
04:35It has global investors who have global portfolios and issuers who raise money in many jurisdictions.
04:41And that's one of the challenges of having very contained sectoral views and geographic views that are too narrow
04:53that don't try and take account of all the different geographies in which projects are being financed and where investors are.
05:02And in the past, we've spoken about this myth of carbon footprinting.
05:06Can you tell us what exactly you mean by that when you talk about carbon footprinting from a disclosure perspective?
05:13Well, I think that the issue for me with carbon footprinting, and it's a bit about what I was saying,
05:20what it tells you about is where you are now.
05:22It's what would be called an externality.
05:24So if you take the carbon footprint of your current portfolio, it doesn't tell you whether you're going to be in line with the goals of the Paris Agreement or not.
05:34It only tells you where you are right now.
05:38And actually what's important is about where you're going, not necessarily where you are now.
05:44So one of the great difficulties is there are lots of challenges in actually coming out with a quantification of a carbon footprint.
05:53For certain industries, it's easier than for others.
05:57In bank portfolios, it's incredibly complex with all the different kinds of clients that they have.
06:02I should imagine for the provincial issuers, it's likewise.
06:06It's very challenging when you're dealing with many different sectors.
06:09For the energy sector, it's perhaps a little easier to come out with a carbon footprint metric.
06:16But given that the whole point is to say, if I undertake this project, this is what I expect to be the positive outcome for the environment.
06:25This is how I'm moving in the right direction.
06:27It doesn't tell you about that.
06:29It only tells you where your starting point is.
06:32And one of the greatest difficulties is when you have investors that are focused on their portfolios and they say, well, I'm going to reduce the carbon footprint of my portfolio progressively year on year.
06:46One of the best ways of doing that is not investing in the most impactful things they can.
06:51So what we really need to see is a crowding in of all the hard-to-abate projects, all the high-emission projects that we need to transition.
07:04So, you know, manufacturing of cement and steel and the energy sector generally, agribusiness, all the things that we really need to be moving in the right direction because they're not even close to near zero or net zero right now.
07:21And we absolutely won't achieve the goals of the Paris Agreement without it.
07:26So if you need those to happen, we need investors to invest in them.
07:31And the minute they do invest in them, their carbon footprint, i.e. where they are at time zero when they've invested, goes up, not down.
07:40So if we focus unduly and a lot of the regulatory reporting, start saying, please report on carbon footprint, all you do is dissuade them from investing in the most impactful things that they probably can be doing at this point.
07:56So, yes, you can invest in a new renewable project.
08:00And that's great.
08:01But we need so much more than that.
08:03That won't help the totality of the economic transition that we need to see.
08:08Luckily, we have a lot of smart people, including many in this room, who are up to taking on that task.
08:14But, yes, it is extremely complex and it's going to take a lot of resources.
08:18You were talking about investors.
08:20And I want to switch over to the issuer, especially since at Bloomberg we love talking about bonds and financial instruments here.
08:27Can you talk a little bit about who your issuers are and what type of financial instruments you offer to them in order to help their sustainable transition?
08:36So, well, we, the issuer, that's my role as head of funding of EBRD.
08:43So we issue, but we also encourage others to issue bonds.
08:49So EBRD's clients can get loans from EBRD, but we can also encourage them to access the capital markets.
08:58And the one really positive thing about the use of proceeds market, the green bond and social bond market, is that many investors who want to achieve significant impact, like the transparency of the disclosure, and will take credits that they wouldn't take on a standalone basis.
09:17So it's not enough to have sort of general notion of where the issuer is.
09:21They want to know the issuer is on a journey and the money is going to projects that they can assess and understand and determine are important for transparency.
09:32So a lot of investment funds, which shy away generally from things like a sub-investment grade, will, in fact, buy green bonds that are sub-investment grade.
09:45And when people talk about greeniums, does that still exist?
09:50It certainly does for those types of investors, because what it's really about is supply and demand.
09:59So the demand for use of proceeds bonds is much higher than the supply.
10:04And the demand for the bond of a just investment grade or sub-investment grade issuer is going to be far smaller than it is for one of their use of proceeds bonds.
10:16And so that's what gives the greenium.
10:21For multilateral development banks, such as EBRD with AAA ratings, we're very fortunate that we've got a broad investor base for any bonds that we issue.
10:31So, yes, it's true that there are some very specific pockets that will potentially buy you through the level.
10:39Actually, it doesn't increase the universe that much of your investor base.
10:43It's pretty similar. It's just that some have very specific pockets that they're trying to fill.
10:49And so it never really existed in a meaningful form, I would say, for AAA issuers, whereas for the investment, just investment grade or sub-investment grade, it can be very meaningful.
11:02That makes a lot of sense.
11:03And can you tell the audience exactly sort of what type of entities are your issuers?
11:10I mean, sorry, are your investors?
11:11I know you work with banks in Canada.
11:13Could you give us some insight onto that?
11:16Yes, I think all the banks in Canada have been very focused on integration of ESG as well as supporting the green bond market.
11:27It was funny, yesterday we were listening, I think several of us in the room, to somebody giving a speech saying that they thought that ESG was not for investors, it was for governments.
11:40And I was amused by that, just trying to think, well, you know, if your project is consumed by fire or extremes of temperature or drought or various different things,
11:53clearly there's a sort of economic impact that's being measured.
11:56And I think that is well understood in North America generally.
12:01I mean, there's a lot of tendency to assume that the U.S. is not on that path.
12:05There are still substantial pockets of money that are focused on it.
12:09So investors are a mixture of insurance companies, pension funds, asset managers, but also the banks are significant.
12:19There are some central banks that have pockets that are specific to that.
12:23But we definitely see some plenty of dedicated funds that are focused on use of proceeds, bonds, but ESG integration more generally.
12:35And in terms of, you know, the work that you do in your issuance and sort of the countries that you're looking to help,
12:41can you talk a little bit about biodiversity and sort of how you work with, you know,
12:46more developing nations in Europe and other continents to sort of achieve that?
12:51Yes, it's been far more of a focus recently trying to think about not just climate mitigation and adaptation,
12:59although that can also come into biodiversity as well.
13:02So thinking about stresses and how to have nature-based solutions.
13:10So in some of our geographies, you see substantial water shortages,
13:16which again speaks to climate adaptation, but also flooding that happens.
13:20So looking at rivers and planting of trees in certain areas, correcting river courses, having floodplains,
13:29those are the kinds of things that we focus on in some of our projects to end up with nature-based solutions
13:37to very specific problems, which may or may not relate to climate particularly.
13:43Got it.
13:44We have time for one more question, I believe, in a tiny pivot, but I want to talk about defense
13:49and how defense spending, particularly in Europe, but all over the globe, has been rising.
13:55And with that has been an increasing component of defense money being earmarked for climate emergencies
14:04and disaster relief.
14:06Can you talk a little bit about how defense spending and sustainability can coexist with one another?
14:13Well, I don't think that defense spending, that ESG considerations are antithetical to defense spending.
14:20On the other hand, I mean, EBRD is not focusing on defense at this point.
14:26And I think that the sustainable finance market is focused a lot on transparency.
14:32And the kind of transparency that isn't really going to be very aligned with defense investments.
14:40So, you know, trying to report on how many tanks you're investing in or what kind of machinery
14:46may be less likely to hit the kind of use of proceeds bond market.
14:54But I think you also have to be very mindful of where the investments are going
14:59and who the end users are and what form, because defense and offense use the same kind of instrumentation.
15:06Absolutely. Well, we're out of time.
15:09We could talk for many, many more hours about this.
15:12But thank you so much, Isabel, for your time.
15:14Thank you very much. Thank you, everybody.
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