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Speeches & Transcripts September 7, 2017

The Role of Exchanges in Fostering a Sustainable Future


World Bank

1. It is an honor and privilege to deliver this keynote address to such a distinguished audience. I am also delighted that you chose the beautiful and historic city of Bangkok for your 57th Annual Meetings and I want to thank the Stock Exchange of Thailand for being such a great host. My sincere appreciation to WFE and, particularly, to the CEO, Nandini Sukumar, for extending this invitation to me again. The 56th annual meeting, which I had the pleasure of attending was phenomenal and I am absolutely delighted to join you again this year. As you may recall, I spoke about partnering to tackle global fragility at that Annual Meeting, held in November last year.

2. Since then, global economic growth has picked up, due to firm momentum in global manufacturing and trade, as well as favorable financing conditions and stable commodity prices. Our economists expect global growth to rise to 2.7% from a post-crisis low of 2.4% in 2016. It reflects an investment-led growth in advanced economies, and receding obstacles to economic activity amongst the major commodity-exporting developing countries. Also, growth in commodity- importing developing countries is projected to remain robust.

3. However, I do not believe that growth in the near term is sufficient to protect the global economy from various risks and shocks. It is neither adequate to address poverty and the extreme inequalities around the world, nor able to stem the geopolitical tensions, populist and anti-globalization sentiments that we have witnessed in recent times. What we need is growth that is sustainable. I have therefore chosen to focus my remarks on the important role of Exchanges in fostering sustainable growth, and will first define what I mean by growth that is sustainable. I will then outline elements of the important role of Exchanges in fostering a sustainable future and highlight opportunities for Exchanges to partner with the World Bank Group in the quest for sustainable economic growth.

4. Sustainable growth addresses inequalities and climate risk, the world’s two most important challenges. It leverages potential opportunities, notably, demographic patterns and emerging technologies, and protects the global economy from risks and shocks. Such growth ensures a safe and stable financial system and promotes a secure world.

5. Sustainable growth addresses inequalities by being inclusive. This point was reinforced by the Dr. Santiprabhob (Governor of the Central Bank of Thailand) in his Special Address yesterday. In other words, inclusive growth benefits everyone, everywhere; not a few, in only certain places. It is one that fosters an enabling environment for equal opportunity so that people are not resentful of others within their countries or across borders. Growth that results in, as Oxfam reports, 8 men owning the same wealth as half of the world (or 3.6 billion people) is clearly unsustainable.

6. The importance of tackling climate risk has become even more apparent from various recent events, notably the unprecedented floods in Bangladesh, the Caribbean Islands, India, Nigeria, Sierra Leone, United Kingdom and the United States.

7. Sustainable growth also focuses on key demographic patterns including the consumer preferences of millennials and youth as 50% of the world’s population is currently under 30 years of age. Such growth recognizes that the influence of young people can only get stronger as they make up an increasing proportion of the global workforce and voter base. Also, survey data collected by Ipsos Reid shows that Millennials – now the largest demographic in North America’s workforce, are set to inherit more than $30 trillion in the next few decades and as such, responsible investment advisors and companies are positioned to reap to the rewards by engaging this emerging generation of investors. Similarly, sustainable growth is one that focuses on the opportunities offered by emerging technologies such as driverless cars, robotics, machine learning, 3D printing, and blockchain that will continue disrupting entire sectors of the global economy

8. In September of 2015, world leaders agreed on the seventeen sustainable development goals which they expect will lead to a sustainable future by 2030. At the World Bank Group, our twin goals of ending extreme poverty and boosting shared prosperity enables us to focus on sustainable growth. The three ways in which we will achieve sustainable growth are (a) inclusive growth by facilitating infrastructure and private sector investments, (b) investing in human capital and (c) helping our clients build resilience against global shocks.

9. Asia also offers us several lessons on ways to foster sustainable growth. For example, Thailand’s sustained economic growth over recent decades has supported impressive successes in poverty reduction. As a consequence, since 1986, the number of Thais living at or below the national poverty line has decreased by 88%.

10. Last year, I reminded you that exchanges and market infrastructure entities (MIEs) are agents of social change. They are indeed critical to sustainable growth given their global influence. They are the epicenter of capital flows and as a market place, mobilize savings that finance key government projects as well as new businesses and business expansions which in turn create jobs and provide key products and services. Exchanges and MIEs provide transparency, full disclosure of information, liquidity, operational speed and accuracy, factors on which efficient and well-functioning capital markets are built. With USD 70 trillion of market capitalization for the almost 50,000 companies that are listed on them, Exchanges are the visible symbols of most economies. Futures, options and other derivatives that enable us manage various forms of risk are also hosted by MIEs.

11. Historically, Exchanges have been associated with a number of pioneering initiatives. During the 19th century, the only source of funding for the British railway network was via securities quoted on the London Stock Exchange. Numerous studies have shown that countries with robust capital markets grow faster and produce higher and more equitably distributed incomes for their citizens than those dominated by the banking sector. For example, a 2014 study by the Alternative Investment Management Association estimated that growing combined stock and bond markets by one-third could increase long-term, real growth in per capita GDP by 20%, as capital markets allow for more efficient allocation of capital across industries. The potential of capital markets to fuel sustainable economic growth cannot be overemphasized.

12. Funding solutions to the world’s key challenges will need to harness a significantly larger portion of the world’s investment capital to support sustainable investments, including those that promote equitable opportunities and poverty alleviation in developing countries. In addition, the institutions, at these annual meetings, represent a large percentage of the vital infrastructure through which the world’s capital flows. Changing the direction of these flows to   more   socially   and   environmentally sustainable uses can create new opportunities to earn higher returns than currently available in the persistent low interest rate environment in most advanced economies. For example, it is estimated that approximately USD 26 trillion is currently invested in low-yielding government securities around the world, with perhaps as much as USD 8.5 trillion in virtually zero or negative yielding securities. Re-purposing even a relatively small percentage of these investments each year will have a significant impact on our collective future, and – again - your institutions (positioned at the center of the global capital flow infrastructure) can play a key role in facilitating this process.

13. As technology and innovation are intricately linked to their business model, Exchanges and MIEs are well positioned to adopt various emerging technologies timely. History has shown that the companies that have the highest market capitalization, will be those that have led the disruptions of various sectors of the economy. For example, a comparison of the top ten companies (by market capitalization) on the S&P 500 index in 1980 and those in 2017, clearly illustrates this point. In 1980, seven oil companies, IBM, AT&T and GE made the top ten list, while today, the companies in the top ten list are Apple, Alphabet, Microsoft, Facebook, Amazon, Berkshire Hathaway, Johnson & Johnson, J.P. Morgan and Bank of America, in others words five technology oriented companies including three that were not even in existence twenty-five years ago. You therefore have many reasons to focus on driverless cars, drones, robotics, machine learning, 3D printing, Hyperloop, blockchain and all other emerging technologies.” Exchanges can also develop products that target millennials such as those that respond to their increasing desire to invest in socially responsible opportunities.

14. Not only do members of WFE have significant influence over creating the preferred future path to sustainable development, you are also a group that clearly “gets it.” The efforts you all have put into promoting sustainable investment are laudable. According to the recent study by WFE and the United Nations Conference on Trade and Development (UNCTAD), the number of United Nations Sustainable Stock Exchanges has more than tripled in the last two years. Thirty-eight Exchanges now offer environmental, social and governance indices and eleven list green bonds. But there is clearly much more to be done. In the area of sustainable finance, both new products and new applications of existing products are sorely needed to increase the speed and volume of money flowing into financing a sustainable future.

15. I am also very happy to note that a number of exchanges are working on adopting the recommendations of the Task Force on Climate-Related Financial Disclosure established by the Financial Stability Board. As you know, they released their final recommendations on 28th June 2017. While it does not promote any position on the climate change debate, it provides a neutral framework for disclosing the impact of climate risks on an entity’s business. I believe that this approach will enhance decision making on climate related risks as it promotes transparency of material risks that entities face.

16. Partnerships are also key to fostering a sustainable future as no one can go it alone given the enormous challenges that we need to overcome. As an example, let me highlight the existing areas of cooperation with the World Bank Group and outline future opportunities.

17. Over the entire history of the World Bank, the world’s Exchanges have been vital partners in our capital market activities. Our first bond issue, which was a $250 million, dual tranche transaction launched in July 1947, was listed on the New York Stock Exchange. Later, those same bonds were also listed on the Mexico City and Paris Stock Exchanges. In 1951, we issued our first non-dollar issue, a British pound bond that was listed – not surprisingly - on the London Stock Exchange. Switzerland was also an important market for World Bank bonds in our early years, and those early Swiss franc denominated bonds were listed simultaneously on five different Swiss exchanges, Zurich, Geneva, Basel, Berne and Lausanne. Since then, World Bank bonds have been listed on exchanges all over the world. Our global debt program is listed on the Luxembourg Stock Exchange while many of other transactions are listed on the corresponding Exchange. For example, our Thai Baht transaction, issued in 2011, was listed on the Thai Bond Exchange.

18. In addition to our annual funding activities for the International Bank for Reconstruction (IBRD), which is at least USD 55 billion, we will start raising funds for the International Development Association (IDA) in 2018. We also manage USD180 billion for the World Bank Group Institutions, central banks, pension funds, sovereign wealth funds and other official institutions, and predominantly invested in fixed income securities. Our assets under management include a USD 25 billion pension fund portfolio that we also invest in other asset classes, namely, public and private equities, infrastructure, real estate, hedge funds, direct lending and opportunistic strategies. We also have a derivatives portfolio of more than USD 550 billion. We have also championed many capital market innovations, including the first currency swap with IBM in 1981, as well as the global bond and green bond markets. In 2016, established the Mulan Bond market, and in 2017, the Sustainable Development Goals (SDG) bond and the pandemic bond markets. An Exchange or MIE has also facilitated our success with each of these innovations.

19. I also want you to know that there is scope for you to partner even more broadly with any of the five World Bank Group Institutions – IBRD, IDA, International Finance Corporation (IFC), International Centre for the Settlement of International Disputes (ICSID) and the Multilateral Investment Guarantee Agency (MIGA). Working together, these five institutions, ensure that we de-risk investments, projects and countries by providing knowledge, structuring, technical assistance, and other support that leverages our global reach and experience as well as our ownership, as we are owned by governments from around the world. This year, we re-formulated our business model to ensure that we are effectively and efficiently leveraging the five institutions to provide value to our clients and all other stakeholders. A key element of this re-formulated model is our ‘CASCADE’ approach which is a consequence of our acknowledgement that the public sector cannot solve development challenges on its own. It is a systematic approach to mobilizing private sector resources for development. Specifically, for every project or investment opportunity being reviewed to support a country’s development objectives, we will select commercial financing if available and viable as the preferred form of financing. If commercial financing is absent, we will seek to address the relevant market failures through providing support to the relevant regulatory and policy reforms. We will only deploy public sector resources as a last resort, when private sector resources are neither available nor optimal, thereby supporting the private sector to invest in attractive emerging market opportunities. We believe this is a win- win solution that offers the best value for money.

20. I also believe that the ‘CASCADE’ approach offers significant opportunities for us to support the development of capital. I hope that you can seek to take advantage of the possible partnerships that we can enter into with you. As the African Proverb says: 'If you want to go fast, go alone. If you want to go far, go together'.

21. Let me conclude by reminding us all that if we do not urgently focus on working together to build a sustainable future, we could leave more than 60% of the world’s poor living in areas impacted by chronic fragility, conflict and violence, by 2030. Our goal should be to meet the aspirations of a growing global population, lift people out of poverty, end protracted periods of conflict and violence and reduce inequality in ways that are environmentally and socially sustainable?  Make no mistake, these are the principal challenges of our time.

22. This requires a new mindset. From thinking short term, to thinking long term. From redefining success to be more than just profits for shareholders, to a definition that includes the impact that we and our organizations have on society.

23. It requires a focus on sustainable growth, in other words, growth that is inclusive and that tackles the world’s greatest challenges.

24. Let us be inspired by the life of the late King Bhumibol of Thailand, who was revered by many because of his fortitude and devotion to human development. He said: ‘We cannot be alone and still be happy if others around us are suffering. Instead we should share their suffering and help ease their troubles according to our ability and capability’.

25. Indeed, I believe we are all very able and capable, as all of us have significant influence given our critical roles as senior public or private sector officials and more importantly as agents of change.

26. If not us, then who? If not now, then when? Thank you.