ABCDE 2024—Session 3: Private Capital Mobilization for Sustainable Development

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00:06 Welcome to the 3rd session

00:08 of the day.

00:09 Uh,

00:10 very exciting session today.

00:11 We're gonna be talking about private

00:12 capital mobilization for sustainable development.

00:15 I'm very excited to introduce our moderator,

00:17 Andrew Steer,

00:18 who's the president of the Bezos Earth Fund.

00:21 The sequence of the session.

00:22 We're gonna start with Bob Cowell,

00:24 who's a Research Manager and lead economist in the finance

00:27 and private sector development team here at the World Bank.

00:29 He'll give us some intro remarks

00:31 and then we're gonna have 3 papers presented,

00:33 uh,

00:33 carbon forest,

00:34 Carbon Prices and Forest Preservation Over Space and Time in the Brazilian Amazon

00:38 by Jose Shenkman

00:40 from Colombia,

00:41 Climate Regulatory Risks and Corporate Bonds by Lee Selzer

00:44 from the Federal Reserve Bank of New York.

00:46 And then too big to strand,

00:48 bond versus bank financing in transition to a low carbon economy from Manos Telles

00:53 from Audencia Business School at the University

00:56 of Johannia.

00:57 I get that right?

00:59 Uh,

00:59 and then afterwards,

01:00 our discussions with Claudio Radatz from the University of Chile

01:03 and Sergio Schmukla,

01:04 Research Manager of Macroeconomics and Growth in

01:06 the World Bank's Development Research Group.

01:09 With that,

01:09 let me hand over to you,

01:11 Andrew.

01:13 Thank you very much.

01:13 Uh,

01:14 it's great to be here.

01:16 Um.

01:17 A few gaps in the audience for those that

01:20 don't take climate finance as seriously as the euros,

01:24 and uh shame on them,

01:26 shame on them,

01:26 and I,

01:27 that doesn't give anyone else the excuse to leave now,

01:30 in the mid,

01:31 cos the,

01:31 the,

01:32 the.

01:35 The important semi-final is tomorrow,

01:38 uh,

01:38 Netherlands against England,

01:39 you'll be glad to know.

01:40 It is fantastic to be back at ABCDE.

01:44 Um,

01:44 Indermit and I are old enough to have been at the first one.

01:47 Were you there?

01:47 1989,

01:49 I think Paul Eisenman was there.

01:51 I was heavily involved in it then.

01:53 And my goodness me,

01:54 it's fantastic to see 35 years in

01:57 the role that ABCD has played

02:00 on the intellectual journey for development has been stunning,

02:03 and

02:03 thank you Indemit and your whole team for

02:05 continuing this amazing

02:08 progression and it's great to do it with CGD.

02:11 The subject.

02:12 But this session

02:13 is uh is climate finance.

02:15 Um,

02:16 you'll have heard many,

02:16 many stories about how desperately short of

02:20 finance we are.

02:21 Um,

02:22 you'll have heard the IEA,

02:23 uh,

02:24 we're going to need $9 trillion of investment worldwide.

02:29 That includes rich and poor countries.

02:31 By 2030

02:32 compared to about 1.8 trillion

02:35 today,

02:36 massive increase.

02:37 The issue as everybody here knows,

02:39 is that,

02:40 not that there's a shortage of finance in the world.

02:47 We'll come on to philanthropy,

02:48 but there are $200

02:51 trillion

02:54 under management of financial assets.

02:56 No shortage of money.

02:57 The challenge is how do you get it?

02:59 Two very important things that often

03:01 are justified

03:03 but not included in the marketplace,

03:05 and that's where you need government regulations and

03:07 many books and papers have been written,

03:09 and we're going to.

03:10 Address some pretty interesting issues

03:13 here,

03:14 um,

03:14 right now.

03:16 Um,

03:16 the World Bank is at the center

03:18 of this debate,

03:19 um,

03:20 because

03:21 everybody knows that public money is massively

03:23 too little,

03:24 um,

03:25 and therefore the name of the game

03:27 is leverage

03:28 of private money,

03:30 and of course the World Bank Group,

03:31 those of us that have spent a lot of time here in our careers.

03:34 Um,

03:35 admit

03:36 that we actually haven't done a very good job at mobilizing private money.

03:40 Every

03:40 dollar of World Bank lending

03:43 generates less than an extra $1

03:45 of private money,

03:46 and of course Ajay Banga regards this as one of his

03:49 biggest challenges,

03:50 and I'm sure he spoke about.

03:52 That this morning and doing some very exciting things,

03:54 reforming

03:55 the guarantee structures,

03:56 but also doing some

03:58 other very,

03:58 very interesting

04:00 things as well.

04:00 There are lots of innovations in this space,

04:03 whether from carbon markets or

04:06 debt for climate swaps,

04:07 all kinds of

04:08 issues going on.

04:10 Um,

04:10 2.5 years ago,

04:12 um,

04:12 we,

04:13 we achieved what we thought was an amazing breakthrough.

04:16 In the lead up

04:18 to the Glasgow COP,

04:20 it's a conference of the parties of UNFCCC,

04:23 um,

04:23 the financial sector suddenly,

04:25 um,

04:26 got religion

04:27 about climate change,

04:28 um,

04:29 under something called GFANS,

04:30 that's the Glasgow

04:33 on net zero.

04:34 It's the financial sector,

04:35 every single asset class.

04:38 In their own groups got together and committed

04:41 to move towards net zero portfolios

04:44 by 2050.

04:45 Incredible.

04:46 $150 trillion were committed.

04:50 Well,

04:50 that was like a Saturday night,

04:52 you know,

04:52 let's give a go of it.

04:54 It's now Monday morning.

04:55 It turns out it's much,

04:57 much more difficult than we thought,

04:59 so there's been some backtracking for all kinds of reasons,

05:01 including political.

05:03 We might talk about that

05:04 in the,

05:05 in the question time.

05:07 So our speakers today are gonna be extremely

05:09 um efficient.

05:11 We're gonna start with Robert Cole,

05:12 who's um

05:13 research manager in uh DEC,

05:16 doing some really interesting work,

05:17 and he's going to give us a sort of a framing

05:20 of how we should be thinking about these,

05:21 these issues.

05:22 Over to you,

05:22 Robert.

05:26 So if that's OK.

05:29 Oh.

05:33 I had slides prepared,

05:34 but.

05:36 OK,

05:36 thanks very much for the opportunity to speak to you,

05:38 um,

05:39 about mobilizing private capital for,

05:41 for the SDGs.

05:43 Um,

05:44 so,

05:45 um,

05:45 to be honest,

05:46 in the research department,

05:47 we,

05:47 we're not the leaders on this,

05:48 on private capital mobilization.

05:50 Um,

05:51 so,

05:52 um,

05:52 Intermitt sent me,

05:54 must be 15 or 18 months ago,

05:56 our chief economist sent me an email and he said,

05:59 Certainly you and your group should have

06:00 thought about this pretty carefully by now,

06:02 huh?

06:03 Uh,

06:05 we're used to such emails from and it's fine,

06:09 but I think he knew the answer.

06:10 I'm an empirical research economist.

06:13 So,

06:13 yeah,

06:14 I had thought about it.

06:15 You can't avoid it around here,

06:17 but I knew it was a tough problem.

06:18 I like a simple problem with good data,

06:21 specify a hypothesis,

06:22 test the hypothesis,

06:24 gain a little insight from that paper,

06:26 then move on to the next,

06:27 and then make

06:28 big contributions,

06:29 uh,

06:30 from that.

06:31 Intermitt's not that way.

06:32 He's a go big or go home guy.

06:34 Um,

06:35 and so we started this conversation,

06:37 he and I,

06:38 um,

06:38 and from that conversation,

06:40 we decided to do a little bit of a stocktaking.

06:43 And then,

06:44 you know,

06:44 a diagnosis,

06:45 diagnosis of the challenges and opportunities

06:48 with respect to private capital mobilization.

06:50 And eventually it produced this working paper that we,

06:53 uh,

06:53 um,

06:54 it went out last week.

06:56 So I'm just gonna give you a few of the highlights

06:57 from this paper in order to set up what comes next.

07:00 Um,

07:01 next slide,

07:02 please.

07:04 Oh,

07:04 I do.

07:05 Sorry.

07:06 Oh boy,

07:06 this will get screwed up.

07:08 OK.

07:09 Um,

07:09 oh no,

07:10 this is the one,

07:11 the top slide,

07:12 you know,

07:13 stocktaking diagnosis,

07:14 this wasn't hard.

07:14 We,

07:15 we went over this in the morning.

07:16 We're falling trillions of dollars short in a,

07:18 in a bunch of,

07:19 uh,

07:20 areas and this is why we need private capital.

07:22 And then the Laru Lankus sort of summarized the problem here.

07:27 We haven't been able to get this done on a big scale at all.

07:30 Um,

07:30 no major breakthrough,

07:31 breakthroughs,

07:32 fragmentation,

07:33 and we're just not going to meet um

07:35 the,

07:35 the,

07:35 the,

07:35 the financial goals that we need.

07:37 So,

07:38 in terms of stocktaking diagnosis,

07:40 this is not a problem.

07:41 This is not enough money.

07:42 Everyone's alluded to that.

07:44 Um,

07:44 so we started to think a little bit about

07:47 what it would take,

07:48 where,

07:49 where,

07:49 could,

07:50 how could we crowd in private investment.

07:52 And um

07:54 Again,

07:54 I,

07:55 I won't

07:55 spend.

07:57 Too much time on this is just sort of the highlights from,

07:59 from our analysis.

08:01 And you know,

08:01 on the left-hand side,

08:03 MDB supported investment,

08:04 public investment generally,

08:06 um,

08:06 it can attract additional

08:08 um private investment,

08:10 um,

08:11 and you know,

08:12 it does this through signaling and demonstration effects

08:15 as an MDB.

08:15 The participation in syndicated loans.

08:18 There's work at the IMF that show that MDB participation in syndicated loan

08:23 brings for every $1 invested,

08:25 it brings $7 more in,

08:27 in,

08:27 in private credit,

08:28 bank credit

08:29 over the next 3 years.

08:30 So there's some signs that,

08:32 that,

08:33 that can happen.

08:34 Um,

08:35 it,

08:35 it also attracts private capital through risk sharing and expertise,

08:40 um,

08:40 know-how as in uh

08:42 uh

08:42 public-private partnerships for infrastructure.

08:45 Um,

08:45 we can also attract additional private capital,

08:48 um,

08:48 through managing risk and reducing uncertainties,

08:50 uh,

08:51 such as using our guarantees

08:53 to address political and credit risk.

08:55 So,

08:55 um,

08:57 we're able to do that,

08:58 we know,

08:59 um,

09:00 but to have the biggest effects,

09:01 uh,

09:02 we use this applied micro framework that we,

09:04 uh,

09:04 macro framework that we borrowed from Art Crey and Jeff Chelsky here at the bank

09:08 that sort of,

09:09 uh,

09:10 starts from a basic production function.

09:13 And

09:14 the large,

09:14 the big takeaway is that

09:16 the biggest gains in terms of crowding in private investment come from

09:20 uh

09:21 projects that raise the marginal product of capital.

09:23 These high NPK projects have the,

09:25 the,

09:25 the,

09:25 the most to offer in terms of growth benefits.

09:29 Um,

09:30 at the same time,

09:31 even though those projects have

09:33 large benefits,

09:34 you still have to persuade private investors to invest in them.

09:37 It still comes down

09:38 to them believing that they're going to be returned on those projects.

09:42 And so we come to the conclusion uh

09:44 in our paper that mobilizing substantial additional capital

09:47 is gonna require

09:48 financial structures,

09:49 contracts,

09:49 and platforms that augment sort of business as usual financial intermediation.

09:54 And,

09:54 and our reasoning is that if private investors were aware of and persuaded by

09:58 the potential returns on these investments,

10:00 they would have already invested in them.

10:02 Um,

10:03 and so,

10:04 what we did next was starting to think about

10:07 um,

10:09 What,

10:10 what does the financial system do and how can it be adapted and modified

10:15 to draw in private investment in support of the SDGs.

10:18 So,

10:19 we went back to Robert Merton's

10:20 classic functional approach to financial intermediation,

10:24 uh,

10:24 to think about what we might be able to do.

10:26 And then from the perspective of those functions,

10:28 we examined 5 instruments,

10:30 uh,

10:30 approaches to financial intermediation.

10:33 Uh,

10:33 that could be adapted to increase investment that supports STG progress.

10:37 And we looked at guarantees,

10:38 public PPPs,

10:39 syndicated lending,

10:40 sustainable financial contracts and climate policies and

10:45 bank regulation to promote green lending.

10:47 Um,

10:48 the takeaway here,

10:49 I mean,

10:50 it's 2,

10:52 pooling of funds,

10:53 for example,

10:54 syndicated lending does a good job of that.

10:55 3,

10:56 resource transfer,

10:57 bank regulation,

10:58 capital regulation to incentivize green lending would be an example.

11:02 Um,

11:03 for

11:04 coping with risk and uncertainty,

11:05 you know,

11:05 the World Bank,

11:06 we do a lot in the way of guarantees that can do it,

11:08 and function 6,

11:10 dealing with asymmetric information incentive problems,

11:12 PPPs,

11:13 they improve risk sharing between public and private sector,

11:16 and they resolve moral hazard and other incentive problems.

11:19 Um,

11:21 so,

11:21 a few things,

11:22 the stuff that the bank is involved in the World Bank Group,

11:25 the guarantees,

11:26 the public-private,

11:27 private partnerships,

11:28 uh,

11:28 and syndicated lending.

11:30 We have the most influence over but they're the smallest in scale by far.

11:33 Um,

11:35 and more generally,

11:36 um,

11:37 high marginal product or capital

11:40 projects

11:40 that could crowd in private investment

11:42 are hard to come by.

11:44 Um,

11:44 scaling up is difficult.

11:46 Um,

11:47 it's complex.

11:48 Uh,

11:48 these projects are complex and context-specific,

11:51 and project pipelines are therefore limited.

11:53 So I was very happy to hear Ajay,

11:54 uh,

11:55 President Banga talk in the morning about the private sector investment lab,

11:58 which I think is a great initiative

11:59 and ideas to deal with the scaling up problem.

12:02 For example,

12:03 you know,

12:04 facilities to deal with foreign exchange risks,

12:06 for example,

12:07 and securitization,

12:08 but you know,

12:08 that's beyond the scope of this talk.

12:10 Um,

12:11 so,

12:14 And we're gonna talk about uh

12:16 environmentally related SDGs here and trying to

12:19 do things in terms of green finance.

12:21 And there's an additional complication here,

12:23 um,

12:24 and it's that private investors do not

12:26 generally internalize all the potential positive externalities.

12:30 Um,

12:31 and so this is more a proposition that we put forth in the paper than anything else.

12:35 Um,

12:35 but

12:36 we think it's very challenging and perhaps

12:38 sometimes inefficient for financial support instruments to overcome

12:41 both these uninternalized externalities,

12:44 environmental externalities as well as conventional market failures.

12:47 It's a tall order.

12:48 This is the,

12:49 this is the crux of our problem here.

12:51 Um,

12:52 which brings us to the first paper in the session.

12:54 Um,

12:54 well,

12:54 the other two are going to be focused on,

12:56 uh,

12:57 more traditional green funding through capital markets and bank lending,

13:01 which also have challenges for ensuring green outcomes.

13:04 Um,

13:04 and we'll touch on that at all.

13:06 This first paper by Professor Shenkman

13:08 identifies huge potential environmental benefits associated

13:11 with reforestation of the Amazon.

13:13 But finding a workable contract structure seems to be a challenge.

13:16 I'll see what he says about that.

13:18 And it's unclear,

13:19 although this is a hugely important,

13:21 um,

13:22 project,

13:23 what role private capital could play in this.

13:25 So with that,

13:26 I will sit down.

13:31 Thanks so much,

13:32 Bob.

13:32 That was a,

13:33 a wonderful,

13:34 uh,

13:34 framing,

13:35 and we're now gonna go to the

13:36 Brazilian Amazon.

13:38 Um,

13:38 Professor Jose Shenkman,

13:40 distinguished professor at Columbia University,

13:43 he's gonna talk about

13:44 carbon pricing and what it'll

13:46 take to keep the forests alive.

13:51 And measure my 10 minutes.

13:59 OK,

14:00 so the motivation for this problem is very simple.

14:03 Um,

14:04 um,

14:04 an area the size of Texas has been deforested in the Brazilian Amazon.

14:09 85% of this land is going to low productivity cattle.

14:14 And the destruction of the forest has not helped to alleviate poverty.

14:18 In fact,

14:19 the Amazon has lower growth,

14:21 the people have

14:22 lower wages,

14:23 and everything

14:25 compared to other regions in Brazil.

14:27 So,

14:28 but there's a good side to it.

14:30 In Amazon,

14:31 in the Amazon,

14:32 a tree can store between 500 and 550 tons of CO2.

14:37 And low and declining productivity of,

14:39 of land

14:41 has led about 20% of the deforested land

14:44 to be abandoned.

14:46 OK?

14:47 So that highlights the opportunity for what we could call passive deforestation,

14:51 because in this land,

14:52 you actually see a lot of reforestation,

14:55 just passive reforestation.

14:57 So we had an economic and ecological disaster,

15:00 but we also have a great opportunity.

15:03 So in this work I'm doing with Juliana Sanson,

15:05 Lars Hansen,

15:06 and Todd Munson,

15:07 we try to understand

15:09 um

15:10 how the trade-off between agriculture,

15:14 mostly cattle,

15:15 and,

15:15 and,

15:16 um.

15:17 And uh

15:19 carbon capture works,

15:20 and let me start,

15:22 there's a lot of math in the paper,

15:23 but we don't have to worry about that.

15:25 So here's the bottom line

15:27 with modest prices for CO2,

15:30 uh,

15:30 the Brazilian Amazon can produce not very large

15:34 capture of carbon.

15:35 I'll,

15:36 I'll give you numbers in a moment,

15:37 OK?

15:38 We do that by thinking two ways.

15:41 First,

15:41 we look at the historical performance to derive

15:45 what

15:46 we can call a reviewed price.

15:48 How much have Brazilians valued the Amazon?

15:51 And the number is not surprising,

15:53 it's not very large,

15:53 about $7 a ton if you see the shadow price that gets reviewed.

15:59 But

16:00 then we ask,

16:01 what happens if you increase payments from,

16:04 from get transfers,

16:05 and I'll talk a little bit more

16:07 about that.

16:09 Of

16:09 $10.15 dollars,

16:11 $25

16:14 of per net to.

16:16 So there is no

16:18 burnett to captured,

16:20 so there's no payment for simply preserving,

16:22 only for actual

16:24 carbon capture.

16:26 So

16:27 let me get you to the,

16:28 to the graphs.

16:29 I didn't use the slides because I think the slides are confusing,

16:32 but this one is necessary.

16:34 So this graph shows three trajectories.

16:37 OK.

16:37 The red trajectory is what we call business as usual.

16:40 What will happen to the Amazon

16:42 if things continue

16:44 the trajectory we've been in terms of implicit prices?

16:48 And it turns out

16:49 that deforestation

16:51 will become something between 20% and 25% in the next 30 years.

16:55 And that's enough to bring a lot of trouble,

16:58 you know,

16:59 depending on the scientists,

17:00 either you're going to be,

17:02 the forest is going to disappear in some areas or the forest is going to disappear

17:06 everywhere into a savannah,

17:07 and

17:08 it's not really clear.

17:10 But

17:10 with even $15 if you look at that map,

17:13 you can see that.

17:15 You completely get rid of agriculture and reforest the whole,

17:19 this is the trajectory of agriculture,

17:20 of occupational agriculture,

17:22 and of course,

17:22 at 25,

17:23 it's that.

17:24 Now,

17:26 This next table is,

17:27 I want you to keep only a couple of numbers from this next table.

17:30 Don't look at all of it.

17:32 The first has to do

17:33 with what,

17:34 what will happen as these transfers come in,

17:37 in Brazil with forests,

17:38 OK?

17:39 What happened with the value of agriculture.

17:41 Agriculture essentially vanished.

17:43 Right now,

17:44 the present value of agriculture in Brazil would be about $372 billion.

17:49 But that would be reduced to 18,

17:51 so it basically goes away.

17:52 On the other hand,

17:53 you get transfers,

17:55 because for every unit of carbon capture,

17:57 you're going to get $25 for instance,

18:00 and those transfers add up to $350 billion.

18:04 And then you have the rest,

18:05 you can compare the Forest Service Brazilians would enjoy at the price of $7 etc.

18:10 But here's the lesson you could get from this deal.

18:12 First of all,

18:13 it's big,

18:13 $350 billion is a lot of money.

18:16 You're not going to get the private sector to transfer,

18:18 you know,

18:18 the flow

18:19 in certain years,

18:20 you know,

18:20 forests go very fast in the beginning and slow down,

18:23 would be of the order of $20 billion.

18:26 You don't get $20 billion for one program to capture carbon like this.

18:31 So,

18:31 even though,

18:32 as Indermet said,

18:33 I have impeccable Chicago credentials,

18:36 I think that that's a problem that only governments can solve.

18:39 OK?

18:39 So let's start from the side of the government of Brazil.

18:43 Now,

18:44 so let's do some accounting very fast,

18:46 OK?

18:47 Business as usual,

18:49 would emit an extra 18 gigatons in the next 30 years.

18:54 But if you've paid Brazil $25 it would be irrational to capture 15 gigatons.

18:59 Now,

19:00 you only get paid for the 15 gigatons,

19:02 but on the whole,

19:03 the change in trajectory is 33 gigatons.

19:06 So if you compute the price

19:08 per unit change,

19:10 that turns out to be about $8 a ton.

19:13 That's a very good deal.

19:15 So

19:15 the next table,

19:16 it's produced from data with you guys.

19:19 OK.

19:20 And by the way,

19:22 33 gigatons is big,

19:24 you know,

19:24 our budget

19:26 for 1.5 degrees is about 200 gigatons at this point,

19:30 so that's a big number.

19:32 So,

19:32 let me talk about,

19:33 this is a table

19:35 prepared from the by the World Bank

19:37 that shows the price,

19:38 the implicit price of carbon

19:40 at different markets

19:42 in the world.

19:43 Now,

19:43 I only put the low ones above 25,

19:45 there are a few below,

19:46 but you can see that some of the biggest schemes in the world like ETS,

19:50 the European trading System,

19:52 those

19:53 are,

19:54 are already

19:57 at $1000 a ton or over $100 a ton.

20:00 So now one thing we economists

20:03 know for sure.

20:04 Is that since carbon

20:07 is a global bet,

20:09 given,

20:09 as Sandra corrected me this afternoon,

20:11 given the quality of the scheme,

20:13 given the quality of the carbon capture,

20:15 um,

20:16 prices should be uniform.

20:18 There's no point in having different prices for

20:20 carbon capture in Europe than capture in Brazil.

20:23 And so these firms that are paying $100

20:25 I would argue that these firms that are paying $100 a ton at the margin,

20:29 because they must be paying because that's the glooming price.

20:32 They should be buying carbon at $25 a ton.

20:36 Now

20:37 The second thing we should know is that this has to be done in scale,

20:42 OK,

20:43 for two reasons.

20:43 One is a scientific reason.

20:46 Every

20:47 You know,

20:48 people that work on forests will tell you about edge effects.

20:51 If you have

20:52 a piece of the forest preserve,

20:54 but

20:55 next door you have human activity,

20:58 you're going to have these edge effects.

20:59 We're going to lower the quality of the forest.

21:02 So as we learned in elementary school,

21:05 right,

21:05 the area of the circle

21:07 grows

21:08 much faster than the perimeter.

21:10 It turns out that the best way to do preservation is to do a big area continuous.

21:15 OK.

21:16 Now experience in Brazil shows that you can do this.

21:19 You can do this because in in there's work on this,

21:22 we,

21:23 we succeeded using satellites to stopping deforestation

21:27 through a period.

21:29 OK,

21:30 now,

21:31 um,

21:31 there are two questions you have to think about the forests,

21:34 they kind of grow very fast and then they exhaust,

21:37 OK?

21:38 They stop growing.

21:39 You know,

21:40 there's no infinitely long

21:41 tree in the world.

21:42 So,

21:43 as a result,

21:44 once they reach an equilibrium,

21:46 there'll be a temptation to deforest,

21:48 but that can be achieved.

21:49 That's where finance can bring in their bonds that countries could pay.

21:53 Now,

21:54 I don't want to tell you

21:55 that there's no role for the private sector.

21:58 The private sector can play in two sides.

22:00 In the Brazilian side,

22:01 in this example,

22:03 they could actually be doing work on reforestation,

22:06 active reforestation,

22:07 which actually produces more carbon than passive reforestation faster.

22:12 That's number 1.

22:14 The second is that

22:15 they would be able to,

22:17 on the European side,

22:19 the Europeans should allow their firms

22:21 to buy

22:22 credits in Brazil.

22:23 And I mentioned that to one of Macron's advisors,

22:26 he's probably out of a job by now,

22:28 but he said,

22:29 oh,

22:29 that's politically very difficult.

22:32 OK,

22:33 so.

22:34 So let me finish by saying that there's a lot of potential.

22:38 What's going on in the Brazilian Amazon,

22:40 and in fact,

22:41 I am pretty sure is generalizable to all tropical forests in the world.

22:46 OK.

22:47 Uh,

22:47 it's safe carbon because there are no natural fires

22:51 in,

22:52 in,

22:52 in,

22:53 um,

22:53 in tropical,

22:55 in tropical rainforests.

22:57 The prices are modest when compared both with this

23:00 and for the crazy carbon capture schemes that we're financing right now.

23:05 Right now,

23:06 if you

23:07 capture carbon

23:08 at the well

23:10 and use that carbon to increase the productivity

23:13 in that

23:14 place,

23:15 you get paid $60 a ton,

23:17 according to the IRA.

23:19 OK,

23:19 so we don't even know how much net results you get,

23:22 and

23:24 Anyway,

23:25 there are problems that I could talk about,

23:26 but I think that's

23:27 good enough.

23:28 I stay within your time.

23:29 Thank you.

23:35 Jose,

23:35 that was,

23:36 uh,

23:36 that was superb.

23:37 Thank you very much indeed.

23:39 Um,

23:40 a sign of real hope.

23:41 In the discussion,

23:42 we might

23:43 sort of take it one step further,

23:44 which is

23:45 How do the transfers actually get

23:48 made?

23:48 How do we know they're honorable?

23:51 Basically,

23:52 some of you that are aware of

23:55 climate cops way back in 2007,

23:59 the famous one in Bali,

24:01 where the whole idea of red plus,

24:03 and we really thought we were going to protect forests.

24:07 Well,

24:08 we didn't.

24:09 We took our eye off the ball.

24:11 Massive problems of leakage,

24:12 low quality,

24:13 no monitoring.

24:15 Now we can do it much,

24:17 much better,

24:18 and I believe we're on the cusp

24:20 of,

24:20 of a radical increase in carbon markets.

24:23 Currently it's only 2 billion a year.

24:25 Um,

24:25 and,

24:26 but the analysis you do is an incredibly useful

24:29 basis,

24:29 so thank you very much.

24:31 Let's go now to Lee Selzer,

24:33 um,

24:33 talking about,

24:34 uh,

24:34 climate regulatory risks and corporate bonds.

24:37 Interestingly,

24:38 Lee,

24:39 um,

24:39 is in the climate risk department.

24:42 At the New York Fed,

24:44 which I think is very encouraging,

24:45 it's the first of the feds to actually

24:47 sort of have such a unit and um

24:50 well done.

24:53 Thank you.

24:53 Uh,

24:54 thank you so much for,

24:55 um,

24:56 having me here.

24:57 I've really enjoyed my day and I'm

24:59 really looking forward to presenting this.

25:01 Um,

25:01 so this is joint work with Laura Starks and Chi Fei Zu.

25:06 Um,

25:06 of course,

25:07 these are

25:08 my views and not the Fed's.

25:10 So this,

25:11 this paper's been around for quite a while,

25:13 and

25:14 when I first

25:15 started presenting it,

25:16 I had to spend a lot of time convincing people

25:19 that investors and policymakers care about climate risk.

25:22 Usually I have to spend some time.

25:24 Today though,

25:25 climate risk has come up so many times at a conference at

25:28 the World Bank that I don't really have to spend any time,

25:30 which I think is just great.

25:32 Um.

25:33 So,

25:34 what we're going to be thinking about here is,

25:36 of course,

25:36 if we want to

25:38 combat climate change and reduce carbon emissions,

25:41 we're going to need some sort of policy response.

25:44 Um,

25:44 and we're going to ask the question,

25:46 does

25:47 climate risk related to climate regulation

25:50 affect financial markets?

25:52 And specifically,

25:53 we're going to be thinking about

25:54 corporate bond

25:56 risk and pricing.

25:57 Um,

25:58 the way we're going to measure

25:59 how

26:00 brown a firm is,

26:02 is going to be using

26:03 the sustainnalytics Environmental score,

26:06 um,

26:06 and then scope one carbon emissions,

26:08 which is

26:09 scope one emissions,

26:10 those are emissions that are being pumped directly into the sky.

26:14 Um,

26:14 and then we have this way to measure regulatory exposure from

26:17 the EPA that I'm going to talk a bit about later.

26:20 Um,

26:21 we're going to use a

26:22 natural experiment where

26:24 the Paris Agreement

26:26 changed how people viewed future climate regulation going forward.

26:30 We're going to see how corporate bonds changed after that,

26:33 and then we're going to try to understand what's driving this effect.

26:37 So just in a nutshell,

26:39 we find that

26:41 bonds issued by brown firms

26:43 that are exposed to stricter regulatory

26:46 environments that have stricter regulatory enforcement

26:49 tend to have higher yield spreads and lower credit ratings.

26:53 So to put some numbers on it,

26:54 corporate bond ratings

26:56 dropped by about 0.6 notch

26:59 for

27:01 bonds issued by firms in high emitting industries relative to others.

27:05 And their spreads increased by 38 basis points

27:09 relative to others,

27:10 and these results are strong,

27:12 strongest for firms exposed to strict regulatory environments.

27:16 We also see

27:18 that these results seem to be driven by a change in the assets volatility,

27:22 which we ascribe to

27:25 uncertainty associated with this regulation,

27:27 which I'll talk about more later.

27:30 So

27:32 In the United States,

27:34 environmental regulation is done in a really interesting way.

27:37 It tends to be set at the federal level by the EPA,

27:40 but individual states actually have a lot of

27:42 discretion in how they're going to enforce them.

27:46 So the way this tends to work

27:48 is different states have to come up with a

27:49 plan for how they're going to enforce the regulations,

27:52 and then the federal government

27:54 will review the plan.

27:55 If they say that it's strict enough,

27:56 then the state's in charge.

27:58 Every state

27:59 in green

28:00 here

28:01 does their own enforcement for the Clean Air Act,

28:03 the Clean Water Act,

28:04 and the Resource Conservation and Recovery Act.

28:06 You could see this is almost all of them.

28:09 So,

28:10 we're going to take

28:11 information on how different states enforce their

28:14 environmental regulations and just see

28:17 which states firms operate in.

28:18 And using that,

28:19 we're gonna see

28:20 how strict the enforcement,

28:23 uh,

28:23 the

28:24 environmental enforcement that firms are exposed to is.

28:27 Um,

28:28 so we do an initial test just in,

28:29 in the interest of time,

28:30 I'm gonna skip to the meat,

28:31 to the experiment,

28:33 um.

28:34 So what we're going to do is we're going to look at the Paris Agreement.

28:37 Um,

28:38 Paris Agreement in 2015,

28:40 175 nations

28:43 agreed to

28:44 do what they need to do

28:46 to limit global temperature rise from climate change to 1.5

28:50 °C.

28:51 Um,

28:52 this of course is going to require

28:54 some type of a policy response if we're

28:56 going to make this happen.

28:58 Um,

28:59 we're going to see this as a shock to climate

29:01 regulatory risk that's otherwise unrelated to firm default risk.

29:05 And

29:06 you could see we have a quote from

29:09 managing director from Moody's here.

29:11 The gist of it is

29:12 they weren't exactly sure how this was going to affect brown firms,

29:16 but it probably wasn't good for them.

29:18 So

29:20 how is the US going to enforce this?

29:21 We go into more detail about this in the paper.

29:24 Obama was at the same time pushing this

29:27 Clean Power Plan,

29:29 which was essentially

29:30 a plan to

29:31 limit emissions from new power plants and to decarbonize existing power plants.

29:36 This was announced in

29:38 late August 2015.

29:40 It was sold at the Paris Agreement negotiations as being

29:43 how we were going to enforce the Paris Agreement.

29:46 Two months later,

29:47 February 2016,

29:48 the Supreme Court strikes this plan down.

29:51 So all of these dynamics are going to be at play when we look at the results.

29:55 So,

29:56 what we do is we do what's called a difference in differences analysis,

29:59 where basically we just see

30:01 how corporate bond ratings and spreads

30:03 changed

30:04 for bonds issued by brown firms relative to others.

30:08 Um,

30:08 we have several different ways of defining the brown firms.

30:11 What I'm going to show you

30:12 is results using

30:14 um

30:15 whether a firm is in the top quartile of scope one carbon emissions,

30:19 so if they're very high emitting.

30:21 Um,

30:21 and we're going to look at how the ratings changed for brown firms relative to others

30:26 after the Paris Agreement.

30:28 So here

30:29 this

30:30 plot shows you

30:32 the difference in the change in corporate bond ratings

30:36 for high emitting firms relative to others.

30:40 The red line is

30:42 December 2015.

30:43 That's when the Paris Agreement.

30:46 was announced

30:47 the time before then

30:48 is before the Paris Agreement,

30:50 so you could see that corporate bond ratings were pretty similar

30:53 for brown and green firms

30:55 before,

30:55 before the agreement.

30:56 But then there was a significant drop

30:59 in

30:59 ratings for

31:01 brown firms relative to others after the Paris Agreement.

31:04 So you could see

31:05 it seems like the Paris Agreement was associated with a big drop in ratings

31:09 for

31:10 brown firms.

31:12 So we also look at bond yield spreads.

31:14 I'm not gonna get

31:15 too

31:16 nitty gritty with this,

31:17 but we do have a problem with yield spreads.

31:20 Um,

31:20 yield spreads move

31:22 with a lot more volatility than ratings.

31:24 Rating agencies tend to be pretty conservative.

31:25 They don't like to change

31:27 ratings unless they know for sure that's what's going on.

31:30 Um,

31:31 bond traders will trade on any new information they get,

31:34 especially oil prices.

31:36 So we're gonna match.

31:37 Each

31:38 brown bond

31:39 to

31:41 another control bond

31:42 based on a bunch of factors

31:44 that are related to the rating,

31:45 but most importantly,

31:46 we construct

31:47 a measure of how

31:49 their equity prices move with

31:51 oil prices.

31:53 So we find here,

31:54 and this is where the dynamics I was talking about before really come into play,

31:58 you see there isn't much of a difference leading up to the agreement,

32:01 but then in around August,

32:03 you see bondy spreads for

32:05 brown bonds creeping up

32:07 relative to others.

32:09 This is around the time that the Clean Power Plan

32:11 was announced.

32:13 Paris Agreement happens,

32:14 there's a really big spike

32:16 in yield spreads.

32:17 And this drops pretty soon afterward.

32:21 That drop is corresponding with

32:23 the Supreme Court stay of the Clean Power Plan.

32:25 It was

32:26 at that moment that the US response to the Paris Agreement

32:29 lost its teeth.

32:30 You start to see this reversal.

32:33 So now I showed you that you have this response

32:36 related to

32:37 um

32:38 around the time of the Paris Agreement.

32:40 Was this really related to regulation?

32:42 So what we're gonna do

32:43 is we're going to do what's called a triple difference,

32:46 where we look

32:48 at how

32:49 ratings and spreads change for brown bonds that

32:53 are exposed to very strict regulation.

32:55 We

32:56 compare those

32:57 that operate in strict regulatory environments to others.

33:00 Um,

33:01 and when we look at ratings,

33:02 you could see that really

33:05 the bulk of this effect is driven by

33:08 bonds operate that are in states with strict regulatory environments.

33:13 Um,

33:13 and then when you look at yield spreads,

33:14 it looks similar.

33:15 It seems like the effect is stronger

33:17 when you're looking in states

33:19 located in strict regulatory environments.

33:22 So,

33:23 in the last couple of minutes,

33:25 I've shown you that there was this change in pricing that happened,

33:28 but there's

33:29 all of this funny stuff going on,

33:30 we have this reversal,

33:32 um,

33:33 what's really driving it?

33:35 So what we're gonna do,

33:36 and the details for all of this are in the paper,

33:38 but

33:39 They're

33:40 frankly,

33:41 too technical and boring for me to go into detail about now.

33:44 Um,

33:45 we do a Merton model decomposition

33:47 where

33:48 we jointly estimate the change in equity prices

33:52 and

33:53 bond prices,

33:54 and this.

33:55 Allows us to see how the asset value changes,

33:58 how the fundamental firm value is changing

34:00 surrounding the Paris Agreement,

34:03 and how the asset volatility changes.

34:05 And this asset volatility,

34:06 you could say,

34:07 is,

34:08 should be related to some sort of policy uncertainty.

34:11 You could see

34:12 that for

34:13 brown bonds,

34:15 brown firms relative to others,

34:17 there is a drop in asset value,

34:19 but right around this Supreme Court stay,

34:22 you see it reverse more or less completely.

34:26 Um,

34:26 if we look at the asset volatility,

34:29 first,

34:29 the increase in volatility

34:31 is very,

34:32 very big,

34:33 but we don't see a complete reversal.

34:35 There is some reversal after the Supreme Court stay,

34:38 but you still see elevated volatility.

34:41 And the reason for this is because even if

34:43 we didn't have

34:45 a

34:46 Literal change in policy at that point,

34:48 there was still a lot of uncertainty because remember this was

34:50 the time where we didn't know who the next Supreme Court

34:54 justice was gonna be.

34:55 Um,

34:55 it was gonna be based on whether Trump or Biden won the election.

34:58 Um,

34:59 and because of that,

35:00 there was a lot of uncertainty in the,

35:02 the policy landscape.

35:04 Um,

35:04 so just to conclude,

35:05 these results show that corporate bond investors and rating agencies

35:09 respond to regulatory risk

35:10 and

35:12 We have survey evidence that says

35:14 that institutional investors view regulatory risk

35:18 as an

35:19 as an especially important channel of climate risk,

35:22 and this is consistent with that.

35:24 But um I think something that's really interesting here

35:27 is

35:28 these results show that the change in volatility is driving the results,

35:30 and

35:31 we,

35:32 we know now we're at 9 years after the Paris Agreement that

35:36 nothing really happened in the US after the Paris Agreement.

35:39 Um,

35:40 but this indicates that regardless,

35:42 because there was that change in the

35:45 policy uncertainty,

35:47 investors responded.

35:48 So even in the absence of

35:50 changes in policy,

35:52 if we have some sort of shock to the

35:55 policy uncertainty related to climate change,

35:57 that can matter for asset prices.

35:59 Thank you.

36:04 Thank you,

36:05 Lee,

36:05 very much indeed,

36:06 and

36:07 Fairly encouraging.

36:09 Financial markets

36:11 do reflect

36:13 the,

36:13 uh,

36:13 the,

36:14 the,

36:14 uh,

36:14 climate risk.

36:15 Um,

36:16 finally,

36:16 Manos,

36:17 uh,

36:17 Delles is uh from the Adencia Business School.

36:21 He's going to present a very interesting

36:23 paper,

36:24 uh,

36:25 uh,

36:26 about the difference between

36:27 bank lending and bond financing.

36:32 Great.

36:33 Uh thank you so much for having me in this,

36:35 uh,

36:36 place of wisdom.

36:38 First time in the DC to present this paper on the bond to bank uh substitution.

36:43 This is part of a broader endeavor actually,

36:45 uh,

36:46 where we use,

36:47 uh,

36:48 um,

36:48 syndicated loan pricing

36:51 in,

36:51 in many respects to examine how the banks price,

36:54 uh,

36:55 carbon risk,

36:55 how they price,

36:56 uh,

36:56 fossil fuel reserves,

36:57 how they price the possibility that,

36:59 uh,

36:59 or the probability that these reserves are going to get stranded.

37:03 Eventually,

37:03 by stranded,

37:04 we mean that they are going to become unburnable because of,

37:07 uh,

37:07 Um,

37:09 uh,

37:09 policy stringency,

37:10 right?

37:10 So that's the,

37:11 the main idea here.

37:13 I don't think that I need to motivate in a place like this,

37:15 and,

37:15 uh,

37:16 following the speeches that we had this morning,

37:18 um,

37:19 uh,

37:19 too much,

37:20 uh,

37:20 this paper,

37:21 um,

37:22 uh,

37:23 we know,

37:23 uh,

37:24 we know the background,

37:25 we know what's happening with,

37:27 uh,

37:27 uh,

37:28 we just mentioned that,

37:29 uh,

37:29 we need trillions of dollars to catch up

37:32 in terms of financing,

37:34 so I'm going to skip all that and I'm going to focus more.

37:37 Um,

37:38 on what the pricing issues are with um

37:42 with banking now.

37:44 What is bond to bank substitution?

37:47 Uh,

37:47 it's pretty simple actually.

37:48 The firms can issue corporate bonds or they can get loans,

37:51 OK?

37:52 And there is a very big literature

37:54 on these issues in other respects,

37:55 not uh concerning fossil fuel reserves.

37:59 Uh,

37:59 this theoretical literature suggests that uh bank finance

38:02 can be subject to more monitoring and screening.

38:05 However,

38:07 banks,

38:08 as we saw in this other paper with uh.

38:11 Uh,

38:11 the Grey,

38:12 Joseffidi and Jena in 2021

38:16 are more,

38:17 are a little bit more weak on the environment compared to markets,

38:21 and I'm going to show you some data

38:23 on this,

38:23 um,

38:24 uh,

38:24 soon enough,

38:25 and the banking sector development is not the most suitable one,

38:29 according to other research,

38:30 mainly by,

38:31 uh,

38:32 uh,

38:32 De Has and Popoff on,

38:33 uh,

38:34 on,

38:35 um,

38:35 uh,

38:36 innovation intensive industry.

38:37 So we need to find finances.

38:40 Uh,

38:40 on this respect from other sources,

38:43 and this is super important in terms of the literature,

38:46 uh,

38:46 that we are trying to,

38:47 um,

38:48 to augment and,

38:49 uh,

38:49 the problems here that we aim to tackle.

38:52 So,

38:53 um,

38:54 why

38:55 is that

38:56 substitution from corporate bonds to loans possible?

39:00 Now,

39:00 these firms obviously are large firms,

39:02 right?

39:02 We're talking about giants,

39:04 um,

39:05 giant firms

39:06 extracting fossil fuels and holding reserves.

39:10 Now,

39:11 these firms are going to aim to get finance

39:14 from very large corporate bonds or from large syndicated loans.

39:20 That implies the large banks are more likely to be involved,

39:23 and um

39:25 um

39:26 large banks,

39:26 we know

39:27 they are more able to diversify risks,

39:29 but they are also

39:31 subject to capital requirements,

39:33 and the capital requirements imply a moral hazard.

39:35 We know that from banking one on one,

39:37 right?

39:37 So,

39:38 uh,

39:38 when you have a high capital requirement,

39:40 then you feel safer to provide.

39:42 Uh,

39:43 these loans,

39:44 don't forget that these fossil fuel giants are super profitable,

39:48 so it's profit maximizing for the banks to,

39:50 to provide credit

39:52 to fossil fuel firms,

39:54 and,

39:55 uh,

39:56 of course that is going to relate,

39:58 that is going to generate a not too big to fail problem,

40:00 but perhaps a too big to strand problem

40:04 for the banking sector.

40:05 Of course there are other issues at play.

40:08 Uh,

40:08 for example,

40:09 syndicated loans have an average maturity of 4,

40:12 4.5

40:13 years,

40:14 whereas corporate bonds is 10 years or more in terms of maturity.

40:18 And

40:18 also banks are politically connected,

40:20 so this is also

40:22 kind of important in this line of research.

40:26 So

40:27 skipping the,

40:28 the overview of the results and going straight

40:32 to what we do in this paper,

40:34 so we generate this climate policy exposure index.

40:38 We did some very heavy data collection here.

40:41 The

40:41 data collection comes in the first part of the product in the relative reserves.

40:45 So these are the rela,

40:46 these are the relative reserves

40:48 for each firm.

40:50 In each year,

40:52 and in each country

40:53 where they hold their reserves,

40:55 OK?

40:56 And we're talking about fossil fuel reserves here.

40:58 So these are hand-collected data,

41:00 we literally go inside the financial statements of the

41:02 firms and collect this data from 2007 to 2018.

41:07 And then we multiply

41:09 this index,

41:10 which implies how sensitive these firms are going to be to stranding assets

41:15 if policy becomes more stringent.

41:17 We multiply this with this CCPI index,

41:20 which is a climate,

41:22 it's a country specific with a time variation,

41:25 OK,

41:25 a country-specific climate policy index,

41:28 how stringent

41:30 uh climate policies are in each country,

41:32 uh,

41:33 um,

41:34 uh,

41:34 that we examine in our sample.

41:37 So this is the Climate Policy exposure index,

41:39 so you can see the location of fossil fuel reserves here.

41:42 Uh,

41:43 the Climate Change Performance index is the highest,

41:46 the most stringent

41:47 in the United Kingdom.

41:49 The United States is somewhere in between there,

41:51 rising until 2016.

41:54 And then,

41:55 uh,

41:55 you have countries like Australia,

41:58 uh,

41:58 somehow at the bottom of the,

42:00 of,

42:00 uh,

42:00 of this stringency in terms of,

42:02 uh,

42:02 the index,

42:03 and this is the map.

42:04 You can see that uh North America is not doing very well in terms of our

42:09 um

42:10 index,

42:11 Europe is doing better.

42:13 I come from Europe.

42:14 I also come from Greece,

42:15 where

42:16 I shouldn't discuss fiscal policy too much,

42:18 so,

42:19 um,

42:20 anyway,

42:21 so this is the data,

42:22 the data

42:23 that we have two data sets.

42:24 The one is syndicated loans,

42:26 um,

42:27 uh,

42:28 we have at the end,

42:29 more than 13,

42:30 uh,

42:31 about 13.5,000

42:33 syndicated bank loans.

42:35 1100 of these loans are to fossil fuel companies,

42:38 and then we have this corporate bond data set.

42:41 Uh,

42:41 more than 9000 corporate bonds and 682 are to fossil fuel

42:46 firms.

42:46 Comparing these,

42:48 uh,

42:48 now,

42:49 of course,

42:50 there's lots and lots of endogeneity issues floating around.

42:53 I'm not,

42:54 I'm not going to

42:55 take out,

42:55 uh,

42:55 the,

42:56 the identification police,

42:57 uh,

42:57 in this audience,

42:58 but,

42:58 uh,

42:59 um,

43:00 uh,

43:01 we do many,

43:01 many things to,

43:02 to safeguard causality.

43:03 Some of these relates to the previous presentation where we do din diffs.

43:07 We also use instrumentation.

43:09 OK,

43:10 um,

43:11 what I want mainly to show here

43:14 is that the corporate bonds have one,

43:16 a mean,

43:16 uh,

43:17 spread of 195.

43:19 And the fossil fuel bonds have 377,

43:22 so there's a massive difference between the corporate spreads of

43:26 of corporate bonds to fossil fuel firms compared to non-fossil fuel firms.

43:30 This is not at all the case in syndicated bank loans.

43:33 You can see that the mean is 231,

43:36 whereas for fossil fuel loans,

43:37 it's only the gap is minor,

43:39 it's only 247.

43:41 This is what generated the interest,

43:42 uh,

43:43 our interest in this idea.

43:46 This is the regression that we run,

43:48 uh,

43:48 the first regression,

43:50 we estimate two separate regressions,

43:52 one for the loans,

43:54 one for the bonds.

43:55 We have the cost of debt,

43:56 which is the loan spread and the bond spread

43:58 on the left-hand side,

44:00 and then we regress that on this red

44:02 interaction term between fossil fuel dummies,

44:05 1,

44:06 if it is a fossil fuel company,

44:07 0 if it's not,

44:09 and the climate policy exposure index that I just

44:12 talked about.

44:13 Uh,

44:14 you can see that

44:15 the difference,

44:17 much like the descriptive statistic,

44:18 the difference,

44:19 um,

44:20 uh,

44:20 in,

44:20 um,

44:21 loan spreads,

44:22 it's the,

44:22 the red column,

44:23 it's 31 basis points.

44:25 The difference in bonds is 82 basis points,

44:27 so it's much bigger difference in corporate bonds.

44:31 So this essentially motivates the,

44:33 the,

44:34 the,

44:34 the rest of the analysis.

44:36 In the rest of the analysis,

44:37 this is the regression that we do.

44:39 Uh,

44:39 we use loan to bond substitution.

44:43 Uh,

44:43 essentially on the left hand side we have a dummy which takes the value 1 if

44:47 we only have

44:49 syndicated bank loans by an underwriter,

44:51 by the large bank that is underwriting the loan,

44:54 and 0 if it's only corporate bond,

44:56 OK?

44:56 And then we run the same regression

44:58 as we did before,

45:00 and this is very small numbers here that it's positive.

45:04 Um,

45:04 effect.

45:05 So indeed,

45:07 for a plus 30 index points of the climate policy exposure,

45:10 so you increase policy stringency by one standard deviation,

45:14 you have a 21% points increase in the probability

45:17 that you issue a loan compared to a bond.

45:20 So essentially,

45:21 these underwriters are substituting loans,

45:24 sorry,

45:24 bonds,

45:24 corporate bonds for loans,

45:26 OK,

45:27 so this is the main result in the paper.

45:30 Um,

45:31 lots of other stuff,

45:33 uh,

45:34 here,

45:35 we,

45:36 we do one last thing.

45:38 Uh,

45:39 is this because of large banks?

45:42 Indeed,

45:42 yes,

45:43 it is because of large banks.

45:45 This is the main result here,

45:46 triple interaction term.

45:48 OK,

45:49 if you control for pretty much everything,

45:50 then you see that the price decrease in the

45:52 loan spread comes primarily when you have a large

45:55 uh bank as the underwriter of the loan,

45:57 OK?

45:58 So what is the takeaway from all of that,

46:01 tentative conclusions,

46:03 3 things

46:05 banks

46:06 give better pricing

46:08 to loans compared to bonds.

46:11 OK.

46:12 Second issue is that

46:14 they

46:15 substitute

46:16 actively

46:18 bonds for loans,

46:20 and the third issue is that this primarily comes from large banks,

46:24 irrespective of the fact of whether these claim to be green banks or not.

46:28 OK,

46:29 by the way.

46:30 So that's that.

46:31 Thank you very much for listening and uh I'm looking forward to the discussion.

46:38 Thanks very much,

46:39 Manus,

46:40 fascinating.

46:41 I,

46:41 I,

46:42 I'd be interested to know whether you've presented

46:44 these findings to some of the large banks.

46:47 It'd be really interesting to see

46:49 what they have to say and uh

46:52 maybe in the discussion we could,

46:54 we could consider that.

46:54 We're gonna have two brief comments now from

46:58 World Bank senior um research leaders,

47:01 uh,

47:01 Bob Cul and then Sergio

47:03 Smkla.

47:03 Over to you,

47:04 Bob.

47:13 It's coming.

47:13 OK,

47:14 thanks.

47:15 OK.

47:16 Um,

47:17 so it's a pleasure to be able to comment on this paper,

47:19 um,

47:20 by Professor Shankman.

47:21 It's,

47:21 um,

47:22 It's a tour de force of applied theoretical research.

47:25 This is a skill set that I don't have

47:27 at all,

47:28 uh,

47:28 and therefore I won't have anything to say about the model itself.

47:32 Um,

47:33 but,

47:34 you know,

47:34 the conclusions,

47:35 uh,

47:35 you know,

47:36 what I,

47:37 there's a huge environmental opportunity here,

47:39 and it seems so simple.

47:41 It seems so simple,

47:42 it's like low hanging fruit.

47:44 And so why did I ask myself as I was reading it,

47:47 why doesn't

47:48 this get done?

47:49 Um,

47:50 and so motivated by that last question,

47:52 I have comments in two areas,

47:54 um,

47:54 about the contract itself and how it could work in practice,

47:57 and some of those are about clarification,

47:59 just some of the things I didn't understand.

48:01 I think now that we've spoken to each other,

48:02 but

48:03 still maybe helpful for others in the audience to,

48:05 um,

48:06 you know,

48:06 I'll reveal my ignorance,

48:07 which is always fun.

48:09 Um,

48:10 but those questions may help you as well.

48:12 Um,

48:12 but then,

48:13 uh,

48:14 a second part

48:15 of the comments is,

48:16 um,

48:18 How

48:19 do,

48:19 you know,

48:20 projects,

48:20 contracts to support attainment of environment,

48:23 environmentally related SDGs

48:26 which in this case appear to have a huge payoff.

48:28 How do they fit within the framework for

48:30 private capital mobilization that the bank has laid out

48:33 um for itself?

48:35 So,

48:35 um,

48:36 in terms of these clarifying questions and how the contract

48:39 would work,

48:40 um,

48:41 again,

48:41 reveals my ignorance.

48:43 So,

48:44 there's a phrase here,

48:44 the planner would agree to sign an agreement to receive

48:48 B equals 25,

48:49 which is the cornerstone of the analysis to

48:51 get the um optimal benefit in terms of reforestation

48:54 for each ton of CO2 captured.

48:57 So

48:58 And this is such a basic question.

49:00 Who are the parties to the transaction?

49:02 Um,

49:03 I think

49:04 Jose's made it clear that the Brazilian government has to be a party to it,

49:08 and it seems like we're talking about

49:10 carbon markets working

49:12 some

49:12 way here,

49:13 or

49:14 could

49:15 there be another party to the transaction?

49:18 MDB is a fund,

49:19 the bank.

49:19 I'm just curious about,

49:21 given the large amounts involved,

49:23 who could the other partner be and how does that work?

49:26 Again.

49:27 And then,

49:27 and this is again,

49:29 as I was writing the margin.

49:31 Brazil pays the landholders

49:33 not to produce cattle.

49:34 Is that how it will work then and is it

49:37 or buys their land?

49:38 Um,

49:40 and then does Brazil do the reforesting itself?

49:42 Does that occur naturally?

49:44 And you address that in your comments.

49:45 There would maybe be a role for um

49:48 the private sector to play here.

49:50 Um,

49:51 so those are just sorts of things about the contract,

49:54 um.

49:55 A second part of the contract is how do we make sure that Brazil doesn't defect,

50:00 and Professor Shengman didn't have a lot of time to talk about this,

50:03 but

50:04 um in the paper he lays out

50:06 how these environmental gains to carbon capture and deforestation

50:09 would be achieved over a very long time horizon.

50:11 I think he mentioned this,

50:12 of course,

50:13 and um

50:15 and here's the quote to avoid defection,

50:16 you could use a carrot which involved buyers establishing a fund.

50:20 Uh,

50:21 with the value of,

50:22 of,

50:22 uh,

50:22 you know,

50:23 uh,

50:24 the value of defection

50:25 essentially is what they,

50:26 they calculate there,

50:27 and it's payable if

50:29 a planned deforestation does not

50:31 deviate substantially from the target.

50:33 Um,

50:34 so my question is,

50:35 would the contract be sustainable over such a long period?

50:38 Um,

50:39 who are the buyers who creates the fund again?

50:42 It's not a huge amount,

50:43 so maybe that's easier to handle,

50:44 but I'm just curious about who you have in mind.

50:47 And are these straight transfers or is Brazil borrowing these funds?

50:50 I think we're talking about straight transfers,

50:53 um.

50:55 So if they're not borrowing,

50:56 we don't have to worry so much

50:56 about competing priorities for politicians and government.

50:59 But I do wonder if financial

51:02 incentives are going to be enough here,

51:04 um,

51:04 to keep them on the right

51:05 path.

51:06 And then,

51:06 so what's calculated is the financial cost of deviating essentially.

51:10 Um,

51:11 but if government changes hands,

51:12 couldn't it be worth more to politicians in terms of dimensions they care about,

51:16 votes,

51:17 patronage,

51:18 um,

51:18 to defect,

51:19 and I'm just curious about your thoughts on that.

51:22 Um,

51:22 turning to my last point,

51:24 which,

51:24 um,

51:25 thinking of this idea and proposal,

51:27 which

51:27 makes so much sense,

51:29 but I'm thinking in terms of the,

51:30 the World Bank approach to private capital mobilization.

51:33 So we go back to this notion of the

51:35 cascade where countries are going to maximize development resources.

51:38 By drawing on private financing and sustainable private sector solutions

51:42 to provide value for money and meet the highest environmental,

51:45 social,

51:45 and fiscal responsibility standards.

51:48 This is from that famous 2017 World Bank Development Committee paper.

51:52 So,

51:53 to operationalize this,

51:55 uh,

51:55 we're supposed to first ask,

51:57 is there a sustainable private sector solution

51:59 that limits public debt and contingent liabilities.

52:02 And I wrote,

52:03 I,

52:03 I don't see an obvious one,

52:04 and I'd,

52:05 I'd like to know what Professor Shenkman thinks about that.

52:08 Um,

52:08 if the answer is yes,

52:09 promote such solutions.

52:10 If the answer is no,

52:11 ask whether uh the,

52:12 the,

52:13 uh,

52:13 it's no because of policy or regulatory gaps or weaknesses.

52:17 I don't see that being the problem here,

52:19 though I may be missing something.

52:21 Um,

52:22 or is it because of risk?

52:24 So assess the risks and see whether World Bank instruments can address them.

52:28 If you conclude that the project requires public funding,

52:30 pursue that option.

52:31 So,

52:32 similarly,

52:33 I don't see risks that need to and could be addressed,

52:35 mitigated using World Bank instruments.

52:38 Um,

52:39 and so,

52:40 I don't,

52:41 carbon pricing,

52:42 transfers,

52:42 reforestation,

52:43 I don't see it fitting into the

52:45 way we're thinking about private capital mobilization.

52:47 I would love to get

52:48 Professor Shenkman's views on that.

52:50 Um,

52:51 the major impediment to private capital mobilization that I see in this context,

52:55 and you know,

52:55 I might be wrong,

52:56 is that the project

52:58 and would not generate returns for private investors.

53:01 I don't,

53:01 I don't see an easy way to do it.

53:03 Um,

53:04 and then

53:05 it forced me to step back and again,

53:06 I want,

53:07 it's great to have you here just to

53:09 hear what you think about this.

53:10 I wonder if you think this feature is likely to

53:12 be a common one for projects designed to tackle,

53:15 you know,

53:15 environmentally related

53:17 goals,

53:17 SDGs,

53:18 but on a really large scale.

53:20 Um,

53:21 and so,

53:21 if so,

53:22 how much scope is there to pursue private capital mobilization in these contexts?

53:26 So those are my comments.

53:31 Of,

53:32 um,

53:33 perfect questions.

53:34 Um,

53:35 there are billions of dollars

53:37 that the private sector would be willing to invest

53:40 in this.

53:41 The reason they're not doing it,

53:42 and that's under the voluntary carbon market,

53:45 it's not even

53:46 regulatory,

53:47 um,

53:47 um,

53:48 carbon market.

53:49 The reason they're not doing it is because

53:51 they don't see standards

53:53 that will enable them to hold their heads high.

53:56 And they do not want to be accused of greenwashing.

54:00 That's the debate,

54:01 exactly the issues,

54:02 you say,

54:03 World Bank is heavily involved in this,

54:04 we are the Bezos Earth Fund,

54:06 we're the largest financier of

54:08 standard setting,

54:10 um,

54:11 uh,

54:11 goal setting,

54:13 monitoring,

54:14 satellite technology now can basically see not only every tree as it falls or grows,

54:20 but actually now can figure out how much carbon is embedded in that.

54:25 And so we're in a,

54:26 a new era,

54:27 but there's still a huge way to go because

54:30 trust is so

54:31 lacking in this er field.

54:34 Um,

54:35 let's see,

54:36 Sergio,

54:36 over to you.

54:38 Well,

54:38 thank you very much.

54:39 Thanks for inviting me to be in the conference.

54:41 It's a pleasure to be here.

54:43 I'm going to discuss the 2nd and 3rd paper.

54:46 Um,

54:47 the 2nd set of comments are on the 2nd paper from me and the

54:52 other ones are from Claudio that unfortunately

54:54 had a family emergency academy here.

54:58 So,

54:58 uh,

54:59 regarding the first paper,

55:00 uh,

55:01 on Climate regulatory risks and corporate bonds,

55:03 um,

55:05 So,

55:06 let me very briefly summarize the papers.

55:08 The paper looks at the effects of um a climate regulatory risk on corporate bonds,

55:14 and it basically says that um

55:17 firms that are,

55:18 we have a weaker environmental profiles

55:21 pay a higher cost of capital,

55:23 uh,

55:24 higher spreads,

55:25 and have lower credit ratings.

55:28 And these have become more exacerbated

55:31 after the Paris Agreement.

55:33 That's basic,

55:34 and they use a very neat experiment,

55:36 which is this exogenous shock,

55:38 and they use variation within across US

55:41 states with different enforcement of the regulation,

55:44 and I believe the results is a very well done paper.

55:48 It's a long paper that has matured.

55:51 And the paper also presents some complementary

55:54 evidence showing um using the Merton model

55:57 that this is driven by an increase in the volatility of the assets.

56:02 And that both credit ratings and investors react to climate regulatory risk

56:07 and that in

56:09 the evidence that Lithium provide here but is in the paper

56:13 that insurance companies are the ones that are

56:16 reducing the holdings of these bonds and are creating

56:19 this higher cost of capital for these firms.

56:23 So,

56:24 uh,

56:24 the comment,

56:25 um,

56:25 the paper is very nice,

56:26 um,

56:27 it raises new issues related to climate risk.

56:30 Um,

56:31 as I said,

56:31 it's a,

56:32 um,

56:32 very mature paper

56:33 that provides a useful French,

56:35 uh,

56:35 benchmark,

56:36 um,

56:37 benchmark estimate of going forward in terms of climate risk.

56:41 Uh,

56:41 the main contribution I think is on the legal side.

56:43 I have comments on both,

56:45 um,

56:46 what climate risks are

56:48 and also on the big analysis.

56:50 Let me go first to the climate risk,

56:51 um,

56:52 comments.

56:56 Yeah,

56:56 yeah,

56:56 I,

56:56 I use my time.

56:57 I use 5 minutes for each.

56:59 Um,

57:00 so,

57:00 basically,

57:01 um,

57:02 the climate risks that are at least 3 types of risks.

57:05 One is the supply side of risk,

57:06 uh,

57:07 supply side,

57:07 um,

57:08 uh,

57:08 type of risk,

57:09 which is uh damage to the physical assets of the firms,

57:13 technology,

57:14 production capacity.

57:15 Also,

57:16 on the demand side,

57:18 this consumption of products that

57:22 consumers might change their preferences,

57:24 and investors also might change their preferences.

57:26 And also on the regulatory side,

57:28 the regulator might impose new rules.

57:32 This paper focuses on the regulatory side,

57:36 but basically ignores the supply side or the demand side.

57:40 Um,

57:42 and it basically

57:43 focuses on the costs,

57:45 not on the benefits of the regulation.

57:47 These regulations are

57:48 to improve the climate,

57:50 so it might have some benefits in the longer term.

57:53 So the bigger question is

57:55 how large are these regulatory risks versus the other type of risk

57:59 that the paper

58:01 doesn't measure,

58:02 but it would be good to have

58:04 those answers to have a bigger picture

58:07 of the importance of regulatory risk.

58:09 And it will also be important to disentangle

58:12 the regulatory risk from the demand side.

58:14 Regulators are not crazy.

58:16 They are kind of imposing those

58:18 constraints on firms because consumers and investors and the society demands it,

58:24 so it's very difficult to

58:26 disentangle one from the other.

58:29 And also,

58:30 um,

58:31 the,

58:31 the paper tends to focus on the negative effects on the claim on those risks,

58:36 on the,

58:37 on the regulatory risk,

58:39 but there might be some longer term benefits,

58:42 and the long-term benefits might be affecting,

58:44 for example,

58:45 the diff indeed that you have on the treatment

58:48 firms that might benefit from those,

58:50 some of those regulations.

58:52 So I think having a bigger

58:54 picture would be

58:56 useful.

58:57 Couple of on the legal side,

59:00 focusing on the US,

59:01 Europe might be a good

59:03 case to study as well,

59:05 and the paper doesn't do it,

59:06 but I think that that's a material for future work.

59:09 And also related to the other paper,

59:11 it focuses on bonds which Important,

59:14 but they might be in transition from bonds to bank financing.

59:17 So look at the cost of financing to this firm,

59:19 not only on the bond market,

59:20 but also

59:21 on the bank side.

59:23 It might be useful as well as distinguishing between

59:26 green

59:27 and brown bonds.

59:31 To finalize my comments

59:33 on the PA side,

59:34 you focus independently on ratings and spreads,

59:38 and these two things might be correlated.

59:41 If rating agencies downgrade the firm,

59:44 that will have an effect on spreads.

59:46 It spreads increase.

59:48 This agency will tend to downgrade those

59:50 firms because the cost of capital increases.

59:53 So looking at the feedback loop between

59:55 these two variables that you study independently

59:58 will be very useful.

1:00:00 Also to understand better why volatility is increasing because regulation might

1:00:06 might make

1:00:08 things more certain,

1:00:09 not more uncertain.

1:00:10 And also try to understand why pension funds are reacting this way,

1:00:15 and not only

1:00:16 whether we care about pension funds versus mutual funds as the paper does,

1:00:19 but also we want to look at

1:00:21 the overall size of the investor base,

1:00:24 and not just the composition.

1:00:26 So these are the comments on the first paper.

1:00:28 Let me go,

1:00:29 uh,

1:00:29 for a couple of minutes to um

1:00:32 the other the other paper.

1:00:37 So these are

1:00:39 Claudio Rada's comments

1:00:41 on,

1:00:41 on the third paper,

1:00:43 and basically,

1:00:44 uh,

1:00:44 the paper

1:00:45 looks at banks

1:00:47 that they,

1:00:48 they,

1:00:49 the paper argues they charge a lower spread

1:00:51 than corporate bond markets for lending to fossil fuel firms

1:00:56 with higher stranded assets.

1:00:58 And the paper argues that this is evidence

1:01:02 that banks are mispricing these stranded

1:01:04 assets because they have an implicit support

1:01:07 they could get from the government,

1:01:09 and this produces reallocation

1:01:11 toward bank lending that mitigates the capital constraints of fossil fuel firms.

1:01:16 And postpones the green transitions.

1:01:18 Banks are financing fossil fuel fuel firms.

1:01:21 That's what the paper finds,

1:01:24 and the paper basically argues that banks are doing the mispricing.

1:01:30 So two comments,

1:01:31 um,

1:01:32 is it really that banks are mispricing or,

1:01:35 or the bond market participants are mispricing this transition risk?

1:01:39 It's not clear.

1:01:40 And the other,

1:01:41 the second comment is,

1:01:42 can banks help with this green transition

1:01:45 and not be here

1:01:47 the bad financial intermediaries.

1:01:49 So going to the first comment.

1:01:53 So it could be the case that actually banks

1:01:57 are,

1:01:58 um,

1:01:58 you have two investors

1:02:00 and you argue that there is a differential in the pricing,

1:02:04 and you're saying that the banks are the ones that are doing the mispricing,

1:02:08 but we don't know.

1:02:09 It could be,

1:02:10 for example,

1:02:10 that corporate bond buyers

1:02:12 have a preference for green type of.

1:02:16 Financing,

1:02:17 and then they penalize fossil fuel firms

1:02:21 when they issue

1:02:23 a bond,

1:02:24 so the differential might be coming from the

1:02:28 of,

1:02:28 of bond investors are not pricing that risk uh correctly.

1:02:33 And there is evidence that investors have a willingness to pay

1:02:38 for ESG or green type of securities.

1:02:41 If one looks at,

1:02:41 for example,

1:02:42 the share of environmental funds on corporate bonds,

1:02:45 it has been increasing over time,

1:02:47 so.

1:02:48 Bond investors want to invest more

1:02:50 on green bonds relative to brown bonds,

1:02:53 and that might

1:02:54 push up the price

1:02:56 of the brown um

1:02:57 um

1:02:58 um bond that the fossil fuel firms are issuing.

1:03:04 So,

1:03:04 there is also this issue that

1:03:08 Banks are mispricing and that might

1:03:11 generate banks are not

1:03:14 correctly valuing

1:03:16 the fact that those assets by fossil fuel firms might get stranded,

1:03:21 but the stranding of these fossil fuel of these assets

1:03:25 will come from a policy-related measure.

1:03:28 So there is a policymaker that say

1:03:30 you cannot produce fossil fuels or it's too costly to produce fossil fuels.

1:03:35 And therefore strand those assets.

1:03:38 However,

1:03:39 if policymakers know

1:03:41 that banks are suffering

1:03:43 from this measure,

1:03:44 they will take into account

1:03:46 the effect on the financial system

1:03:49 because it might generate a crisis.

1:03:51 So it might be less likely

1:03:54 to impose

1:03:55 those

1:03:57 those measures that will strand the assets.

1:03:59 So it will be important to look at more

1:04:01 at the general equiliminary effects of how the policymaker reacts

1:04:04 when banks are taking that risk.

1:04:06 So in that sense,

1:04:07 if the policymakers is going to take that into account,

1:04:10 the banks might not be

1:04:12 mispricing because they know the action of the policymaker

1:04:16 is going to take,

1:04:17 not to kind of

1:04:18 penalize banks to generate the financial crisis.

1:04:22 The other

1:04:24 issue is that this paper is very negative on the banks.

1:04:27 And if one looks at

1:04:29 this related work that we are doing with Claudio,

1:04:32 that when one looks at the green financing,

1:04:35 which is the green lines,

1:04:37 this is a total financing,

1:04:39 and the dash,

1:04:40 the large dashes at the top

1:04:43 are the bank financing.

1:04:44 So bank financing

1:04:46 within green has increased a lot

1:04:48 relative to the other financing,

1:04:50 which is

1:04:51 the gray line there.

1:04:53 So banks have been providing a lot of financing to firms.

1:04:56 And if one looks at how firms are doing,

1:05:00 when firms are obtaining loans,

1:05:03 and even when they are obtaining bonds,

1:05:05 firms are improving

1:05:08 the CO22 income.

1:05:10 So different measures of the environmental performance of firms improve

1:05:14 when they take a green bond or a green loan.

1:05:17 But with the green loan,

1:05:18 they improve more.

1:05:19 So banks in some sense are providing a good service in the sense that they are

1:05:25 allowing firms to generate some type of transition.

1:05:28 So while this paper is kind of very negative on the banks,

1:05:31 I think other views might argue that banks are not that

1:05:36 that harmful to,

1:05:38 to,

1:05:38 to the environment here.

1:05:40 So

1:05:41 to conclude,

1:05:42 this is a very nice paper with a compelling and plausible story.

1:05:47 It's,

1:05:47 it's not clear,

1:05:48 clear what,

1:05:49 who is wrong,

1:05:50 and the,

1:05:51 the,

1:05:51 the evidence

1:05:53 is tilted towards one,

1:05:56 it's interpreted towards against the banks,

1:05:58 but it's,

1:05:58 uh,

1:05:59 as Claudio argues,

1:06:00 it's not very clear,

1:06:02 and it would be useful to understand more the overall

1:06:05 role of the financial intermediation

1:06:07 in supporting the transition.

1:06:10 Thank you very much.

1:06:15 Thank you,

1:06:15 Sergio,

1:06:16 and,

1:06:16 and thanks to Claudio Radatz who wasn't able to be here,

1:06:19 but he did the,

1:06:19 uh,

1:06:19 the,

1:06:20 the final one.

1:06:21 A fascinating discussion between you two at the end there.

1:06:24 Um,

1:06:25 I,

1:06:25 I,

1:06:25 I'm on the side of the paper.

1:06:27 I actually do think that banks,

1:06:29 um,

1:06:30 underpriced,

1:06:31 but I think it's for a different reason.

1:06:33 You think it's because they'll be bailed out.

1:06:36 I wonder if it's because

1:06:38 banking is a much more relational issue.

1:06:41 Uh,

1:06:41 I was on the advisory Group of Bank of America,

1:06:43 its largest client.

1:06:45 Was ExxonMobil.

1:06:46 Um,

1:06:47 you know,

1:06:47 they say,

1:06:48 well you expect us to,

1:06:49 to stop lending?

1:06:50 No,

1:06:50 we've had a relationship forever,

1:06:51 and actually we can influence,

1:06:53 they listen to us.

1:06:54 I was chair of the,

1:06:55 um,

1:06:56 climate board for HSBC,

1:06:59 um,

1:06:59 incredibly sophisticated guys,

1:07:01 these,

1:07:02 by the way,

1:07:02 doing work on what would it mean

1:07:04 to have a net zero

1:07:06 portfolio

1:07:08 by 2050

1:07:10 when we make 10,000,

1:07:11 we have 10,000 customers in Asia.

1:07:13 They don't even know how to measure their climate,

1:07:16 their,

1:07:17 their emissions.

1:07:17 What would it take for us to reach that level?

1:07:20 Really exciting stuff.

1:07:21 So

1:07:21 please,

1:07:22 both of you,

1:07:23 keep studying

1:07:24 this subject.

1:07:25 It's important.

1:07:26 If there's a question or two,

1:07:28 we started a little late,

1:07:29 um,

1:07:29 in the midst,

1:07:30 just give them permission to give another 5 minutes.

1:07:33 Let's just have some very brief,

1:07:34 let's take 2 or 3 questions.

1:07:38 Yeah,

1:07:38 quick,

1:07:38 uh,

1:07:38 Manpreet,

1:07:39 uh,

1:07:40 I'm,

1:07:40 I've been working on banking issues for a long time,

1:07:43 for the question on that.

1:07:45 So,

1:07:45 uh,

1:07:45 I'm wondering if this holds across regions and countries.

1:07:49 Is it that countries that have stronger capital markets

1:07:51 and bond markets are also more inclined to green,

1:07:55 green economy?

1:07:56 And then on banking regulations,

1:07:59 uh,

1:07:59 you know,

1:08:00 banking regulations support better credit ratings for

1:08:03 on issuer basis,

1:08:04 the history of the issuer versus bonds are able to rate based on project.

1:08:09 So,

1:08:10 is it more

1:08:11 due to banking regulations and history of the issuer

1:08:14 that uh

1:08:15 they get lower spread?

1:08:17 Um,

1:08:17 yeah,

1:08:18 that's great.

1:08:19 What a wonderful question.

1:08:20 Are

1:08:21 more sophisticated,

1:08:22 stronger capital markets,

1:08:24 greener?

1:08:24 So we'll just go along the line before,

1:08:26 before we end,

1:08:27 and it's a yes no answer

1:08:28 from each of you at the,

1:08:29 oh,

1:08:30 here,

1:08:30 sir.

1:08:31 Um,

1:08:31 yes,

1:08:31 I'm uh John Strand.

1:08:33 I work as a consultant for the bank at the moment.

1:08:35 I used to,

1:08:37 used to be in the,

1:08:37 the research department and I'm not working on,

1:08:40 uh,

1:08:40 climate finance,

1:08:41 so.

1:08:42 So this area is really,

1:08:44 uh,

1:08:45 I,

1:08:45 it raises a lot of questions for me.

1:08:47 I,

1:08:47 I just want to uh raise a couple of uh points.

1:08:51 One is to Bob Carr's initial

1:08:55 uh presentation and it has to do with uh

1:08:59 how to mobilize the private sector.

1:09:02 And I think

1:09:04 a key issue which hasn't been stressed enough here

1:09:08 is that

1:09:09 carbon pricing

1:09:10 is essential.

1:09:12 Carbon pricing in all the countries

1:09:14 where the private sector is to come in,

1:09:17 uh,

1:09:17 it,

1:09:17 it's,

1:09:18 it's,

1:09:18 it's really essential.

1:09:20 The,

1:09:20 the,

1:09:20 the other,

1:09:21 the other issue I just want to mention

1:09:24 is to

1:09:25 Shenkmann's presentation on the Amazon.

1:09:27 I've been working a lot on the Amazon myself and

1:09:30 I know

1:09:31 quite a bit about the mechanisms working there.

1:09:34 I know that

1:09:36 there's one thing that you haven't really stressed

1:09:38 too much,

1:09:39 namely that

1:09:41 A a

1:09:41 a big part of the problem of deforestation in the Amazon

1:09:46 has to do with ownership

1:09:48 issues,

1:09:49 and,

1:09:50 and it has to do with the,

1:09:51 the fact that the Brazilian government is not sufficiently strong

1:09:56 in enforcing,

1:09:57 uh,

1:09:57 ownership rights

1:09:59 and

1:10:00 John,

1:10:01 we just,

1:10:01 we just have to get to a question or yeah,

1:10:03 the,

1:10:03 the,

1:10:04 the,

1:10:04 the issue,

1:10:04 the issue is that.

1:10:06 And that

1:10:07 when uh when

1:10:09 when

1:10:10 uh

1:10:11 parties deforest,

1:10:12 it's to a large extent because they want

1:10:15 to try to grab that land.

1:10:18 And um

1:10:20 I think that's,

1:10:21 that's an issue that has to be in,

1:10:23 in,

1:10:24 in the,

1:10:25 in the accounts here.

1:10:26 Excellent.

1:10:27 Thank you very much.

1:10:29 Uh,

1:10:29 who's got the microphone?

1:10:30 This gentleman here.

1:10:36 Hello,

1:10:37 uh,

1:10:37 Chris McCrae.

1:10:39 I,

1:10:39 I'm surprised that so far today,

1:10:41 artificial intelligence hasn't actually been mentioned.

1:10:44 Now I know that's many different things,

1:10:46 but the part of it that interests me

1:10:48 is that in the last few years,

1:10:50 you've had a million times more compute

1:10:53 available for really big data analysis,

1:10:56 and you have hundreds of networks and companies doing that.

1:10:59 I'm wondering if you can translate

1:11:01 some of those simple things like you can now monitor each

1:11:05 tree.

1:11:06 Uh,

1:11:06 in terms of its effectiveness

1:11:08 into AI so that it can be a positive story for you and

1:11:12 a positive story for King Charles's AI summits or anyone who wants to see

1:11:17 the,

1:11:17 the good uses of AI.

1:11:20 Well said.

1:11:21 The,

1:11:21 the answer's yes.

1:11:24 Um,

1:11:24 we'll take one more at the back or along here,

1:11:26 ah,

1:11:26 Paul,

1:11:27 Paul Eisenman.

1:11:30 Um,

1:11:32 thank you.

1:11:32 I have a question for the moderator.

1:11:35 Uh,

1:11:36 just picking up on something that,

1:11:38 uh,

1:11:39 Inviet said this morning.

1:11:40 He had a very powerful chart

1:11:42 showing how growth in developing countries,

1:11:45 except in South Asia

1:11:47 over the next 10 years was likely to be well below past trends.

1:11:52 He didn't

1:11:53 give a similar information about the creditor countries,

1:11:56 but,

1:11:57 um,

1:11:58 Between uh

1:12:00 the

1:12:01 problems of the growth problems and the debt problems of many,

1:12:05 most of the creditor

1:12:07 countries.

1:12:08 Um,

1:12:09 the,

1:12:09 the outlook doesn't look so great,

1:12:12 and the question is,

1:12:15 Given that there's clearly a link

1:12:18 between growth

1:12:19 and the availability of private sector lending resources.

1:12:24 Uh,

1:12:25 what is your,

1:12:26 I'm not,

1:12:26 uh,

1:12:26 uh,

1:12:26 uh,

1:12:27 uh,

1:12:27 what is your counsel

1:12:29 about dealing with this apparent very difficult problem?

1:12:34 Wow.

1:12:36 Like,

1:12:36 should we take an evening session we'll just keep going?

1:12:39 Why don't,

1:12:39 why don't I thank you,

1:12:40 Paul.

1:12:41 We,

1:12:41 we'll take,

1:12:41 should we take one more,

1:12:42 and then I think

1:12:43 we're being told we probably need to end.

1:12:49 Thank you.

1:12:50 My name is Sandeep Jain.

1:12:51 I really enjoyed the discussion.

1:12:54 Two comments,

1:12:55 uh,

1:12:55 both on market discipline.

1:12:57 So,

1:12:58 when the commercial real estate market had a problem,

1:13:01 it was immediately reflected on the,

1:13:03 on the bank's share prices.

1:13:06 Why do you think,

1:13:07 you know,

1:13:07 there will be a stranded assets problem and

1:13:09 it will not be reflected on the bank's,

1:13:11 uh,

1:13:12 you know,

1:13:13 uh,

1:13:13 share prices.

1:13:14 And secondly,

1:13:15 if the market can discipline the firms.

1:13:18 In terms of the bond pricing,

1:13:20 it will,

1:13:20 it will also discipline

1:13:22 the bond prices of the banks,

1:13:24 and the banks themselves are big borrowers.

1:13:27 So 22 comments.

1:13:29 Thank you.

1:13:30 Thank you very much.

1:13:32 Um,

1:13:32 look,

1:13:33 uh,

1:13:33 I,

1:13:33 I would just ask you to be very disciplined.

1:13:35 Let's just go round down the road,

1:13:37 pick one question,

1:13:38 maximum 30 seconds,

1:13:40 I'm afraid,

1:13:41 starting with you,

1:13:42 Bob.

1:13:44 Oh,

1:13:44 you can skip.

1:13:46 You can have 45 seconds there.

1:13:51 I don't know,

1:13:52 uh,

1:13:53 everything,

1:13:53 there were a lot of questions and please forgive me if I don't answer yours.

1:13:57 I'll start with Bob's.

1:13:58 I think this is a problem of collective action.

1:14:01 I keep saying,

1:14:01 I think it's more surprising that Europeans are willing to put a tax

1:14:06 on their firms

1:14:08 by themselves just to protect the environment

1:14:10 and protect to diminish climate.

1:14:13 I think it's

1:14:14 wonderful,

1:14:15 OK.

1:14:16 But

1:14:17 it's very hard for an economist to explain,

1:14:19 so it would be easier if we had collective action.

1:14:21 That's number one.

1:14:23 Now,

1:14:23 given that we have right now volunteer,

1:14:25 I would argue,

1:14:26 like I argued to the council of Macron,

1:14:29 that

1:14:30 they should be doing this instead of

1:14:32 forcing their firms to spend all their money,

1:14:35 but it has to be the government to government,

1:14:37 and that answers Andrew's question.

1:14:39 Enforcement is going to have to be done by the Brazilians.

1:14:41 And that's going to happen from two ways.

1:14:43 I think that there is a lot of,

1:14:46 in the beginning,

1:14:46 there's a lot of future gains.

1:14:48 It'll be very difficult for government to stop doing it,

1:14:50 and then the idea of the bond comes in,

1:14:53 and the bond doesn't cost that much.

1:14:56 If you think about 50 years,

1:14:58 the bond will be worth about 50 cents a ton.

1:15:01 So if you pay an extra 50 cents

1:15:04 and put it on a fund and it's a carrot,

1:15:05 there's no incentive for Brazil to break down

1:15:08 from the agreement,

1:15:09 at least for the next 50 years.

1:15:11 By then you're going to have Bill Gates' magic machine,

1:15:14 and we can all go home and

1:15:16 You know,

1:15:18 live happily.

1:15:19 Brilliant.

1:15:19 Thank you very much,

1:15:21 Lee.

1:15:21 Thank you.

1:15:22 Um,

1:15:23 I'm gonna take this time to,

1:15:24 uh,

1:15:25 to respond to Sergio's discussion.

1:15:27 Um,

1:15:27 first off,

1:15:27 I thought it was great.

1:15:28 I could take

1:15:29 much more than 30 seconds talking about it,

1:15:31 but I'll just talk about a couple of the big picture points.

1:15:35 Um,

1:15:36 so,

1:15:37 on the supply demand

1:15:39 point,

1:15:39 um,

1:15:40 that's easy.

1:15:41 It's a hard,

1:15:42 that part's really hard,

1:15:43 that's why we didn't look at it.

1:15:45 The second point,

1:15:46 um,

1:15:46 I think

1:15:47 there's two things that are important to think about when we

1:15:51 are talking about the,

1:15:52 the benefits of these policies.

1:15:54 So,

1:15:55 um,

1:15:57 one issue that came up before that I think

1:15:58 is really relevant here is that a lot of these

1:16:01 The effects of the policies would be

1:16:04 essentially positive

1:16:06 externalities,

1:16:06 so

1:16:07 the brown firms wouldn't necessarily be feeling them,

1:16:10 they'd be felt by the rest of society.

1:16:12 Now,

1:16:12 of course,

1:16:13 it's important to

1:16:14 mention that the analysis I did

1:16:17 was partial equilibrium.

1:16:18 So,

1:16:19 I don't want anybody to take away that

1:16:22 the analysis we did is a reason we shouldn't

1:16:25 transition to a greener economy because we aren't picking up those things.

1:16:28 It's,

1:16:29 it is important to understand that

1:16:31 there are transition risks

1:16:33 associated with the green transition,

1:16:35 but if you did the general equilibrium analysis,

1:16:38 of course you would pick up a lot of benefits as well.

1:16:42 Great.

1:16:42 Thank you very much,

1:16:43 Manos.

1:16:44 So,

1:16:44 there is no right or wrong

1:16:46 in terms of corporate bonds and loans.

1:16:48 Uh,

1:16:49 I,

1:16:49 I agree with the comment,

1:16:50 it,

1:16:50 it's relationship lending,

1:16:52 OK,

1:16:53 but,

1:16:53 uh,

1:16:53 in one of the robustness tests,

1:16:54 we have the same bank,

1:16:56 the same underwriter

1:16:58 also issuing the bond.

1:16:59 It's the same bank

1:17:00 that issues both a loan and a bond.

1:17:02 And that bank prefers to issue the loan.

1:17:04 It's a maturity issue which relates to your question.

1:17:08 OK,

1:17:08 that,

1:17:08 that risk is gonna go down the road.

1:17:10 It's not a risk that materializes right now,

1:17:12 so it's not the same

1:17:13 with home ownership.

1:17:15 And at the end of the day,

1:17:17 the bank is a profit maximizer,

1:17:19 right?

1:17:20 They aim to make a profit.

1:17:21 So,

1:17:23 They are going to increase green lending,

1:17:24 but at the same time they are going to increase brown lending

1:17:27 to make that profit because these firms are large,

1:17:29 profitable,

1:17:30 and,

1:17:31 uh,

1:17:31 banks are making a lot of profit from them and from their

1:17:35 40-year relationship with them.

1:17:37 OK,

1:17:37 so that's

1:17:38 the message of the,

1:17:39 of the paper here.

1:17:40 At the end,

1:17:41 you need regulation,

1:17:42 that's the idea with the government stepping in.

1:17:45 Perfect.

1:17:46 Sergey,

1:17:46 do you want to say a word?

1:17:47 Yes,

1:17:48 uh,

1:17:48 really,

1:17:49 um,

1:17:49 really to your comment about relationship lending and your,

1:17:51 your,

1:17:52 your,

1:17:52 your point relationship lending.

1:17:54 If banks are doing relationship lending,

1:17:56 they might have more

1:17:58 information about those firms and might be,

1:17:59 they might be able to monitor more of those firms.

1:18:02 So in that sense it might be a better financial intermediary than bond markets,

1:18:07 uh,

1:18:07 to channel the green financing.

1:18:09 Great,

1:18:10 thank you very much.

1:18:11 Just a word on AI,

1:18:12 yes,

1:18:13 um,

1:18:13 and in a way that might be a help to Paul's question too.

1:18:16 A huge opportunities.

1:18:18 Uh,

1:18:18 two weeks ago,

1:18:19 we,

1:18:19 the Bezos Earth Fund,

1:18:20 launched a $100 million

1:18:22 grand challenge

1:18:23 for those that are trying to solve problems of

1:18:25 climate change and nature on the front line,

1:18:28 we're going to match them up with the AI

1:18:29 and provide financing to make that happen.

1:18:32 Um,

1:18:33 yes,

1:18:33 Paul,

1:18:34 it's a dreadful global economy we face

1:18:37 looking forward.

1:18:38 The good news is that doing it green actually is no longer more expensive.

1:18:42 There are some things,

1:18:43 uh,

1:18:44 that are more expensive,

1:18:45 the so-called green premium for green hydrogen,

1:18:47 but even there,

1:18:48 the cost of electrolyzers have fallen by 75% of what they need to fall by.

1:18:53 So in a way,

1:18:54 given how very,

1:18:55 very difficult it is,

1:18:57 we need to be,

1:18:58 we need to have ideas that are sort of

1:19:00 really different,

1:19:01 like,

1:19:02 President Ajay Banga and the African Development Bank are committed to bring

1:19:06 to 300 million Africans

1:19:09 green electricity

1:19:11 by 2030.

1:19:12 We're piling into that

1:19:14 um because it's important.

1:19:15 AI can

1:19:17 play a really exciting role,

1:19:19 but there's a real possibility

1:19:21 that great initiatives such as the so-called JetPas,

1:19:24 which

1:19:25 Deals done with Indonesia,

1:19:26 South Africa,

1:19:27 Vietnam,

1:19:28 and now some others whereby G7 will come and provide finance,

1:19:32 and they will close down coal plants and only invest in renewables.

1:19:36 Those potentially could collapse

1:19:38 unless we're able to be innovative and bring the kind of carbon markets in.

1:19:42 There's plenty of money there.

1:19:44 There's philanthropy,

1:19:45 but above all,

1:19:47 there is the

1:19:48 catalyzing role of MDBs and others to bring in the private sector.

1:19:52 We believe at the Bezos Earth Fund that there is a huge gap

1:19:56 of a,

1:19:56 of a,

1:19:57 of a uh of,

1:19:58 of what,

1:19:59 what we,

1:19:59 we,

1:20:00 we,

1:20:00 we're proposing something called a deal team for the planet,

1:20:03 where the World Bank should lead together with

1:20:06 uh DFCs,

1:20:07 other MDBs,

1:20:08 private financial institutions,

1:20:10 and instead of staying in their own silos,

1:20:13 because at the end of the day on a Monday morning.

1:20:15 MDB people do not think the way that the private corporate

1:20:20 investors think.

1:20:21 They should form real teams

1:20:23 with real commitments and go after like half a dozen

1:20:27 major regional investments,

1:20:29 and the presidents of these institutions,

1:20:31 whether it's Jamie Dimond or whether it's Ajay Banga,

1:20:34 they should be saying,

1:20:34 OK,

1:20:35 9 months from now,

1:20:36 our teams are working between now and then.

1:20:39 We're going to meet with heads of state and we're going to do deals.

1:20:42 We simply.

1:20:43 We don't have that kind of

1:20:45 um

1:20:46 that kind of vision.

1:20:47 We do when it comes to war,

1:20:49 we do when it comes to,

1:20:51 you know,

1:20:51 the pandemic,

1:20:52 but we don't have it when it comes to do with what's an even bigger challenge.

1:20:56 Look,

1:20:56 this was brilliant,

1:20:57 thank you very much.

1:20:58 Thank you,

1:20:59 Intermittent team for putting this on the agenda.

1:21:01 This is absolutely relevant.

1:21:08 Thank you so much,

1:21:08 Andrew.

1:21:09 The turnaround is super quick.

1:21:12 You have 2 minutes.

1:21:13 We need to change the batteries,

1:21:14 change all this other stuff.

1:21:15 Next speaker is Michael Kramer.

showAllTimestamps

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transcript

Welcome to the 3rd session of the day. Uh, very exciting session today. We're gonna be talking about private capital mobilization for sustainable development. I'm very excited to introduce our moderator, Andrew Steer, who's the president of the Bezos Earth Fund. The sequence of the session. We're gonna start with Bob Cowell, who's a Research Manager and lead economist in the finance and private sector development team here at the World Bank. He'll give us some intro remarks and then we're gonna have 3 papers presented, uh, carbon forest, Carbon Prices and Forest Preservation Over Space and Time in the Brazilian Amazon by Jose Shenkman from Colombia, Climate Regulatory Risks and Corporate Bonds by Lee Selzer from the Federal Reserve Bank of New York. And then too big to strand, bond versus bank financing in transition to a low carbon economy from Manos Telles from Audencia Business School at the University of Johannia. I get that right? Uh, and then afterwards, our discussions with Claudio Radatz from the University of Chile and Sergio Schmukla, Research Manager of Macroeconomics and Growth in the World Bank's Development Research Group. With that, let me hand over to you, Andrew. Thank you very much. Uh, it's great to be here. Um. A few gaps in the audience for those that don't take climate finance as seriously as the euros, and uh shame on them, shame on them, and I, that doesn't give anyone else the excuse to leave now, in the mid, cos the, the, the. The important semi-final is tomorrow, uh, Netherlands against England, you'll be glad to know. It is fantastic to be back at ABCDE. Um, Indermit and I are old enough to have been at the first one. Were you there? 1989, I think Paul Eisenman was there. I was heavily involved in it then. And my goodness me, it's fantastic to see 35 years in the role that ABCD has played on the intellectual journey for development has been stunning, and thank you Indemit and your whole team for continuing this amazing progression and it's great to do it with CGD. The subject. But this session is uh is climate finance. Um, you'll have heard many, many stories about how desperately short of finance we are. Um, you'll have heard the IEA, uh, we're going to need $9 trillion of investment worldwide. That includes rich and poor countries. By 2030 compared to about 1.8 trillion today, massive increase. The issue as everybody here knows, is that, not that there's a shortage of finance in the world. We'll come on to philanthropy, but there are $200 trillion under management of financial assets. No shortage of money. The challenge is how do you get it? Two very important things that often are justified but not included in the marketplace, and that's where you need government regulations and many books and papers have been written, and we're going to. Address some pretty interesting issues here, um, right now. Um, the World Bank is at the center of this debate, um, because everybody knows that public money is massively too little, um, and therefore the name of the game is leverage of private money, and of course the World Bank Group, those of us that have spent a lot of time here in our careers. Um, admit that we actually haven't done a very good job at mobilizing private money. Every dollar of World Bank lending generates less than an extra $1 of private money, and of course Ajay Banga regards this as one of his biggest challenges, and I'm sure he spoke about. That this morning and doing some very exciting things, reforming the guarantee structures, but also doing some other very, very interesting things as well. There are lots of innovations in this space, whether from carbon markets or debt for climate swaps, all kinds of issues going on. Um, 2.5 years ago, um, we, we achieved what we thought was an amazing breakthrough. In the lead up to the Glasgow COP, it's a conference of the parties of UNFCCC, um, the financial sector suddenly, um, got religion about climate change, um, under something called GFANS, that's the Glasgow on net zero. It's the financial sector, every single asset class. In their own groups got together and committed to move towards net zero portfolios by 2050. Incredible. $150 trillion were committed. Well, that was like a Saturday night, you know, let's give a go of it. It's now Monday morning. It turns out it's much, much more difficult than we thought, so there's been some backtracking for all kinds of reasons, including political. We might talk about that in the, in the question time. So our speakers today are gonna be extremely um efficient. We're gonna start with Robert Cole, who's um research manager in uh DEC, doing some really interesting work, and he's going to give us a sort of a framing of how we should be thinking about these, these issues. Over to you, Robert. So if that's OK. Oh. I had slides prepared, but. OK, thanks very much for the opportunity to speak to you, um, about mobilizing private capital for, for the SDGs. Um, so, um, to be honest, in the research department, we, we're not the leaders on this, on private capital mobilization. Um, so, um, Intermitt sent me, must be 15 or 18 months ago, our chief economist sent me an email and he said, Certainly you and your group should have thought about this pretty carefully by now, huh? Uh, we're used to such emails from and it's fine, but I think he knew the answer. I'm an empirical research economist. So, yeah, I had thought about it. You can't avoid it around here, but I knew it was a tough problem. I like a simple problem with good data, specify a hypothesis, test the hypothesis, gain a little insight from that paper, then move on to the next, and then make big contributions, uh, from that. Intermitt's not that way. He's a go big or go home guy. Um, and so we started this conversation, he and I, um, and from that conversation, we decided to do a little bit of a stocktaking. And then, you know, a diagnosis, diagnosis of the challenges and opportunities with respect to private capital mobilization. And eventually it produced this working paper that we, uh, um, it went out last week. So I'm just gonna give you a few of the highlights from this paper in order to set up what comes next. Um, next slide, please. Oh, I do. Sorry. Oh boy, this will get screwed up. OK. Um, oh no, this is the one, the top slide, you know, stocktaking diagnosis, this wasn't hard. We, we went over this in the morning. We're falling trillions of dollars short in a, in a bunch of, uh, areas and this is why we need private capital. And then the Laru Lankus sort of summarized the problem here. We haven't been able to get this done on a big scale at all. Um, no major breakthrough, breakthroughs, fragmentation, and we're just not going to meet um the, the, the, the financial goals that we need. So, in terms of stocktaking diagnosis, this is not a problem. This is not enough money. Everyone's alluded to that. Um, so we started to think a little bit about what it would take, where, where, could, how could we crowd in private investment. And um Again, I, I won't spend. Too much time on this is just sort of the highlights from, from our analysis. And you know, on the left-hand side, MDB supported investment, public investment generally, um, it can attract additional um private investment, um, and you know, it does this through signaling and demonstration effects as an MDB. The participation in syndicated loans. There's work at the IMF that show that MDB participation in syndicated loan brings for every $1 invested, it brings $7 more in, in, in private credit, bank credit over the next 3 years. So there's some signs that, that, that can happen. Um, it, it also attracts private capital through risk sharing and expertise, um, know-how as in uh uh public-private partnerships for infrastructure. Um, we can also attract additional private capital, um, through managing risk and reducing uncertainties, uh, such as using our guarantees to address political and credit risk. So, um, we're able to do that, we know, um, but to have the biggest effects, uh, we use this applied micro framework that we, uh, macro framework that we borrowed from Art Crey and Jeff Chelsky here at the bank that sort of, uh, starts from a basic production function. And the large, the big takeaway is that the biggest gains in terms of crowding in private investment come from uh projects that raise the marginal product of capital. These high NPK projects have the, the, the, the most to offer in terms of growth benefits. Um, at the same time, even though those projects have large benefits, you still have to persuade private investors to invest in them. It still comes down to them believing that they're going to be returned on those projects. And so we come to the conclusion uh in our paper that mobilizing substantial additional capital is gonna require financial structures, contracts, and platforms that augment sort of business as usual financial intermediation. And, and our reasoning is that if private investors were aware of and persuaded by the potential returns on these investments, they would have already invested in them. Um, and so, what we did next was starting to think about um, What, what does the financial system do and how can it be adapted and modified to draw in private investment in support of the SDGs. So, we went back to Robert Merton's classic functional approach to financial intermediation, uh, to think about what we might be able to do. And then from the perspective of those functions, we examined 5 instruments, uh, approaches to financial intermediation. Uh, that could be adapted to increase investment that supports STG progress. And we looked at guarantees, public PPPs, syndicated lending, sustainable financial contracts and climate policies and bank regulation to promote green lending. Um, the takeaway here, I mean, it's 2, pooling of funds, for example, syndicated lending does a good job of that. 3, resource transfer, bank regulation, capital regulation to incentivize green lending would be an example. Um, for coping with risk and uncertainty, you know, the World Bank, we do a lot in the way of guarantees that can do it, and function 6, dealing with asymmetric information incentive problems, PPPs, they improve risk sharing between public and private sector, and they resolve moral hazard and other incentive problems. Um, so, a few things, the stuff that the bank is involved in the World Bank Group, the guarantees, the public-private, private partnerships, uh, and syndicated lending. We have the most influence over but they're the smallest in scale by far. Um, and more generally, um, high marginal product or capital projects that could crowd in private investment are hard to come by. Um, scaling up is difficult. Um, it's complex. Uh, these projects are complex and context-specific, and project pipelines are therefore limited. So I was very happy to hear Ajay, uh, President Banga talk in the morning about the private sector investment lab, which I think is a great initiative and ideas to deal with the scaling up problem. For example, you know, facilities to deal with foreign exchange risks, for example, and securitization, but you know, that's beyond the scope of this talk. Um, so, And we're gonna talk about uh environmentally related SDGs here and trying to do things in terms of green finance. And there's an additional complication here, um, and it's that private investors do not generally internalize all the potential positive externalities. Um, and so this is more a proposition that we put forth in the paper than anything else. Um, but we think it's very challenging and perhaps sometimes inefficient for financial support instruments to overcome both these uninternalized externalities, environmental externalities as well as conventional market failures. It's a tall order. This is the, this is the crux of our problem here. Um, which brings us to the first paper in the session. Um, well, the other two are going to be focused on, uh, more traditional green funding through capital markets and bank lending, which also have challenges for ensuring green outcomes. Um, and we'll touch on that at all. This first paper by Professor Shenkman identifies huge potential environmental benefits associated with reforestation of the Amazon. But finding a workable contract structure seems to be a challenge. I'll see what he says about that. And it's unclear, although this is a hugely important, um, project, what role private capital could play in this. So with that, I will sit down. Thanks so much, Bob. That was a, a wonderful, uh, framing, and we're now gonna go to the Brazilian Amazon. Um, Professor Jose Shenkman, distinguished professor at Columbia University, he's gonna talk about carbon pricing and what it'll take to keep the forests alive. And measure my 10 minutes. OK, so the motivation for this problem is very simple. Um, um, an area the size of Texas has been deforested in the Brazilian Amazon. 85% of this land is going to low productivity cattle. And the destruction of the forest has not helped to alleviate poverty. In fact, the Amazon has lower growth, the people have lower wages, and everything compared to other regions in Brazil. So, but there's a good side to it. In Amazon, in the Amazon, a tree can store between 500 and 550 tons of CO2. And low and declining productivity of, of land has led about 20% of the deforested land to be abandoned. OK? So that highlights the opportunity for what we could call passive deforestation, because in this land, you actually see a lot of reforestation, just passive reforestation. So we had an economic and ecological disaster, but we also have a great opportunity. So in this work I'm doing with Juliana Sanson, Lars Hansen, and Todd Munson, we try to understand um how the trade-off between agriculture, mostly cattle, and, and, um. And uh carbon capture works, and let me start, there's a lot of math in the paper, but we don't have to worry about that. So here's the bottom line with modest prices for CO2, uh, the Brazilian Amazon can produce not very large capture of carbon. I'll, I'll give you numbers in a moment, OK? We do that by thinking two ways. First, we look at the historical performance to derive what we can call a reviewed price. How much have Brazilians valued the Amazon? And the number is not surprising, it's not very large, about $7 a ton if you see the shadow price that gets reviewed. But then we ask, what happens if you increase payments from, from get transfers, and I'll talk a little bit more about that. Of $10.15 dollars, $25 of per net to. So there is no burnett to captured, so there's no payment for simply preserving, only for actual carbon capture. So let me get you to the, to the graphs. I didn't use the slides because I think the slides are confusing, but this one is necessary. So this graph shows three trajectories. OK. The red trajectory is what we call business as usual. What will happen to the Amazon if things continue the trajectory we've been in terms of implicit prices? And it turns out that deforestation will become something between 20% and 25% in the next 30 years. And that's enough to bring a lot of trouble, you know, depending on the scientists, either you're going to be, the forest is going to disappear in some areas or the forest is going to disappear everywhere into a savannah, and it's not really clear. But with even $15 if you look at that map, you can see that. You completely get rid of agriculture and reforest the whole, this is the trajectory of agriculture, of occupational agriculture, and of course, at 25, it's that. Now, This next table is, I want you to keep only a couple of numbers from this next table. Don't look at all of it. The first has to do with what, what will happen as these transfers come in, in Brazil with forests, OK? What happened with the value of agriculture. Agriculture essentially vanished. Right now, the present value of agriculture in Brazil would be about $372 billion. But that would be reduced to 18, so it basically goes away. On the other hand, you get transfers, because for every unit of carbon capture, you're going to get $25 for instance, and those transfers add up to $350 billion. And then you have the rest, you can compare the Forest Service Brazilians would enjoy at the price of $7 etc. But here's the lesson you could get from this deal. First of all, it's big, $350 billion is a lot of money. You're not going to get the private sector to transfer, you know, the flow in certain years, you know, forests go very fast in the beginning and slow down, would be of the order of $20 billion. You don't get $20 billion for one program to capture carbon like this. So, even though, as Indermet said, I have impeccable Chicago credentials, I think that that's a problem that only governments can solve. OK? So let's start from the side of the government of Brazil. Now, so let's do some accounting very fast, OK? Business as usual, would emit an extra 18 gigatons in the next 30 years. But if you've paid Brazil $25 it would be irrational to capture 15 gigatons. Now, you only get paid for the 15 gigatons, but on the whole, the change in trajectory is 33 gigatons. So if you compute the price per unit change, that turns out to be about $8 a ton. That's a very good deal. So the next table, it's produced from data with you guys. OK. And by the way, 33 gigatons is big, you know, our budget for 1.5 degrees is about 200 gigatons at this point, so that's a big number. So, let me talk about, this is a table prepared from the by the World Bank that shows the price, the implicit price of carbon at different markets in the world. Now, I only put the low ones above 25, there are a few below, but you can see that some of the biggest schemes in the world like ETS, the European trading System, those are, are already at $1000 a ton or over $100 a ton. So now one thing we economists know for sure. Is that since carbon is a global bet, given, as Sandra corrected me this afternoon, given the quality of the scheme, given the quality of the carbon capture, um, prices should be uniform. There's no point in having different prices for carbon capture in Europe than capture in Brazil. And so these firms that are paying $100 I would argue that these firms that are paying $100 a ton at the margin, because they must be paying because that's the glooming price. They should be buying carbon at $25 a ton. Now The second thing we should know is that this has to be done in scale, OK, for two reasons. One is a scientific reason. Every You know, people that work on forests will tell you about edge effects. If you have a piece of the forest preserve, but next door you have human activity, you're going to have these edge effects. We're going to lower the quality of the forest. So as we learned in elementary school, right, the area of the circle grows much faster than the perimeter. It turns out that the best way to do preservation is to do a big area continuous. OK. Now experience in Brazil shows that you can do this. You can do this because in in there's work on this, we, we succeeded using satellites to stopping deforestation through a period. OK, now, um, there are two questions you have to think about the forests, they kind of grow very fast and then they exhaust, OK? They stop growing. You know, there's no infinitely long tree in the world. So, as a result, once they reach an equilibrium, there'll be a temptation to deforest, but that can be achieved. That's where finance can bring in their bonds that countries could pay. Now, I don't want to tell you that there's no role for the private sector. The private sector can play in two sides. In the Brazilian side, in this example, they could actually be doing work on reforestation, active reforestation, which actually produces more carbon than passive reforestation faster. That's number 1. The second is that they would be able to, on the European side, the Europeans should allow their firms to buy credits in Brazil. And I mentioned that to one of Macron's advisors, he's probably out of a job by now, but he said, oh, that's politically very difficult. OK, so. So let me finish by saying that there's a lot of potential. What's going on in the Brazilian Amazon, and in fact, I am pretty sure is generalizable to all tropical forests in the world. OK. Uh, it's safe carbon because there are no natural fires in, in, in, um, in tropical, in tropical rainforests. The prices are modest when compared both with this and for the crazy carbon capture schemes that we're financing right now. Right now, if you capture carbon at the well and use that carbon to increase the productivity in that place, you get paid $60 a ton, according to the IRA. OK, so we don't even know how much net results you get, and Anyway, there are problems that I could talk about, but I think that's good enough. I stay within your time. Thank you. Jose, that was, uh, that was superb. Thank you very much indeed. Um, a sign of real hope. In the discussion, we might sort of take it one step further, which is How do the transfers actually get made? How do we know they're honorable? Basically, some of you that are aware of climate cops way back in 2007, the famous one in Bali, where the whole idea of red plus, and we really thought we were going to protect forests. Well, we didn't. We took our eye off the ball. Massive problems of leakage, low quality, no monitoring. Now we can do it much, much better, and I believe we're on the cusp of, of a radical increase in carbon markets. Currently it's only 2 billion a year. Um, and, but the analysis you do is an incredibly useful basis, so thank you very much. Let's go now to Lee Selzer, um, talking about, uh, climate regulatory risks and corporate bonds. Interestingly, Lee, um, is in the climate risk department. At the New York Fed, which I think is very encouraging, it's the first of the feds to actually sort of have such a unit and um well done. Thank you. Uh, thank you so much for, um, having me here. I've really enjoyed my day and I'm really looking forward to presenting this. Um, so this is joint work with Laura Starks and Chi Fei Zu. Um, of course, these are my views and not the Fed's. So this, this paper's been around for quite a while, and when I first started presenting it, I had to spend a lot of time convincing people that investors and policymakers care about climate risk. Usually I have to spend some time. Today though, climate risk has come up so many times at a conference at the World Bank that I don't really have to spend any time, which I think is just great. Um. So, what we're going to be thinking about here is, of course, if we want to combat climate change and reduce carbon emissions, we're going to need some sort of policy response. Um, and we're going to ask the question, does climate risk related to climate regulation affect financial markets? And specifically, we're going to be thinking about corporate bond risk and pricing. Um, the way we're going to measure how brown a firm is, is going to be using the sustainnalytics Environmental score, um, and then scope one carbon emissions, which is scope one emissions, those are emissions that are being pumped directly into the sky. Um, and then we have this way to measure regulatory exposure from the EPA that I'm going to talk a bit about later. Um, we're going to use a natural experiment where the Paris Agreement changed how people viewed future climate regulation going forward. We're going to see how corporate bonds changed after that, and then we're going to try to understand what's driving this effect. So just in a nutshell, we find that bonds issued by brown firms that are exposed to stricter regulatory environments that have stricter regulatory enforcement tend to have higher yield spreads and lower credit ratings. So to put some numbers on it, corporate bond ratings dropped by about 0.6 notch for bonds issued by firms in high emitting industries relative to others. And their spreads increased by 38 basis points relative to others, and these results are strong, strongest for firms exposed to strict regulatory environments. We also see that these results seem to be driven by a change in the assets volatility, which we ascribe to uncertainty associated with this regulation, which I'll talk about more later. So In the United States, environmental regulation is done in a really interesting way. It tends to be set at the federal level by the EPA, but individual states actually have a lot of discretion in how they're going to enforce them. So the way this tends to work is different states have to come up with a plan for how they're going to enforce the regulations, and then the federal government will review the plan. If they say that it's strict enough, then the state's in charge. Every state in green here does their own enforcement for the Clean Air Act, the Clean Water Act, and the Resource Conservation and Recovery Act. You could see this is almost all of them. So, we're going to take information on how different states enforce their environmental regulations and just see which states firms operate in. And using that, we're gonna see how strict the enforcement, uh, the environmental enforcement that firms are exposed to is. Um, so we do an initial test just in, in the interest of time, I'm gonna skip to the meat, to the experiment, um. So what we're going to do is we're going to look at the Paris Agreement. Um, Paris Agreement in 2015, 175 nations agreed to do what they need to do to limit global temperature rise from climate change to 1.5 °C. Um, this of course is going to require some type of a policy response if we're going to make this happen. Um, we're going to see this as a shock to climate regulatory risk that's otherwise unrelated to firm default risk. And you could see we have a quote from managing director from Moody's here. The gist of it is they weren't exactly sure how this was going to affect brown firms, but it probably wasn't good for them. So how is the US going to enforce this? We go into more detail about this in the paper. Obama was at the same time pushing this Clean Power Plan, which was essentially a plan to limit emissions from new power plants and to decarbonize existing power plants. This was announced in late August 2015. It was sold at the Paris Agreement negotiations as being how we were going to enforce the Paris Agreement. Two months later, February 2016, the Supreme Court strikes this plan down. So all of these dynamics are going to be at play when we look at the results. So, what we do is we do what's called a difference in differences analysis, where basically we just see how corporate bond ratings and spreads changed for bonds issued by brown firms relative to others. Um, we have several different ways of defining the brown firms. What I'm going to show you is results using um whether a firm is in the top quartile of scope one carbon emissions, so if they're very high emitting. Um, and we're going to look at how the ratings changed for brown firms relative to others after the Paris Agreement. So here this plot shows you the difference in the change in corporate bond ratings for high emitting firms relative to others. The red line is December 2015. That's when the Paris Agreement. was announced the time before then is before the Paris Agreement, so you could see that corporate bond ratings were pretty similar for brown and green firms before, before the agreement. But then there was a significant drop in ratings for brown firms relative to others after the Paris Agreement. So you could see it seems like the Paris Agreement was associated with a big drop in ratings for brown firms. So we also look at bond yield spreads. I'm not gonna get too nitty gritty with this, but we do have a problem with yield spreads. Um, yield spreads move with a lot more volatility than ratings. Rating agencies tend to be pretty conservative. They don't like to change ratings unless they know for sure that's what's going on. Um, bond traders will trade on any new information they get, especially oil prices. So we're gonna match. Each brown bond to another control bond based on a bunch of factors that are related to the rating, but most importantly, we construct a measure of how their equity prices move with oil prices. So we find here, and this is where the dynamics I was talking about before really come into play, you see there isn't much of a difference leading up to the agreement, but then in around August, you see bondy spreads for brown bonds creeping up relative to others. This is around the time that the Clean Power Plan was announced. Paris Agreement happens, there's a really big spike in yield spreads. And this drops pretty soon afterward. That drop is corresponding with the Supreme Court stay of the Clean Power Plan. It was at that moment that the US response to the Paris Agreement lost its teeth. You start to see this reversal. So now I showed you that you have this response related to um around the time of the Paris Agreement. Was this really related to regulation? So what we're gonna do is we're going to do what's called a triple difference, where we look at how ratings and spreads change for brown bonds that are exposed to very strict regulation. We compare those that operate in strict regulatory environments to others. Um, and when we look at ratings, you could see that really the bulk of this effect is driven by bonds operate that are in states with strict regulatory environments. Um, and then when you look at yield spreads, it looks similar. It seems like the effect is stronger when you're looking in states located in strict regulatory environments. So, in the last couple of minutes, I've shown you that there was this change in pricing that happened, but there's all of this funny stuff going on, we have this reversal, um, what's really driving it? So what we're gonna do, and the details for all of this are in the paper, but They're frankly, too technical and boring for me to go into detail about now. Um, we do a Merton model decomposition where we jointly estimate the change in equity prices and bond prices, and this. Allows us to see how the asset value changes, how the fundamental firm value is changing surrounding the Paris Agreement, and how the asset volatility changes. And this asset volatility, you could say, is, should be related to some sort of policy uncertainty. You could see that for brown bonds, brown firms relative to others, there is a drop in asset value, but right around this Supreme Court stay, you see it reverse more or less completely. Um, if we look at the asset volatility, first, the increase in volatility is very, very big, but we don't see a complete reversal. There is some reversal after the Supreme Court stay, but you still see elevated volatility. And the reason for this is because even if we didn't have a Literal change in policy at that point, there was still a lot of uncertainty because remember this was the time where we didn't know who the next Supreme Court justice was gonna be. Um, it was gonna be based on whether Trump or Biden won the election. Um, and because of that, there was a lot of uncertainty in the, the policy landscape. Um, so just to conclude, these results show that corporate bond investors and rating agencies respond to regulatory risk and We have survey evidence that says that institutional investors view regulatory risk as an as an especially important channel of climate risk, and this is consistent with that. But um I think something that's really interesting here is these results show that the change in volatility is driving the results, and we, we know now we're at 9 years after the Paris Agreement that nothing really happened in the US after the Paris Agreement. Um, but this indicates that regardless, because there was that change in the policy uncertainty, investors responded. So even in the absence of changes in policy, if we have some sort of shock to the policy uncertainty related to climate change, that can matter for asset prices. Thank you. Thank you, Lee, very much indeed, and Fairly encouraging. Financial markets do reflect the, uh, the, the, uh, climate risk. Um, finally, Manos, uh, Delles is uh from the Adencia Business School. He's going to present a very interesting paper, uh, uh, about the difference between bank lending and bond financing. Great. Uh thank you so much for having me in this, uh, place of wisdom. First time in the DC to present this paper on the bond to bank uh substitution. This is part of a broader endeavor actually, uh, where we use, uh, um, syndicated loan pricing in, in many respects to examine how the banks price, uh, carbon risk, how they price, uh, fossil fuel reserves, how they price the possibility that, uh, or the probability that these reserves are going to get stranded. Eventually, by stranded, we mean that they are going to become unburnable because of, uh, Um, uh, policy stringency, right? So that's the, the main idea here. I don't think that I need to motivate in a place like this, and, uh, following the speeches that we had this morning, um, uh, too much, uh, this paper, um, uh, we know, uh, we know the background, we know what's happening with, uh, uh, we just mentioned that, uh, we need trillions of dollars to catch up in terms of financing, so I'm going to skip all that and I'm going to focus more. Um, on what the pricing issues are with um with banking now. What is bond to bank substitution? Uh, it's pretty simple actually. The firms can issue corporate bonds or they can get loans, OK? And there is a very big literature on these issues in other respects, not uh concerning fossil fuel reserves. Uh, this theoretical literature suggests that uh bank finance can be subject to more monitoring and screening. However, banks, as we saw in this other paper with uh. Uh, the Grey, Joseffidi and Jena in 2021 are more, are a little bit more weak on the environment compared to markets, and I'm going to show you some data on this, um, uh, soon enough, and the banking sector development is not the most suitable one, according to other research, mainly by, uh, uh, De Has and Popoff on, uh, on, um, uh, innovation intensive industry. So we need to find finances. Uh, on this respect from other sources, and this is super important in terms of the literature, uh, that we are trying to, um, to augment and, uh, the problems here that we aim to tackle. So, um, why is that substitution from corporate bonds to loans possible? Now, these firms obviously are large firms, right? We're talking about giants, um, giant firms extracting fossil fuels and holding reserves. Now, these firms are going to aim to get finance from very large corporate bonds or from large syndicated loans. That implies the large banks are more likely to be involved, and um um large banks, we know they are more able to diversify risks, but they are also subject to capital requirements, and the capital requirements imply a moral hazard. We know that from banking one on one, right? So, uh, when you have a high capital requirement, then you feel safer to provide. Uh, these loans, don't forget that these fossil fuel giants are super profitable, so it's profit maximizing for the banks to, to provide credit to fossil fuel firms, and, uh, of course that is going to relate, that is going to generate a not too big to fail problem, but perhaps a too big to strand problem for the banking sector. Of course there are other issues at play. Uh, for example, syndicated loans have an average maturity of 4, 4.5 years, whereas corporate bonds is 10 years or more in terms of maturity. And also banks are politically connected, so this is also kind of important in this line of research. So skipping the, the overview of the results and going straight to what we do in this paper, so we generate this climate policy exposure index. We did some very heavy data collection here. The data collection comes in the first part of the product in the relative reserves. So these are the rela, these are the relative reserves for each firm. In each year, and in each country where they hold their reserves, OK? And we're talking about fossil fuel reserves here. So these are hand-collected data, we literally go inside the financial statements of the firms and collect this data from 2007 to 2018. And then we multiply this index, which implies how sensitive these firms are going to be to stranding assets if policy becomes more stringent. We multiply this with this CCPI index, which is a climate, it's a country specific with a time variation, OK, a country-specific climate policy index, how stringent uh climate policies are in each country, uh, um, uh, that we examine in our sample. So this is the Climate Policy exposure index, so you can see the location of fossil fuel reserves here. Uh, the Climate Change Performance index is the highest, the most stringent in the United Kingdom. The United States is somewhere in between there, rising until 2016. And then, uh, you have countries like Australia, uh, somehow at the bottom of the, of, uh, of this stringency in terms of, uh, the index, and this is the map. You can see that uh North America is not doing very well in terms of our um index, Europe is doing better. I come from Europe. I also come from Greece, where I shouldn't discuss fiscal policy too much, so, um, anyway, so this is the data, the data that we have two data sets. The one is syndicated loans, um, uh, we have at the end, more than 13, uh, about 13.5,000 syndicated bank loans. 1100 of these loans are to fossil fuel companies, and then we have this corporate bond data set. Uh, more than 9000 corporate bonds and 682 are to fossil fuel firms. Comparing these, uh, now, of course, there's lots and lots of endogeneity issues floating around. I'm not, I'm not going to take out, uh, the, the identification police, uh, in this audience, but, uh, um, uh, we do many, many things to, to safeguard causality. Some of these relates to the previous presentation where we do din diffs. We also use instrumentation. OK, um, what I want mainly to show here is that the corporate bonds have one, a mean, uh, spread of 195. And the fossil fuel bonds have 377, so there's a massive difference between the corporate spreads of of corporate bonds to fossil fuel firms compared to non-fossil fuel firms. This is not at all the case in syndicated bank loans. You can see that the mean is 231, whereas for fossil fuel loans, it's only the gap is minor, it's only 247. This is what generated the interest, uh, our interest in this idea. This is the regression that we run, uh, the first regression, we estimate two separate regressions, one for the loans, one for the bonds. We have the cost of debt, which is the loan spread and the bond spread on the left-hand side, and then we regress that on this red interaction term between fossil fuel dummies, 1, if it is a fossil fuel company, 0 if it's not, and the climate policy exposure index that I just talked about. Uh, you can see that the difference, much like the descriptive statistic, the difference, um, uh, in, um, loan spreads, it's the, the red column, it's 31 basis points. The difference in bonds is 82 basis points, so it's much bigger difference in corporate bonds. So this essentially motivates the, the, the, the rest of the analysis. In the rest of the analysis, this is the regression that we do. Uh, we use loan to bond substitution. Uh, essentially on the left hand side we have a dummy which takes the value 1 if we only have syndicated bank loans by an underwriter, by the large bank that is underwriting the loan, and 0 if it's only corporate bond, OK? And then we run the same regression as we did before, and this is very small numbers here that it's positive. Um, effect. So indeed, for a plus 30 index points of the climate policy exposure, so you increase policy stringency by one standard deviation, you have a 21% points increase in the probability that you issue a loan compared to a bond. So essentially, these underwriters are substituting loans, sorry, bonds, corporate bonds for loans, OK, so this is the main result in the paper. Um, lots of other stuff, uh, here, we, we do one last thing. Uh, is this because of large banks? Indeed, yes, it is because of large banks. This is the main result here, triple interaction term. OK, if you control for pretty much everything, then you see that the price decrease in the loan spread comes primarily when you have a large uh bank as the underwriter of the loan, OK? So what is the takeaway from all of that, tentative conclusions, 3 things banks give better pricing to loans compared to bonds. OK. Second issue is that they substitute actively bonds for loans, and the third issue is that this primarily comes from large banks, irrespective of the fact of whether these claim to be green banks or not. OK, by the way. So that's that. Thank you very much for listening and uh I'm looking forward to the discussion. Thanks very much, Manus, fascinating. I, I, I'd be interested to know whether you've presented these findings to some of the large banks. It'd be really interesting to see what they have to say and uh maybe in the discussion we could, we could consider that. We're gonna have two brief comments now from World Bank senior um research leaders, uh, Bob Cul and then Sergio Smkla. Over to you, Bob. It's coming. OK, thanks. OK. Um, so it's a pleasure to be able to comment on this paper, um, by Professor Shankman. It's, um, It's a tour de force of applied theoretical research. This is a skill set that I don't have at all, uh, and therefore I won't have anything to say about the model itself. Um, but, you know, the conclusions, uh, you know, what I, there's a huge environmental opportunity here, and it seems so simple. It seems so simple, it's like low hanging fruit. And so why did I ask myself as I was reading it, why doesn't this get done? Um, and so motivated by that last question, I have comments in two areas, um, about the contract itself and how it could work in practice, and some of those are about clarification, just some of the things I didn't understand. I think now that we've spoken to each other, but still maybe helpful for others in the audience to, um, you know, I'll reveal my ignorance, which is always fun. Um, but those questions may help you as well. Um, but then, uh, a second part of the comments is, um, How do, you know, projects, contracts to support attainment of environment, environmentally related SDGs which in this case appear to have a huge payoff. How do they fit within the framework for private capital mobilization that the bank has laid out um for itself? So, um, in terms of these clarifying questions and how the contract would work, um, again, reveals my ignorance. So, there's a phrase here, the planner would agree to sign an agreement to receive B equals 25, which is the cornerstone of the analysis to get the um optimal benefit in terms of reforestation for each ton of CO2 captured. So And this is such a basic question. Who are the parties to the transaction? Um, I think Jose's made it clear that the Brazilian government has to be a party to it, and it seems like we're talking about carbon markets working some way here, or could there be another party to the transaction? MDB is a fund, the bank. I'm just curious about, given the large amounts involved, who could the other partner be and how does that work? Again. And then, and this is again, as I was writing the margin. Brazil pays the landholders not to produce cattle. Is that how it will work then and is it or buys their land? Um, and then does Brazil do the reforesting itself? Does that occur naturally? And you address that in your comments. There would maybe be a role for um the private sector to play here. Um, so those are just sorts of things about the contract, um. A second part of the contract is how do we make sure that Brazil doesn't defect, and Professor Shengman didn't have a lot of time to talk about this, but um in the paper he lays out how these environmental gains to carbon capture and deforestation would be achieved over a very long time horizon. I think he mentioned this, of course, and um and here's the quote to avoid defection, you could use a carrot which involved buyers establishing a fund. Uh, with the value of, of, uh, you know, uh, the value of defection essentially is what they, they calculate there, and it's payable if a planned deforestation does not deviate substantially from the target. Um, so my question is, would the contract be sustainable over such a long period? Um, who are the buyers who creates the fund again? It's not a huge amount, so maybe that's easier to handle, but I'm just curious about who you have in mind. And are these straight transfers or is Brazil borrowing these funds? I think we're talking about straight transfers, um. So if they're not borrowing, we don't have to worry so much about competing priorities for politicians and government. But I do wonder if financial incentives are going to be enough here, um, to keep them on the right path. And then, so what's calculated is the financial cost of deviating essentially. Um, but if government changes hands, couldn't it be worth more to politicians in terms of dimensions they care about, votes, patronage, um, to defect, and I'm just curious about your thoughts on that. Um, turning to my last point, which, um, thinking of this idea and proposal, which makes so much sense, but I'm thinking in terms of the, the World Bank approach to private capital mobilization. So we go back to this notion of the cascade where countries are going to maximize development resources. By drawing on private financing and sustainable private sector solutions to provide value for money and meet the highest environmental, social, and fiscal responsibility standards. This is from that famous 2017 World Bank Development Committee paper. So, to operationalize this, uh, we're supposed to first ask, is there a sustainable private sector solution that limits public debt and contingent liabilities. And I wrote, I, I don't see an obvious one, and I'd, I'd like to know what Professor Shenkman thinks about that. Um, if the answer is yes, promote such solutions. If the answer is no, ask whether uh the, the, uh, it's no because of policy or regulatory gaps or weaknesses. I don't see that being the problem here, though I may be missing something. Um, or is it because of risk? So assess the risks and see whether World Bank instruments can address them. If you conclude that the project requires public funding, pursue that option. So, similarly, I don't see risks that need to and could be addressed, mitigated using World Bank instruments. Um, and so, I don't, carbon pricing, transfers, reforestation, I don't see it fitting into the way we're thinking about private capital mobilization. I would love to get Professor Shenkman's views on that. Um, the major impediment to private capital mobilization that I see in this context, and you know, I might be wrong, is that the project and would not generate returns for private investors. I don't, I don't see an easy way to do it. Um, and then it forced me to step back and again, I want, it's great to have you here just to hear what you think about this. I wonder if you think this feature is likely to be a common one for projects designed to tackle, you know, environmentally related goals, SDGs, but on a really large scale. Um, and so, if so, how much scope is there to pursue private capital mobilization in these contexts? So those are my comments. Of, um, perfect questions. Um, there are billions of dollars that the private sector would be willing to invest in this. The reason they're not doing it, and that's under the voluntary carbon market, it's not even regulatory, um, um, carbon market. The reason they're not doing it is because they don't see standards that will enable them to hold their heads high. And they do not want to be accused of greenwashing. That's the debate, exactly the issues, you say, World Bank is heavily involved in this, we are the Bezos Earth Fund, we're the largest financier of standard setting, um, uh, goal setting, monitoring, satellite technology now can basically see not only every tree as it falls or grows, but actually now can figure out how much carbon is embedded in that. And so we're in a, a new era, but there's still a huge way to go because trust is so lacking in this er field. Um, let's see, Sergio, over to you. Well, thank you very much. Thanks for inviting me to be in the conference. It's a pleasure to be here. I'm going to discuss the 2nd and 3rd paper. Um, the 2nd set of comments are on the 2nd paper from me and the other ones are from Claudio that unfortunately had a family emergency academy here. So, uh, regarding the first paper, uh, on Climate regulatory risks and corporate bonds, um, So, let me very briefly summarize the papers. The paper looks at the effects of um a climate regulatory risk on corporate bonds, and it basically says that um firms that are, we have a weaker environmental profiles pay a higher cost of capital, uh, higher spreads, and have lower credit ratings. And these have become more exacerbated after the Paris Agreement. That's basic, and they use a very neat experiment, which is this exogenous shock, and they use variation within across US states with different enforcement of the regulation, and I believe the results is a very well done paper. It's a long paper that has matured. And the paper also presents some complementary evidence showing um using the Merton model that this is driven by an increase in the volatility of the assets. And that both credit ratings and investors react to climate regulatory risk and that in the evidence that Lithium provide here but is in the paper that insurance companies are the ones that are reducing the holdings of these bonds and are creating this higher cost of capital for these firms. So, uh, the comment, um, the paper is very nice, um, it raises new issues related to climate risk. Um, as I said, it's a, um, very mature paper that provides a useful French, uh, benchmark, um, benchmark estimate of going forward in terms of climate risk. Uh, the main contribution I think is on the legal side. I have comments on both, um, what climate risks are and also on the big analysis. Let me go first to the climate risk, um, comments. Yeah, yeah, I, I use my time. I use 5 minutes for each. Um, so, basically, um, the climate risks that are at least 3 types of risks. One is the supply side of risk, uh, supply side, um, uh, type of risk, which is uh damage to the physical assets of the firms, technology, production capacity. Also, on the demand side, this consumption of products that consumers might change their preferences, and investors also might change their preferences. And also on the regulatory side, the regulator might impose new rules. This paper focuses on the regulatory side, but basically ignores the supply side or the demand side. Um, and it basically focuses on the costs, not on the benefits of the regulation. These regulations are to improve the climate, so it might have some benefits in the longer term. So the bigger question is how large are these regulatory risks versus the other type of risk that the paper doesn't measure, but it would be good to have those answers to have a bigger picture of the importance of regulatory risk. And it will also be important to disentangle the regulatory risk from the demand side. Regulators are not crazy. They are kind of imposing those constraints on firms because consumers and investors and the society demands it, so it's very difficult to disentangle one from the other. And also, um, the, the paper tends to focus on the negative effects on the claim on those risks, on the, on the regulatory risk, but there might be some longer term benefits, and the long-term benefits might be affecting, for example, the diff indeed that you have on the treatment firms that might benefit from those, some of those regulations. So I think having a bigger picture would be useful. Couple of on the legal side, focusing on the US, Europe might be a good case to study as well, and the paper doesn't do it, but I think that that's a material for future work. And also related to the other paper, it focuses on bonds which Important, but they might be in transition from bonds to bank financing. So look at the cost of financing to this firm, not only on the bond market, but also on the bank side. It might be useful as well as distinguishing between green and brown bonds. To finalize my comments on the PA side, you focus independently on ratings and spreads, and these two things might be correlated. If rating agencies downgrade the firm, that will have an effect on spreads. It spreads increase. This agency will tend to downgrade those firms because the cost of capital increases. So looking at the feedback loop between these two variables that you study independently will be very useful. Also to understand better why volatility is increasing because regulation might might make things more certain, not more uncertain. And also try to understand why pension funds are reacting this way, and not only whether we care about pension funds versus mutual funds as the paper does, but also we want to look at the overall size of the investor base, and not just the composition. So these are the comments on the first paper. Let me go, uh, for a couple of minutes to um the other the other paper. So these are Claudio Rada's comments on, on the third paper, and basically, uh, the paper looks at banks that they, they, the paper argues they charge a lower spread than corporate bond markets for lending to fossil fuel firms with higher stranded assets. And the paper argues that this is evidence that banks are mispricing these stranded assets because they have an implicit support they could get from the government, and this produces reallocation toward bank lending that mitigates the capital constraints of fossil fuel firms. And postpones the green transitions. Banks are financing fossil fuel fuel firms. That's what the paper finds, and the paper basically argues that banks are doing the mispricing. So two comments, um, is it really that banks are mispricing or, or the bond market participants are mispricing this transition risk? It's not clear. And the other, the second comment is, can banks help with this green transition and not be here the bad financial intermediaries. So going to the first comment. So it could be the case that actually banks are, um, you have two investors and you argue that there is a differential in the pricing, and you're saying that the banks are the ones that are doing the mispricing, but we don't know. It could be, for example, that corporate bond buyers have a preference for green type of. Financing, and then they penalize fossil fuel firms when they issue a bond, so the differential might be coming from the of, of bond investors are not pricing that risk uh correctly. And there is evidence that investors have a willingness to pay for ESG or green type of securities. If one looks at, for example, the share of environmental funds on corporate bonds, it has been increasing over time, so. Bond investors want to invest more on green bonds relative to brown bonds, and that might push up the price of the brown um um um bond that the fossil fuel firms are issuing. So, there is also this issue that Banks are mispricing and that might generate banks are not correctly valuing the fact that those assets by fossil fuel firms might get stranded, but the stranding of these fossil fuel of these assets will come from a policy-related measure. So there is a policymaker that say you cannot produce fossil fuels or it's too costly to produce fossil fuels. And therefore strand those assets. However, if policymakers know that banks are suffering from this measure, they will take into account the effect on the financial system because it might generate a crisis. So it might be less likely to impose those those measures that will strand the assets. So it will be important to look at more at the general equiliminary effects of how the policymaker reacts when banks are taking that risk. So in that sense, if the policymakers is going to take that into account, the banks might not be mispricing because they know the action of the policymaker is going to take, not to kind of penalize banks to generate the financial crisis. The other issue is that this paper is very negative on the banks. And if one looks at this related work that we are doing with Claudio, that when one looks at the green financing, which is the green lines, this is a total financing, and the dash, the large dashes at the top are the bank financing. So bank financing within green has increased a lot relative to the other financing, which is the gray line there. So banks have been providing a lot of financing to firms. And if one looks at how firms are doing, when firms are obtaining loans, and even when they are obtaining bonds, firms are improving the CO22 income. So different measures of the environmental performance of firms improve when they take a green bond or a green loan. But with the green loan, they improve more. So banks in some sense are providing a good service in the sense that they are allowing firms to generate some type of transition. So while this paper is kind of very negative on the banks, I think other views might argue that banks are not that that harmful to, to, to the environment here. So to conclude, this is a very nice paper with a compelling and plausible story. It's, it's not clear, clear what, who is wrong, and the, the, the evidence is tilted towards one, it's interpreted towards against the banks, but it's, uh, as Claudio argues, it's not very clear, and it would be useful to understand more the overall role of the financial intermediation in supporting the transition. Thank you very much. Thank you, Sergio, and, and thanks to Claudio Radatz who wasn't able to be here, but he did the, uh, the, the final one. A fascinating discussion between you two at the end there. Um, I, I, I'm on the side of the paper. I actually do think that banks, um, underpriced, but I think it's for a different reason. You think it's because they'll be bailed out. I wonder if it's because banking is a much more relational issue. Uh, I was on the advisory Group of Bank of America, its largest client. Was ExxonMobil. Um, you know, they say, well you expect us to, to stop lending? No, we've had a relationship forever, and actually we can influence, they listen to us. I was chair of the, um, climate board for HSBC, um, incredibly sophisticated guys, these, by the way, doing work on what would it mean to have a net zero portfolio by 2050 when we make 10,000, we have 10,000 customers in Asia. They don't even know how to measure their climate, their, their emissions. What would it take for us to reach that level? Really exciting stuff. So please, both of you, keep studying this subject. It's important. If there's a question or two, we started a little late, um, in the midst, just give them permission to give another 5 minutes. Let's just have some very brief, let's take 2 or 3 questions. Yeah, quick, uh, Manpreet, uh, I'm, I've been working on banking issues for a long time, for the question on that. So, uh, I'm wondering if this holds across regions and countries. Is it that countries that have stronger capital markets and bond markets are also more inclined to green, green economy? And then on banking regulations, uh, you know, banking regulations support better credit ratings for on issuer basis, the history of the issuer versus bonds are able to rate based on project. So, is it more due to banking regulations and history of the issuer that uh they get lower spread? Um, yeah, that's great. What a wonderful question. Are more sophisticated, stronger capital markets, greener? So we'll just go along the line before, before we end, and it's a yes no answer from each of you at the, oh, here, sir. Um, yes, I'm uh John Strand. I work as a consultant for the bank at the moment. I used to, used to be in the, the research department and I'm not working on, uh, climate finance, so. So this area is really, uh, I, it raises a lot of questions for me. I, I just want to uh raise a couple of uh points. One is to Bob Carr's initial uh presentation and it has to do with uh how to mobilize the private sector. And I think a key issue which hasn't been stressed enough here is that carbon pricing is essential. Carbon pricing in all the countries where the private sector is to come in, uh, it, it's, it's, it's really essential. The, the, the other, the other issue I just want to mention is to Shenkmann's presentation on the Amazon. I've been working a lot on the Amazon myself and I know quite a bit about the mechanisms working there. I know that there's one thing that you haven't really stressed too much, namely that A a a big part of the problem of deforestation in the Amazon has to do with ownership issues, and, and it has to do with the, the fact that the Brazilian government is not sufficiently strong in enforcing, uh, ownership rights and John, we just, we just have to get to a question or yeah, the, the, the, the issue, the issue is that. And that when uh when when uh parties deforest, it's to a large extent because they want to try to grab that land. And um I think that's, that's an issue that has to be in, in, in the, in the accounts here. Excellent. Thank you very much. Uh, who's got the microphone? This gentleman here. Hello, uh, Chris McCrae. I, I'm surprised that so far today, artificial intelligence hasn't actually been mentioned. Now I know that's many different things, but the part of it that interests me is that in the last few years, you've had a million times more compute available for really big data analysis, and you have hundreds of networks and companies doing that. I'm wondering if you can translate some of those simple things like you can now monitor each tree. Uh, in terms of its effectiveness into AI so that it can be a positive story for you and a positive story for King Charles's AI summits or anyone who wants to see the, the good uses of AI. Well said. The, the answer's yes. Um, we'll take one more at the back or along here, ah, Paul, Paul Eisenman. Um, thank you. I have a question for the moderator. Uh, just picking up on something that, uh, Inviet said this morning. He had a very powerful chart showing how growth in developing countries, except in South Asia over the next 10 years was likely to be well below past trends. He didn't give a similar information about the creditor countries, but, um, Between uh the problems of the growth problems and the debt problems of many, most of the creditor countries. Um, the, the outlook doesn't look so great, and the question is, Given that there's clearly a link between growth and the availability of private sector lending resources. Uh, what is your, I'm not, uh, uh, uh, uh, what is your counsel about dealing with this apparent very difficult problem? Wow. Like, should we take an evening session we'll just keep going? Why don't, why don't I thank you, Paul. We, we'll take, should we take one more, and then I think we're being told we probably need to end. Thank you. My name is Sandeep Jain. I really enjoyed the discussion. Two comments, uh, both on market discipline. So, when the commercial real estate market had a problem, it was immediately reflected on the, on the bank's share prices. Why do you think, you know, there will be a stranded assets problem and it will not be reflected on the bank's, uh, you know, uh, share prices. And secondly, if the market can discipline the firms. In terms of the bond pricing, it will, it will also discipline the bond prices of the banks, and the banks themselves are big borrowers. So 22 comments. Thank you. Thank you very much. Um, look, uh, I, I would just ask you to be very disciplined. Let's just go round down the road, pick one question, maximum 30 seconds, I'm afraid, starting with you, Bob. Oh, you can skip. You can have 45 seconds there. I don't know, uh, everything, there were a lot of questions and please forgive me if I don't answer yours. I'll start with Bob's. I think this is a problem of collective action. I keep saying, I think it's more surprising that Europeans are willing to put a tax on their firms by themselves just to protect the environment and protect to diminish climate. I think it's wonderful, OK. But it's very hard for an economist to explain, so it would be easier if we had collective action. That's number one. Now, given that we have right now volunteer, I would argue, like I argued to the council of Macron, that they should be doing this instead of forcing their firms to spend all their money, but it has to be the government to government, and that answers Andrew's question. Enforcement is going to have to be done by the Brazilians. And that's going to happen from two ways. I think that there is a lot of, in the beginning, there's a lot of future gains. It'll be very difficult for government to stop doing it, and then the idea of the bond comes in, and the bond doesn't cost that much. If you think about 50 years, the bond will be worth about 50 cents a ton. So if you pay an extra 50 cents and put it on a fund and it's a carrot, there's no incentive for Brazil to break down from the agreement, at least for the next 50 years. By then you're going to have Bill Gates' magic machine, and we can all go home and You know, live happily. Brilliant. Thank you very much, Lee. Thank you. Um, I'm gonna take this time to, uh, to respond to Sergio's discussion. Um, first off, I thought it was great. I could take much more than 30 seconds talking about it, but I'll just talk about a couple of the big picture points. Um, so, on the supply demand point, um, that's easy. It's a hard, that part's really hard, that's why we didn't look at it. The second point, um, I think there's two things that are important to think about when we are talking about the, the benefits of these policies. So, um, one issue that came up before that I think is really relevant here is that a lot of these The effects of the policies would be essentially positive externalities, so the brown firms wouldn't necessarily be feeling them, they'd be felt by the rest of society. Now, of course, it's important to mention that the analysis I did was partial equilibrium. So, I don't want anybody to take away that the analysis we did is a reason we shouldn't transition to a greener economy because we aren't picking up those things. It's, it is important to understand that there are transition risks associated with the green transition, but if you did the general equilibrium analysis, of course you would pick up a lot of benefits as well. Great. Thank you very much, Manos. So, there is no right or wrong in terms of corporate bonds and loans. Uh, I, I agree with the comment, it, it's relationship lending, OK, but, uh, in one of the robustness tests, we have the same bank, the same underwriter also issuing the bond. It's the same bank that issues both a loan and a bond. And that bank prefers to issue the loan. It's a maturity issue which relates to your question. OK, that, that risk is gonna go down the road. It's not a risk that materializes right now, so it's not the same with home ownership. And at the end of the day, the bank is a profit maximizer, right? They aim to make a profit. So, They are going to increase green lending, but at the same time they are going to increase brown lending to make that profit because these firms are large, profitable, and, uh, banks are making a lot of profit from them and from their 40-year relationship with them. OK, so that's the message of the, of the paper here. At the end, you need regulation, that's the idea with the government stepping in. Perfect. Sergey, do you want to say a word? Yes, uh, really, um, really to your comment about relationship lending and your, your, your, your point relationship lending. If banks are doing relationship lending, they might have more information about those firms and might be, they might be able to monitor more of those firms. So in that sense it might be a better financial intermediary than bond markets, uh, to channel the green financing. Great, thank you very much. Just a word on AI, yes, um, and in a way that might be a help to Paul's question too. A huge opportunities. Uh, two weeks ago, we, the Bezos Earth Fund, launched a $100 million grand challenge for those that are trying to solve problems of climate change and nature on the front line, we're going to match them up with the AI and provide financing to make that happen. Um, yes, Paul, it's a dreadful global economy we face looking forward. The good news is that doing it green actually is no longer more expensive. There are some things, uh, that are more expensive, the so-called green premium for green hydrogen, but even there, the cost of electrolyzers have fallen by 75% of what they need to fall by. So in a way, given how very, very difficult it is, we need to be, we need to have ideas that are sort of really different, like, President Ajay Banga and the African Development Bank are committed to bring to 300 million Africans green electricity by 2030. We're piling into that um because it's important. AI can play a really exciting role, but there's a real possibility that great initiatives such as the so-called JetPas, which Deals done with Indonesia, South Africa, Vietnam, and now some others whereby G7 will come and provide finance, and they will close down coal plants and only invest in renewables. Those potentially could collapse unless we're able to be innovative and bring the kind of carbon markets in. There's plenty of money there. There's philanthropy, but above all, there is the catalyzing role of MDBs and others to bring in the private sector. We believe at the Bezos Earth Fund that there is a huge gap of a, of a, of a uh of, of what, what we, we, we, we're proposing something called a deal team for the planet, where the World Bank should lead together with uh DFCs, other MDBs, private financial institutions, and instead of staying in their own silos, because at the end of the day on a Monday morning. MDB people do not think the way that the private corporate investors think. They should form real teams with real commitments and go after like half a dozen major regional investments, and the presidents of these institutions, whether it's Jamie Dimond or whether it's Ajay Banga, they should be saying, OK, 9 months from now, our teams are working between now and then. We're going to meet with heads of state and we're going to do deals. We simply. We don't have that kind of um that kind of vision. We do when it comes to war, we do when it comes to, you know, the pandemic, but we don't have it when it comes to do with what's an even bigger challenge. Look, this was brilliant, thank you very much. Thank you, Intermittent team for putting this on the agenda. This is absolutely relevant. Thank you so much, Andrew. The turnaround is super quick. You have 2 minutes. We need to change the batteries, change all this other stuff. Next speaker is Michael Kramer.

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