00:15 OK,
00:16 so this is very quiet.
00:17 That means I should get going,
00:18 huh?
00:19 OK,
00:19 thank you.
00:20 Welcome everybody.
00:20 My name is Dion Filmer.
00:21 I'm the director of the research department here at the World Bank.
00:24 Um,
00:25 can we just do a quick check to make sure that you can hear me online?
00:29 Can somebody just unmute and just say,
00:31 we can hear,
00:32 we can hear you?
00:36 Or maybe you can't unmute.
00:40 Um,
00:41 can someone put in the chat that you can hear me?
00:42 Oh,
00:42 audio's good,
00:43 OK.
00:46 So,
00:46 so welcome to this,
00:47 um,
00:48 edition of our policy research talk series.
00:51 Um,
00:52 this is a,
00:53 this is a series where we in the research department organize,
00:56 uh,
00:57 to provide an opportunity to present work coming out of the department and um
01:01 share with colleagues both inside and outside the department
01:05 as well as external stakeholders beyond the World Bank,
01:08 um.
01:09 A
01:09 warm welcome to those uh watching on Webex
01:12 and the live stream,
01:13 um,
01:14 and of course to all of you who've joined in person.
01:17 Um
01:18 The last two weeks have really underscored the importance
01:21 of the finance agenda as it relates to climate.
01:24 Uh,
01:24 in this spirit,
01:26 I'm really pleased to,
01:27 uh,
01:28 that we can continue to,
01:29 uh,
01:29 to contribute to this
01:31 discussion on,
01:32 on green finance.
01:34 Um,
01:35 today's session,
01:35 I think,
01:36 is particularly timely as we explore new
01:38 research that can help policymakers and others design
01:40 better regulatory mechanisms and financial instruments to
01:43 reduce carbon emissions and promote sustainable investments.
01:46 Our speaker today is Frederia Zenni.
01:48 She's an economist in the finance and private sector development team,
01:52 uh,
01:52 in the development research group.
01:54 Uh,
01:54 Federica's research focuses on corporate finance,
01:57 sustainable finance,
01:58 and financial economics.
02:00 Uh,
02:00 Prior to joining the bank,
02:01 she worked as a researcher at the Bank of Italy
02:04 and as a quantitative analyst at British Petroleum.
02:10 Enough said.
02:11 She holds a BA and an MA in Mathematical Engineering from the University of Rome,
02:15 Torvegata
02:16 and Polytechnico di Milano in Italy,
02:19 an MA in Quantitative finance from the University
02:22 Pierre Mercury in France,
02:24 and a PhD in finance from Imperial College.
02:28 London.
02:29 I'm also very pleased to welcome our discussant
02:32 just back from COP.
02:34 Uh,
02:35 Olivier Mah,
02:36 he's the global manager
02:39 for
02:39 climate finance mobilization
02:42 here at the bank.
02:43 Prior to this current role,
02:45 that's in the prosperity in the planet,
02:47 uh,
02:47 vertical.
02:48 Prior to this current role,
02:49 he was practice manager of the
02:51 Crisis and Disaster Risk finance unit.
02:54 Uh,
02:54 in prosperity,
02:55 right?
02:56 And the prosperity Belt where he led
02:58 the disaster risk financing and Insurance Program,
03:01 which is a joint program between the World Bank
03:04 and the Global Facility for Disaster Reduction and Recovery,
03:08 and which is also supported by um,
03:10 uh,
03:10 a number of partners,
03:11 developing partners.
03:13 Donor partners.
03:15 Uh,
03:15 since joining the bank in 2003,
03:17 Olivier has been involved in developing disaster,
03:20 disaster risk financing and insurance solutions
03:23 in more than 40 countries.
03:25 He holds a PhD in economics from Toulouse
03:27 School of Economics and postdoctorates from Wharton Business School
03:31 and University of California,
03:32 Berkeley.
03:33 Uh,
03:34 Federica will start by presenting for approximately 40,
03:37 45 minutes,
03:38 after which we'll hear from Olivier for
03:40 10 minutes or so.
03:42 Uh,
03:42 we'll then open the floor for questions and,
03:44 uh,
03:44 Q&A from the audience.
03:47 Uh,
03:47 if you're watching online and you have a question,
03:49 please use the raised option,
03:51 raised hand option in Webex or signal to me in the chat that you have a question,
03:55 and I,
03:56 uh,
03:56 will call on you,
03:57 um,
03:58 uh,
03:58 for you to ask a question.
04:00 And we are recording,
04:02 so just so you know,
04:03 and also just please mute if you're not speaking uh online.
04:07 Uh,
04:08 with that,
04:08 over to you,
04:09 Federica.
04:34 OK,
04:34 uh,
04:35 thank you for participating,
04:37 uh,
04:37 both in person and virtually,
04:39 um,
04:40 as Dion said,
04:41 my name is Federica Zanni,
04:42 a part of the,
04:43 uh,
04:43 finance and private sector development team of the development research group,
04:47 uh,
04:47 that have been going forward.
04:50 So,
04:50 uh,
04:50 we all know,
04:51 uh,
04:51 that,
04:52 uh,
04:52 the Paris Agreement goal was to reach net zero by 2050,
04:56 um,
04:56 in order to
04:58 avoid catastrophic consequences of climate change,
05:01 um,
05:01 yet as we have seen,
05:03 uh,
05:03 from the,
05:04 uh,
05:04 from the map we are having troubles are,
05:06 are,
05:07 are doing so so ideally we should.
05:09 We have to raise the cost of pollution,
05:12 um,
05:12 homogeneously across countries we could do so throughout
05:15 a variety of instruments such as carbon taxes or
05:19 carbon markets,
05:20 um,
05:20 such as the emission trading scheme in Europe.
05:23 Yet
05:24 the current regulatory framework is highly fragmented and overall insufficient.
05:29 The reasons are um
05:32 that there's a lot of to do with
05:34 political constraints but within economies and across economies
05:37 uh within economies as I will um discuss more uh in um mm in a paper
05:44 um regulators and politicians may have a hard
05:47 time in passing unpopular policies such as carbon taxes
05:51 but also there are equity considerations across countries because although um.
05:56 In principle we should raise the cost of pollution of homogeneously we didn't
06:01 uh contribute to create this problem equally in the first place.
06:05 And so as Dion said
06:07 there has been a lot of talk about climate financing,
06:11 uh,
06:11 which,
06:11 um,
06:12 in few words means is the alternative of raising the cost
06:16 of polluting is making it cheaper for firms to decarbonize,
06:20 and the idea is that,
06:22 uh,
06:23 developed countries which bear the historical responsibility
06:26 and also have the resources to do.
06:28 So
06:29 to try to provide this,
06:30 uh,
06:30 climate financing needs both for themselves and
06:34 also for emerging and developing countries.
06:36 Also there's a paper that didn't come up of the,
06:40 the uh the development research group,
06:41 but it is still worth,
06:43 um,
06:43 you know,
06:43 um,
06:44 mentioning
06:45 a recent paper that shows that is also economically efficient to do so for the.
06:50 About countries,
06:52 um,
06:52 yeah,
06:52 uh,
06:53 we are,
06:53 uh,
06:53 as you,
06:54 as you,
06:54 I'm sure you all know,
06:55 um,
06:56 there have been,
06:56 uh,
06:57 a lot of,
06:57 um,
06:58 talks at the COP,
06:59 um,
07:00 and instead of the 1 trillion
07:02 $1.3 trillion
07:05 of,
07:06 um,
07:06 annual contribute from developed to developing and emerging market countries,
07:10 uh,
07:11 we agreed to about $300 billion.
07:13 Now the point is that the goal is to
07:15 reach that extra 1 trillion through private sectors and
07:20 um
07:21 also multi multilateral development banks
07:24 and so
07:25 banks such as the World Bank are becoming the key key players are
07:29 at mobilizing at cre uh looking at inefficiencies and trying to solve them
07:34 in order to make uh to make it for the private sector.
07:38 Attractive
07:39 to invest and to transfer resources across countries and to
07:42 invest in the developing and emerging countries decarbonization goals.
07:47 So clearly resources are limited and so it is important also from
07:52 a research point of view to sort of like trying to understand more
07:55 of everything in this context and specifically
07:58 about regulation and the financial market side.
08:01 So here um in DC FB I'm I'm
08:04 presenting some papers that have been developing throughout,
08:07 uh,
08:08 the,
08:08 um,
08:09 last,
08:09 uh,
08:10 few years,
08:11 um,
08:12 but I have to say that there is also a lot
08:14 of great work that has been done by other colleagues,
08:17 uh,
08:18 in other departments and so you can always,
08:20 uh,
08:20 go on our website and and check them.
08:23 Um,
08:24 so I'm going to present,
08:25 uh,
08:26 4 papers,
08:27 uh,
08:27 that are,
08:28 um,
08:28 divided into two main,
08:30 uh,
08:30 sections.
08:31 There are 2 theoretical papers
08:33 that I contributed myself,
08:35 uh,
08:35 with other,
08:36 uh,
08:36 colleagues,
08:37 uh,
08:37 from academia,
08:38 and,
08:39 uh,
08:39 2 empirical papers from 2,
08:41 colleagues,
08:42 uh,
08:42 that are present here.
08:44 So,
08:44 um,
08:45 from a theory point of view we first are
08:47 gonna look at the interaction between a regulatory tool,
08:51 uh,
08:51 for,
08:52 um,
08:52 carbon mitigation which is a carbon tax
08:55 and,
08:56 uh,
08:56 green finance or specifically a carbon finance and we're gonna look,
09:01 uh,
09:01 at this,
09:02 um,
09:03 within an economy within a single economy.
09:06 Um,
09:06 then,
09:07 um,
09:07 the second paper,
09:09 um,
09:09 makes the ambitious question on how we should,
09:12 um,
09:14 structure,
09:15 uh,
09:16 debt securities,
09:17 um,
09:18 so as to finance decarbonization goals
09:20 in presence of manipulation or greenwashing.
09:24 Uh,
09:24 the second,
09:25 um,
09:26 set of papers are,
09:27 um,
09:28 on the other hand advancing our understanding on,
09:31 um,
09:32 banks' reaction to climate policies
09:35 again both within a country and,
09:37 uh,
09:38 globally so across countries.
09:40 So let me jump to the first paper.
09:42 Uh,
09:42 there's a lot of material,
09:43 so I've tried to make it attractive throughout the presentation,
09:46 um.
09:47 They're just a little bit of equation I have to say,
09:50 but they're gonna disappear.
09:52 Uh,
09:53 very soon I promise.
09:54 OK,
09:54 so,
09:55 mm,
09:56 as I said here we,
09:57 um,
09:58 put in comparison,
09:59 uh,
10:00 regulatory,
10:01 uh,
10:01 and financial markets tool for reducing carbon.
10:04 Um,
10:05 you can see that,
10:06 um,
10:06 on the left hand side,
10:08 uh,
10:08 you have the carbon price,
10:11 uh,
10:11 implied by the current regulatory,
10:14 um,
10:15 framework.
10:16 On the right hand side you have this,
10:17 uh,
10:17 so-called sustainable debt securities as a percentage of total debt issuance,
10:23 uh,
10:23 uh,
10:24 across countries
10:25 and so you can already see that.
10:26 That um
10:28 the green finance is at least on paper more geographically widespread.
10:33 There are countries that have both countries that have just the green finance,
10:37 countries that have just uh um the carbon regulation.
10:40 So what,
10:40 what we want to understand is within a single economy
10:43 what happens if um
10:45 we introduce financial markets in um
10:49 a politically constrained,
10:51 uh,
10:51 um,
10:52 country.
10:54 So,
10:54 um,
10:55 here there's a binary model just to,
10:58 uh,
10:58 let you understand the mechanics of the paper,
11:00 uh,
11:00 assume that the economy is just made of two technology,
11:04 a brown one and a green one.
11:07 The brown technology deliver output,
11:09 um,
11:10 for a certain investment either deliver output and emissions.
11:14 We despise the production parameter just to,
11:16 uh,
11:17 uh,
11:17 justify the investment.
11:19 And then there's a green technology which for the same amount
11:21 of of investment deliver yet less output and zero emissions.
11:25 So there's a basic
11:27 sort of like productivity gap like a
11:29 trade-off between investing in green versus brown
11:32 and then there are two types of uh agents uh
11:36 um
11:37 in,
11:37 in the economy,
11:38 uh,
11:39 the so-called standard or self-interest agents
11:42 which only care about consumption.
11:44 And they form a portion
11:46 of the population and then there is um
11:49 um
11:50 another share of the population which we call
11:52 environmental green
11:54 um.
11:56 This agent care about their consumption but also they uh experience this utility
12:02 from the emissions that derive from their own actions
12:06 so this is similar if you think about the
12:09 sort of like to the preference parameter that we
12:12 we all we all might have like we don't feel very,
12:15 very good if we know that we are contributing
12:18 uh uh to um mm to the global warming problem throughout some some of our choices.
12:25 Um,
12:25 and so
12:26 in this binary model,
12:28 the,
12:28 uh,
12:29 preference parameter is actually pretty high,
12:31 uh,
12:31 so it has to be higher than the productivity gap for,
12:34 uh,
12:34 some tension to be created.
12:37 So then there's a regulator that cares about uh maximizing the consumption of both
12:42 the agents and also internalize the right cost of polluting which is this uh lambda
12:49 uh that is um the social cost of carbon
12:52 now you can see that uh in an economy that is
12:54 not regulated uh the standard agent are going to invest.
13:00 In the brown technology and the green agent in the green technology,
13:04 there's gonna be a certain amount of emissions produced
13:07 and uh uh a corresponding welfare.
13:11 If the regulators set up a carbon tax that
13:14 it's at least as high as the productivity gap,
13:16 then basically can reform the brown agent actions
13:20 so you can give the right incentive to the brown
13:23 agent to switch um and to reform its behavior.
13:27 So emissions are zero and welfare is actually higher than the laissez faire
13:32 if this lambda is high enough,
13:34 which we argue to be in this case at the at the moment.
13:38 And so the regulator should put up the tax.
13:40 However,
13:40 we have seen that the majority of the population is made of standard,
13:45 mm,
13:46 uh,
13:46 borders
13:47 and so,
13:47 uh,
13:48 in this very simple model where you need the majority is
13:51 the bank bank solution the tax either passes or it doesn't
13:54 simply it cannot enforce the tax.
13:58 Now the point is that there has to be there is a minority
14:01 of the population which uh may be wealthy I mean uh maybe wealthy enough
14:07 that is worse off in this uh equilibrium without the tax
14:12 and so uh the idea is that if we.
14:14 Allow uh the green and the brown agents to trade among themselves
14:20 uh throughout uh securities that depend
14:24 on the emissions that are produced by the agent actions
14:28 we could in principle
14:31 uh circumvent the political problem and achieve
14:35 uh um the same result as the carbon tax.
14:38 It is important here to sort of like mm to give some mm
14:42 in practical terms this uh security here as a
14:46 debt component like as a principal D and then.
14:50 A payoff that depends on um
14:54 the emissions that the issuer produces
14:57 uh vis a vis a certain benchmark and this benchmark should be
15:02 the emissions produced in absence of this of this security.
15:07 And so the idea is that you can see easily as
15:10 in this market the green agent is gonna act as a borrower source of like lend
15:14 money and be prepared to pay uh mm if for reforming the brown agent actions.
15:22 And so basically we have this uh result that in absence of the carbon tax
15:28 there there is this market for carbon contingent financing can arise uh um
15:34 and basically trading is mutually beneficial.
15:37 The green agent derived the utility from reforming others.
15:41 The brown agent monetize the green preferences and we
15:44 partially at least partially solved this political problem.
15:49 Now the point is that still within the single economy
15:52 is the introduction of this financial market always well for
15:56 improving in order to respond to that we need to
15:58 slightly make the models slightly more complex and specifically look at
16:05 intensive margin interaction between the tax
16:08 and the market for carbon finance and think
16:11 about how these interactions shape the border preferences.
16:16 Uh,
16:17 so now I have this simple graph,
16:18 um,
16:19 that we have in this extended model
16:22 that shows,
16:23 so on the,
16:23 on the X axis you see a carbon tax,
16:26 uh,
16:26 in,
16:27 in proposed in the economy
16:29 and on the Y axis you see the,
16:31 uh,
16:32 carbon market price that arises in the economy given the tax.
16:38 And we basically show that the higher is the level of regulation in the economy,
16:43 the lower is the price of the uh carbon market,
16:46 and the idea is that it is increasingly costly to
16:50 finance that additionality so the extra amount of emission reduction.
16:54 Uh,
16:55 there's less demand for it,
16:56 like,
16:57 a a larger share of the population is actually happy
17:01 with the tax and with the,
17:02 the way that the economy it is.
17:04 And so the,
17:05 the sort of like there's basically less,
17:07 less demand for these markets
17:10 now from the point of view of the voter,
17:12 uh,
17:13 especially if the vote is self-interest,
17:15 uh,
17:15 if it's a standard type,
17:17 what happens is that,
17:18 um,
17:18 the voter it may internalize the fact that,
17:21 um.
17:23 Mm,
17:23 with a higher tax,
17:25 uh,
17:26 financial markets are gonna be less rewarding for
17:29 their actions and so the idea is that
17:32 is even less willing to support
17:34 the carbon tax because he knows that in absence of the carbon tax,
17:38 financial markets are gonna,
17:39 uh,
17:40 mm,
17:41 come up and sort of like try to solve the
17:43 situation and they may may make some profit out of it
17:46 and so the point is that the support for the carbon tax
17:49 may be reduced this we are talking about a single economy.
17:53 Uh,
17:53 so in practice what is the ultimate effect
17:56 of financial market is a quantitative question.
17:58 Uh,
17:58 so,
17:59 uh,
17:59 it may here you have,
18:01 uh,
18:01 welfare of the economy as a function of the tax.
18:03 Ideally,
18:04 ideally you'd like to set up in this case a $65
18:08 carbon tax,
18:09 yet in practice you can only set up a $20 carbon tax
18:13 with the presence of financial markets.
18:15 You get two effects.
18:16 On one hand you are basically on this green line,
18:19 so on one hand you shift.
18:21 On the left,
18:23 the welfare functions,
18:24 so meaning that you can get to the same level of optimal welfare with a lower tax,
18:28 so you make it easier for the regulators to,
18:31 to,
18:31 um,
18:32 decarbonize because part of the solution
18:34 is provided by financial market but on the
18:36 other hand they decrease support for the tax
18:39 and so in practice we are here at this point here.
18:42 And so whether or not we are better
18:44 off than in the constrained economy without financial markets
18:48 depends on
18:50 a variety of
18:51 of factors such as the endowments of green agents,
18:54 the endowments and brown agents,
18:56 our preferences are strong and
18:58 and and so on and so forth and so it is not always true that financial markets improve.
19:04 Uh,
19:05 make things better,
19:06 it depends on the amount of political constraint that we have at
19:09 the beginning and on the preferences in the economy and the environment.
19:14 OK,
19:14 so this is the first
19:15 paper,
19:16 uh,
19:17 let me move,
19:18 uh,
19:18 quickly
19:19 to the second one,
19:21 so we now talk,
19:22 we talked about financial markets where they're good when they're not,
19:25 um,
19:26 now we,
19:26 we,
19:27 um,
19:28 go more into the details on
19:31 how this debt securities should be designed
19:34 so one important thing that the previous paper missed is
19:38 the fact that these emissions outcomes are not always,
19:42 uh,
19:42 measurable.
19:43 Um,
19:44 and so the idea is that can we really set up,
19:48 uh,
19:48 a financing mechanism such as the carbon contingent security that I showed before,
19:53 or do we need to do something more?
19:56 So the,
19:56 the sustainable debt market um has emerged about 10 years ago,
20:02 um,
20:02 it has tried to respond to this challenge already
20:05 uh throughout the issues of a variety of debt securities
20:09 in particular it has um differentiated
20:13 into two broad categories
20:15 uh.
20:15 Uh,
20:15 one are the green,
20:17 they call it the use of proceed use of proceeds bonds.
20:20 Those are otherwise equivalent to,
20:22 uh,
20:23 conventional bonds and loans,
20:24 but they constrain the sure to,
20:27 um,
20:27 invest
20:28 in predeterminate projects that needs to be green or sustainable,
20:32 and this is the green category.
20:35 The second category,
20:36 the,
20:36 the red one,
20:37 are the outcome linked,
20:39 uh,
20:40 so called sustainability linked bonds and loans.
20:42 Uh,
20:43 so those are general.
20:45 That contract that um don't constrain the issue choices ex
20:49 ante but then they depend ex post on the sustainable performance
20:53 so they look more like the security that I showed uh before.
20:59 However,
20:59 we don't see that this,
21:00 this red security are cannibalizing the green one,
21:03 but rather we see the coexistence and so we want to understand basically what's,
21:07 uh,
21:08 what's driving this and more importantly how,
21:10 what is the optimal
21:12 design,
21:12 at least theoretically.
21:14 So just to give you a bit more uh um background on this,
21:17 so there's a green bond is the it,
21:19 it's a part of the use of proceed,
21:21 uh,
21:22 structure,
21:23 uh,
21:23 as you see at issuance there,
21:24 there,
21:25 there's a selection of a project that is a wind farm,
21:28 uh,
21:29 in Belgium.
21:29 This is the issued by EDF in 2016,
21:33 uh,
21:34 as you see,
21:34 the bond coupon is flat but at maturity,
21:37 um.
21:39 The proceeds are are put in a dedicated
21:41 account that can be verified by the investors,
21:44 uh,
21:45 and so the investor verified that the proceeds
21:47 have been allocated to construct wind farms.
21:50 Uh,
21:50 on the other hand,
21:50 the outcome link structures such as SLBs,
21:53 so,
21:53 um,
21:54 this is issued by NL in 2021 for the general
21:58 objective of reducing direct emissions.
22:02 And so,
22:03 uh,
22:03 these are general purpose bond,
22:05 but the bond coupon varies with the sustainable
22:08 with the emission reduction performance of the issue.
22:11 Um,
22:11 and so at at maturity,
22:13 uh,
22:13 there's not the reporting of how the proceeds have been allocated to,
22:17 but rather a reporting of the final emission
22:19 reduction that comes from this financing choice.
22:23 Uh,
22:24 now the paper basically makes this theoretical question of,
22:28 um,
22:28 how we should,
22:29 uh,
22:30 optimally,
22:31 um,
22:32 mm,
22:33 finance the decarbonization goal of a firm,
22:37 um,
22:37 and,
22:38 uh,
22:38 so the idea is that there's a green investor,
22:40 an investor that has sufficiently clear preferences that,
22:43 uh,
22:43 mm mm,
22:45 uh,
22:45 makes a monetary transfer to the firm
22:48 in exchange for this green outcome such as the reduction in carbon emission.
22:52 Now a key feature of the model is that this green outcome,
22:55 um,
22:56 if you sort of zoom into it,
22:58 um,
22:59 it can be,
22:59 uh,
23:00 is the outcome of multiple,
23:02 uh,
23:03 actions
23:04 is more,
23:04 it,
23:04 it can be
23:06 both delivered by installing green technologies,
23:09 and this is more what we call extensive margin
23:12 choices like you either install it or not.
23:14 But also by exerting effort to uh become more um environmentally,
23:20 uh,
23:20 friendly,
23:21 uh,
23:22 or generally to reduce your consumption
23:25 of energy even without changing technology.
23:29 Um,
23:29 and so those are what we call intensive margin choices.
23:32 Um,
23:33 we also argue that the quality of the technologies,
23:37 those are sort of like,
23:38 um,
23:39 uncertain investment ex ante,
23:41 uh,
23:41 and,
23:42 um,
23:42 you basically know their quality,
23:44 uh,
23:45 uh,
23:45 later on after the financing choice.
23:48 And overall the firm can manipulate basically
23:52 both the outcomes that comes from these actions
23:55 because we don't have yet a great uh technology that to measure
24:00 a great ability to measure this carbon emissions or at least our ability vary a lot
24:05 across industries and for some industries is actually very bad.
24:09 So,
24:10 uh,
24:10 this is the,
24:11 the,
24:12 the paper is basically just,
24:13 just this slide,
24:14 um,
24:15 the what we call the contractable dimensions are two,
24:19 so as investors
24:21 we observe this imperfect
24:23 outcome,
24:24 uh,
24:25 that we know has been partly manipulated,
24:28 but,
24:28 uh,
24:29 we can do some 11 thing so we can,
24:32 it's easy to verify for us if the green technology is installed or not.
24:37 And so,
24:38 uh,
24:39 the paper,
24:39 the,
24:39 the main proposition of the paper is that in presence of this manipulation risk,
24:45 the,
24:45 we cannot just have a security that depends on carbon emissions only,
24:50 but rather we need,
24:51 we need to have a security that uses
24:55 both this contractable dimensions so we want.
24:57 A payoff,
24:59 uh,
24:59 an interest rate on the debt if you want
25:01 that bond depends on the performance on the green performance of the issuer
25:06 throughout this beta,
25:08 uh,
25:08 variable here red,
25:10 but also um
25:11 a reward specific to the project
25:15 to the technology installation.
25:17 Um,
25:18 and so this is more similar to the use of proceeds
25:22 structure where you basically have an interest rate discount at ex ante
25:26 if you implement a certain project
25:28 and so the optimal contrast should blend
25:31 the two categories that we see in the market.
25:34 Um,
25:35 and
25:35 an important thing also is that the optimal contract should be flexible ex ante.
25:40 So in practical terms,
25:42 I should pay you both for your green performance,
25:45 but also I should have
25:47 a certain reward if I verify that you have implemented green technology.
25:52 And so the firm should report quite a lot to the investor,
25:55 but it's use of proceed choices,
25:58 but also is green performance.
26:00 And you can see that depending on the level of manipulation,
26:03 these two contra these two dimensions are more or less important.
26:07 When we can observe very well outcomes,
26:09 then we can only rely on sustainability linked bonds.
26:13 When we cannot observe at all,
26:15 then we
26:16 go back to the green bonds which were the initial structure.
26:21 Now the interesting thing is that even though I don't think
26:23 that anybody looked at my paper when the World Bank,
26:26 uh,
26:27 issued,
26:27 uh,
26:27 recently,
26:28 uh,
26:28 a bond that blends
26:30 the use of proceed structure and the outcome linked structure and so
26:34 I think that there is at least the potential uh those are called
26:37 sort of like super green structures and are receiving a lot of attention.
26:41 So although I mean 1 may argue that there are like other
26:44 costs like liquidity concern transaction costs
26:47 rate with issuing such complex securities,
26:50 at least it seems that we are moving in in the right direction and
26:53 we see this example both from the private sector and from developing banks.
26:58 So in practice just to conclude the the
27:01 this leaves us with the
27:03 um mm.
27:05 Acknowledgement that the current structure have some flaws,
27:09 both of them.
27:10 And what the paper shows,
27:12 uh,
27:12 without going into details and that you have,
27:15 you may overinvest in green technology with green bonds,
27:18 so you enter too early,
27:20 uh,
27:21 in the green technology,
27:22 uh,
27:22 and you may learn export that it wasn't the,
27:25 the best choice.
27:26 On the other end with sustainability linked bonds,
27:28 if the,
27:29 uh,
27:29 variation on the interest rate is,
27:31 is very low,
27:32 uh,
27:32 you don't have
27:34 enough financial incentive to actually
27:36 invest in a green technology.
27:39 Um,
27:40 green bonds arguably,
27:41 uh,
27:42 incentivize the technology installation,
27:44 but not really uh any other effort beyond
27:48 that technology installation.
27:51 But on the other hand,
27:51 we can argue that sustainability linked bonds,
27:54 although they incentivize effort,
27:55 they may also be more manipulated
27:58 and so in practice we show that
28:00 the way industry issue preferred the security sort of like respond to this
28:05 uh main uh factors.
28:07 OK,
28:08 so this basically concludes,
28:10 uh,
28:10 the theory part.
28:12 Um,
28:12 I'm now moving to the empirical part
28:15 uh of the presentation,
28:16 uh,
28:17 and this is uh basically joint work by,
28:19 uh,
28:19 Claudia and Alvaro which are,
28:21 uh,
28:21 here present.
28:23 So,
28:23 uh,
28:24 we have seen a bit of theory we want to understand now a bit more about,
28:29 um.
28:31 Our
28:31 climate policies affect
28:34 banks lending choices and looking at banks is particularly
28:38 important especially because uh in emerging and developing countries,
28:42 most of the financing
28:44 uh external financing comes from uh from banks.
28:48 And so what the orders,
28:49 so the first paper
28:51 is,
28:51 uh,
28:51 um,
28:52 a paper that looks at um mm the our climate policies
28:57 affect
28:58 basically uh banks lending behavior,
29:00 uh,
29:01 in a global,
29:02 uh,
29:02 in a global,
29:03 um context.
29:04 So we know that,
29:05 uh,
29:06 climate policies are good at promoting renewable energies and
29:10 so uh so like make it cheaper to,
29:12 um,
29:12 to decarbonize but also make it make it
29:15 more costly to pollute.
29:17 And that's overall good,
29:18 but we want to understand,
29:20 uh,
29:20 our banks uh which are not the direct uh um
29:24 even though they are not directly regulated by these policies,
29:27 our banks react basically our banks lending choices change,
29:31 uh,
29:32 uh,
29:32 when,
29:32 um,
29:33 the level of um mm climate policy change uh in in the country.
29:37 And um the
29:40 here the interesting part is uh is related to uh potential leakage effects because
29:45 as we know we are back basically to the map that I showed before
29:49 the mm carbon regulation is highly fragmented
29:52 and so um.
29:54 An interest it is important to see whether raising
29:57 the level of climate policy in a certain country
30:01 uh may basically um mm,
30:04 enact some uh regulatory arbitrage,
30:08 uh,
30:08 some,
30:08 mm,
30:09 sort of like um move a capital away from
30:11 that country and towards country that are less regulated,
30:14 um,
30:15 and this is specifically the case for banks that are
30:18 very large and global and operates across multiple coun countries.
30:23 Um,
30:24 and so,
30:24 uh,
30:25 the,
30:25 the main question that they ask is like how do global banks respond to changes,
30:29 uh,
30:29 in the climate policy of a country in which they have a subsidiary.
30:35 Um,
30:35 so to do so,
30:37 um,
30:37 the,
30:38 the orders,
30:39 mm,
30:39 mm,
30:40 divide,
30:40 try to,
30:41 uh,
30:41 divide the,
30:42 um,
30:43 um,
30:44 pool of global banks into two,
30:47 classes,
30:48 the so-called brown brown and green banks,
30:51 um,
30:51 so they we can see here that,
30:53 um,
30:54 they identify the green banks.
30:55 Um,
30:56 as the first signatory to the task force for related financial disclosure,
31:01 which is,
31:01 uh,
31:02 um,
31:02 an organization that promotes,
31:04 uh,
31:04 uh,
31:05 financial disclosure
31:06 and so the first,
31:08 the banks that,
31:08 uh,
31:09 were the first signatories,
31:10 uh,
31:10 you can see that they have a much higher environmental score
31:14 related to the,
31:15 um,
31:16 to the one that,
31:17 uh,
31:18 sign up basically later.
31:20 And so,
31:21 um,
31:22 they,
31:22 they not only look at our banking lending choices,
31:26 uh,
31:26 respond to the policy change policy in the host country,
31:30 but they want to look at whether there are cross sectional differences
31:33 and it turns out that
31:34 looking at cross sectional differences is the important it's sort
31:38 of like the important exercise because overall although overall,
31:42 um,
31:43 uh raising the level of climate policy in a country
31:47 doesn't change much.
31:49 Credit,
31:50 uh,
31:50 um,
31:51 the amount of credit that goes in or out of the country,
31:54 uh,
31:55 you can see that there is,
31:56 um,
31:57 quite a bit of mobility in the cross section and specifically there's a selection
32:01 effect where green banks attract more capital
32:04 so more capital goes to subsidiaries,
32:07 uh,
32:07 of this,
32:07 uh,
32:08 green,
32:08 um,
32:09 of countries
32:10 whereas brown banks tends to,
32:12 um,
32:13 move the capital away from,
32:15 from the,
32:16 uh,
32:16 from the country.
32:18 And that's the first,
32:19 the first paper,
32:20 uh,
32:21 the second paper,
32:22 um,
32:22 it's,
32:23 mm,
32:23 only look at the effect within a single economy of a prudential regulation.
32:29 Um,
32:29 so a prudential regulation,
32:31 um,
32:31 so this is a regulation that to that,
32:34 um,
32:34 mm forces banks to disclose
32:37 their exposure to,
32:38 um,
32:40 social and environmental risk throughout their lending choices
32:44 and,
32:44 um,
32:45 here,
32:46 uh,
32:46 we go back to the,
32:47 uh,
32:47 sort of like,
32:48 um,
32:48 theoretical structure of the,
32:51 um.
32:52 So,
32:52 so,
32:52 to the,
32:53 um,
32:54 to the fact that in principle,
32:55 uh,
32:56 in order to,
32:57 uh,
32:57 sort of like,
32:58 um,
32:58 rev decarbonize efficiently
33:01 you should ideally sort of like provide credit
33:04 to those sectors and those firms that are so
33:07 like highly emission intensive but want to decarbonize,
33:10 right,
33:11 um,
33:11 and so what the authors warn about this,
33:14 uh,
33:14 poten with this prudential policy which on one hand
33:18 as the good thing of clear clearly like um.
33:21 Um,
33:22 how to say limiting,
33:23 uh,
33:23 uh,
33:24 sort of like ensuring financial stability in that country.
33:26 The other wars about potential counteractive effect of this policy
33:30 to the extent that
33:32 they basically force they incentivize the banks to just
33:37 provide more credit to to firms that are already green,
33:40 so to firms that don't want to decarbonize and to
33:43 move credit away from firms that are brown and wanted to decarbonize.
33:48 And so the idea is that here we really have to look at potential
33:52 negative unintended consequences of prudential regulation in a certain country.
33:59 Um,
34:00 so the orders,
34:01 so,
34:01 um,
34:02 the others have an identification strategy because they only a certain amount of,
34:06 uh,
34:07 Braz um,
34:08 the sorry,
34:08 the,
34:08 um,
34:09 the exercise in Brazil
34:11 and only a certain amount of banks,
34:13 the large one,
34:13 are actually fully subject to the regulation.
34:16 And so basically the orders
34:18 are able to dis to disentangle the effect of the policy looking at the differences
34:24 uh um
34:25 of uh um across regulated and re-regulated banks
34:28 uh um before and after the uh enactment of the regulation.
34:33 And um
34:34 again we have that in aggregate there hasn't been uh much change in lending uh
34:41 uh in the uh country uh as a response to this uh prudential regulation
34:47 however in the cross section there's a lot of there
34:49 are a lot of things happening and specifically the large
34:52 firms that were regulated or shifting,
34:56 uh,
34:56 credit away from exposed sectors,
34:59 so from brown sectors,
35:01 um.
35:02 And this uh um credit contraction has been partially offset by
35:07 small banks that start to provide credit to to firms,
35:11 uh,
35:11 but we are seeing that the small firms
35:14 operating in brown sectors are actually hit the most
35:18 uh by this regulation because
35:20 there's not a like a perfect substitution they get basically worse quality of.
35:24 Credit,
35:25 uh,
35:25 or they actually experience a credit contraction
35:27 and so the response is that maybe in real terms although the the the mm,
35:32 the,
35:33 uh,
35:33 sorry,
35:33 orders don't find like a large effect,
35:36 uh,
35:36 the risk here is that
35:38 small firms that wanted to decarbonize are gonna be impacted by this,
35:43 um,
35:44 prudential regulation.
35:46 OK,
35:47 so,
35:47 uh,
35:47 to summarize the findings of our research in the CFP,
35:51 uh,
35:52 well,
35:52 we first show that,
35:53 um,
35:54 in principle carbon contingent finance can substitute
35:58 for a carbon tax.
35:59 However,
35:59 we need to be aware of,
36:01 uh,
36:02 potential counteractive effect,
36:04 uh,
36:04 in the economy,
36:05 uh,
36:06 um,
36:06 from the,
36:07 uh,
36:07 political,
36:08 uh,
36:08 point of view.
36:09 Um,
36:10 also we looked,
36:11 uh,
36:12 we show that in present of greenwashing,
36:14 um,
36:15 the there's has to be
36:17 fairly like quite a
36:19 big amount of of financial structuring
36:21 in order for,
36:22 uh,
36:23 uh,
36:23 preserve additionality but also eliminate greenwashing risk
36:27 and finally on the empirical side,
36:29 um.
36:30 We have seen that like a lot of credit redistribution in response
36:34 to um climate policies although in equilibrium the aggregate effect is limited
36:39 um
36:40 perhaps the um important message from this empirical uh work is that um regulation
36:46 to banks should try to be um
36:49 as least fragmented as possible to like
36:51 avoid this equilibrium readjustment
36:54 OK and for with this I'm going to conclude thank you.
37:07 Thanks,
37:08 Federica for that uh
37:10 excellent overview of 4 paper.
37:12 It's a lot,
37:13 a lot packed in
37:14 very efficiently.
37:16 Um,
37:16 Olivier,
37:16 do you wanna come up and
37:19 You,
37:19 yeah,
37:19 you had some slides,
37:20 right?
37:20 I had some slides,
37:21 yes,
37:21 indeed.
37:22 I'm not sure.
37:24 Should be.
37:30 Uh
37:38 Where's that?
37:44 Where's the screen mode,
37:45 um,
37:51 And full screen
37:55 yeah.
37:55 OK,
37:56 so they,
37:56 they'll,
37:56 they'll come.
37:57 OK,
37:58 wonderful.
37:58 Great.
37:58 No,
37:58 thanks a lot,
38:00 um.
38:03 OK,
38:03 so it's a,
38:03 it's a big task
38:05 to try to summarize,
38:05 you said,
38:06 to try to summarize those papers,
38:07 uh,
38:08 but at the same time very excited and very happy to be here.
38:10 Thanks for the invite,
38:11 Dion.
38:12 Um,
38:13 so I'm,
38:13 I'm,
38:14 I used to be in the,
38:14 uh,
38:15 in the,
38:15 uh,
38:15 in the prosperity,
38:16 uh,
38:17 VP dealing with climate
38:19 and this as a risk.
38:19 I recently moved to the planet VP dealing more
38:22 with carbon markets and the kind of transition phase,
38:24 and you,
38:24 you'll see that.
38:25 Um,
38:26 so I was at,
38:27 I was at COP and in fact just maybe to,
38:28 to,
38:29 to share a couple of highlights from COP and Intact Federica,
38:31 you did also mention some of them
38:33 which to some extent address
38:35 some of the points you made in your research.
38:36 One on adaptation and resilience,
38:39 uh,
38:39 a lot of focus on that,
38:40 although we know that this is not something which is top priority,
38:42 at least
38:43 where the funding is going,
38:44 and I will elaborate about that and the launch of the fund for responding
38:48 to loss and damage,
38:49 this kind of new funds,
38:50 you know,
38:50 uh,
38:51 agreed with the UN in fact hosted by the BA,
38:53 so I think it's a bigger,
38:54 it's a big highlight.
38:56 And which also
38:57 may change to some extent the architecture of the ecosystem around
39:00 uh
39:01 uh uh um
39:02 risk finance in particular and adaptation finance more generally.
39:06 The second takeaway from my side,
39:07 which also echoed what Federica was explaining is on the Article 6
39:11 carbon markets and how to some extent to create some sort of a vibrant,
39:14 at least working.
39:16 Carbon market to start,
39:17 uh,
39:18 including with Article 6.2 and 6.4,
39:19 it's,
39:20 it's all about the architecture and making the market,
39:22 I would say trusted by parties,
39:24 and I think there is still a lot of work to be done.
39:26 And the third one which was also mentioned by Federica is what we call the NCQG,
39:31 the 300 billion being mobilized compared to 1.3 trillion that we're to some extent
39:36 asked by the uh by the country.
39:38 So anyway,
39:38 a lot of thinking around that.
39:41 So when I was asked to,
39:41 uh,
39:42 to,
39:42 to comment on Fidega's paper and I was reading the papers carefully,
39:46 I thought I have two options either I share with you some,
39:48 uh,
39:48 some equations or I share with you some visuals.
39:51 Since I'm not anymore good in equations,
39:53 I,
39:53 I decided to share some visuals and maybe to focus on one specific aspect
39:57 which is again was covered in Ferriga's paper,
40:00 uh,
40:00 in particular the the last one about the role of the banking sector
40:03 when it comes to climate finance,
40:04 and we'll see why it's important.
40:06 And so my
40:07 objective here is just to my expectations is not to share
40:10 grandiose ideas but just to
40:12 share what we've observed
40:14 and try to make the link and hopefully to some extent nourish some more
40:17 future work you may want to think to explain
40:20 what we have,
40:20 uh,
40:20 what we're observing in in in this market.
40:23 So first
40:24 visual first slide,
40:25 some of you may be familiar with this one,
40:27 so it shows you to some extent how much is mobilized,
40:30 but also how much is spent on mitigation and how
40:32 much is spent on adaptation and as we all know,
40:35 uh,
40:35 there is a strong,
40:36 I would say focus on on mitigation a bit less,
40:39 much less on adaptation,
40:40 which is about 16%
40:42 of the total climate finance flows
40:43 in developing economies when we exclude China.
40:46 And out of that 98%
40:49 uh dedicated to adaptation finance in
40:52 uh uh low income and middle income economies come from public finance.
40:55 So definitely there is no private sector or private capital going to
40:59 adaptation finance into
41:01 uh uh uh uh into uh in in middle and low and low income countries.
41:05 And then you can see how this is to some extent,
41:07 uh,
41:07 uh,
41:08 uh,
41:08 I would say,
41:09 uh,
41:09 how,
41:09 how,
41:10 how we can,
41:10 you can see by region as well so.
41:12 This is one of the of the key points to address and we know there is a big
41:15 climate finance climate finance gap around around that.
41:18 So
41:19 again,
41:19 as I said in my previous job,
41:20 I was mainly looking at adaptation.
41:22 Now I'm looking more from a kind of mitigation lens,
41:25 but fundamentally,
41:25 as you can see,
41:26 it's,
41:26 it's closely related in fact,
41:28 and there is a lot of conversation
41:29 in fact now trying to see how we can
41:31 to some and leverage mitigation with adaptation
41:34 and vice versa.
41:35 And again,
41:35 very happy to share a couple of examples later on
41:37 if we have a few minutes.
41:39 Uh,
41:39 so in,
41:40 in that context what I decided to do is,
41:42 as I said,
41:42 to focus more specifically on the banking sector,
41:45 uh,
41:45 which is de facto in,
41:46 in most of the,
41:47 uh,
41:47 uh,
41:48 economies working in 80% of the total capital of financing comes from
41:52 the,
41:52 the,
41:52 the domestic,
41:53 uh,
41:53 banking sector.
41:54 It's something we can
41:55 clearly not ignore so we can
41:56 definitely talk about.
41:58 Domestic products SLBs,
42:00 and I'll I'll have an example later on,
42:01 but fundamentally this,
42:02 I don't think this is where the
42:03 the capital mobilization will come from.
42:05 It will have to come
42:06 from the banking sector itself
42:08 and then of course we can access capital markets,
42:10 but in some of the economies you start
42:12 developing your banking sector and then you move to
42:14 more sophisticated
42:15 solutions provided by the capital.
42:18 Sorry.
42:22 So Singapore will be here and China will be here.
42:26 Yeah,
42:27 yeah,
42:28 yeah,
42:28 indeed it's a it's a it's an advanced economy indeed.
42:31 But good point because this is something we can
42:33 we can argue on,
42:34 um,
42:35 so.
42:36 So this is from a recent study done by my former colleagues in in FCI
42:42 looking at the climate finance in the in the banking sector.
42:47 Uh,
42:47 and some interesting results,
42:49 um,
42:49 come from that.
42:50 So first of all,
42:50 on the left hand side,
42:51 this is more or less what Federica Federica showed in our,
42:54 in our slide.
42:55 What is interesting on is,
42:56 is on the right hand side where you can see that,
42:59 uh,
42:59 5% or less of the lending portfolio
43:02 of nearly 60% of the,
43:04 of the banking,
43:05 uh,
43:05 of the banking
43:06 sector,
43:07 uh,
43:07 doesn't have any,
43:08 uh,
43:08 climate,
43:09 uh,
43:09 uh,
43:09 climate agenda.
43:10 And then of course you have a,
43:12 a small share of
43:13 banking,
43:14 the banking sector,
43:15 the bank,
43:15 the banks.
43:16 Being more,
43:17 uh,
43:17 more involved in climate finance,
43:18 but definitely there is a big,
43:19 big gap,
43:20 very little appetite.
43:22 I wouldn't say interest,
43:22 but at least appetite,
43:23 and we can discuss why
43:25 for,
43:25 uh,
43:25 most of these kind of banks and the banking
43:27 sector in general to invest in climate finance.
43:29 So we can say whether it's not bankable,
43:31 whether the the regulation is not right.
43:33 There are many reasons,
43:34 and I'll let you to some extent address some of that,
43:36 but fundamentally this is what we observe,
43:38 and it's something we need to fix again if you want to mobilize or to channel
43:41 more funding
43:42 in those economies toward toward climate finance or green finance.
43:46 The second message which is related to that,
43:48 and again you talked a bit about that is about it's about taxonomy,
43:52 so we need for a proper legal and
43:53 regulatory framework and it starts with the taxonomy.
43:56 So again interesting numbers here
43:58 where you can see that uh
43:59 only one third of the uh uh um of the developing economies do have a kind of proper
44:03 taxonomy compared to almost 100% in developed in developed economies.
44:07 So definitely of course uh more to be done in in uh in
44:10 uh in low and middle income countries but at the same time,
44:13 interestingly there is no one
44:14 approach,
44:15 no universal approach,
44:16 and taxonomies
44:17 mean different things.
44:18 Depending where you talk to,
44:20 who you talk to,
44:20 and where you work in,
44:21 in the,
44:22 in this,
44:22 in,
44:23 in this,
44:23 uh,
44:23 in this economy,
44:24 so
44:24 again there is a lot of work to be done around that,
44:27 uh,
44:27 uh,
44:27 a lot of work being done in fact by the bank and others trying to create some sort of
44:31 to harmonize if I may say,
44:33 the,
44:33 the this kind of classification for,
44:34 uh,
44:35 for sustainable,
44:35 uh,
44:35 for sustainable activities.
44:37 So most of that are being done at the voluntary level.
44:39 There are some attempt to make it a bit more mandatory.
44:41 Uh,
44:42 I think in Bangladesh,
44:43 in China,
44:44 in Colombia,
44:44 Mexico,
44:45 there is a trend to make it a bit more compulsory,
44:47 but still
44:48 there's still a lot of work,
44:49 uh,
44:49 in progress,
44:50 and again you have to,
44:50 you have to have it,
44:51 uh,
44:52 right in order to,
44:53 to create the right incentives,
44:54 but first you need to have the right
44:56 way to measure what you want to at least to identify
44:58 you want to measure and classify what you want to measure
45:00 and the taxonomy is the
45:02 definitely the first,
45:03 uh,
45:03 the first step.
45:06 Another interesting um
45:07 uh uh uh visual I would like to share
45:10 with you is when it comes to climateary supervision.
45:13 And how countries react to that and how the uh the banking authorities
45:17 uh in in developed and developed economies are addressing that.
45:21 So
45:21 one interesting thing in in our specific discussion here is about
45:25 climate risk assessment.
45:26 So it does cover both
45:27 the kind of transition risks related to,
45:30 you know.
45:30 The uh the mitigation
45:32 risk most most likely and
45:33 also the kind of more physical risk related to adaptation
45:36 but all in all,
45:37 uh you can see that definitely it's much less
45:40 advanced than in uh in uh in developing economies
45:42 and a lot of these authorities are working
45:44 toward
45:45 creating some sort of uh
45:46 uh.
45:47 Guiding principles,
45:48 if not standards
45:50 in order to better capture in fact
45:52 this impact of climate risks.
45:53 So the
45:54 the the the Financial Stability Board
45:56 or the NGFS
45:58 are among this kind of international
46:00 bodies trying to some extent to come up with some interesting
46:04 discussions.
46:04 I was in my previous job working.
46:05 With the NGFS,
46:06 the,
46:07 the,
46:07 the network for central banks
46:09 and
46:10 and
46:10 and the sorry,
46:11 the
46:12 the the network for greening the financial sector systems
46:15 and again dealing with particularly with physical risks and interestingly,
46:18 just as a small anecdote,
46:20 there was a lot of
46:21 interest from developed economies to focus on mitigation.
46:24 Much less on adaptation because of course most of
46:26 these kind of large economies are not really impacted by
46:28 big extreme events
46:30 while of course most of our clients
46:31 are particularly interested at least in the short
46:33 term deal with physical risks extreme weather events
46:36 so again sometimes you need you need to
46:38 harmonize at least you need to uh
46:39 to uh to find a way to uh to to to cover both
46:42 uh interests from.
46:44 From those uh different economies because their interests of course can be
46:47 sometimes a bit divergent but all in all there is a more
46:50 uh uh more awareness around,
46:52 uh,
46:52 taking into account
46:53 uh climate risk when it comes to the uh to the supervision
46:56 and the regulation but the question is how you're gonna measure that?
46:58 What,
46:58 what would the,
46:59 what is the impact on the,
47:01 on the economy?
47:01 Is it a systemic risk
47:03 or it's not a systemic risk.
47:04 So
47:05 a few years ago back in 2021 in what we call the financial
47:09 sector assessment program,
47:10 one of the World Bank IMF programs,
47:12 we looked at it,
47:13 uh,
47:13 I think this was the first time we did it
47:15 with the IMF in the context of the Philippines,
47:17 highly exposed to disasters,
47:18 typhoons and earthquakes.
47:19 Here we did focus on,
47:21 on,
47:21 on typhoons particularly,
47:22 and we tried to measure
47:24 the impact of physical risks in that case
47:27 typhoon on the solvency risks for the banks.
47:30 So in that case it was quite innovative a few years ago,
47:32 55 years,
47:33 4 years ago,
47:34 um,
47:34 and it was really trying to mix
47:36 the,
47:37 the kind of macroeconomic scenarios
47:38 together with the climate models and together with the cut risk models,
47:42 uh,
47:43 uh,
47:43 and the macro financial models ultimately.
47:45 So this was very much one of the first time we were trying to
47:47 capture that in the kind of more traditional macro financial model.
47:50 Uh,
47:51 and frankly,
47:51 the results were,
47:52 were,
47:52 were a bit disappointing.
47:54 In other words,
47:54 from a pure
47:55 macro perspective,
47:56 from a pure systemic perspective,
47:58 even a major
48:00 disaster in the Philippines will not have a
48:02 systemic risk.
48:03 It's not a systemic per se.
48:05 If you com if you combine that,
48:07 uh,
48:07 with some of the risks like in that case,
48:09 uh,
48:10 a pandemic risk,
48:10 yes,
48:11 this kind of compounding impact
48:13 may have a more
48:14 significant impact on.
48:15 The uh
48:16 on the solvency of the banks,
48:17 but interestingly when you just focus on this weather events,
48:20 extreme events,
48:21 the impact on the on the banking sector is limited,
48:23 and there are
48:24 many reasons for that.
48:25 One is that usually those banks don't invest
48:28 in areas where there is high risk.
48:30 So in that case,
48:30 of course,
48:31 then their their portfolio is very,
48:32 uh,
48:32 is very is not very exposed and the same can be seen,
48:35 can be seen in in Africa where we did the same analysis for droughts
48:39 and again except the agricultural banks.
48:41 Most of the banks don't have
48:42 an impact.
48:42 I mean,
48:43 the,
48:43 the drought risk will not have an impact on their banking
48:45 on their portfolio simply because they don't invest
48:48 in those areas.
48:48 They should,
48:49 of course,
48:49 in terms of development perspective,
48:51 but simply they don't do because they're not forced to do it or because the banks,
48:54 uh,
48:55 because the investments are not,
48:57 are not,
48:57 are not,
48:57 uh,
48:58 I would say attractive enough for them.
49:00 So again,
49:00 a lot of work has been done.
49:01 This kind of,
49:02 uh,
49:03 I would say component is now being done.
49:06 As a module in the FSAP,
49:08 so countries can,
49:09 and we did recently in Indonesia for example,
49:11 can
49:12 decide if it's a priority for them
49:14 to
49:14 look at
49:16 the opportunities and the risks related to climate risks,
49:19 including
49:20 this kind of extreme weather events,
49:21 and again see what will be the impact on
49:23 their on their on their banking on the banking sector
49:25 and again the same could be done on the insurance sector as well,
49:28 but here
49:28 it was mainly done on the on the banking sector.
49:32 Uh,
49:33 last slide,
49:33 last visual,
49:34 um,
49:35 just to again go back to the,
49:37 uh,
49:37 SLB,
49:38 uh,
49:38 agenda that Federica mentioned
49:40 just to highlight,
49:41 uh,
49:41 a kind of interesting,
49:42 uh,
49:43 uh,
49:43 deal that was done,
49:44 uh,
49:44 last year by my colleagues in Long Term finance in FCI
49:47 in the,
49:48 in the prosperity VP,
49:49 uh,
49:50 where for the first time a development bank
49:52 in the case of Rwanda
49:53 did issue,
49:54 uh,
49:54 uh,
49:54 uh,
49:55 a sustainability linked bond.
49:56 Um,
49:57 so
49:57 here is broadly how it works,
49:59 but fundamentally there were 3 key,
50:01 um,
50:02 um,
50:02 um,
50:03 I would say in,
50:03 uh,
50:03 2 key innovations in fact.
50:05 One was
50:06 3 key innovations.
50:07 One is it was done through the local capital markets,
50:10 so it was a local,
50:11 local issues by
50:13 a local development bank.
50:14 The second one was it was a sustainable link bonds with some KPIs,
50:19 uh,
50:19 uh,
50:19 um.
50:20 Related in that case to
50:22 um and just mentioned some of them increasing the environmental,
50:25 social and governance compliance
50:26 in the local financial sector.
50:28 Another KPR was about boosting the funding of women-led projects,
50:32 and the third one was about
50:33 financing a portfolio of 13,000 affordable housing projects.
50:37 So these are the kind of KPRs,
50:38 KPR which were used very much aligned with the,
50:41 with the,
50:41 with the SG
50:42 and our development development goals.
50:45 And the,
50:45 the third innovation here was,
50:47 which is also quite important in that case
50:49 was to have this kind of credit enhancement.
50:51 So for the country
50:53 in that case Rwanda to use part of the IDA allocation
50:56 to enhance to credit enhance
50:58 their uh their uh,
50:59 their,
51:00 their loan in order again to
51:01 to have lower interest rates.
51:03 So it's,
51:03 it's,
51:04 uh,
51:04 it's,
51:06 it was done jointly with the,
51:06 with the,
51:06 with the World Bank Treasury
51:08 I think they were.
51:09 Another issueance earlier this year.
51:11 So again this is the kind of model that could work
51:14 again to just to respond to what Federica was saying.
51:16 We have some
51:17 sophisticated countries.
51:18 I think you,
51:19 um,
51:19 uh,
51:20 um,
51:20 Uruguay is one of them.
51:22 Uh,
51:22 uh,
51:22 Chile also has done that.
51:23 They're pretty sophisticated clients,
51:25 but again the same can be done with some adjustments in
51:28 less advanced economies like in the case of uh of Rwanda.
51:32 OK,
51:32 I'll,
51:33 I'll stop here.
51:34 I appreciate it was a bit,
51:34 uh,
51:35 disjoint,
51:35 but just wanted to,
51:36 you know,
51:36 to share those kind of,
51:37 uh,
51:37 uh,
51:38 thoughts and hopefully this will,
51:39 uh,
51:39 this will help you
51:40 shape your next,
51:41 uh,
51:41 and your future agenda.
51:42 Thanks.
51:50 Thanks Olivier for uh for for for um.
51:55 Ground truth in some of the some of the things
51:57 and and and and pointing us in new directions,
51:59 um,
52:00 before opening it up for Q&A,
52:02 just any reactions,
52:03 Frederica to some of what what what Olivier
52:06 uh described and just wanna turn the mic on.
52:11 OK,
52:12 can you hear me?
52:12 Yes,
52:12 OK,
52:13 uh,
52:14 no,
52:14 this was a very interesting,
52:15 uh,
52:15 presentation,
52:16 um,
52:17 in fact,
52:18 uh,
52:18 I was very happy that,
52:19 um,
52:20 I mean,
52:20 we are more learning from you than the other way around,
52:23 uh,
52:23 if anything,
52:24 um,
52:26 for sure,
52:26 I mean,
52:26 um.
52:28 I was actually uh um just um
52:32 thinking about the fact that
52:33 there's clearly uh not all I mean I've always been talking
52:36 about decarbonization goals but clearly we have an even more um.
52:41 Uh,
52:41 pressing problem that there is no interest at all
52:44 things or appetite at all for climate adaptation investments,
52:48 uh,
52:49 and so that's sort of like the first,
52:50 uh,
52:50 reaction that I had,
52:52 um,
52:53 and,
52:53 um,
52:54 again that the banking sector,
52:56 uh,
52:56 the fact that the banking sector,
52:58 um,
52:59 should
53:00 be the first one to be,
53:02 uh,
53:02 not only,
53:03 uh,
53:03 regulated but also informed.
53:06 Uh,
53:06 about,
53:07 uh,
53:07 sort of like how to structure,
53:09 uh,
53:10 this lending,
53:11 uh,
53:11 and sort of also incentivize in these countries and,
53:14 um,
53:14 yeah,
53:15 and then I wanted to know more,
53:16 uh,
53:17 in general about the issues that,
53:19 uh,
53:19 from the operational point of view,
53:21 um,
53:22 mm,
53:23 Olivier or his colleagues,
53:24 uh,
53:25 colleagues had when,
53:26 uh.
53:27 Of trying to indeed uh scale up and mobilize
53:30 uh mm mm mm private capital throughout this innovative uh financing structure
53:37 and I I know that
53:38 I was just talking to him in private like some of these countries didn't manage to
53:43 to do it and maybe what are were the main
53:45 challenges and what you see we could do going forward.
53:51 Thanks.
53:52 Um,
53:53 any questions in the room?
53:56 I would ask,
53:57 do you mind going to the mic?
53:58 We'll come back to,
53:59 if you don't mind,
54:00 Olivia,
54:00 if you,
54:01 we'll get back to.
54:02 Does this work?
54:02 Yeah,
54:03 yeah.
54:03 Hi,
54:04 I'm,
54:04 uh,
54:04 Michelle Noel.
54:05 I'm consultant in uh FCI.
54:07 Uh,
54:08 I have uh.
54:10 I have,
54:10 uh,
54:11 first of all,
54:11 I would like to congratulate you for an excellent and very thoughtful paper.
54:16 Thank you so much.
54:17 Um,
54:18 two points one concerning the paper,
54:20 one concerning the discussion
54:21 concerning the paper,
54:23 I think it would be good in future research maybe to consider the empirical evidence
54:29 concerning,
54:30 uh,
54:30 sustainability linked bonds.
54:33 Uh,
54:34 as you know,
54:34 green bonds in general have a
54:36 greenium
54:37 of about 8 points.
54:39 That's the best estimate that we see,
54:41 sometimes less,
54:42 but for sustainably linked bonds,
54:44 the num is about 1 basis point,
54:47 which means de facto that there is no
54:51 yield difference between a plain vanilla bond
54:54 and a sustainability linked bond.
54:57 And in my view,
54:58 there are two explanations for that.
55:01 First,
55:02 the quality of the climate transition plans that underlie
55:06 the sustainability linked bonds varied a lot.
55:09 In a recent study in China,
55:10 only
55:11 1 in 5
55:13 sustainability linked bonds had a
55:16 climate plan that was
55:18 considered satisfactory by the Climate bond initiative,
55:21 which means that
55:23 the market is extremely murky and not transparent.
55:27 And the second point
55:31 is that there are in those sustainability linked bonds embedded options
55:37 which are
55:38 very important because in many of these bonds
55:41 you can escape
55:44 the
55:45 triggered date
55:47 if you see that you are not going to make it,
55:49 you just simply exercise the option to buy back the bond that you are not penalized.
55:54 So
55:55 at the end of the day.
55:57 When you look at
55:59 the real value added of sustainability bonds,
56:02 you have to ask yourself the question
56:04 whether it would not be better
56:06 from a regulatory perspective
56:09 to be very tough on the regulation of
56:12 the underlying climate transition plans.
56:15 And let people finance them however they are,
56:17 even through plain vanilla bonds.
56:20 What matters is not whether your bond is plain Danilla or sustainably linked.
56:25 What matters is the quality of the underlying
56:28 transition plan.
56:29 I think
56:30 some research should be done there because in
56:32 my view this is where regulations should go,
56:35 and
56:37 EU CSDR is one option
56:40 that one can imagine.
56:41 And the second point concerns.
56:43 Your presentation,
56:44 Olivier,
56:45 and you will not be surprised by my remark.
56:48 My advice would be actually
56:50 to
56:51 do this research on the impact of catastrophe
56:55 on
56:56 banks,
56:56 but to do it also for bonds.
56:58 Because
56:59 as we all know,
57:00 banks by their nature and by Basel 3 and 4
57:04 are inherently
57:07 restricted from taking risks
57:10 because they need to protect the depositors' money.
57:12 So
57:12 if you want to look at risk taking,
57:15 banks is probably one of the last things you want to look at.
57:19 However,
57:19 if you want to look at risk taking,
57:21 bonds is probably a market you want to look at.
57:25 Without suggesting that we should not look at banks or regulate banks,
57:30 my
57:31 recommendation would be for future research to look also at
57:34 the bond market because you are likely to see
57:37 much more significant reactions there
57:40 since they don't have to protect depositors' money at all,
57:44 and you could extend that of course to
57:46 private equity.
57:47 Thank you.
57:51 Thank you.
57:51 Um,
57:52 just a reminder,
57:52 if you have questions online,
57:54 just raise your hand and I can call on you and,
57:56 um,
57:56 OK,
57:57 it's,
57:57 let's go 123.
57:58 OK.
57:59 Thanks.
58:00 So,
58:01 sort of listening to both presentations,
58:02 I was
58:04 struck by sort of the difference between,
58:06 I guess,
58:06 direct and indirect effects here.
58:08 So,
58:08 you know,
58:09 you've got these,
58:10 um,
58:11 you know,
58:11 things that are trying,
58:12 you know,
58:12 the Rwanda one where it's called sustainability,
58:15 but then we're just packaging things that,
58:17 you know,
58:17 giving credit to women or giving credit to the agricultural.
58:20 Things and you know that it's an indirect way at best of,
58:24 of dealing with it.
58:25 But then on the other hand,
58:26 when we're doing these
58:27 sort of um
58:29 risks assessments of banks,
58:31 it seems like most of that is directly
58:33 looking only at their direct exposure.
58:35 Are you lending to
58:37 areas that are gonna be hit by this,
58:38 but of course if the whole country is hit by
58:40 a,
58:41 a typhoon,
58:41 even if you
58:43 are not lending to a firm that is directly wiped out,
58:46 the economy's gone,
58:48 people are not gonna be shopping from other businesses,
58:49 and so.
58:50 I don't know how this,
58:52 you know,
58:52 direct versus indirect effects gets,
58:54 gets sort of captured in some of this,
58:57 this work.
59:00 Thanks.
59:03 Thanks.
59:03 Great presentation,
59:05 Frederica,
59:06 you know,
59:06 to,
59:07 uh,
59:07 very intuitive,
59:09 uh,
59:09 explanation of the issues for people who are not familiar with this area.
59:13 Um,
59:14 my question might be linked to the first,
59:16 uh,
59:16 comment.
59:17 Uh,
59:17 I wondered how I was struck by how
59:20 much all the results were predicated on preferences driving
59:25 financing for green projects,
59:28 and I wondered,
59:29 uh,
59:29 to what extent there are some straight economics
59:33 of long term economic gains from,
59:35 say,
59:36 the energy transition.
59:37 So I recently came across this econometrica paper.
59:40 I won't remember the authors,
59:43 but it gave the example of Chile.
59:45 In a transmission grid
59:48 that linked
59:49 a region in the country in the north where there was high potential for
59:54 zero marginal cost renewable energy
59:57 and the transmission grid linked that area to
1:00:01 the center,
1:00:01 the capital area where energy costs are very high,
1:00:05 um,
1:00:06 uh,
1:00:06 but economic activity is located there
1:00:09 and
1:00:09 that result,
1:00:10 that building of that transmission grid resulted in.
1:00:14 Entry of solar firms
1:00:16 and created like orders of magnitude greater
1:00:20 economic returns as a result of that entry.
1:00:23 Now
1:00:24 that kind of a transmission grid
1:00:27 wouldn't be financed necessarily by a green
1:00:31 instrument
1:00:32 but results in
1:00:34 uh sort of economic returns in general.
1:00:36 So how does that kind of thing factor into this literature
1:00:40 on green finance?
1:00:41 Thanks.
1:00:43 Next up.
1:00:47 Thanks.
1:00:47 Uh,
1:00:47 I'm Dilip Ratha.
1:00:49 I'm actually now in MA and,
1:00:50 uh,
1:00:51 uh,
1:00:52 working with,
1:00:52 uh,
1:00:52 Federica as well,
1:00:53 um,
1:00:55 on a green finance report.
1:00:56 Uh,
1:00:57 Richard Damania from Climate Change Group is,
1:00:59 uh,
1:01:00 leading a livable planet flagship report for the
1:01:03 World Bank
1:01:05 Group,
1:01:05 and,
1:01:06 uh,
1:01:06 uh,
1:01:06 I have been
1:01:08 charged with,
1:01:08 uh,
1:01:09 putting together that,
1:01:10 uh,
1:01:10 that chapter on finance,
1:01:11 the green finance.
1:01:13 So this is very,
1:01:14 very timely.
1:01:15 And,
1:01:15 uh,
1:01:16 I wanted to uh make uh
1:01:19 one comment
1:01:20 to the comments from Oliver.
1:01:23 Uh,
1:01:23 the EMD EMDE banks that you have surveyed,
1:01:27 are they
1:01:28 emerging markets banks or EMDE country banks,
1:01:31 or are they global banks?
1:01:32 Uh,
1:01:33 the financing is about the whole thing.
1:01:35 So,
1:01:35 that's one clarificatory question.
1:01:38 And on Federica's presentation and overall.
1:01:41 How
1:01:43 would we
1:01:44 take into account,
1:01:46 uh,
1:01:46 sort of
1:01:47 two
1:01:48 distinguishing characteristics of green finance or climate finance?
1:01:52 One is that this kind of financing probably has to be much longer term
1:01:57 than the normal
1:01:58 type of
1:01:59 financing.
1:02:00 And how would that
1:02:04 Interact or influence your results.
1:02:08 So that is one characteristic,
1:02:09 very long term.
1:02:10 And the second characteristic is often the,
1:02:14 uh
1:02:15 The,
1:02:16 the receivables generated by
1:02:19 climate finance,
1:02:20 uh,
1:02:21 climate finance instrument finance projects,
1:02:24 uh,
1:02:25 they will be in local currency.
1:02:27 So if you're talking about cross-border financing,
1:02:30 It's a huge risk,
1:02:32 and I haven't found that solution.
1:02:34 It's a bit like searching for instruments and endogeneity,
1:02:37 uh,
1:02:38 the search for nirvana in econometrics.
1:02:41 I haven't figured out,
1:02:42 I don't think I have seen anything
1:02:44 on how to manage the local currency risk.
1:02:46 They,
1:02:46 they,
1:02:47 so those are two characteristics.
1:02:49 And the,
1:02:50 the third factor,
1:02:51 which is a very,
1:02:52 very important,
1:02:53 um,
1:02:55 Factor for
1:02:56 scalability,
1:02:58 given the,
1:02:59 you know,
1:02:59 the aspirations of how much we need and how,
1:03:02 what,
1:03:02 what we have in reality.
1:03:04 Uh,
1:03:05 We talk about structuring a lot.
1:03:09 The moment you do structuring,
1:03:11 the instrument becomes
1:03:13 illiquid.
1:03:15 So
1:03:16 How do we manage that?
1:03:18 Uh,
1:03:18 so this is not directly relevant for your work right now,
1:03:21 but
1:03:22 it's very important for the report that we are going to come out in what,
1:03:24 2 months' time or something.
1:03:26 Thank you.
1:03:30 Thank you all.
1:03:31 Uh,
1:03:31 we have one
1:03:33 question online and then,
1:03:34 um,
1:03:35 I'll
1:03:35 sort of go back to Federica and Olivia just to react to whichever comments,
1:03:39 there's a lot of comments,
1:03:40 so,
1:03:40 uh,
1:03:41 so we have,
1:03:41 uh,
1:03:42 Carlos,
1:03:42 do you mind unmuting and just asking you a question?
1:03:46 Yeah,
1:03:47 absolutely,
1:03:48 uh,
1:03:48 thank you again for the,
1:03:49 this is Carlos.
1:03:50 I'm with the IFC
1:03:52 thank you for the great,
1:03:53 uh,
1:03:53 presentation.
1:03:54 I have
1:03:55 just one comment or one question for Federica
1:03:58 uh you showed
1:04:00 heterogeneity in preferences,
1:04:02 heterogeneity in in intermediation,
1:04:05 and I wanted to see if there's anything you know about heterogeneity in terms.
1:04:09 Of the firms that have access to those instruments,
1:04:12 right?
1:04:12 I mean,
1:04:13 you didn't show much of that other than assuming that
1:04:16 the green technology was not as productive as the,
1:04:18 as the brown technology.
1:04:20 Uh,
1:04:20 the reason I ask that is because we're in the beginning
1:04:23 of a project trying to understand the firm dynamics of,
1:04:26 of.
1:04:27 Sustainable finance and matching basically climate bonds initiative
1:04:30 uh data and Bloomberg data to Orbit's data
1:04:34 to map
1:04:35 which one of the firms that actually take advantage of those instruments
1:04:39 and given your knowledge of the literature,
1:04:41 I just wanted to see if there's anything you know about that
1:04:43 that you know can speed up our our knowledge of that.
1:04:50 Thanks Carlos.
1:04:51 Well,
1:04:51 given the number of people who say that they're
1:04:53 asking a question because they're writing a report,
1:04:55 this is definitely very timely.
1:04:57 So back to you Frederica.
1:04:58 OK,
1:04:59 uh,
1:04:59 quite a lot of questions,
1:05:00 um,
1:05:01 and I didn't have,
1:05:01 um,
1:05:02 yeah,
1:05:03 uh,
1:05:04 notes as
1:05:04 Oliver did,
1:05:05 but
1:05:06 I.
1:05:06 Try,
1:05:06 I'll try to respond to everybody.
1:05:08 So,
1:05:08 uh,
1:05:08 the first one was about the SLBs and the fact that they have a very low,
1:05:12 uh,
1:05:12 embedded in premium,
1:05:13 uh,
1:05:13 that makes perfect sense.
1:05:14 In part it can be already explained by them all.
1:05:17 I mean,
1:05:17 I don't wanna push them all,
1:05:19 but
1:05:19 in part,
1:05:19 basically what I've been saying so far is that,
1:05:22 um.
1:05:23 In presence of this manipulation,
1:05:25 greenwashing risk which can take various forms such as I don't know as luck
1:05:29 transition plan
1:05:31 ability to opt out,
1:05:32 etc.
1:05:33 uh,
1:05:34 the firm can still have some sort of like
1:05:36 advantage,
1:05:37 uh,
1:05:38 uh,
1:05:38 to,
1:05:38 to issue that and when we can discuss what what's this is disadvantage,
1:05:42 but then the investor is not like stupid in some in some certain sense
1:05:45 is anticipating sort of like that there's a a lot of greenwashing and so
1:05:49 the embedded.
1:05:51 amount of payment that is prepared to pay is actually very,
1:05:54 very low and so we have seen this bonds emerging because there,
1:05:58 there's been some interest some demand for it,
1:06:00 but then
1:06:02 still they,
1:06:02 they,
1:06:03 we need to go like a long way and I think what you mentioned is probably like
1:06:07 banking regulation,
1:06:08 disclosure regulations and sort of like a whole like regulatory structure.
1:06:13 Uh,
1:06:13 that's like surrounds this uh issuances that
1:06:16 would make them eventually more robust would,
1:06:19 uh,
1:06:20 probably contribute to increasing the premium.
1:06:23 And indeed we see a better premium on green bonds because arguably
1:06:27 you already have done quite a lot of work
1:06:29 with the taxonomies also the European Union has a pretty
1:06:32 extensive taxonomy framework and so I think
1:06:35 I mean at least there is the like the hope that
1:06:38 the securities would get
1:06:40 uh more so like implied financial reward once they get more uh regulated.
1:06:46 Um,
1:06:47 OK,
1:06:48 so the other,
1:06:49 uh,
1:06:49 question was related,
1:06:50 uh,
1:06:50 I think you're right.
1:06:51 I mean,
1:06:52 the,
1:06:53 the both the models are like start from the idea that it is not economically
1:06:58 profitable for you to become green and so you need some.
1:07:02 Through like some investor that I mean
1:07:05 investor or whatever entity that has some social
1:07:08 uh outcomes at uh that's sort like care about non-financial
1:07:13 outcomes that would sort of like try to step in
1:07:15 but you're right that um
1:07:17 if this was economically beneficial then you wouldn't
1:07:21 need a dedicated market for it right?
1:07:23 you could just finance them with.
1:07:25 I mean at least theoretically I could finance them with the conventional bonds
1:07:29 which also relates to the question that Carlos said.
1:07:32 I mean
1:07:33 this is not my research but I think it would be
1:07:36 interesting to see I mean I think there's really a paper about
1:07:39 like a related paper about the
1:07:41 what are the firms that issued these securities.
1:07:44 Uh,
1:07:46 sometimes the firms that issued the securities could have
1:07:49 financed this investment with conventional bonds anyway,
1:07:52 so those are like already regulated firms
1:07:55 that have like already set up incentives to decarbonize
1:08:00 for them is already like
1:08:02 financially profitable to do so.
1:08:03 The investor already know that if they do so it's gonna have a financial return
1:08:08 and so probably they don't need to issue a green bond yet
1:08:11 we see that a lot of green bonds are issued by firms
1:08:15 that already have the right incentives set up
1:08:18 and so maybe this is uh like a button and like a
1:08:21 theory question but also like an actual.
1:08:23 Uh,
1:08:24 for the operational side,
1:08:25 I think that's something to do with like additionality we do one
1:08:28 that the firms that issued the green bonds are the one that,
1:08:32 uh,
1:08:32 so like needed the most,
1:08:33 uh,
1:08:34 we had,
1:08:34 um,
1:08:35 a project in Brazil
1:08:37 that was specially like targeted doing.
1:08:39 So sort of like trying to identify what firm
1:08:42 would need this sort of like issuances but then we had quite a bit of troubles and uh
1:08:46 um to like pushing this project and so I would
1:08:49 be very happy to see if there is something,
1:08:51 uh,
1:08:52 some new project coming coming up and the potential to contributing to it.
1:08:56 Um,
1:08:57 so that's 11,
1:08:58 but also like,
1:08:59 uh,
1:09:00 to respond to Carlos,
1:09:01 uh,
1:09:01 we see issuances of the securities also from some
1:09:05 firms that actually need to issue the securities some
1:09:08 like very heavy polluting,
1:09:10 uh,
1:09:10 uh.
1:09:11 Firms like from the material sectors
1:09:14 uh mm from like emerging market economies of that
1:09:18 and I,
1:09:19 I mean at least like on paper
1:09:21 they could be sort of like the right ones that are
1:09:23 accessing this market then of course as um
1:09:27 Dilipe said there are like a variety of frictions that I'm not capturing
1:09:31 that could prevent
1:09:32 firms to access capital markets,
1:09:35 especially in these economies
1:09:37 uh so the last question were about the long term.
1:09:41 Yes,
1:09:41 I mean basically my models don't take account of the huge dimension which is risk
1:09:47 and this expresses in uh like currency risk long term so like the
1:09:53 the actually length
1:09:55 of the financing structure and um.
1:09:58 So I think that's where uh if I had to write a paper
1:10:02 with the risk dimension to it I would definitely write a paper for
1:10:06 the role of development banks because I think that the role
1:10:08 of development banks is sort of like trying to manage to the
1:10:12 risk right and and for example I've seen that uh one
1:10:16 challenge for the World Bank was to maybe actually Olivier knows better
1:10:20 to try to make the issuance in local currency to sort
1:10:23 of like make it like reduce sort of like the.
1:10:26 Uh,
1:10:26 so probably that's where the development bank should,
1:10:28 uh,
1:10:29 come in,
1:10:30 um,
1:10:30 and I think I'm
1:10:31 done with my questions.
1:10:34 I'll leave it to,
1:10:35 uh,
1:10:36 Oliviera.
1:10:38 You left me in the tough ones.
1:10:39 So,
1:10:39 uh,
1:10:40 one easy one on the,
1:10:41 on the banks,
1:10:41 uh,
1:10:42 in the survey,
1:10:42 uh,
1:10:43 it's all bank licensed in the country.
1:10:44 So it's,
1:10:45 um,
1:10:45 it's all banks as licensed in the country.
1:10:47 So maybe three points from my side.
1:10:49 One on the,
1:10:49 on the greenium I
1:10:51 mentioned by by Michel.
1:10:52 I mean it's all about the.
1:10:53 the trust and the transparency you have.
1:10:55 And in fact,
1:10:55 now working on the,
1:10:56 on the carbon market side and learning a lot from my colleagues,
1:10:59 including from,
1:10:59 from Klaus,
1:11:00 uh,
1:11:01 it's all about your crediting methodology.
1:11:03 It's all about what we call MRV measurement reporting verification that
1:11:06 to some extent create trust and then we'll give a price
1:11:08 to the quality of your product.
1:11:10 And this is how you end up sometimes having a carbon,
1:11:12 carbon credits for $5 versus higher.
1:11:14 It's
1:11:15 because simply the market doesn't really appreciate or doesn't really understand
1:11:18 or doesn't really trust.
1:11:19 In fact,
1:11:20 to some extent the the underlying assets.
1:11:21 A lot of work is being done around that.
1:11:24 And in fact,
1:11:25 in,
1:11:25 in going back to Baku,
1:11:26 there was an event organized together with,
1:11:28 with our president
1:11:30 Aj Banga and Singapore about that.
1:11:32 And Aja Banga gave this kind of,
1:11:34 and we're talking about
1:11:35 trust and standard,
1:11:36 and they say,
1:11:36 why can't we create something like gold?
1:11:38 We have to go 24 carats,
1:11:39 18 karat,
1:11:41 14 carats.
1:11:41 And when I buy gold,
1:11:42 I know what I buy
1:11:43 and I know that I'm going to pay
1:11:45 more if I,
1:11:46 if I need to buy you 24 carat versus 18 carats.
1:11:48 So.
1:11:49 To some extent coming with some basic standards will help to some extent
1:11:52 create a market and also create some goods that could be appreciated by
1:11:56 by the parties.
1:11:57 Uh,
1:11:58 the second point on also made Michel,
1:12:00 uh,
1:12:00 the,
1:12:01 the,
1:12:01 the work we've been doing with FSAP,
1:12:02 and this is why I did mention FSAP,
1:12:04 this is very much from the solvency perspective.
1:12:06 So I would say to be a bit provocative,
1:12:08 the only
1:12:09 interest,
1:12:10 particularly when we,
1:12:11 when we work with IMF is from the solvency perspective,
1:12:13 not from a different perspective.
1:12:14 So in that context you look at the portfolio
1:12:16 of your banks and you see whether our bank,
1:12:17 uh,
1:12:18 when you stress test your bank,
1:12:19 whether or not the portfolio will be impacted.
1:12:21 If it's not,
1:12:22 that's fine.
1:12:22 Nothing to be done.
1:12:24 Why it's not,
1:12:25 as I said,
1:12:26 because sometimes there.
1:12:26 Banks don't invest
1:12:28 in in in those kind of risky markets
1:12:30 and maybe they should from a development perspective,
1:12:32 not from a solvency perspective.
1:12:33 So
1:12:34 I do agree with you.
1:12:35 If we were to be more more specific on tracking the impact of climate risks,
1:12:39 yes,
1:12:40 looking at
1:12:41 the bonds may be more relevant,
1:12:42 but again it was not the
1:12:45 the the the the the the
1:12:46 the
1:12:46 the the the the the rationale for for the for this kind of EFSA
1:12:49 now in terms of indirect and direct impact
1:12:52 definitely and in fact we did some work on
1:12:55 on the.
1:12:55 Infrastructure,
1:12:56 uh,
1:12:57 building on what Stefan Algatz
1:12:59 has been doing
1:13:00 and showing definitely that you know the the direct impact
1:13:02 on infrastructure is minimal compared to the indirect impact.
1:13:05 Uh,
1:13:05 it's about assets and services,
1:13:07 you know,
1:13:07 it doesn't cost a lot to build,
1:13:09 you know,
1:13:09 uh uh uh uh uh a tower for electricity,
1:13:11 but of course
1:13:12 when you don't,
1:13:13 when you,
1:13:13 you,
1:13:13 you,
1:13:13 you,
1:13:14 you lacked,
1:13:14 you lack power,
1:13:15 of course this has,
1:13:16 this has a lot of indirect impact.
1:13:17 So
1:13:18 yeah,
1:13:18 this,
1:13:18 this has been calculated,
1:13:19 but although it's quite complex in fact,
1:13:21 and we've been doing some work with the
1:13:22 Oxford University on that if you're,
1:13:24 if you're interested.
1:13:25 And then the last point,
1:13:27 yes,
1:13:27 in terms of risks.
1:13:28 In fact,
1:13:28 this was one thing I was thinking when I was
1:13:31 listening to Federica.
1:13:32 This kind of risk dimension can be quite important indeed.
1:13:35 And again,
1:13:36 since I've done
1:13:37 some work on that as well,
1:13:38 it can definitely impact your ultimate results
1:13:40 depending on the type of.
1:13:41 You're going to face,
1:13:42 but of course
1:13:43 then you can then introduce some product to de-risk
1:13:45 uh uh those uh that including with insurance,
1:13:48 uh,
1:13:48 the,
1:13:49 the kind of guarantees the work
1:13:50 that M is doing,
1:13:52 uh,
1:13:52 and also,
1:13:53 you know,
1:13:53 some of the cat bonds when it,
1:13:55 when you move into some more sophisticated
1:13:57 financial products.
1:13:59 Thank you.
1:14:01 Thanks.
1:14:02 We have a little time,
1:14:03 so we have time for sort of one
1:14:05 rapid fire round.
1:14:06 We have one question online
1:14:09 from
1:14:10 Olivier,
1:14:11 Olivier,
1:14:12 presumably,
1:14:13 uh,
1:14:13 Olivia,
1:14:13 do you want to unmute yourself and,
1:14:15 and ask your question?
1:14:22 Uh
1:14:23 sure.
1:14:23 Um,
1:14:24 this is Olivier.
1:14:24 I'm an academic from Georgetown.
1:14:26 Uh,
1:14:27 Olivia,
1:14:27 thank you so much,
1:14:28 uh,
1:14:28 for your insightful,
1:14:30 um,
1:14:31 presentation,
1:14:32 mostly on ESG environmental,
1:14:35 social,
1:14:36 and governance.
1:14:37 Crisis.
1:14:38 And uh
1:14:38 I would like just to come back on um your trip
1:14:42 to COP 29.
1:14:44 Do you think that this newly achieved
1:14:48 fund from COP 29,
1:14:49 of course,
1:14:50 can be highly invested in uh
1:14:52 ESG?
1:14:53 Globally.
1:14:54 And secondly,
1:14:55 do you have any other good example like Rwanda?
1:14:57 I mean,
1:14:58 with the framework that you have explained,
1:15:00 which was
1:15:01 very insightful to me.
1:15:02 Do you have any other example like Rwanda,
1:15:04 maybe
1:15:05 in South Asia or MENA,
1:15:07 which is Middle East and North Africa?
1:15:09 Thank you.
1:15:12 So before
1:15:13 turning back for final comments,
1:15:15 anything else in the room?
1:15:17 Nope,
1:15:18 OK,
1:15:18 I think that one was mainly to you,
1:15:20 but
1:15:20 if you wanna come in afterwards,
1:15:22 no,
1:15:22 the answer will be pretty simple.
1:15:23 I mean,
1:15:23 I think the,
1:15:24 the,
1:15:24 the,
1:15:24 the case of Rwanda was the first of its kind.
1:15:27 Uh,
1:15:27 I'm not aware of any,
1:15:29 uh,
1:15:29 recent developments,
1:15:30 although I should ask with my,
1:15:31 uh,
1:15:32 my FCI colleagues,
1:15:33 uh,
1:15:34 but this is again,
1:15:34 this kind of,
1:15:35 this is the kind of model we would like,
1:15:36 uh,
1:15:37 uh,
1:15:37 to replicate more
1:15:38 again,
1:15:38 not only from the kind of,
1:15:39 uh,
1:15:40 um,
1:15:40 um,
1:15:41 I would say KPI's perspective and we can also.
1:15:44 You know,
1:15:44 discuss,
1:15:45 of course the KPIs,
1:15:46 but more on the kind of credit enhancing
1:15:47 again to make access capital lot cheaper.
1:15:49 So this,
1:15:50 it's a nice also to leverage in that case,
1:15:51 you know,
1:15:52 either limited IA funding
1:15:54 in order to access additional,
1:15:55 uh,
1:15:56 additional capital.
1:15:57 So it's a nice way to mobilize private capital which,
1:15:59 as you know.
1:16:00 And to blend in fact capital,
1:16:01 which is quite important.
1:16:02 So,
1:16:02 uh,
1:16:03 to answer your question,
1:16:03 the model,
1:16:04 um,
1:16:04 is there has been tested at least once in the context of Rwanda
1:16:07 and to be tested in other countries.
1:16:09 I know for example there is,
1:16:10 there is work as we speak in Kenya
1:16:11 for the kind of same uh
1:16:13 approach.
1:16:13 I would say not maybe not the same model but actually the same approach.
1:16:19 Well,
1:16:20 thank you to both of you for,
1:16:21 for very insightful comments and,
1:16:23 and great presentation and,
1:16:24 and,
1:16:24 and,
1:16:24 and valuable discussion.
1:16:26 Um,
1:16:27 I won't try to summarize
1:16:28 everything,
1:16:29 uh,
1:16:29 but just to say that it's,
1:16:30 it's been fascinating to me somebody not in,
1:16:32 in this space at all,
1:16:34 just to hear the conversation and I appreciate that
1:16:36 both the comments and the questions because I think we
1:16:38 had a really good discussion around some of these.
1:16:40 I think there's food for thought and food for research,
1:16:42 which is
1:16:42 definitely something we want to have come out of
1:16:45 these kinds of sessions.
1:16:45 So thanks again to both of you,
1:16:47 both of you and thank you for for being here and
1:16:49 thanks to those online.
1:16:50 Thanks.
1:17:07 I think we had a meeting for the.
1:17:09 I just wanted to follow up on.
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