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Concerned about climate change is rising around the world on the streets in parliaments and among investors questions about the future of fossil fuels are putting new pressure on companies. He's and financial institutions so he was made to discuss what this means are hugh vents daynuss chair of the sustainable finance committee at UBS and former adviser to to Bank of England governor mark. Carney and billy nauman a reporter for the FTA's moral money. which covers the world of sustainable finance? I billy let's talk about some examples of the financial impact of climate change. What's been the economic fallout from the Australian? Bushfires that's a very good example I think and and it's one that's still kind of playing out obviously so it will take some time to see. The True Fallout Bank of America made some projections that the fires just for the first quarter of twenty twenty twenty could subtract at least zero point zero point four percent from Australia's entire GDP. So yeah. It's it's bad and probably a bit worse than people. Were expecting only a month six weeks ago absolutely. Yeah I mean the numbers were seeing on the insurance sector at this point they. They don't jump off the page. Necessarily I think they were close to nine. Thousand fire related claims from September until early January but that compares to just fourteen hundred fifteen hundred hundred for the yearly average of the last five years. I think so. It's a massive uptick in so much is still coming at this point. It's hard to say with the crisis. It's still playing out how bad it's going to be right. Hugh you recently wrote pace for the FDA about why investors and boards NATO take climate. I'm at risk into account now the Australian fires an example of that sort of risk. Or you have other. Things changed as well. Australia is clearly very stark reminder of the potential attention challenges but I think it's a much broader range of issues and I think there's always a push poll we're seeing regulators start to impose stress tests on the banks and their insurers shores particularly led by Governor Connie but also there have been some great initiatives to improve the quality of data. Because the key issue if you can't measure it you can't manage it and I think one of the companies and boards in particular realized they will increasingly be held to account through numbers which could be used both by investors by pressure groups. And we shouldn't underestimate the impact or pressure groups oops grabbing and using this data so far it's been a kind of voluntary initiative nine hundred of the biggest one thousand five hundred companies now starting to measure data but bit by bit is improving but the challenges as just investor behavior themselves. A growing number of vest design meet. Astonished say well they're all GONNA be big valley dispersions not just more Stralia. It could be from changes in tax. Six regulation or Brandon Pam if people think the company simply not honoring its responsibility. So it's it's a range of issues but there was definite groundswell in the market and that son what we're seeing in all business. Yeah you mentioned shareholder pressure there. We've just seen shareholders in Barclays Bank demanding that it starts the phase out financing companies that are not aligned with the Paris agreement. I wonder if both of you this seems to be something of a step up in relation relation to shareholder action when it comes to financial institutions. Is that how you say it or do you think. It's a trend already saying certainly I see. It's a growing trend and I think it comes from particularly some of the AH owners the big pension funds who are demanding action something like two thirds of all new mandates which are granted have some sort of sustainable finance aspect so they're pressurizing the managers to put their money where the mouth is but secondly on billy side of the pond in the states. There's a much richer. Set of data around proxy voting. One of the most striking statistics about the current round was the provos around environment were as frequent has governance. I think that's the first year that I've seen that. Yeah that's absolutely been the trend in it's been increasing and and one of the things I think is interesting is looking at some of these pressure groups some of these activist groups. And they're really ramping up their efforts. I was at a thing in in September around climate week here in New York and it was the principles for responsible banking which is a big. UN Consortium of banks talking about what their responsibility is as bankers anchors in terms of helping the world achieved the sustainable development goals and even at that event there was a group of protesters out there. And you could tell it really struck a chord with the bankers anchors. That were there. You know they're thinking well we're the ones that are doing well. We signed our names to this piece of paper and replacing to do this but from the activist groups. The message was that's not enough. We need to see action on this. And they're very adamant about keeping up this pressure on the banks that are financing fossil fuel companies. That's the case isn't Hugh that the banks are moving. They are taking steps to be more transparent in many cases but at the same time activists are saying listen. That's great but we just want. You should get out of fossil fuels. Yeah I think this is very challenging because you know let's face it finances the arterial system of the economy. And so we always you need power and and whilst I think many can be frustrated with the pace of change this will be more evolutionary than revolutionary some stats that McConnell US recently is one hundred trillion dollars of power and a sustainable projects which needs to be financed of the next decade and some of the going green so a new soda plant but some of them can try to be improving the quality of what we've God and we shouldn't underestimate improving. The bad to good is actually still step forward and I think that's a very nuanced and difficult argument for a financial innovation to make into a pressure. Group agree with what you said and it is very important that we have financing for going from bad to good from Brown to green. Or however you want to phrase it but I think that at that area gets very ripe for greenwashing for putting money into things that are not actually improving climate emissions. Like they might say they. Are you talking. In relation onto green bonds there perhaps green bonds is a perfect example. Yeah and then there's these things called transition bond which is a relatively new development. You Know Green bonds you run into the the problem where these companies are issuing green bonds for these projects that are allegedly going to improve carbon emissions. But it's just they were going to do anyway at stuff they're mandated to do you buy some new set of regulations and they are going out with this green bond and getting better terms as a result because they can label it his green the transition bonds. It's something that's offered offered to companies that might not usually qualify for green bond but they need to transition to be more green so this is a new category of financing financing available to these companies that helps them fund projects that move along that spectrum from Brown to green. Yeah and I mean greenwashing is a concern obviously and seems to me that more and more focus has come onto these sorts of bonds at some people find a suspect however broadly speaking. Isn't this a structural troll issue. I mean it. Doesn't it really point to the fact that there's not enough regulation either national or international of this market. I'm not sure if it's necessarily the regulation because you know if you make an example. Sir Chris hones dissolve all the company's portfolio disclose. Just this Christopher Hon who has a large hedge fund and here in London and. He said that he's not going to invest in any company that doesn't abide by the climate disclosure guidelines. That Mr Connie and you helped develop the Governor Carney server initiative but I think that the bottom line here is that actually sometimes the activists in the regulators may not be that far apart. Obviously there's a lot of good hard work to be done around the Standards Serum the investor point of view. Wouldn't it be great if as early as possible tomorrow. Really these guidelines which as you say currently voluntary were made mandatory. So I think actually in the best thing to do would be say within three years it will be mandatory and get companies to get on undo it there are still some some creases to iron out in the methodology but I think I would be very encouraging of that. Why should we wait three years when we've got the climate scientists telling us that this is a matter of extreme urgency and we really need eight to be cutting emissions as quickly as possible and therefore financing of fossil fuels needs to be effectively reigned in so for me? I would want all the companies to start today. Hey but you may not want to co defy methodologies. There's still a work in progress so I think it's by saying we will make it managed to in three years and we really rather expect you to do it. This year is sort of awed. Get to and billy what about the US. Do you think that you're going to be seeing. Regulators introducing mandatory disclosure anytime soon. No no I don't think the Political Otago Environment here is is going to lead to that at all. Unfortunately and what does that mean then if we have a world in which we have say European countries are making it mandatory the US and others a saying saying it's fine. You don't need to what then happens if we have a very uneven playing field. Well I mean I think we kind of saw something like this with GDP right where American companies have to abide by GDP CPR if they have European clients or do business in Europe so it's it's not ideal that the US is dragging its feet on these sorts of issues. But I do think that US companies will have to come around to some degree depending on what sort of regulation comes out of the you just moving onto another area. Do you think there are parts of the financial world old that Performing will when it comes to taking climate concerns into account for example green bond market is expected to keep growing this year. And we've forty saint extraordinary growth there there any other areas where we are starting to see a real change. You're starting to see a lot of sustainability linked loans Richard similar to green bonds where banks are incentivizing borrowers to hit targets whether it's emissions reductions by whatever means they can do it and if they do so they get better terms on their loans. That kind of stuff is growing a lot of support. You'll nap there's lots of really interesting pockets. One of the ones which is hardly reported about is the private equity quarter to also trying to become more sustainable an increasing number of creating their own sustainable funds. But also if you turn this around and it's not just climate if you've got a very concentrated portfolio do you really WanNa make sure your companies are being well run and that by the time you come until I was seldom they actually look as valuable as possible. So there's an increasing focus on what I'd say is the sustainability the inability of the franchise in all its manifestations and clearly firms will prioritize. But there's a growing market as well in private equity. I'm a little skeptical of of a lot of the claims coming out of the private equity market cricket and that's because of the lack of transparency. A lot of the major major companies have come out with these big impact funds. And when you look under the hood at some of the investments they've made aide you know there since there are no kind of set definitions on what is impact or how impact is measured. Some of them do a little dubious. I've been doing some research into one. One of the the bigger impact funds and just looking at some of the underlying investments. This is the Bane Double Impact Fund which is run by Duval. Patrick who's a former governor of Massachusetts. WHO's now running for president here in the US and A lot of the investments are in home health care which is a growing sector but is that really impact or is that just a play for a sector that they think. There's going to be growth in. I think more transparency from the private equity market would help a lot in terms of if they do deserve credit on this to give them that credit. But I'm skeptical of a lot of their claims this to be frank right. I'd like to ask both of you when you think we will see major banks in Europe and on wall all straight no longer financing fossil fuels. Never sorry to be a downer. But unless they're strict regulation that says you cannot do this someone will always do. Okay never look we will want to keep the lights on and so I. My sense is that this isn't evolution. And I got back the statistic if there's one hundred trillion over investments be made in energy clean energy and transition. That's an extraordinary amount of money. And fumbled in central banks buying and so whether it's capital markets all banks or insurers don't need be financing all the overall transition I think that what regulators can do and what I was certainly arguing for in the pieces through stress testing the banks us through providing better data. You can at least act to trump bring forward when that transition happens and that's probably the best one can hope for. I mean even the practice of with that transition though is likely to have an impact on a lot of industries. And how should that be managed. Well this comes down to the big public policy questions which you know the F. T. writes about so eloquently silently. I mean these are genuinely as much political questions other opportunities. I think that you know Al Gore says the investing in Green Tech is one of the biggest investment opportunities in his lifetime and at one level we need to also change the language so it was seen as much. The investment opportunities immobilized the capital in the way. That governor Connie is going to be going onto after the bank as much chaz trying to stress test and think through the risks. And I think it's a bit of sticks and carrots to try not just along but that's not going to take away the very big political challenges ages of you know who wants a carbon tax. I think that's an excellent point. Actually I I will amend my never if there is a disruptive technology that makes fossil fuel obsolete then then they will stop financing it because it will no longer be profitable. Think about whale oil. I suppose you could compare it to that. When fossil fuels came along and made will oil obsolete than nobody nobody is financing it anymore? So maybe if there is some sort of green technology that completely upends the energy sector then that could lead to it from a fan perspective. I suppose billy thank very much end. Hugh thank