Modern Money SmartPod

How COP26 might change climate finance

October 27, 2021 Season 1 Episode 1
Modern Money SmartPod
How COP26 might change climate finance
Show Notes Transcript Chapter Markers

This episode is presented by ICE

Finance is gonna play a key role in how the world tackles climate change -- so much so that an entire day at the United Nations COP26 will focus on nothing but Finance. We thought our first show should feature someone who knows the ins and outs of Finance and the ins and outs of the UN’s climate and sustainability agenda.

Simon Puleston Jones has spent years working in finance - both inside individual firms and as a representative for the wider industry - but he also paused his financial services career to launch a social platform that focused specifically on the UN’s Sustainable Development Goals. Simon recently helped found a new company, Climate Solutions, so he is now operating at the intersection of finance and climate investing. Simon explains how COP26 might influence the flow of capital aimed at tackling the climate crisis. Simon also explains the educational journey taking place around ESG and impact investing.

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More about ICE: Environmental, Social and Governance issues are in the spotlight. Investors need the markets, data and indices to understand how their decisions impact the planet, people and their portfolios. At ICE, we provide data, markets and analytics to help you measure performance, manage risk and connect to opportunity. Visit ice.com/connecttoesg for more information.


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(Editor's note: This transcript was creating using artificial intelligence. It has NOT been edited verbatim.)

Colin Hogan  00:13

Hello everyone and welcome to the very first episode of the Modern Money SmartPod. I’m Colin Hogan.

 

Sean McMahon  00:17

And I'm Sean McMahon.

 

Colin Hogan  00:20

We are part of the team that brings you need-to-know information via SmartBrief’s dozens of finance newsletters, so we're going to do the same thing with the show.

 

Sean McMahon  00:29

Yep. We're going to bring you insights and interviews that focus on the way the financial services industry is changing ever so rapidly. So Collin, you're ready to get things started? 

Colin Hogan

Yep. 

Sean McMahon

Financial Services experts around the world will have their eyes on Glasgow, Scotland the next few weeks as the United Nations convened its 26th Climate Change Conference of the Parties, or what you know from the headlines as COP26.

 

Colin Hogan 01:01

Finance is going to play a key role in how the world tackles climate change. So much so that an entire day at COP 26 Next Wednesday, November 3, will focus on nothing but finance. Since we're launching this podcast so close to COP 26. We thought our first show should feature someone who knows the ins and outs of finance, and the ins and outs of the UN's climate and sustainability agenda.

 

Sean McMahon  01:24

Simon Puleston Jones has spent years working in finance, both inside individual firms and as a representative for the wider industry. But he also paused his financial services career to launch a social platform that focused specifically on the UN's Sustainable Development Goals. Simon recently helped found a new company: Climate Solutions. So he will be joining us in a minute to share the details of his journey, and we really think you'll appreciate hearing his insights. But before we kick off that conversation, here's a quick word from the exclusive sponsor of today's episode: ICE

 

Colin Hogan  01:56

Environmental, social and governance issues are in the spotlight. Investors need the markets, data and indices to understand how their decisions impact the planet, people and their portfolios. ICE provides data, markets and analytics to help you measure performance, manage risk, and connect to opportunity. For more information, visit ice.com/connecttoESG. Or click the link in the show notes.

 

Sean McMahon  02:30

Hello, everyone. And thank you for joining us for this episode of The Modern Money SmartPod. Colin and I are excited to welcome today's guest, Simon Pulelston Jones, the co-founder and CEO of Climate Solutions. Simon, how you doing today?

 

Simon Puleston Jones  02:44

Very well. Thanks. Thanks very much for having me on this podcast.

 

Sean McMahon  02:47

You know, Simon, I've really been looking forward to talking to you because we go back aways. And I know that your career has taken some twists and turns. But you're now in a position that's perfect for what's going on in the world right now. especially as it pertains to COP 2016. Can you take just a quick second and walk our audience through what your career path has been?

 

Simon Puleston Jones  03:05

Absolutely, I tend to look at my career today through the lens of four crises. So moving from one crisis to the next, starting with the 2008 financial crisis. I was at that time a lawyer inside an investment bank specializing in cash CDOs and derivatives. And the thing that saved my job at the time was I was also an expert in the financial products that the financial services regulators and policymakers wanted more of as a response to the causes of the financial crisis. So I was an expert in exchange traded and centrally cleared derivatives, futures options cleared swaps. I then moved away from Barclays investment bank in 2014, to become the CEO of a Pan European Trade Association focused on Exchange Traded derivatives, which we then took through a merger in 2016. That then led me to my next crisis, which was the Brexit crisis. And I found myself as the public face of the corner of financial markets that was potentially most impacted by the Brexit negotiations, because derivatives are cleared in the UK through one particular clearing house more than they are elsewhere in Europe. So I had the pleasure of discussing that and being cross examined in the House of Lords about the impact of Brexit on the City of London, with a particular focus on clear derivatives.

 

Sean McMahon  04:32

That sounds like a fun time.

 

Simon Puleston Jones  04:36

It was very technical, it was very technical. The third crisis was definitely not a fun time, which was a personal crisis. A year after that, that trade association merger and a year after the Brexit referendum, I then got divorced. But that divorce very much led to you and I talking today about all things climate, because I fell in love again And I met a wonderful Californian opera singer, who would later become my wife and mother of my third child. And Renee introduced me to life coaching. And through that life coaching, I really discovered my purpose, the desire to help others, and to take action on the social and in particular, the environmental causes that mattered to me. But I don't know where to start, I shared that problem with millions of people. And I set about solving that problem for me and millions of others, as this life coaching project that then led in January 2019. To meet pausing my financial services career for a couple of years, I realized that what I needed to create was a mechanism to connect millions of people. So they could mobilize and take action, and connect to drive change on the causes that matter to them. And through that, I came across something I'd never heard of, in my financial services career, called the United Nations Sustainable Development Goals, I realized here was a vision for what the world could look like, should look like in 2030. If only we could get enough people to take enough action. And that's going to be the core of today's conversation. So I created the world's first social media platform squarely focused on the United Nations Sustainable Development Goals, and bringing together a critical mass of people to build back better, as we would now say, in 2021. And this is all pre COVID. That, unfortunately, ran out of capital at the end of last year, and then the thing for me, but what Now, unfortunately, what now arrived when someone tapped me on the shoulder at the beginning of 2021, and said, Look, Simon, there are all of these companies that are now making commitments to mobilize trillions of dollars to address the climate crisis. So would you be interested in building a business from scratch that connects those making these commitments to mobilize trillions of dollars and finance with the opportunity to do so with the companies that need the capital in order to address the climate crisis at the scale and pace that we need? So the fourth and final crisis I have it's final, in my professional career is the climate crisis, which is now at the core of everything that I'm doing.

 

Colin Hogan  07:32

So Simon, looking ahead at Glasgow, What expectations do you and others in the finance community have ahead of COP26? What are the areas of most concern right now.

 

Simon Puleston Jones  07:43

So the the climate crisis is the biggest threat to humanity we've ever seen. But it's also the greatest commercial and political opportunity in history. And so whilst there are many reasons to be negative and pessimistic, I choose to be positive, and opportunistic, and to really encourage people to see the opportunities and seize them. There's a lot of focus being pessimistic for a moment around the negatives. Yeah, who's actually going to be there? Or the Chinese going to be there? Does it matter if President Xi doesn't turn up? Given the Chinese are one of the top five polluters in the world? Maybe it does, maybe it doesn't. But I prefer to focus on the people who are there, and what are they committing to do? And more importantly, what are they actually going to do? So understandably, there'll be a lot of concern. That cup 26 turns out to be another massive exercise in greenwash, lots of people turning up playing Top Trumps in making the biggest possible commitment about what they're going to do in the future, to go address today's problem of climate change. So there's understandable skepticism about what's going to be achieved if you haven't got all the major players around the table. Understandable skepticism around people are going to be making all of these commitments but will they actually follow through? But the answer to that is actually then making sure there are consequences if people don't make good on their commitments. It's about making sure that the regulatory environment within industry is designed in such a way as to sanction those who aren't taking action that is consistent with these policy goals that COP 26 and policymakers more generally outside of COP 26 will be making a one of the key goals of COP 26. There are four but one of them is to mobilize finance, mobilizing finance is a problem. Partially though we need to de mobilize finance. There's a left hand right hand issue within financial services, financial services has funded the climate crisis. We have provided trillions of dollars So oil and gas businesses and fossil fuel businesses. And it is only recently that we've woken up to the consequences of that, in particular, this year 2021, as we've seen the climate crisis unfold in real time, under heat domes and flooding, a numerous other ecological disasters. And so climate change felt like a problem that was many decades in the future. But in the last two, three years, there's been an increasing appreciation that the problem is today, the problem is now. And whilst we've been talking about 2050, and zero in 2050, and we'll talk about this decade being the decade of action, actually, we need action, right now. So partly, we need to D mobilize finance, in those areas that have been causing the problems. But we can't just turn it off, we can't just stop funding oil and gas, because energy prices will spike enormously overnight. And as we've seen in the UK, in recent days and weeks, then when there's an energy crisis, we don't yet have sufficient rollout of the cleaner alternatives, so that we can just flick a switch and just rely on that, and that provides a reliable energy supply. So we're on a journey, we're on a transition. So we need COP 26 To really be about taking stock of where we are today. What do we need to do to build a more sustainable future and a more sustainable economy and a more inclusive economy together? What do we need to promote? And what do we need to stop doing? So there was a report recently that said that $11 million a minute of subsidies are provided for oil and gas? Well, imagine if you had $5 trillion dollars a year, that's what it is $5 trillion a year in subsidies to the clean energy sector, what that would mean for accelerating the transition? So the trick, what we're looking for is, how can we promote the transition in a smooth and orderly way, in a way that doesn't massively disrupt the economy, given that we have today, whether we like it or not a fossil fuel based economy, so need to work through pulling the right levers. What we want to see at COP 26, is firm political commitment, showing the path forward. In financial services, we need a lot more focus on climate related disclosure, so that there's more transparency on the impact of climate on companies, and what does that mean, with respect to their financing and their financial stability? We need a lot more data, a lot more access to data around climate. And as Greta tunberg would say, we need to follow the science, we really do need to have a better understanding of what should we be investing in to ensure that we achieve the climate goals that we're setting? Yeah, is ESG the right way to go about it? Or should we be talking less about ESG? And talking more about impact investing? So there are a number of things that we can look forward to in COP 26? I think hopes and expectations are are split, in part because politically, if we look at the US at the moment, obviously with your can mentions objections to the Biden administration's proposals, can those be navigated so that the US can commit to clean energy? The difficulty is that self interest and hypocrisy is the enemy of successful climate action. And we need to put self interest to one side. And we need to look more holistically at what our left hand and our right hands are doing to make sure there's proper alignment and achieving the outcomes we're setting for ourselves.

 

Colin Hogan  13:48

Do you have a dream scenario in all this? What could you see happen at COP 26 that you think would drive the most growth in climate focused capital raising?

 

Simon Puleston Jones  13:58

So if the aim is to mobilize finance and financial services and provision of finance is a regulated activity, that means that regulation or regulatory policy is very, very important. And what we saw in the, in the aftermath of the 2008 financial crisis was that the GE 20 got together in Pittsburgh in September 2009. And said, as one, this is what we want, as part of the policy response to the financial crisis. We want more central clearing of derivatives. And we want more reporting more data, more transparency. And because there was a single source and global consensus on what's the solution to this crisis, in this case, the financial crisis, it meant that CPMA artscow On the one hand, and Basel and others on the other could be tasked with then agreeing, what's the global policy framework? And then whether you're at the CFTC or the SEC, or you're at the European Commission, or the Bank of India And you've all got the same starting point. Now what's happened is that when the Paris Agreement was formed, and we got together at the cup in 2015, we knew we wanted action on climate, but there was no agreement, no single agreement on how we get there. Yes, we want to keep global warming to preferably one and a half degrees, certainly no more than two. And at the end, it affects me said, our industry go figure it out. That hasn't worked. It's created a policy vacuum. And in that policy vacuum, that lack of leadership by the G 20, what has happened is, the Europeans who are most if you like ESG, focused historically, have started to create regulation, a lot of regulation around sustainable finance. And now the UK post Brexit, no longer a part of that European Union goes, Yeah, we need some rules to cover that stuff off to so they're creating their rules. And then under the Trump administration, it was very difficult to do anything in that space. And neither the CFTC or SEC wanted anything to do with sustainable finance, because it just wasn't politically where the administration of the time was that now the SEC is moving forward. So I think what I'd like to see my dream is a more consistent, global regulatory framework for sustainable finance. My nightmare to the other side of the coin is it's already too late. The policy vacuum has been filled, Europe's horses bolted, it's already created lots of regulation around sustainable finance, the UK is a little bit behind us is years behind. But it's now too late to say to the Europeans, no, stop, stop, stop, stop, stop all that stuff you've been proposing. Forget about it, tear it up. Cop 26 has disagreed a new set of standards. And what you've written isn't consistent with that. So sacrifice your work for the last few years. Instead agree a nice, harmonious global stance, I don't see that politically happening, not least because I talked about self interest earlier. There are a number of countries, the UK being one looking to position themselves as the global leader in sustainable finance and climate finance. And so they want to create their own rules that are consistent with their own vision about what that looks like. So the dream would be consistent regulation, the nightmare would be the horse already bolted. And it's too late to put that policy framework in place.

 

Sean McMahon  17:20

Is there any chance that some of those regulators could come together and kind of choose the best couple ideas from here and there and kind of try to cobble together some kind of global framework or global priority list? Yeah,

 

Simon Puleston Jones  17:31

there's there's still space. There's there's still lots of space and lots of opportunity to do that. Most obviously, with respect to digital financial markets. So as we look at megatrends during the 2020s, sustainable finance and ESG is one, but digital assets are another. And another area where the SEC and the CFTC is still working things through the moment are who between us is responsible for regulating digital assets? How should it be regulated? If I tokenize, a green bond? Should it be regulated by the same people who regulating and tokenized green bond? Should it be subject to a prospectus and all the prospectus requirements in the same way as a un tokenized bond? Or does the tokenization make it a derivative and somehow take it out of the prospectus requirements? So I think, what's really interesting for me, as I look at Where's financial services by the end of the decade, and what is the role of blockchain and digital assets and fractional ownership of solar farms? What are the opportunities there to blend digital and sustainable finance together, and use that point in time of the policymaking process as a way of creating some consistency so that perhaps, the horse bolts for the analog world, but we can remediate some of that, as we look at a consistent global framework for the regulation of digital finance. And if Digital finance increasingly becomes the future, then we can smooth the path

 

Sean McMahon  19:09

already and kind of pulling on that evolution thread a little bit. I mean, you've been in the finance community for a while. And so how is the attitude of people inside, you know, inside those banks, and inside those asset management firms and places like that? How is their attitude evolved? When it comes to climate focused investing? Three years

 

Simon Puleston Jones  19:25

ago, we would know, as an industry 2018 When I was trying to work out my purpose, and I was talking to law firms and banks about what I was doing in my spare time, the odd person would say, Oh, we've got this thing called a sustainability report, where we tell our stakeholders, all the good that we're doing in the world. And my immediate reaction to that is somebody's been in finance for 20 years. What's the sustainability report? What's an impact report? What are these funny 17 colored icons I've never seen before that the United Nations Sustainable Development Goals, it just wasn't mainstream. even close to mainstream. So I think what we've really seen is a very rapid shift in awareness. We've seen a societal shift in what really matters to some people, to millions of people to billions of people. And that's been driven in part because now you politics is so much more identity based. And as you formulate around identity, you formulate around policies, you follow it around, well, what matters to me versus what most of us. So, your ESG has massively jumped up the radar over the last three years. And there's now a societal expectation that finance having been part of the problem for so many years, now is the time for finance to become part of the solution to the problems that it in part created. So there's massive changes, we're on a journey around ESG. And I think people's first reaction when they hear about ESG is is is great. This is all about investing to make the world a better place. And then it's only a little bit later that they better understand the difference between ESG as primarily a risk management tool, versus impact investing, where you are directly committing capital to make a specific targeted social or environmental change. And most people are still in the thinking that's what ESG is about, which it isn't. So there's a massive education journey, we're at the start of the journey, Sean and Colin, nowhere near the end of it.

Sean McMahon 

We're gonna take a quick 3o-second break. But when we come back, we'll hear more from Simon about how much longer he thinks the boom in ESG investing will continue. 

Colin Hogan  21:30

Environmental, social, and governance issues are in the spotlight. Issues like climate change, diversity and data privacy have growing influence across the investment cycle, from assessing exposure to allocating capital and achieving sustainability goals. Investors need markets, data and indices to help them understand how their decisions impact the planet, people and their portfolios. ICE provides quality data, analytics, and markets to help you measure performance, manage risk, and connect to opportunity. For more information, visit ICE.com/ConnectToESG. Or click the link in the show notes.

 

Sean McMahon  22:23

And now back to our conversation with Simon Puleston Jones, the co-founder and CEO of Climate Solutions.

 

Colin Hogan  22:30

Well, so we know things are ramping up with ESG and all sorts of sustainable investing. It's kind of booming right now, how much longer do you think that will last are the levels we're at now the new normal.

 

Simon Puleston Jones  22:42

So all things have boom and bust, there have been bubbles, there will be more bubbles. And we can expect that as ESG and impact investing and climate investing becomes ever more of a specific targeted focus that there are and will be bubbles within that. But I think broadly speaking, ESG and sustainable finance are becoming more a core priority and focus for financial services. And so I don't think that sustainable finance is a passing fad. And that in 10 years, we'll be talking about something else. If for no other reason, then I don't see the climate crisis getting solved in the next 10 years. And so there will be a continued need to mobilize finance for decades to come to address the climate crisis at the scale and pace needed to put some metrics on that UBS has asserted that in order to decarbonize just the energy sector, by 2050, will require $144 trillion of expenditure. There's not a whole lot more capital in the world available than $144 trillion. There are 10s on another 100 or 200 have trillions of capital left. But that's just a decarbonize one sector, the one that matters the most, and by 2050, and the danger of talking about 2015, that puts the focus on 2050. Whereas the focus really needs to be not even on 2030. But what are we going to have achieved by 2025?

 

Colin Hogan  24:22

So is there anything that could come out of COP 26 that you think might dampen this momentum might slow this or if we're too focused on the future, in this upcoming summit? Is that going to hurt things now?

 

Simon Puleston Jones  24:34

It's about the power of now. We can no longer pass the buck down to those around in 2030 4050, our children or our grandchildren, we need a collective collaborative effort. Capital Markets have not traditionally been collaborative, they've been competitive, zero sum game, your losses. My game. One of the joys of being in climate capital markets, is it's a very collaborative corner of financial services. because we all share the common goal of addressing the climate crisis, which leads to more collaboration, which actually helps get deals done. So are there concerns around COP 26? Absolutely. There's a need for politics to play its part and incentivize change. And it can do that through policies. It can do that through governments making funding available. And it's not just about cashes about the provision of guarantees the provision of subsidies, the planning consents to do various things. So what one has to do is press on as an industry, regardless of any political stalemate, or political headwinds, whether or not the Biden administration succeeds in committing trillions of dollars to climate, the amount of capital globally dwarfs the amount of capital, that is the subject of that bill, if you had all the asset managers in the world, allocate capital to addressing the climate crisis, it would be unbelievably effective. So the problem isn't there's not enough money to go around. The problem is that we have enough capital, but it is not being deployed in a way that is consistent with addressing the climate crisis at the scale and the pace that we need. And so the job of COP 26, is to help ease the process of mobilizing finance by providing the political frameworks to do that. And partly that's also through creating a consistent regulatory framework to think that's possible. But regardless, the industry just has to crack on. And there is no time to wait. The industry is innovative. The industry is keen to mobilize finance, what we're seeing at the moment with ESG is it's doing a lot of good. At times, it is a distraction, there is a rightful focused on some greenwashing of ESG funds that are a little more than tarted up tech funds, there is say an education journey around demonstrating ESG. And impact, there is a growing awareness that a lot of the solutions to the climate crisis exist in private markets, in small and medium sized enterprises. They're not publicly traded. So we need to massively massively increase the amount of investment in private companies in private markets. And by massively I mean to the tune of trillions of dollars, not billions, trillions of dollars. And there needs to be a change of risk appetite. Because with private markets, you're dealing with less mature companies. So the returns are higher. And that's why we're starting to see investors increasingly venture into private markets, particularly late stage Series C and onwards to my IPO in the next couple of years. Because it's riskier, perhaps than investing in a publicly traded company, but you can see the exits a couple of years away. And so that gives many investors a degree of comfort.

 

Sean McMahon  28:05

Okay, so you talk about the difference in ESG investing and an impact investing. So what specific kinds of investment opportunities are, you know, banks or asset managers or other private investors? What are they most interested in participating right now?

 

Simon Puleston Jones  28:17

So what we're gonna see at COP 26, is we're going to see investment banks and others commit to invest trillions of dollars in climate change solutions by 2030. It'll be Top Trumps, as I mentioned earlier, the question is, where are they going to find the deal flow, to invest at that level of trillions, you know, if 20 banks between them come out and commit to invest $20 trillion? What are they going to be investing those $20 trillion in. And if it's ESG funds in the form they are today, we're screwed. So What's critical is that, as we talk about investing, we make sure we're investing in the actual solutions to the crisis, and that the recipients of the investment are the companies with the solutions, not other investors. At the moment where we are, is we're happily trading feel good ESG stocks and ESG funds, and they're listed, they're publicly traded. And all we're doing is we're moving money from one field, good investor to the next field, good investor, what we need to see is a lot more investment in private markets, because a lot of the solutions are in private markets. And we need to see a hell of a lot more investment in primary markets, where the capital that's being deployed goes into the companies with a solutions rather than secondary market trading of passing money from one field investor to the next.

 

Sean McMahon  29:52

Okay, so we've talked a little bit about greenwashing. And you know, a lot of the funds that are highly touted as being things but maybe not that effective. So how does it investor, try to weed through all that. It's a lot of work. There's a lot of due diligence. And you know, sometimes the research is pretty opaque, you know what you're trying to find out about a given company or given cost. So how does that process work in terms of sorting out the investments with the most direct impact? versus some of the others? Yeah,

 

Simon Puleston Jones  30:18

absolutely. So partly, this is about what are you going to invest in? Partly, it's about education. And partly, it's about due diligence, and data. So first of all, you've got to work out well, what do you want to invest in. So that's then about creating your investment thesis, being clear on what it is you're trying to achieve with your investments. If you've decided that you want to mobilize capital to go address the climate crisis, you're going to have to scale up on project finance, and infrastructure finance, because a lot of the solutions are about infrastructure. They're about solar developments, wind developments, battery storage, biofuels, geothermal energy, vertical farms, and this is project finance, which has been a very sort of discreet corner of financial services to date. But if we're talking about making a planet that's fit for the future, then the time has come for project finance, because we need more project finance than we've probably seen at any other time in history. So Paul is bad education. You could decide to mobilize your capital in in in a wide array of themes within our business climate solutions. We have the energy transition, which splits into 10 sub sectors, maybe, then we have sustainable agriculture, netzero real estate or solutions to circular economy? So do you want to pick all of these? Or do you just want to go hard at the energy transition? So what we're seeing is investors increasingly are focused on decarbonisation. Net Zero, is getting all the press all the glamour if you like, but there's an increasing awareness. And not just in places like California, where water availability is a challenge, but globally, increasing awareness that it's not only the need to reduce the amount of carbon dioxide and methane that's going into the air, we also need to make more of our finite resources. So we have to be a lot more conscious around water usage. And that's why vertical farms are an important part of agriculture going forwards. And when it comes to then thinking about due diligence, so how can they weed out the wheat from the chaff? How can they work out what to invest in? Firstly, it's about being really clear on what you're looking for, both in terms of your impact, and your expected return. And for all the talk of saving the world through investing in climate or ESG. It's still a world that revolves around fiduciary duty, and shareholder primacy, whatever business roundtable may say, and that's currently in law, I think that needs to be changed. But that is the law as we find it today. And so it has to be about returns. So what are your return metrics? And what are the asset classes you're interested in investing in? Is it equity? Is it debt? What's your appetite for project finance? Where is your risk appetite, we in the last two months, we've signed eight mandates for two and a half billion dollars of capital raising. And those eight mandates came after we reviewed 350 investment opportunities. So it is about the reviewing the 100 deals to work out which two or three, you might have even a passing interest in as being remotely credible, and remotely good fit. So that's where COP 26 is really important, is about continuing to promote the idea of transparency, the availability of data around climate around ESG so that people can make informed investment decisions.

 

Colin Hogan  33:47

So what is the hardest metric to gauge when an investor is analyzing a specific company for a potential investment?

 

Simon Puleston Jones  33:55

I think there's no single metric that I would point to. But what I would say just to piggyback off, the last answer is it's all about data and a lack of availability of data. So that whether it be publicly traded companies or companies in private markets, there just needs to be a lot more information available to investors, both in wholesale markets and return investors, so they can make more informed investment decisions. And this isn't just about data prior to the investment. It's about monitoring the impact of your investment after the event, so that there's more real time access to impact data, and ESG data. The challenge we've got in financial markets around data at the moment is data is an industry of itself. And there are custodians of the data. There are gateways to the data. You don't pass through that gateway unless you part with a lot of money and so on. There's some wider policy questions around what data should be made publicly available, free of charge to promote the policy goals that we have, and what data is perfectly okay to be aggregated and made available commercially for a fee. So I can't help but feel it's a very personal view, that there's a role to be played by international bodies, and by the competent authorities of the world that are now receiving a lot of data through things like Miffy to reporting aifmd reporting, Dodd Frank reporting, these all getting reported to repositories, but to what extent can some of this data and some of this technology around reporting be used so that it's more publicly, freely available?

 

Sean McMahon  35:53

I think if you're touting a side benefit of Dodd Frank and MiFID 2, Simon, you're gonna upset quite a lot of folks who really kind of despise those, those regulations.

 

Simon Puleston Jones  36:04

Absolutely. And let's be honest, sorry, reporting is a pain, right? It's a pain. And it's taken most of the last decade to get it even remotely, right. And there's massively more transparency than there was 10 years ago, which is to be applauded. But we have to go through the pain of reporting to go through the gain more effective investment decisions.

 

Sean McMahon  36:30

I hear you. And then now we've talked a little bit about the boom in ESG investing and you know, you've kind of drawn the distinction between that and impact investing. But you know, ESG, investing is here to stay. I would argue, you know, there's certain jurisdictions they tried to kind of place limits on what these funds can, how they can advertise themselves, or what they can tout. But if ESG is going to be here for a while, and we're talking billions and billions of billions of dollars, how can it be improved?

 

Simon Puleston Jones  36:54

So partly, this is about the G word greenwashing. We've seen the UK recently legislate, to remove greenwashing, the Competition and Markets Authority is increasingly clamping down on the claims made by companies, not just financial services companies, but any company about the greenness or sustainability of its product. And so, evidently, there needs to be more clarity around what is green mean, and regulations. And initiatives, like the EU taxonomy are to be applauded, where we look to have a common language around what does it mean to be green? What is specific words mean? That common taxonomy then feeds into the data question, because as soon as you've got shared language that enables you to use data and marshal data much more consistently and internationally? So I think partly it's around the account, can we have more clarity on the language that we use? Partly, we need to have specific regulation targeted around sustainable finance. So that there are things that are required to be disclosed, if you are purporting that your product is a green bond, or some other form of sustainable finance. And again, there are market led initiatives, the ECMO green bond principles are great, the climate bonds initiative is great. But these are all voluntary codes. And what's the industry is great at creating voluntary codes, and there are lots around sustainable finance reporting as well. One can't help but feel that what's lacking is international consistency. And so the more that can be done amongst policymakers to create common approaches to disclosure to the treatment of a financial instrument, whether it be tokenized or not, the better. So I think the answer is afraid to say, more regulation. But the answer critically, is also more internationally consistent regulation. Is that then opens the framework up for equivalence. Equivalence was one of the great potential success stories coming out of the 2008 financial crisis, because we had that common starting point that enabled us to defer to regulators and other jurisdictions. And of course, what we need to do is to mobilize capital across borders. And if what we end up with in climate finance and sustainable finance is a balkanization of sustainable finance regulation, so that Europe does one thing the UK does the second, the US does a third, the rest of the world as a fourth, fifth, sixth and seven. You're doing a number of things. You're not facilitating the mobilization of capital across borders, you're creating a moat. Around today's incumbent financial services firms, because only they will have the capital and the expertise to be able to navigate doing an international deal, because the regulatory framework is so complicated, so inconsistent, that it's hard to navigate for a new entrant into the market. So we need to promote competition. But we need to do so in a way that promotes stability of financial markets, and clarity of regulatory environment.

 

Sean McMahon  40:29

All right, so we're hearing a lot of policy goals out there from various countries about how much they want to spend. But then there's also promises and goals coming from the private sector. So what role do each of those sides of the market play and and where do they come together to help with this?

 

Simon Puleston Jones  40:42

So for me, blended finance has to be an important part of the solution. So the role of governments is to make some finance available to in particular, get deals done, that capital markets can't, for whatever reason, to make the money available, where it isn't available from banks and investors. And they can do that either directly by providing money, or by facilitating things happening by providing guarantees that give investors a bit more confidence. So partly, the solution is for governments to create the right financial incentives and disincentives. And partly it's about them collaborating with the private sector. So I'd like to see a lot more of an increase in blended finance where governments and the financial sector are working hand in hand without picking out too many individual examples. Even today, Breakthrough Energy Bill Gates's venture, as announced their multi 100 million dollar partnership with the UK Government, with the UK Prime Minister, to accelerate the transition to cleaner energy. So those types of blended finance of public private initiatives are going to be critical to accelerating the transition to a more stable future.

 

Sean McMahon  42:03

So your team at Climate Solutions, you focus on five specific areas, and those are energy transition, sustainable agriculture, net-zero real estate, water solutions and circular economy? Where are you seeing the most appetite from investors now? And also just a follow up on that? Where do you see maybe a few years from now, there'll be more opportunities that might kind of surprise people.

 

Simon Puleston Jones  42:24

By far and away, the greatest opportunities we're seeing are in energy transition, almost all of our current deals are in that space by one that's a vertical farming opportunity. So why energy transition, I think financial services understands the energy markets extremely well. But they're now having to become more expert in new technologies. So as we look at, for example, the transition to electric vehicles, that requires a lot of financing, but there's there's a lot of new technologies in the battery space. So we we see a lot of interest in people investing in the transition to a cleaner grid. And there's always been a lot of interest in solar and wind. At the moment, there's a huge amount of interest in utility scale, battery storage, and battery developments that can be connected to the grid as a way of making sure that electricity is available on the grid, even when the sun isn't shining, and the wind isn't blowing. We see some interest in geothermal. We see interest in particular in hydrogen. So certainly the energy sector seems to be where most investors are focused at the moment. Again, the big challenge for investors is better understanding the things they're investing in. So one of the things that our founding team, particularly majors in and one reason clients say they come to us over others is, firstly, one of my colleagues created the world's first green bond under the climate bonds initiative in 2014. So we have specific in house expertise in green bonds. And secondly, unusually, we bridge a couple of gaps we bridge the gap between the underlying industries and financial markets. And we're as expert in financial markets as we are in battery storage in hydrogen in nuclear, in the subsea sector, because one of the founders used to run all of those businesses for footsie 100 listed company, because another one of the founders, created the UK arm of the world's largest solar developer, and EPC. So it's important that banks and investors on the buy side get more expert in these five underlying industries that are the solution to the climate crisis. So they can better understand the risks that they're taking the technologies that they're investing in, and more generally, risk appetite is going to have to increase the other day That bridge is a so called valley of death between on the one hand, family offices, private equity and venture capital, who get companies to a stage where maybe they next need to raise 3040 50 million. But once they're starting to raise 3040 50 million, many of the investors that gotten to where they are today don't have the financial firepower to get them to the next stage of their journey. And certainly, once a company needs to raise 100 million plus, they really need access to wholesale financial markets, and the major asset managers and hedge funds of banks and sovereign wealth funds. And there are not that many companies in the world that look to bridge that valley of death, and go on a journey with the companies that have these solutions to the climate crisis. We are one of the few that are focused primarily on companies that want to raise $100 million or more, but we're happy to support those that need only 10, who in future may need 100 million or a billion or whatever it might be, because they want someone with them for the journey for the long term. And so that's another challenge that we need to address as a financial services industries to better connect the wholesale financial markets with the private equity venture Angel family office world, because otherwise many solutions will fail, when they just don't have access to the distribution networks to raise the next level of money that they that they really need.

 

Colin Hogan  46:28

So I guess, Simon, I'm wondering, Where do you see the state of the climate focused investing market in five to 10 years, have you got any bold predictions you'd like to share with us?

 

Simon Puleston Jones  46:39

I mentioned earlier, it needs to be a multi trillion dollar market. So I think my my predictions are that for the next, let's say a couple of years, we're likely to still be in the lots of talk not enough action category. And we'll still be on the journey of understanding the difference between ESG and impact investing, we will still be on the regulatory journey of putting the frameworks in place to make sustainable finance, as secure as it needs to be for investors, both large and small. By 2025, I do believe we will have had a major transition in financial markets where we will have addressed some of the challenges around ESG, particularly around green washing, we will be more focused than we are today on the impact of the investments that we're making and making sure there's enough available data. So in five years time, if nothing else, because of the returns on offer, we will see hundreds of billions invested even in private markets, in climate solutions. And we need by the end of this decade, for climate finance to be one of the core sections of financial services. Because if it isn't, by the end of the decade, we're too late. The science is clear. We need to act now. We need hundreds of trillions of dollars to create the world in which we want to live that is sustainable, not only for us, but for our children, grandchildren and beyond. And in order to achieve that, the time to mobilize is now.

 

Sean McMahon  48:30

Thank you very much, Simon, you've shared a lot of amazing insights with us today. I think our listeners are really going to appreciate all the knowledge you've shared with us.

 

48:37

Colin Hogan

Thank you, Simon.

 

Simon Puleston Jones  48:38

Thank you. I'm really grateful for the opportunity.

 

Sean McMahon  48:43

That's all for now. Stay tuned for more episodes focused on COP 26 In the coming weeks. But before we go, we just want to say another quick thank you to the exclusive sponsor today's episode, ICE. 

If you liked this podcast, please share it with your friends and colleagues. And be sure to follow us on Apple, Google, Spotify or wherever you get your podcasts. You can also follow us on Twitter, where our handle is @ModernMoneyPod. And if you'd like a daily dose of modern money news delivered to your inbox, head on over to SmartBrief.com and sign up for the Modern Money SmartBrief. The Modern Money SmartPod is a production of SmartBrief - a Future company.



What does the finance industry expect from COP26?
Mobilizing finance vs. De-mobilizing finance
What the finance industry needs from COP26: Disclosure, data and more
Regulatory lessons from the 2008 financial crisis that are applicable to the climate crisis
Where the growth of digital finance can play a role
How attitudes inside the finance industry have evolved
The "educational journey" around ESG investing
On the boom in ESG investing
What kinds of opportunities are investors interested in right now?
Where investments can make the most impact
The rise of project finance
The data conundrum: Fee vs Free
Wait ... actual benefits from Dodd-Frank, MiFID II and AIFMD reporting?!?!
How to tackle "greenwashing" and improve ESG investing
A role for blended finance
The 5 areas of focus at Climate Solutions
Simon's bold predictions about the future of climate investing