(Note: This transcript was created using artificial intelligence. It has not been edited verbatim)
Colin Hogan 00:14
Hello everyone and welcome to the Modern Money SmartPod. I'm Colin Hogan,
Sean McMahon 00:18
And I'm Sean McMahon.
Colin Hogan 00:20
Our guest today is Ken Bentsen, President and CEO of the Securities Industry and Financial Markets Association, known as SIFMA. This organization brings together broker dealers, investment banks and asset managers to advocate for effective and resilient capital markets.
Sean McMahon 00:37
But not only is Ken the head of SIFMA, which is based in the US, he's also the leader of the Global Financial Markets Association, which is a forum that brings sigma together with the Asia Securities Industry and Financial Markets Association, or ASIFMA, and the Association for Financial Markets in Europe, AFME. If something's happening in the financial markets around the world, then Ken knows about it.
Colin Hogan 00:58
And that's good for this conversation, because one of the themes that has become obvious when it comes to ESG and sustainable finance is that it's going to take a coordinated global effort to tackle the complexities of climate finance.
Sean McMahon 01:10
Yes, so we are excited to talk to Ken to get his comprehensive perspective from around the world. Looking ahead, next week, we're going to close out the year with what we call the SmartBrief 7.
Colin Hogan 01:20
The SmartBrief 7 is a rundown of the seven stories Sean and I found most interesting during 2021. Now, to be clear, we aren't saying these are the most important stories or the most valuable or even the most scandalous. They're simply the stories that we as the people who read all the news will remember the most.
Sean McMahon 01:38
Yes, that term “most interesting” gives us lots of room to run when it comes to stories about financial markets in 2021, doesn't is Colin?
Colin Hogan 01:47
Indeed. So watch for that fun episode to drop next week. And before we kick things off with Ken, here's a quick word from the exclusive sponsor of today's episode, ICE.
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Sean McMahon 02:26
Hello, everyone and thank you for joining us for this episode of The Modern Money SmartPod. Colin and I are extremely excited to welcome our guest today. Ken Bentsen. Ken is the president and CEO of SIFMA - the Securities Industry Financial Markets Association. He's also currently in charge of GFMA, the Global Financial Markets Association. Ken, how are you doing today?
Ken Bentsen 02:48
I'm great. Thanks for having me.
Sean McMahon 02:50
Yeah, it seems like our conversation is quite timely because earlier this week GFMA hosted its Second Annual Global Capital Markets Sustainable Finance Conference. And I'm curious if you have any takeaways you want to share with us from that event?
Ken Bentsen 03:01
Yeah, I'd love to. And again, thank you for having me. I'll start regarding the GFMA conference here right that we had our second annual global conference on sustainable finance, the GFMA. As you said, the global partner of SIFMA, AFME and ASIFMA is put out now two papers around climate finance or sustainable finance one in 2020. And then one earlier this year, the first look to try and size the sustainable finance market, which we estimate to be growing to a cost of about $3-$5 trillion a year to meet the Paris Accords. And then paper looking at carbon markets, which are key component, we believe, to developing a robust, sustainable finance marketplace to achieve both the Paris Accords and then some of the issues, you know, coming out of COP26. So yesterday at our conference, I'd say the key issues that were talked about involved again, as I stated how carbon markets are becoming increasingly fundamental to the task of achieving net zero emissions, and that the panelists were talking about, they're really going to need to scale up, you know, as much as 10 times over the next decade, they're going to need to become less fragmented. You have markets developing in Europe, in some regions of the United States, but they're still pretty fragmented. We still have, in some cases, compliance markets and other cases, very much more voluntary regimes, those are going to need to be integrated and become complimentary of one another. compliance regimes are going to need to grow geographically and across sectors. Those are really big policy issues for policymakers to make voluntary markets, which there's been a lot of work done on by a number of our fellow trades and the industry are going to need to grow to allow corporates to take more responsibility for their uncovered emissions and compensate for emissions that can't be avoided today. And then the other takeaway I would say is, you know, banking and capital markets are really going to be there to help scale these markets up by building new capabilities expanding product offerings that will support market formation, build liquidity, and bring increasing price transparency. So a really good conference, a lot of takeaways, again, this is an ever evolving financial marketplace, a lot of work to be done, but a lot of work is being done.
Sean McMahon 05:17
And you mentioned how, you know, earlier this year, we had COP26. And that was all over the news. So, in addition to carbon markets, and some of the role of banks have to play with or any other themes in the event earlier this week, that kind of took the handoff from Glasgow and ran with it.
Ken Bentsen 05:29
There were presentations from some of the non financial corporate sector are talking about what they were doing the transport sector, and how they are trying to become, you know, move to net zero. And certainly, you know, coming out of commitments made at COP 26. But even I think more importantly, also talking about consumer demand is driving this in many cases. And so I found that quite interesting, because we obviously come at this from a finance bent given, that's who we represent, and the role that markets and financial institutions will play and not just investment in green energy or whatever it may be, but also in transitional or transformational areas. But we don't often hear from the corporates, who are in many cases where the rubber meets the road, so to speak. And so I think that was interesting how they're adopting sort of post-COP26.
Colin Hogan 06:18
So we've seen a lot of momentum with sustainable finance this year cop 26 certainly being a big part of that. As that continues. What do you see as the most important role SIFMA and GFMA are going to play in this movement?
Ken Bentsen 06:32
Well, as trade associations focused on the capital markets you know if you if you think about SIFMA, we represent approximately 80% of the broker dealer sector by market share in the US and on the asset management side north of 50% of assets under management. And then if you look at GFMA, which brings together as I said, SIFMA, AFME our colleagues in Europe and and ASIFM, Asia, ex Japan, although we do have an affiliation with another Japanese group, the Japanese Financial Markets Council, you really capture the broad global market capital markets sell side participants. So our members are front and center engaged in not just in the sort of policy arenas around things like COP26, but also in developing products and markets to serve their clients in the non financial corporate sector, to serve their clients. And particularly in the investment side on the buy side, and not just on the institutional buy side. But obviously, we have a huge wealth management policy practice where there's increasing demand in the retail sector for a sustainable product. And so as a result of that we have sort of development that we're looking at from a business policy standpoint of how you develop these markets. But we're also interlocutor on behalf of the industry with our regulator. So here in the US, for instance, very engaged with the SEC, CFTC, prudential regulators, as they look at these issues, and how you always like to say when regulators write rules, and we certainly comment on those rules. Ultimately, at the end of the day, when the rules go final, while the regulators have a major role to play, so does the industry that has to comply with those rules, and really implement those rules and build the policies and protocols. And in some cases, technology, whatever it is. And so sigma plays a very important role, not only in advocating on behalf of our members interest before the regulators, but also working with the regulators and our members as we move to implement the rules. And so we expect to see, you know, a lot of activity out of the SEC, in particular. And then I think subsequently out of the Prudential regulators in this space, and sigma will be in the middle of that. And likewise, at the GFSI global level will continue to be, you know, putting out commentary and thought pieces with respect to developing these markets globally.
Sean McMahon 08:51
And now, you mentioned how the development of carbon markets has been a hot topic, you know, both at the GFMA conference and at COP 26. And we had Gordon Bennett from ICE actually on a previous episode kind of talking about how that market is gonna grow. So how do you see that market evolving? I mean, there's a lot of jurisdictions all over the world. Where do you see that going in the next five to 10 years?
Ken Bentsen 09:09
Well, I think, you know, there are a couple of different parts. And again, I'd refer your listeners to some of the earlier work that we did at the GFMA level on sort of trying to size out the broader climate market. And then most recently, looking at carbon markets. And there are a lot of other pieces. I know we'll get into that get into this. You know, there'll be underpinnings of developing those markets, things around disclosure and the like. But in the carbon markets, you have certain jurisdictions who have set up carbon markets, we have certain parts of the US right particularly in the West in the Northeast that have sort of regional carbon markets, but we don't really have a global carbon market structure in the same way that you would if you look at say the equity markets or the swaps markets in you don't necessarily have what some consultants will call compliance markets established by which you know, there is either a mandatory price on carbon or offset requirements We're more in the voluntary offset stage right now. So some of these things are going to have to be developed. And one of the things that we're focused on and I didn't hear the ICE presentation, but I'm pretty confident they would agree with this is you're going to need to get not only sort of developing the underpinnings and requirements, but you're also going to need to get consistency across markets, because inevitably, these are going to grow to be global markets. So they should grow to be global markets and not be regionalized and fragmented in order to be efficient. So you know, it's really a nascent stage now, but regional policymakers are going to have to think globally as they do these.
Sean McMahon 10:34
Alright, now, for starters, we will go ahead and link to those papers, the earlier research that produced, but getting back to the carbon market, so they're pretty mature. But you also mentioned a lot of the corporates and consumers are kind of demanding, you know, investment in growth and other offerings. And so, you know, we talk a lot about green energy, do you see a potential where renewables contracts in the form of wind and solar, where that market might grow someday to be as mature as the market for carbon?
Ken Bentsen 10:59
No, I think so. I mean, there's been some in the US, there's been a little bit of nascent work of, you know, sort of securitizations around solar and wind farms, it's still a nascent market in that area. But I personally think that those markets will grow as a form of financing. I think, so far, it's been more of an equity financing market. But you know, as you get to a situation where you've got, you know, wind farms that are wielding power on a more consistent basis in developing a steady revenue stream, that to me that's very ripe and developing a form of securitization. Or if you look at, you know, maybe not the right example, they'd look at, you know, sort of the previous natural gas market and things like that. So I absolutely believe that that's going to be another area of finance on, on how you can basically securitize the finance, you know, the revenue stream off of these large projects that are out there.
Colin Hogan 11:49
You've mentioned the inconsistencies with carbon markets and the sort of fragmentation that exists there. So I guess I'm curious, what do you think needs to be done either from public sector private sector to kind of ensure better interoperability between voluntary and compliance markets?
Ken Bentsen 12:05
Yeah, we try to get us in our paper, I think in terms of the voluntary is, is developing standards around what's been achieved through the voluntary offsets that are material to fit into a traditional marketplace instrument that is not is necessarily is robust as compliance market. So I think that's a key component. I think the other thing that's going to be necessary is, or at least that let me put it this way, from an economics perspective. And again, this is a major policy question is, how do you incentivize these markets to grow? And economists pretty unanimously will tell you that you've got to rationalize the price of carbon. And at the current level, it's not really there. So that raises a lot of questions of what's the impact of, you know, setting a price of carbon? And how does that spread out across the general economy, but that's going to be a key component as well. And then, obviously, it can be controversial, but again, something policymakers need to think about is, you know, how do you address if you will seep it across borders, and this is something the Europeans have been looking at trying to address kind of cross border avoidance of mandates and capturing that. So there are a lot of policy questions that have to be addressed.
Sean McMahon 13:28
We're going to take a quick break. But when we come back, we'll hear Ken's thoughts on the global boom and ESG investing.
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Sean McMahon 14:18
And now back to our conversation with Ken Bentsen from SIFMA and GFMA.
So speaking of policy, it seems like you and the team at SIFMA and GFMA are kind of well positioned to see what's going on all around the world. And you mentioned earlier how policymakers should be thinking globally and acting locally. So what do you see as the mission of the organization when it comes to all this because we see different levels of progress around the world. In the EU, they got the EU taxonomy that kind of aims at ESG investing. The SEC is going to come out probably next quarter or two with with our own rules of disclosure here in the US. So at SIFMA and GFMA. Are you trying to kind of use all the the best practices and kind of share those around the world? Are you trying to establish global standards or what's the approach you're taking?
Ken Bentsen 14:59
Well I think it's probably unrealistic to assume you're going to get strict global standards, and maybe not a good idea either. But I do think you can have global consistency, particularly when you think about disclosure, and taxonomy. And actually, you know, when you consider the fact that the Europeans have been sort of a first mover on this, particularly around things around taxonomy, and it hasn't been easy, I mean, they, they're still working through a lot of issues. I don't want to speak for my colleagues in Europe. And so I'll give more of a sort of a view from America. But I think it's proven to be instructive as the US looks at this of where Europe is run into issues that we might avoid. The other thing is, you know, we have today in financial markets, we do have a pretty robust disclosure regime, particularly in the US for, you know, just generally speaking on financial basis for, you know, public issuers, and it's a pretty strong model to build off of, in developing an ESG disclosure regime, Europe has their regime, other jurisdictions as well, they're not necessarily going to be identical, but they can be close on principle. And we've been able to, again, if you go back to sort of, you know, traditional financial markets, we've been able to largely engage in cross border finance issuers have been able to access different markets coming off their local regime, we ought to be able to do that in the ESG space. I think the other thing that we do need to think about, though, globally, as we have multiple efforts out there, looking at different types of disclosure, climate related disclosure, and taxonomy, any of us think about, you have the TCFD, the SASB, the GRI, the WEF, and at some point, and I think this is happening, we're going to have to close in on sort of, again, at least a high level principle, that local jurisdictions, the US, the European Union, the UK, you know, across Asia, can sort of build off of, they won't necessarily be the same, just as they aren't today, between, say, what the SEC requires in a 10K or 10Q versus what Europe may require. But if they're working off the same principles, then I think we can get to a workable solution. But this again, this is a work in progress. Again, this is a new area of finance. And I just say this, I you know, in terms of SIFMA and GFMA’s role, I mean, again, as I said at the outset, we're very engaged with us with our members here in the US. And I've had filed extensive comments with the SEC, if they're considering this question, and I know our colleagues in Europe have done the same at AFME with the European Commission, and with the UK, at the end of the day, I mean, the industry is going to be responsible on overseeing this on behalf of their clients who are issuers is is the corporate community. So all of these parties have to be engaged in this process to get it right. And likewise, investors to find it usable.
Colin Hogan 17:56
You've already sort of touched on this, but I guess I'm curious, what would you like to see from regulators as we continue in this transition? And are there any that are kind of leading more than others in this effort?
Ken Bentsen 18:08
Well, I think, you know, in terms of the so if we just take sort of disclosure, we do think there should be a disclosure regime for ESG. In the US, we think it should be based on materiality in the same way that the existing financial disclosure regime is built. It needs to be an evolving structure, because we have to remember as well, that the data around climate and the models or in some cases are relatively new. And so we have to recognize this isn't is completely equivalent to, you know, traditional financial reporting. And so we have to allow that to develop importantly, from an underwriter standpoint, you know, in the US, there very much needs to be a safe harbor for underwriters, because more than ever, we're relying on the data being provided to us by the issuer. And again, it, it's new data, they're new methodologies, so it's methodologies could be changing over time. And so we need some protection in relying on what's been provided to us. But at the end of the day, we have a very, as I said before, we have a very strong foundation to build off of, and rather than recreate the wheel, we should leverage that disclosure foundation that we have in the US and build on top of that, using the same principles. So that's where we've been engaging is sigma on behalf of our members. And again, my colleagues had asked me or better versed as it relates to what's going on in Europe in the UK, but again, very similar approach.
Sean McMahon 19:44
So you mentioned you know, the benefits of some kind of standardization when it comes to ESG disclosure. And obviously greenwashing has attracted some not so friendly headlines, you know, as of late, so a maybe a company's total marketing approach or a specific bond or anything, there's just been some pretty rough news on that. So what can the industry do to tackle that problem?
Ken Bentsen 20:03
Well, you know, we've talked to the SEC about that, and we want to work with the SEC chair, Gensler has been, you know, certainly been outspoken on this and said he would like to address this. I can't remember exactly how he says it. But something to the effect of, you know, if you're saying something, there's something that ought to be what it is right. And those are my words, he said more eloquently than I just said it. And so our buyside members are eager to work with the Commission to come up with a workable standard of disclosure, that when you say it's a green product, or green investment, it is how do you define that? The other thing that's going to be important here, though, is well, and Europe I think, is also unless they struggling with this, but trying to address this is, you know, there's certain things that will be green, and you have to kind of decide what are the parameters of green? But also, what are the parameters, transitional or transformational? So, you know, moving so called brown to green, and as you make the transition towards carbon neutral or net zero, in certain industries are going to need assistance in how they make that transition? How do you categorize that? How do you define that? And what do you call that? So I think there's going to be work to do here. But we definitely have expressed our interest in working with the Commission to address the issue of greenwashing, which we agree that to the extent that's occurring, that's not beneficial to the market.
Sean McMahon 21:21
So just real quick, though, in terms of, you know, those transitional fuels or transitional power sources, so is there anything in the market structure that can kind of phase those out? Or is that just gonna you can let the market go on its own? I mean, well, regulators come in and say, hey, you know, natural gas is considered transitional for the next 10 years. But after that, it's gone. Like, how do you see that taking shape?
Ken Bentsen 21:42
Well, I mean, that's an interesting question, because, you know, you know, there's a little bit of a chicken or egg thing here also. So I mean, I was having a discussion with a senior British policymaker, this past summer, sidebar, and he was making the point, you know, we're trying to make this transition very much a priority of the British government, but we're still going to need jet fuel for a number of years, right. And we're not going to ground our jets. And that's true with everyone. And on our conference, yesterday, we had one of the large US airlines talking about their transition, the thing that policymakers need to, you know, this is a, I guess, above my paygrade. But the thing that policymakers need to consider is as they want to make the transition, how they do it. And if they want to wean the economy off certain types of activities, be they you know, fossil fuels or certain fossil fuels, whatever it may be, you know, they need to think about doing it. I think just saying, all we need to do is cut off their financing is a little bit indirect to me, as opposed to saying that we want to phase out the use of certain fuels at a certain point in time. Now they in doing so they're going to have to consider how quickly can they bring up the alternative fuels, biofuels, you know, whatever it is, but to me, and this is a my personal view, just suggesting that we will leverage the financial sector to accomplish the policy goal indirectly, as opposed to explicitly addressing the policy goal is not a very efficient means to doing it. So again, going back to using jet fuel as an example, you definitely want to see that marketplace develop, you definitely want to see people investing in it, you see customer demand for it, the airlines are having demands from their own customers on it. So you want to make sure you're getting financing into that, and I think you are, but it's really, it's really not up to the financial sector, to make the decision when you want all jet fuel to be non fossil based, that's really a higher level policy decision. But what you do want to do is you want to continue to incentivize investment in developing new types of carbon neutral, or carbon or carbon less products to replace, you know, more carbon heavy products.
Colin Hogan 24:04
I also wanted to just ask you about ESG investment products, which have seen huge surge in demand this year. Do you think that demand is going to keep up? Or is this just a good year for that?
Ken Bentsen 24:15
I think it's going to keep up? And I'll tell you why. Over the past five years, as I've talked to executives, among our member firms, particularly in the in the private client wealth management side, you know, they've talked about increasing demand from their financial advisors who are hearing from their clients of wanting to have access to certain types of ESG investment. So I think, to me, there's almost nothing more powerful than consumer demand. And that trend line has been growing for a number of years, you know, maybe it's peaking this year in some ways or it's spiking up, but I don't think it's a transitory I think it's, it's just a growing demand. And then of course, large institutional investors are obviously, you know, from pension funds and others as you read, they're not members of sigma, but You're certainly increasing their demand, and they're going to feel it from their own member base. And then lastly, I'd say I mean, you know, we're very pleased with the recent proposal from the US Department of Labor, with respect to benefit plans of taking a very neutral approach and allowing how plans can offer an ESG product or investment as part of their platform. And so I think this is an ongoing demand. I think, as I said, I think that's more powerful than anything in terms of driving investment, you know, obviously, incentives, ability to return market demand, but also you've got investor sentiment and demand. And that's a very powerful force.
Sean McMahon 25:43
All right. Well, before we get out of here, we always like to ask our guests for bold predictions, where you see markets going in the next five to 10 years, you know, is sustainable finance even a thing? Or is it all kind of just wrapped into what we would call finance at that time? So do you have any bold predictions on what we'll be talking about when we discuss sustainable finance in 10 years?
Ken Bentsen 26:00
I hate to make it I mean, I, you know, I was an investment banker, not a financial advisor. And so I'm not good at I shouldn't be predicting markets. And then I was also a politician to boot. I look, I think this is a more than a trend, right? I mean, this is a new product development in the same way, probably that, you know, when I was an investment banker, the only people that worked on computers were the quant people, and you know, and now we have computers, on our phones and in our cars, and everywhere else. And you know, we can't live without them. And so, I think this is true that this is going to march along, and I can't predict the future. But I think the one thing I am quite confident of just having it, you know, thinking about the last several decades, you know, we're gonna be doing stuff 10 years from now that we never thought up today. And I think that's true in the climate and sustainable space.
Sean McMahon 26:47
We know again, thank you very much. We know you're very busy, you got a lot of obligations and a lot of responsibilities all around the world. But we really appreciate you joining us to share your insights.
Ken Bentsen 26:55
Thank you for having me. I appreciate this and appreciate the opportunity.
Colin Hogan 27:00
That's our show for today. But before we get out of here, we just want to say a quick thank you to the exclusive sponsor of today's episode, ICE.
Sean McMahon 27:09
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