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TCW is a leading global asset management firm with over 50 years of investment experience and a broad range of products across fixed income, equities, emerging markets, and alternative investments. In each episode of TCW Investment Perspectives, professionals from the firm share their insights on global trends and events impacting markets and the investment landscape.
New York City Climate Week is an annual gathering of global
policymakers, investors, companies and other stakeholders
to take stock of the world's progress for climate action
TCW's Global Head of Sustainable Investments, Jamie Franco, and I are thrilled
to be joined today by Sonia Gibbs, the Institute of International Finance's
Head of Sustainable Finance, to discuss our
key takeaways from this action-packed week
My name is Cindy Palladinus, and this is TCW's Investment Perspectives Podcast
Sonia, thanks so much for joining us and for being such a
wonderful partner to TCW through your important work at the IIF
As a first pass, Climate Week this year coincides with
political contests in the US, Europe, and elsewhere, and
fiscal support for climate is definitely on the agenda
IIF hosted important conversations during Climate Week highlighting how
fiscal policies can be analyzed within the broader context of rising
debt, inflationary pressures, and a more uncertain macro-fiscal backdrop
What are some of your key takeaways from those conversations and implications
on the availability of public capital for climate finance to come?
Well, first of all, thank you, Cindy, both to you and Jamie and
to TCW for partnering with us and for having me on the podcast
This is a wonderful opportunity to sort of download on everything
that happened at Climate Week, and you're absolutely right
I mean, we are in a rapidly changing political context here in
the United States, in Europe, emerging markets around the world
I think New York kind of kicked off a whole series of global events, including
the annual meetings of the IMF and World Bank and the IIF here in Washington, DC
Also you've got COP coming up in Cali, so the Biodiversity Climate Change
Conference, global one, at the end of October and early November, followed
by the annual climate conference COP in Baku, so a whole suite of events
One thing I think that came out very clearly in New York was the growing sort
of overlap, if you will, between sovereign debt policy agenda and sustainable
finance and transition finance agenda, because at the end of the day, it's
extremely difficult to channel funding for climate, for natural capital, all
of these kind of sustainable development goals, if you are at the same time
drowning in debt, because managing debt requires you to use government
revenues also for debt service and just sort of keep the debt burden going
So it's a conversation, I think, that we increasingly need to have
Where do we have our, where do our fiscal priorities stand?
When we look ahead to 2050, when we're all going to be at net zero greenhouse
gas emissions or whatever goals we set, how is this going to be paid for?
Transition is expensive
Transition has costs, including for sort of poor and vulnerable populations
So getting that message across, positioning government budgets, deploying
the balance sheets of the multilateral development banks, so bringing in
development finance together with government finance and private finance
I think it's the conversation of the decade, really
And it was great that we had the opportunity to discuss that in Climate Week
Completely agreed
I know, Jamie, you had some key observations along these lines as well
Thank you very much, Cindy and Sonia, for this conversation
I think Sonia really hit it on the head, which is we need to
be thinking very holistically about some of these challenges
I think one of my, I've been coming to Climate Week for the past several years,
and one of my observations this year is that we finally have the climate
scientists, folks focused on transition and sustainable investing,
and the economists in the room at the same time having a conversation
And that sounds pretty simple and straightforward, but you
realize that a lot of these conversations are happening in silos
And the IIF in particular has been trying to pull together multiple work
streams to bring the right people to the table to have these conversations
And one of my observations is certainly the debt burden globally,
not just in developed, but also emerging market economies is at
pretty high levels when you look at it on a stock or a flow level
But when you think about climate finance, some of
this is actually growth enhancing in the long run
If you could work with emerging markets who are energy
importers to really reduce that reliance, that's a game
changer from a long-term growth perspective potentially
And so I think it's really important that we have these conversations about,
yes, there's potentially upfront spends here, but those of us who have spent
a lot of time in the fiscal space know that not all spending is equivalent
And we have to really think through those fiscal multipliers
and the short-term and the long-term implications
And we've just started those conversations, which is really very
helpful and productive in order to move the conversation forward
And then maybe if I could bring up one additional observation, which is we do
all struggle with data, with terminology, with standards, but I do think that
this year with the focus on how do we actually
implement the goals that have been set out?
How do we define company or a country that is transitioning
versus one that could be considered a transition asset?
And this conversation around designing credible plans to help
transition I think has been a really productive technical and pragmatic
conversation that I had across a number of meetings last week
Transition planning is certainly top of mind, and I think we
all participated in different conversations along those lines
I also saw that there were some instruments that were
discussed that could support transition planning in new ways
So we were really grateful for the opportunity to co-host an event with IIF
on blended finance and scaling climate finance for emerging market settings
And one of the instruments that was discussed in that
conversation were, you know, debt for nature swaps, outcome
bonds, several new instruments coming to the surface
Sonya, what were your key takeaways in terms of the new
instruments that could facilitate transition planning
moving forward, particularly for emerging market settings?
I'm always amazed, Cindy, at the kind of wealth of creativity
and innovation that goes into designing these instruments
And going back to what we were saying about the kind of intersection of debt and
climate and natural capital, something like a debt for nature swap or a debt
for sustainable development swap, outcome bonds, all of these things that
you might say it's a kind of a conditionality around the outcome, right?
So you're issuing finance with a desired result in mind, or
if it's a debt for nature swap, you're maybe forgiving some
debt in exchange for benefits for natural capital and so on
All of these things are fantastic, and there's a lot
of real kind of innovation going into their design
But one point I wanted to stress and something that really came out in our
blended finance roundtable is how to make these instruments work at scale,
because it's pretty straightforward to find one modest transaction in a country
where the investment environment is conducive to this kind of external capital
to monitor it closely, make sure it works, and, you know,
maybe use it as a template to replicate it elsewhere
Getting it to scale is much more challenging
And here I would highlight a couple of different things
One is that the overall policy environment for transition
finance, however you define it, needs to be conducive
Transition finance isn't just green finance or green technology or even
managed phase out, any of these types of things, they're important
But what really matters is sort of the messy middle of getting
companies that are currently brown and want to be green to a
state where they are green and letting that transition finance
So it's super important that we have the policies in place to allow that
In an ideal world, we would have global carbon price, we would eliminate
fossil fuel subsidies, and that would take care of the pricing issue,
right, because it would make all the brown finance very expensive
and the green finance much less expensive on a relative basis
But we don't have that, we don't live in a sort of perfect world
So the role of the financial sector in
helping all this to happen is super important
We need the right regulatory framework that doesn't unduly penalize, for
example, investments to emerging markets, or that treats things that are part of
blended finance, like guarantees from multilateral development banks that treat
those kind of instruments in a supportive manner in the regulatory framework
And finally, you know, we need the right investment environment
in the countries where this investment is being made
We've got the right regulatory frameworks
And as you say, Cindy, the kind of, and Jamie, you
mentioned this as well, the kind of credibility in their
transition plans and how they're going to finance it
Completely
I wanted to reflect on what you were mentioning about
using the multilateral balance sheet effectively
I thought one of the comments that was part of the discussion we hosted on how
multilateral institutions are using that balance sheet more effectively by
enhancing and streamlining the guarantee agenda, very powerful and important
And I'm curious the extent to which more of these conversations
will be seated at the COP in Baku, given that it's the finance COP
What are your expectations, Sonia, in terms of what are
you excited to see during the COP conversations and
certainly at the bank fund annual meetings as well?
I think it's a phenomenal opportunity because I think what we have seen over the
course of this year and certainly last week in New York was kind of, you might
call it a blended finance ecosystem of the multilaterals, the development
finance institutions, even philanthropic capital, which can play an important
role here, and private sector actors and policy
makers, you know, all going for the same goals
And I would expect that we'll see more of this in COP because remember that part
of the purpose of COP, remember there's a loss and damage fund, there's all
kinds of a focus on getting the right kind of financing
to vulnerable emerging and developing economies
So this conversation, you know, we heard this last year at COP in
Dubai as well, a blended finance handbook issued by the Central
Banks and Supervisors Network for Greening the Financial System
But I think we've grown the conversation since then
So I expected to go forward both at the kind of more philosophical
level about the value of scaling blended finance, but also at a
more technical level, how do we get rid of regulatory barriers?
Where are some good successful case studies of how it can happen?
I'd expect some focus on these just energy transition partnerships, the jet
peaks that have been set up that bring together governments and private sector
and all these different actors to mobilize capital for sustainable development
So a lot of scope for further progress
Yeah, and I just wanted to underscore a few things, Sonia,
you make such great points on the fact that the brown
to green transition, we have to be able to finance
And I think one of the things I heard really is that pension
funds and other asset owners are really focused on this
Not only is this more compelling, I think from an investment opportunity,
which is helpful and encouraging, we all want to do things that are delivering
returns, but it also happens to make a real world difference when you
can underwrite investments that are in the process of transitioning
And I think maybe bringing this up a little bit to a
higher level, this is not business as usual, right?
Meeting the need of what has been identified for ensuring
a climate transition that eliminates or at least reduces
kind of the severe physical risk implications of no action
We can't operate like we have been
And one of the things that came out of our round table, I so appreciated being
able to have Ethiopus Tafara from MIGA at our round table, because it really
demonstrated how creative MIGA and the World Bank Group has been and thinking
about partnering with the private sector, making it easier to do
business with the bank, making the due diligence process easier
Getting that risk transfer piece right is a really important part of being able
to do blended finance successfully and with a larger kind of pool of investors
But it's not just about the World Bank
And I so appreciate the efforts that others at the MDBs and DFIs are working
together because it's not going to be one of them guaranteeing one project
It might actually have to be multiple
MDB is working together to deliver the kind
of risk transfer that's needed on one project
And so I think the degree to which we tap into that creativity that you
mentioned, Sonia, and in our interactions with our colleagues and our
interactions in the broader ecosystem, that helps us, I think,
reimagine the tools that we really need to meet this challenge
And I was pretty encouraged, actually, by the tone of the conversation
and the agreement around this point at our round table last week
And the spirit of partnership, which you mentioned, Jamie, as well
I think what's been nice about being able to be part of these conversations
over the years is that we went from talking about financing gaps to trying to
identify instruments that could fill those gaps, and then working together
now in partnership in light of all of these conversations
to make progress in filling those gaps at scale
Just that spirit of partnership and convening
to address these really complex challenges
Yeah
But one of the issues, Sonia, I wanted to ask you about,
maybe I'll take over questioning from Cindy for a minute
We were meeting with the backdrop of a very large hurricane that
was barreling down on the southern part of the United States
And I think there was a palpable concern that we, as a community,
don't really have a good handle on being able to forecast the impacts
We're worried that we don't have the financial resourcing, either in
the private sector through insurance companies or in their backstops,
to be able to deal with what I think some of us are anticipating
And so I wanted to get your sense of, did the conversation
about climate physical risk really enter into some
of your discussions that you were having last week?
You mentioned the role of insurance, and we were just talking about MIGA, the
World Bank, which provides a really important type of insurance risk guarantee
But a lot of their relationships and a lot of the collaboration
they're doing are with private sector insurers and reinsurers
who play such an important role in risk mitigation
And it's funny because if you talk with a big insurance global
group, they'll just sort of smile at you and say, look, we've been
in the business of climate change risk mitigation for decades
You know, we know more about it than the rest of you put together
And indeed, they are all very well versed with
their own sort of in-house models and so on
I think part of the conversation around the role of insurance is around maybe
the affordability question on this type of insurance and how you make it most
affordable for the widest group of recipients,
including in less developed economies
The other factor that I heard a lot about during Climate Week was this idea
that insurance can facilitate capital flow toward clean technologies, right?
Because at the end of the day, new technology is a risky business
You don't know which one's going to pan out and so on
So that's another role for them
But the kind of pure climate-related damage function, I
mean, you ask any insurance company and this is a huge
kind of actuarial set of calculations that they need to do
They need to think about parametric risk insurance
How do they adapt their models to be dynamic as our climate continues to change?
I mean, it's a big challenge for them and
they're all very focused on that just now
Yeah
And I think looking at some of the flood insurance coverage over some
of the areas that were affected in North Carolina, I mean, they just
weren't insured and to the degree to which the small percentage of
houses that were insured, they were insured for 100-year floods
And what we just saw over the last several days is in the 1,000-year flood range
So I think we need to still keep our eye on the ball, given that the range
of potential implications and the cost associated with that is staggering
So on that note, I want to thank you, Jamie, and thank you, Sonia,
for joining me in this edition of TCW's Investment Perspectives
We hope that you join us next time for more expert analysis and
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