Episode Transcript
[00:00:05] Speaker A: Welcome today to John Lothian news ESG podcast. We're speaking with executives from exchanges from around the world who are members of the World Federation of Exchanges. Leading off the conversation is Nandini Sukumar, who is the CEO of the World Federation of Exchanges, and she's going to bring us up to date on what's happening with the WFE at COP 28 next week. So welcome, Nandini.
[00:00:38] Speaker B: Thank you Sally. And thanks to John Lothian newsletters for having us on. We all are avid listeners to the podcast and read the newsletter, et cetera. So what a great opportunity for us all to be here together, talking all things ESG, talking about cop and talking about the exchange industry, the market infrastructure role in ESG. I want to start by saying that exchanges, market infrastructures have been engaged with ESG issues for the last 20 years. So really as an industry, we have been grappling with some of the issues, innovating to meet some of the challenges, et cetera, for 20 years. This is because the exchange itself sits at the center of the financial system. So I sometimes describe us as the center of the center and we have this unique engagement with a range of different stakeholders. So we speak to the issuers on the equity side, we speak to the regulators, we speak to the policymakers, we speak to my side, we speak to the sell side. And of course, increasingly in the derivatives market, exchanges are enabling some of the problem solving that needs to occur as we transition into those pathways to net zero. In speaking about things today, I wanted to say another thing, which is that every year at the WFE we run an annual sustainability survey and it's our 9th annual edition. If you're interested in the survey, do go onto our website and take a look. It's public, it's full of fascinating information, and I want to contextualize where our industry is at with the results of this survey. The second thing I wanted to say is I'm welcoming on this podcast with us three members of the WFE Sustainability Working Group, and this is a key industry working group for financial services because it brings together the ESG experts, whether at the chief sustainability officer level or the head of that business at our member exchanges. And it's really a group of ESG leaders, three of whom are here today to talk about how and why and things that exchanges are doing to support our industry, the financial services industry, both in the transition and beyond. The sustainability Working group are this group of leaders who are really mandated with working and forging the policy consensus and doing all the thinking and action around industry wide standards, best practice and harmonization and thinking. And I'm delighted also to introduce on the call Victoria Powell, my colleague at the WFE who leads this group from our end. Now, where are we? As we head into cop in Dubai in about a week's time. So earlier this year, when we got the results back from our 9th survey, we discovered that our industry, the exchange, the market infrastructure industry, had really reached a milestone in collective efforts to achieve sustainability. And this is because the new data indicates that this year, for the first time since the surveys began, and reminding you that this is the 9th such survey, every exchange that responded participated in at least one ESG initiative and engaged in at least one WFE sustainability principle. And as an industry a couple of years back, we had agreed a template, five principles that would shape the way our industry worked and acted around sustainability. The survey also found that of the 58% of the exchanges reporting their own carbon emissions, 68% covered scopes one, two and three, which reflects a very comprehensive approach to measuring and managing their carbon footprint, considering both direct and indirect emissions throughout the value chain. The main challenges reported by exchanges and being reported by exchanges are external factors, right? Such as limited resources for implementation, unreliable ESG data, lack of standardized reporting frameworks for promoting sustainability, and the most frequently reported motivation for ESG engagement was sustainability concerns from our stakeholders, of whom there are many, and of course, opportunities for innovation in business. We also discovered that green bonds persist as the most popular ESG product, and that trend seems really likely to continue. Now, I want to flip a little bit to the half day session we're running at COP. We're doing it because we felt it's really important for the industry to convene at CoP, to think a little bit about where we are and where we want to be. As you know, cop is a very broad church, if you like, or a very broad meeting. We have everyone interested in climate. And whenever I go, I'm personally struck by how you have, on the one hand, you really have teenagers who care about climate, and then you have very seasoned business leaders like Thomas and know, Caesar and Victoria, who are know leading from the front on their concerns and the work that they're doing around sustainability. We have this one day session we're going to obviously talk about the role of regulation in our industry and the role of exchanges, the role of regulation. And that's because as exchanges, we are public markets. We're highly regulated market infrastructures. We place investor protection, public good, transparency, accountability at the heart of our industry. We don't do it as an add on. And this really distinguishes us from other new markets, right? That we start with this piece that is do good. We have the rulebook so people know what they're getting when they come to an exchange traded market.
They can engage with confidence. The exchanges that are active, are accountable and have been there for many years. There's no short termism. We are going to talk at length in the conference across three broad themes, the first of which is the potential of green equities to support a sustainable transition. And you and I spoke a little earlier this year, Sally, about the WFE's green equity principles. I'm delighted to be on this podcast with three of the exchanges that have been so active and instrumental and helpful in getting us there in the green equities principles. Thomas, who's head of ESG solutions european markets at Nasdaq, is going to be speaking about green equities and green equity principles. I'll let him talk to that a little bit, because Nasdaq themselves have a very pioneering work in the green equities space. Thomas, do you want to give us a quick snapshot here? And I'm sure Sally will give you further room to play on this one.
[00:08:21] Speaker C: At Nasdaq, we have run a number of different initiatives for quite some time.
Everything you can say emanates, or most emanates, starts from the core of the corporate, the listed corporates, and how we can support the corporates in their sustainability journeys. And everything goes into how can we facilitate, how can we make it easier to ensure that they, over time, always have access to capital. And we strongly believe that over time you need to be a sustainable company to get access to capital. So that's where the starting point and why we are in this, in terms of the green equity, that is something we started a number of years ago. And we saw a possibility to simplify and to improve the transparency around sustainability and the greenness. We have created a framework so we allow listed corporates, and actually non listed corporates also nowadays to get into this framework and be able to show their investors, their different stakeholders in a very structured and transparent way about their sustainability work. The advantage is twofolds, I would say, both in terms of reaching out to investors and show this and to show different stakeholders, but actually also for the corporates themselves, according to our framework, they are forced to go through their whole business model, et cetera, bring in a third party validator and second opinion provider, so to say, to go through everything and to give feedback and to validate their work. They do and that's quite good value for the corporate itself to actually have that second opinion coming in and see what they do and how they can approve, et cetera.
[00:10:29] Speaker B: Cesar, why don't you come in on green equities and just tell us a little bit about it. Caesar has a very broad range of experience, and I personally am still remembering a fascinating session he led at the sustainability working group, where he talked not only about green equities, but about other facets of the sustainability work he has taken. But for the purposes of this podcast, Caesar, give us a quick snapshot of where you're going to take that panel on green equities.
[00:10:56] Speaker D: I think the topic is fascinating. The challenge we have as human beings is massive. Would require hundreds of trillions of dollars if we want to get, if the goal is to get to net zero by 2050. Today we have something close to 100 and 3140 trillion dollars on public markets exchange across the globe in order to improve capital allocation, data will be very, I believe will be very important. So with that in mind, I think I have a few priorities. One of them is ESG data analytics. The other one is carbon markets, financial products, including equity and debt, and engagement. Green equities are certainly important to support that transition. For exchange. I think it's a great opportunity to drive implementation of a new market segment globally.
You can also attract new companies to our platforms. We can improve standardization, harmonization, and we can increase transparency. And that speaks to our, I think at least that's my view. In my opinion, the core values of any exchange, transparency, liquidity, access to opportunities, risk mitigation. So we have all those systems in place. We are very knowledgeable, and we have the tools and the human capital to support that transition. For investors, it's a great opportunity to look at investment opportunities, to diversify the portfolio, to understand the framework of different organizations, the ESG framework of different organizations, and how they correlate to each other, and also to an opportunity to address regulatory requirements on data disclosure. So that creates a number of new investment opportunities. And for companies, it's a great opportunity to raise awareness among investors so they can showcase the good job they are doing. Business models, transitions, how they are preparing for the future, how those organizations see the future, that you need to be more resilient and just.
It's also an opportunity. I think in terms of ipos, I would put those three cornerstones, exchange investors and companies, we all can benefit from having a green equity ecosystem across the globe.
[00:13:52] Speaker B: Next we'll be talking about voluntary carbon markets and Martina McPherson who's head of ESG product strategy and management, will be speaking on that panel. Vcms are obviously the flavor of the month, the day, everyone they're the most fashionable markets in town. We're right at the beginning of beginning to see how they will shape and play out at the WFE. We're actually doing some work and we'll be sure to share it with you once we're ready to publish around what vcms should look like in future.
Given our role running, given the industry's role running public, you know, exchanges know how to run public markets. So very fascinating. Many of our members on this call are also running voluntary carbon markets already or thinking about them. And Martina here in person on this call is going to be our speaker. Martina, do you want to say a few words?
[00:14:53] Speaker E: Sure. Nandini, thank you very much for the warm welcome and also for having us as six group on the panel. I'm representing six group in various facets. We are obviously an exchange running or operating the spanish and the swiss stock exchange up and foremost, but we are also a financial information services provider and in my day to day role, I'm actually representing the financial information business. And beyond that, we have services such as security services and banking services, mobility and connectivity services that we provide. And what is so interesting in looking at what other participants here on the panel have just summarized and when and where we see the opportunities in the ecosystem, it's important to highlight that we work, of course, with issuers in also aligning them with trajectories around Paris Agreement, for instance, TCFD alignment and the broader sustainability and sustainable development agenda. But in other areas, such as financial information, we of course are servicing as well the investor community and capital markets at large. And we are literally and have defined the ESG strategy, especially alongside the financial information trajectories, which are also closely aligned with the objectives of the group. We are looking at ESG 1.0, which is the traditional sphere where we see traditional data and derived data markets. ESG 2.0, where we see regulatory imperatives, we look at the european regulatory disclosure regime, for instance, the yield green taxonomy, the MiFID expectations now set in alignment with sustainability preferences and of course IDD alignment. Here too, we look at a broader spectrum of regulatory parameters at a european, but also at a global level, and the implications, of course for spanish and of course swiss markets, because there's a close alignment between the trajectories. We're seeing, for instance, alongside CSRD on the issuer regulatory reporting agenda and when and where Switzerland will follow suit, will fall under certain parameters of CSRD now confirmed as of 2028, while of course the spanish jurisdictions will already fall under CSRD as of 1 January 2024. But then we also see the alignment with the investor agenda. Again, obviously investors being clients and hence also working on products that help them with their sustainable financial disclosures, in line with us, FDR and of course the european ESG template, which is currently of course not regulatory, but already a recommended tool for reporting. And lastly, capital markets ESG 3.0 trajectories have set us on the pathway in building analytical solutions to help with the complexity jungle we see in ESnG. That comes of course from the variety and maybe the lack of clarity and definition around certain data metrics and frameworks, but also in helping with meeting the regulatory parameters across the value chain from issuers, investors as well as capital market participants and someone here, I think. Nandini, you mentioned the importance of green bonds. There is of course now a regulatory trajectory when we look at the confirmation of eogbs, the green bond standard. But there's also more work to be done when we look at SME midcap financing, a lot of the issuers that might join the exchanges in IPO negotiations that need guidance, that obviously need capital flows and that need SME midcap financing. And we are providing now, going forward, the means. We're going out at cop very excitingly with a new statement in helping and shaping the green lending agenda from the entire side of the equation. If you look at the ecosystem concerning SME issuers, as well as the banking side of the equation, which now again in 2024 in alignment with EU beta and GA regulations, especially in the european context, have to ensure that they are deleveraging climate risks from their balance sheets and hence are also meeting climate risk management trajectories in their lending portfolios. So we see this again as an ecosystem, as a value chain where we can contribute towards ESG 1.02.0 and 3.0 in order to connect ultimately the open gaps in that value chain by establishing an ESG ecosystem.
[00:19:35] Speaker B: Thank you, Martina, that was great. What pleasure it is to introduce you to Victoria Powell, my colleague at the WfE, who leads our sustainability work. And apart from being completely brilliant, she has been the driving force in this cop event that we're holding. So lots of applause for Victoria, in addition to her actual knowledge and all the cool things she's going to take us through on the just transition panel.
[00:20:01] Speaker F: I was about to add also that I think one of the elements on carbon markets is that this is a fast moving area. I think whilst there has been a lot of discussion, Iosco has been doing some consultations and we're really pleased that they'll be joining us at the event. They've had two consultations on voluntary carbon markets and one on other markets. So the important thing there is that they'll be indicating what they think of the responses that they've received. I think that will be interesting to hear about and where they think they'll go next on carbon markets and whether, what kind of incentives and regulatory elements they can put in place that would encourage carbon markets to grow a bit further. One of the other areas that has come up a great deal is also just transition. And so I'll be focusing on a panel on just transition. In particular, one of the things that we will be thinking about on just transition is how do we manage the challenges of ensuring that nobody's left behind in this transition to sustainable future and managing the risk of climate change. And that can have so many different impacts depending on the country that you're in, and also what the just transition priorities are nationally, as with all markets, because they're global, you really do have a broad implications that both issuers need to think about in terms of their supply chain reporting, which is really important, and also in terms of the exchanges themselves and the reporting they do also in thinking about how exchanges can do specific things to promote the issues of just transition or to address the issues of just transition. So, for example, Caesar from B three can talk a little bit to the fact that they have launched a gender diversity index, which is a really good example of a practical application of an exchange, taking some of the themes of just transition and thinking what they can do to actually actively address those issues. So I'll just pass you over to Caesar to add his comments about that and to tell you a little bit about the practical example.
[00:22:23] Speaker D: Climate and social are intertwined in many ways. So climate affects social and vice versa. That's very important to take into consideration, especially if you want to have to create a better society. So especially in Brazil, that's a very important topic. With that in mind, we've been working on diversity index for roughly two years now. Back in August 2021, we issued a sustainability linked bond with two targets. The first one to create diversity index by the end of 2024, and the second one is to increase the percentage of women in leadership positions at b three to 35% by the end of 2026. Since we issued the sustainability link at bond in September 2021, we've been working really hard on that, and I am happy, I'm proud to say, that we have launched the index back in August 2021. And a little bit, to my surprise, it was really well received. Of course, those are challenging projects and access to information. Access to data is crucial. That's one of the reasons I think transparency, not the only one, but transparency is really important.
The more data we have, the more the merrier. So we can improve the methodology.
That's just the first version of that methodology. It was also a good thing that our local regulator, they published a new piece of legislation requiring companies to provide information they call structured and unstructured data. Under the structured data column, you have those information related to social, gender, race, indigenous people, individuals with disabilities. So companies now are required to report to our regulator, they publish that data, and then we use that data to create an index, a diverse index, in a very simple way. What we do, we look at demographic data of the country and we compare with the data that companies provide. You would expect that there should be some sort of correlation, the bigger the distance, and then you have a different score. We have a few. It's all public information can find on our website. But the important thing, again, is that gives the investors the opportunity to look at different opportunities, mitigate risks, find different strategies to meet their clients needs, and also give companies, companies that are doing a good work, a good job, the opportunity to show the good work they're doing. We now have an ETF associated to that diversity index, a great success story, and we deliver that ahead of the time. So one year and a half before.
[00:25:43] Speaker A: The deadline, how does the fact that we're looking at the first global stock tape, how does that affect the work that you're doing? And do you expect that to be conversation at COP 28? Or is that something that's outside the purview of exchanges?
[00:26:00] Speaker C: That is an extremely important milestone and important data points. I think that will have a tremendous impact of the whole discussion and the whole dialogue and the whole negotiation. I wouldn't say it's like impacting us directly, but of course indirectly a lot, because the whole need for decarbonization is going to be even more and more visible and transparent, and everything we can do and everyone can do needs to be done. And it's not about competition, it's about collaboration. And we need to cooperate between the different parts in the value chain. So I think it's going to be even more evident. In that sense, we are very active in the carbon market in terms of carbon removal side. And I think that is going to continue also based on this, to be even more focused on that particular tool as one complementary tool in the toolbox. I'd say personally I would love to see three things within the carbon market. One is to see that we fix the integrity in the assets we trade. I think we are on a very good track. Secondly, that we distinguish between the different tools we have, I. E. First the reductions and abatements, that that is really what everyone needs to do and that is the priority number one. But then we do have the complementary tools in terms of permanent removals. They should be seen as one instrument and the more traditional carbon credits as another instrument have a fight, a heated debate about the different tools. And thirdly, in terms of the article six and the link to VCM market, and to have clarity around that, how that should be handled with the so called corresponding adjustment.
[00:27:53] Speaker A: Any other comments on that, on what you'd like to see happen in CoP.
[00:27:57] Speaker E: 28 here from our ended six when you look and bring it back now to carbon markets, we think there's ultimately the need to provide more definitions and clarity. Ultimately, national governments and financial regulators should really standardize the definitions of carbon credits and classify them as a commodity. There might be also the need to an immediate regulatory intervention when we look at carbon markets per se and all the aspects of the value chain that we are discussing here, and obviously much more at the cop as well then the need for international treaties. We heard just now that the evolution of Article 6.2 of the Paris Agreement, which ultimately allows countries to trade carbon units bilaterally, end of Article 6.4, which permits countries to trade credits approved by a centralized mechanism supervised by the UN, would create greater certainty and confidence for carbon market participants. And that's very much an utmost needed right now. And from there, ultimately corporate reporting, establishing a legal definition of a carbon credit would also help to provide credibility around the accounting treatment and to book valuation methodologies under international finance reporting standards. And that brings me to the last note here. Standards, a recognized professional accounting and legal body or bodies that are really then required to provide advice, auditing and certification services for the carbon markets. This is what we are hoping to see not necessarily at cop as a final and conclusive solution, but ideally in discussions and exactly to the points made earlier in collaboration with the ecosystems and the participants in these markets.
[00:29:41] Speaker A: Yeah, you're all in a very particular position. It's very special because you have a top level overview of what's happening with investors, what's happening with companies. I'd really love to be behind the scenes with you and see what's happening there.
[00:29:58] Speaker D: Firstly, I entirely agree with my colleagues. I think they all brought up a very important point. In addition to that, I think, I tend to think that exchange, we do a lot of stuff, but one important element would be to facilitate the flow of sustainable capital at scale, to have the infrastructure and products in place, that would allow capital allocation towards projects, towards companies in line with global goals. And I think that would be a very nice topic to see a COP 28, how to bring together public money and the private sector. Take for instance, inflation Reduction act, which may not be perfect, but to some extent the inflation Reduction act managed to mobilize the private sector. I think I was reading the reports back in July when it completed one year. So apparently it managed to mobilize over $200 billion from the private sector, in addition to the $370,000,000,000 in terms of tax credits and subsidies. So that shows that there is a bigger trend. It would be important to look at those large and important organizations, the multilateral development banks, how they can send signals to the market, bring together social, of course, and climate, bring those two elements together, but also showing that to the private sector, how they can think about investment narratives, about risk perception. I think risk perception is an important topic as well. If you look at large pools of capital, large pools of capital like pension funds, I think that's another one that we can have discussions on how we could unlock the potential here being Brazil. I think next year we have G 20 in Brazil and COP 30 in 2025. So I think it's an interesting window for Brazil. And of course, there are many opportunities in terms of natural capital in Brazil, carbon markets, wind, solar power, green hydrogen, green metals and so on. So I think would be really nice to see at COP 28 discussion about, right. So we have all those challenge, how can we bring together different stakeholders, government, the private sector, ngos, civil society, regulation, standards, access to information, reporting, all those topics, so we can fast track the transition, because we need to fast track the transition if we want really to deliver on the goals, on the Paris agreement.
[00:33:07] Speaker A: Thank you for that, Caesar, very well said. I was glad to hear that because you're in a unique role where you can really make a difference.
[00:33:16] Speaker B: It's been a pleasure to speak to you and we hope this is best. The fest of many conversations all of us can have with you collectively on behalf of the sustainability working group and on behalf of our industry. Sally, thank you so much for your time and interest and join us virtually anytime you want. At our meeting at COP.
[00:33:37] Speaker A: And thank you for your time, everybody. It's been wonderful getting to know you and hearing what you're working on, and I'm looking forward to see what comes out of COP 28. So thank you.
[00:33:49] Speaker F: Thank you.
[00:33:50] Speaker C: Thank you very much.
[00:33:51] Speaker F: Wonderful.
[00:33:52] Speaker E: Thank you very much. Bye.
