FIA Expo – Managing the Risk of Climate Change: The Role of Markets

Jeff Bergstrom

Jeff Bergstrom

CIO & Editor

Climate change and its attendant issues are often characterized by contentious debate.

That was not the case at the FIA Expo seminar, Managing the Risk of Climate Change: The Role of Markets, moderated by Athena Eastwood (Partner, Willkie, Farr & Gallagher).

FIA president Walt Lukken stole a step on Eastwood in his opening remarks for the three-day event.  Lukken noted the deep ties the FIA has had with agriculture and ranchers and the need for the FIA to help manage their risk (along with a great anecdote about the late Senator Richard Lugar’s walnut trees).

The climate change panel continued that theme.  The panel had broad representation from various sides of the financial industry: Russ Benham (Commissioner, CFTC), Pauline Engelberts (Global Chief Operations Officer, ABN AMRO Clearing), Bill McCoy (Managing Director, Legal and Compliance Division, Morgan Stanley) and Dan Scarbrough (President and Chief Operating Officer, IncubEx).  There was some of everything there, from government regulators to banks, to exchanges to clearing.

They were all in agreement that climate change is a serious issue facing the financial industry.  McCoy noted that the Institute of International Finance just released its report, Taskforce on Scaling Voluntary Carbon Markets today. Combine that with the recent FIA report regarding climate change,  How derivatives markets are helping the world fight climate change, and the CFTC paper Benham mentioned, Managing Climate Risk in the U.S. Financial System, which has 53 recommendations for addressing climate change and the markets. The picture that emerges is an industry that is taking this issue seriously.

Agreement in principle is not the same as agreement to the details on how to best approach the issue, yet even here, at least broadly, everyone seemed to be on the same page.  A few hurdles were noted (in no particular order).

  1. The markets are currently far too small to be effective as a means to drive real changes.  Scarbrough noted that Mark Carney once opined that the current voluntary carbon market is $300 million but needs to be $300 billion.
  2. Behnam stressed the importance of harmonization so that different exchanges and different countries could easily trade with each other.  This would be an important place for regulators to get involved (of course with industry input too).
  3. McCoy explained how banks like Morgan Stanley are crucial in understanding investor demand and helping to guide markets as well as leading the way with initiatives of their own such as helping their clients finance a path to net zero emissions by 2050.
  4. The clearing houses are at the nexus of it all. Engelberts mentioned the importance of using the data the clearing houses collect to help develop these markets and drive standardization in the markets.  Data was a word I think all of the speakers used.

The devil is in the details, and we can’t get all of those from a 45-minute Zoom seminar (attendees were not able to ask questions, a limitation of this format).  Still, it was encouraging to see these people from very different sides of the financial industry all on the same side of what has traditionally been a fraught topic. What was clear is the entire financial industry is pulling in the same direction when it comes to expanding the role of markets in fighting climate change.

 

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