The Network for Sustainable Financial Markets: Financial Market Reform

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1 The Network for Sustainable Financial Markets: Financial Market Reform Professor Cynthia Williams Osler Chair in Business Law Osgoode Hall Law School International Centre for Pension Fund Management 9 June 2009

2 Overview Reminder of what NSFM is and does Progress to date Current collaborative projects

3 Introduction to NSFM: Principles Importance of long-term value creation Identify hidden risks and opportunities Balance long-term and short-term interests Improve market participants accountability Improve governance at financial institutions Better manage agency issues throughout financial system supply chain Promote a coordinated global approach

4 Introduction to NSFM: People Collaboration between academics and financial market participants Participants from Australia, Canada, Denmark, Germany, the Netherlands, the U.K., and the U.S., to name the major jurisdictions Currently 120 participants Each of our projects has involved the active participation of academics and market participants Aiming to be idea incubator and catalyst as individuals act within their many institutions and networks

5 Progress: Our Annual Report Changing Concepts of Pension Fund Fiduciary Duties: Consultation Paper No. 1 Leadership: Keith Johnson and Frank Jan de Graaf Copies available: 87p57/?p=992b235f57e54caea565f6892a1a4db0&pi=7 Report to OECD: We understand it was influential Follow up projects I ll discuss in a moment

6 Further Progress: Regulation Regulating Credit Default Swaps: Consultation Paper No. 2 Leadership: Prof. Janis Sarra, UBC World Bank Discussion: Regulating Non-Bank Financial Institutions Sell-side Conflicts of Interest: Consultation Paper No. 3 Leadership: Raj Thamotheram, Michael Mainelli and Jamie Stevenson Reasonably significant press for all three papers Plans for a conference to bring academics and financial market participants together with regulators Interest in discussing gaps in current G20 proposals

7 Current Projects: Investor Collaborations NSFM Investor Dialogue in the Netherlands in conjunction with ICGN, March 2009 Significant priorities that emerged Improve investor collaboration on sustainability risks Executive remuneration reform: Realign investment industry incentives Increase collaborative investor engagement with company boards

8 Avoiding Runaway Climate Change Means Rapid Low Carbon Reindustrialisation Runaway climate change is the process of unpredictable, irreversible climate shift caused by feedback effects. The temperature increase threshold from which climate change turns out of control is +2 C in global average surface temperature. To avoid, by 2050 we need to achieve man-made greenhouse emissions which are 80% below 1990 levels. The time to start this process is very tight: by the end of 2013 governments must have established a fully operational, low-carbon industry architecture This will require all clean energy, energy efficiency and low carbon agricultural industries to grow globally and simultaneously at about 25% CAGR (i.e. at three times the scale of the industrial revolution) There is insufficient time for industries to develop one after the other!

9 which requires extensive long term funding LOW-CARBON RE-INDUSTRIALISATION NEEDS? Investment for the transition to a low-carbon economy needs to be ramped up quickly Investment to support renewable energy industry development is approximately $11 trillion over the period to 2050 (to make up the cost difference between low carbon energy and fossil fuel energy) Most of the world s capital is locked into the carbon economy. Governments do not by themselves have the capital resources to properly address the necessary speed of the transition. Capital flows will have to be cross-border, with some 60% of investments in the developing world OFFER Economies of scale will result in renewable energy becoming cheaper than fossil fuel over the period 2020 to The difference between the two cost curves creates a revenue streams : return on investment has been estimated to over $30 trillions up to 2050 Governments can develop mechanisms to use public funds and guarantees to reduce investor risks and provide security for returns AN INVESTMENT OPPORTUNITY LONG TERM INVESTORS OFFER Institutional investors have some $120 trillion of funds under management: institutional investors, to fully fund needed low-carbon re-industrialisation NEEDS? Capital protection and long term stable returns in low return and volatile market Shift to low-carbon investment in order to mitigate climate risk in their investment portfolios Be part of the solution to a major threat to global economic and social well-being

10 Climate Bonds Proposals ENERGY BONDS With a maturity of 30 to 40 years, they would facilitate the use of private long term capital to fund a major de-carbonisation of the energy sector Bonds would be raised against projects that meet zero-carbon energy guidelines (generation, smart grids). Principal would be returned over the later years of the bond period, when economies of scale and the highly capitalised nature of project development costs allow positive returns (i.e. clean tech is saving money) post-2025 to repay the bonds. Investors would put the capital for an energy efficiency upgrade and then achieves a return by taking a share of the energy cost savings. They would be guaranteed by a mixture of national governments and the World Bank, drawing on renewable energy underwriting by its member nations. Guarantees from participating governments would be in the form of providing a floor for energy prices.

11 Climate Bonds Proposals POLITICALLY ATTRACTIVE For energy generation projects, governments support investment through a premium rate feed-in tariff by using future cost savings to fund present capital cost. This avoids an extra levy on consumers, in return for governments maintaining consumer prices at a stable level until bonds are repaid. This makes the feed-in-tariff model much more politically palatable. This is a model that is particularly useful for Energy Efficiency Aggregation Bonds.

12 Green Bonds Proposals BONDS FOR DEVELOPING NATIONS Higher risk profiles would be mitigated by regional development banks or other multi-lateral institutions providing back-stop guarantees for national governments. Investor certainty would be aided by an international system of project auditing and verification, both financial and against internationally agreed zero-carbon energy guidelines. An international agency (modelled on IASB?) would agree on crossnational standards for eligible projects, negotiate common regulatory treatments for bonds and work to support security of investments. Auditing and verification roles would be licensed to existing international companies such as PWC. To be eligible for financing (with international back-stop guarantees) projects would sign up to the mandatory auditing and verification scheme.

13 Collaborations What are the most pressing problems confronting the global financial system that affect long-term income security and global sustainability? Which institutions and thought leaders to target? Which projects show the most promise? Who should take the lead?

Revised Additions shown by underscoring; deletions shown by strikethrough

***Revised*** Additions shown by underscoring; deletions shown by strikethrough Office of the Chief Investment Officer I-1 TO MEMBERS OF THE COMMITTEE ON INVESTMENTS / INVESTMENT ADVISORY GROUP: For Meeting