Standard Chartered’s Hanna: “The biggest opportunity of a low carbon future is in Asia”

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Daniel Hanna, global head of sustainable finance at Standard Chartered, shared his view on the future of sustainable finance and its prospects and broader impact in society. He discussed the main challenges confronting the whole industry in transitioning to a low carbon future from the perspectives of regulators, investors and financial institutions themselves, and explored the other key trends in sustainable or impact investment around the globe.

Hanna emphasised that the institution has identified a $10 trillion opportunity in financing to meet UNSDGs within the next 10 years; and with Asia at the forefront, it has the biggest opportunity in dealing with environmental change and evolving to a low carbon future. In his view, the key issue in today’s sustainable regime is a lack of standardisation and transparency. Hanna expects there will be a disruptive jump in carbon price which will generate inflow of capital to the carbon market.

The following key points were discussed:

The following is the full edited transcript of the interview::

Emmanuel Daniel (ED): Today, I'm going to be speaking to Daniel Hanna, who is in London right now. And Daniel is the Global Head of Sustainable Finance at Standard Chartered Bank. This conversation is going to be very important, as I piece together the elements of impact investments, financial institutions, and the whole capital market that is evolving around impact investments. And the reason Daniel captured my attention was an announcement that Standard Chartered Bank made last year that it was going to set aside $1 billion of its own resources, own funds. I'm also interested to know how much of that money is backstopped by government guarantee because many other banks around the world were announcing impact investment-type objectives, always with some form of government backing. The commitment that financial institutions take in repurposing their own business, as well as funding and supporting global and local initiatives is very important. And the steps that StanChart has been taking are transformational, not just for StanChart, but for the financial services industry as a whole. So Daniel, thank you very much for joining me today.

Daniel Hanna (DH): It’s a real pleasure, thank you very much for inviting me.

ED: Although I came across the fact that StanChart made that commitment, I noticed that StanChart is not in any of the league tables, as it were, right, the bond issuance, the league table and so on at the moment. And I also noticed that many financial institutions around the world are falling over themselves to repurpose or to relabel a lot of the lending and the bonds that they have issued to be sustainable finance in order to keep up with the trend. So tell me a little bit about at which point did you personally get involved and be appointed this very important position, that your appointment itself is an important milestone because it indicates the institution's commitment to sustainable finance? And how you and your institution repurposed, or configured this whole approach to impact investments that you have right now? 

An opportunity to evolve to a low carbon future

DH: Thank you very much; I think a great question to start with. StanChart has effectively been doing what you might call sustainable finance for a very long time. Our first ESG (environmental, social and corporate governance) risk team was set up in 1997. We were one of the original signatories to the Equator Principles, the best practice that the private sector sets for doing infrastructure. We set environmental targets in 2002-2003. And we actually issued our first impact report in terms of our financing in 2006. So we've been doing a lot of what gets aggregated sustainable finance for quite some time. What was new with my appointment was just bringing that all together, under one umbrella and having a really core team that is going to drive it going forward. And I've been doing that now for two years. And one of the unique things about Standard Chartered, in sort of the financial institution space, is that we've combined our risk team, so the team that analyses the risk that our clients have in their environmental, social and governance issues, and with effectively the team that finances the opportunity to drive the shift to a low carbon future and to becoming more responsible. And I think that's very important, because we see the risk and the opportunity as being absolutely part of exactly the same equation. So if you look at, for example, Asia, Asia faces probably the biggest risk from climate change in terms of the impact, in terms of rising sea levels and the greatest impact to its GDP (gross domestic product) and to its people from flooding and extreme events from weather, but at the same time, has the biggest opportunity to leapfrog to low carbon business models. And so we wanted to put that conversation in one place, because I think you need to be credible, you need to be doing both that kind of risk analysis, and also that opportunity financing.

ED: How much of your appointment in the last one year or so was relabeling everything that you've been doing? So that you can report better, you can be more visible?

DH: I think you've raised a really important point, and it's actually one that I think the industry is not having an honest conversation around, which is that a lot of green finance, frankly, is relabeling. And sort of development finance speak and I spent quite a few years running our public sector business engaging with governments and financing the multilaterals, it's not additional. It is not creating new financing driving to really where it matters. And so I think this obsession, for example, with green bond league tables, and the like, is completely misplaced. We need to be having a greater focus on actually driving impact to where it really matters. And that, for me, is really in a large part into the emerging markets where there's this opportunity, but there's also this risk from climate change and financing the sustainable development goals (SDGs) and a big financing gap at the moment. So from Standard Chartered’s perspective, yes, there are certain things that we were doing already for a very long time. But there are some things that we've actually done for the first time and to look at, say product innovation. We did the world's first blue bond, like a green bond, but this one was driving towards oceans, and creating a sustainable ocean economy, which has to do with the Republic of Seychelles, or our launch of deposits, which are linked to the sustainable development goals, the first bank to launch a deposit program where you can put liquidity with Standard Chartered and that liquidity is ring-fence, to go to the SDGs. Or to take another example, the recent work that we've done with IIX (Impact Investment Exchange) in Singapore around a women's livelihood bond, creating capital that is driving to underprivileged women in South Asia. So I think there are a lot of areas of innovation where we're really trying to think about how you capitalise capital to where it's really needed. Not just raising another bond, which could probably be done anywhere?

ED: So what do you have as measurements in your institution itself that you're putting up as milestones that you need to achieve?

DH: First of all, we were the first bank to say that we were going to phase all our clients away from coal, anywhere in the world, both in the developed markets and the emerging markets, by 2030. I think that signal is really important. We had a big debate about this, in Standard Chartered, because clearly a lot of economies and livelihoods depend on coal. And frankly, in our footprint, one billion people have no access to power at all, whether it's any kind of power. So we were very thoughtful around, okay, do you really want to do this? Well, we're in a climate emergency. And so I think it's really important that we took that step. But also, we want to work with our clients to transition them to alternatives, which is why we also at the same time made a commitment to fund $75 billion of clean technology and sustainable infrastructure with a focus on emerging markets. And for us, that's key, how do we help emerging countries and Asia in particular transition over the next decade, to what I think will be a big opportunity as well, but one that is much more aligned to the fact that we've got such a big crisis and climate going on at the moment.

ED: So how much of your loan book needs to look like ESG? How much of your goals of capital raising should look like that? The interesting thing about StanChart is that you are an amazing small business bank around the world. You are intimately involved in exactly the emerging market countries that will benefit from impact and from ESG. So, what percentages of changes do you need to see on your balance sheet? 

DH: I think it's really important, as you say that we have the sort of targets, but more importantly, I think transparency around where our financing is going. And it really comes back to that point I was mentioning earlier around, not just saying that something is green or sustainable for the sake of it, but actually making sure that it has a real impact in driving change, which is why we started publishing an annual impact report. We put one out a couple of months ago. And it actually quantifies the amount of financing that is directly linked to central development goals. And you can see the framework of how we work that out. It shows that our financing over the last 12 months have saved around 736,000 tons of carbon, and that $3.4 billion of financing that we clearly identified and have assured is also focused very much on the emerging markets. In fact, 91% of our financing, that is central finance, goes to the emerging markets, 86% of that goes towards low income countries. But we've got a lot more work to do. This is just very much at the beginning. If you look at the amount of financing that we need to scale globally, you're looking at a gap at the moment of about $2.5 trillion a year to hit the sustainable development goals. And then in terms of financing climate as well, on top of that, there's extra capital. So we've got to work very quickly, not just as a bank, but I think as an industry to see how we can drive capital to where it really matters.

ED: There are indications like, the Bank of America put out a report saying that funds that were invested in impact, performed 3%, more than the S&P 500 in the last five years. Morningstar said 77% of ESG funds last longer than 10 years as opposed to other funds. So, is it a rewarding business? Do you have good news to say that impact is good for business?

Investments to outperform excess returns and risk avoidance perspectives

DH: Yes it is. I think particularly in Asia and wider in emerging markets as well. You mentioned that Morningstar report showed that ESG funds outperformed in one, three and five year categories. But I think when you talk about reward, it's important to think about this into two parts, because actually, reward comes from driving sort of excess returns, but also from avoiding risk issues and failures there. And I think what we've seen increasingly is the evidence that shows that ESG, one, is correlated with a sustainable business, that's capital accreted over a period of time or that shows excess returns, but, two, really importantly, it helps avoid downside risks. The IFC (International Finance Corporation) put out some research that shows that ESG funds outperform in terms of return on equity and on return on assets. And part of that, frankly, is a company that runs good ESG is probably just a very well run company. But at the same time, we see a big opportunity here; we put out a piece of research last year called Opportunity 2030. And that showed that within 15 markets, most of them in, I think half of them were in Asia, and there is a $10 trillion investment opportunity over the next 10 years aligned to just three of the SDGs. So I think that's a big opportunity to go after. And then at the same time, if you think about what's happening on carbon prices, there is a growing consensus that you're hearing from many different places in the regulatory space that says that we need to start pricing carbon appropriately. So if that carbon price starts moving up, then if you're not an ESG company, or if you're not effectively moving to that low carbon business model, you're likely to hit a negative hit. And so I think ESG basically will see an outperformance not just for sort of excess returns perspective, but also from an avoiding risk perspective.

ED: So how much of what you're doing in sustainability is going to start showing up in StanChart’s own balance sheet, quarterly reports, coming up? And I want to bear in mind also that BIS (Bank for International Settlements) has put out its report on that. A lot of that had to do with getting out of coal as an important business model for all banks around the world. But beyond that, what you are claiming to be doing, which is, being closer to the ground, being environmentally conscious, and as well as socially responsible. All that is good. But do you personally have responsibility that has to show up in the balance sheet of the bank itself in the near future?

DH: We actually run a sustainable balance sheet. It’s a virtual balance sheet that matches off our assets and liabilities within the bank, precisely so that when we do our liquidity products, liabilities or deposits, or when we raise our sustainability bond, we have to have that sort of ring-fenced pool of assets on the other side, that’s sustainable as well, just to make sure that that's pretty robust and we're driving both of them at the same time. So absolutely, we've got a balance sheet, we've got a P&L (profit and loss). And in coming years, you will see the bank probably starting to move to report on that basis as well. We're not clearly there yet. But the focus of the institution is very much to make sustainable finance one of our big core pillars, we see a big opportunity, and we think this is really important for our clients. And I think we're hearing a lot of demand from our clients across the whole bank, whether it's retail, whether it's high-net-worth individuals, corporates, institutions and governments for this kind of focus.

ED: Do you personally wish that the BIS would reward banks for being sustainably conscious on its balance sheet, the loans that you issue, the bonds and that it will take off some of the capital requirement from that or reward banks for moving in that direction?

Regulators must address financing gap

DH: Within sustainable finance, you've got a real alignment between what the banking sector wants to do with what regulators want to do and what investors want to do, which is drive more capital into these sort of areas. And so I do think there needs to be a question around the capital treatment of some of this, and you've seen a little bit of this happen. So for example, in Europe, they've taken the decision to reduce the RWA (risk weighting adjustments) for qualifying green projects, and to meet certain criteria. Actually, that's something that I would encourage the Asian regulators to be looking at very carefully as well, because there is clearly a big financing gap that needs to happen in order to see the big economic shift towards net zero, towards being much more aligned to low carbon business models. And I think there is a big opportunity for Asia here, in particular.

ED: Do you see regulation evolving, eventually, where it will reward banks, and bank capital adequacy requirements, if they were more attuned to impact, and therefore it won't be the highly developed safe countries that will be rewarded, but the countries which are transformational and using bank capital well? If we are working towards getting a regulatory regime where because of impact, the whole thinking in terms of a well-run institution is one which is relevant to the society that it serves, instead of being just safe and well developed?

DH: I think, from a capital adequacy ratio, and if you'd like a regulatory prudential regime, what the regulators are trying to ensure is that the bank is effectively safe. And so here, where you are going to see increasing focus and work from the regulators, and frankly, from banks as well, is to show that there is a correlation between, if you like the risk that sits on the balance sheet and the ESG. I certainly believe that, right. So whether that is in terms of the sort of physical risk or transitional risk that comes from climate, so the impact that you know, more adverse weather shocks are going to have on physical infrastructure, or that certain business models are going to be able to transition better than others, because of rightly regulatory change in terms of carbon prices and others. I think that is going to start getting reflected in terms of that risk, prudential and effectively, then that will drive some banking change over the coming years. The piece that you're talking about, though, which I think is really interesting is beyond that, which is okay, fine. So that's kind of the risk aspect. But how do we really capitalise this increasing flow of capital? I think, interestingly, this may actually be happening more on the investor side at this stage. And you are now starting to see a lot more momentum and focus around whether you call it impact financing or sustainable financing or ESG financing with capital flows kind of moving this way. And that's where we see a real opportunity for Standard Chartered, where to link if you like the capital flows from the big centres, to the ground where the change can really happen, where the opportunity is, for us as well. So from a regulatory perspective, we're going to see that continued focus on risk. From the investor side, that bigger focus around impact is going to happen. To put that in context, we've got quite a lot of work to do. And we put out a piece of research towards the end of last year called the $50 trillion question where we went and asked investors who have $50 trillion of assets under management, how aligned they were to sustainable development goals? And actually, I mean, somewhat disappointingly, 20% didn't have any knowledge of the SDGs. And only 13% were aligned to the sustainable development goals. And over all that 50 trillion, less than 22% was focused on Asia. And the sort of broader emerging markets was sort of single digits. So we've got a lot of work to kind of move the big pools of capital to these areas. That's hopefully where we see momentum building, but more work to do.

ED: Do you publish what your ESG commitments or rather a checklist, you know, that an issuance client, for example, who wants to work with you, what should they be adhering to, before they would qualify for one of your green bonds or whatever you want to tag them with? Do you have a checklist that you give your clients?

DH: So first of all, we have our own aspirations, our sustainability aspirations that are on our website, in terms of what we as an institution are doing, both in terms of our financing, but also our own operations being net zero by 2030. And the fact that we're reducing our own emissions and also working with our clients to reduce them. Then we have effectively the framework of what we define as sustainable finance, that is, again, up on our website, and it links our activity directly to an SDG and kind of impact that we expect to see on it. And then beneath that, we're working with clients all the time to effectively define, to show them effectively, as you say, a checklist of, okay, so if you want to think about how you can raise sustainable finance, here's what you need to do. We're going a step further this year, which is we're publishing transition pathways on an industry-by-industry basis that says that if you're in this industry, here are the three or four big levers that you can pull that will move you to a low carbon business model, and this is how we can help finance you in that journey.

ED: And how much of that is being communicated internally in the organisation, right from the origination of lending to issuance, your employees, and your staff? So when you say transitioning pathways, how much of that is now embedded in your own evaluation processes, what you do within the organisation?

DH: Yes, it's a really great question, and certainly a big area of focus for us. My aspiration is that in a few years’ time StanChart doesn't need a sustainable finance team. Because it's just so embedded into everything that we do that I sort of do myself and my team out of a job. And there are a key couple of things that you really touched on there. One is putting in the KPIs (key performance indicators). So sustainability is in everyone's KPI in Standard Chartered already. And then the second thing is education. And that's really key. So we're running and developing a global curriculum for all bank staff, not just the sort of frontline people to deal with clients, but the whole bank, in terms of sustainability and sustainable finance, and then effectively are building several layers into that so that you can become qualified within the bank, that kind of a sort of practitioner level and kind of an expert level. On top of that we run a Champions Programme where effectively anyone can volunteer to be part of the work that we're doing in sustainable finance. And we've got 8,000 staff signed up. So it's a big area of focus in the bank and one where staff actually are really engaging very positively in it.

ED: Last year was a very busy year, right? I mean, not just for StanChart but globally in impact and ESG. Tell me a little bit about that $1 billion commitment that you announced last year and how busy has it been? I wanted to test with you is this, how much of last year was relabeling and how much of the last year was real?

DH: I think so COVID is, you know, the joke that goes around about COVID, who's done more to digitise your industry. And you know it was COVID. I think in some ways COVID was also a massive accelerant for the other big trend that I think is, you know, everyone's talking about at the board level and personal level, which is sustainability. So there was definitely a significant shift up. And I'll give you a couple of StanChart’s specific anecdotes to go with record numbers you've seen in the market. The single biggest inflow that we had into our sustainable deposit program was at the height of the COVID pandemic in Asia. The number one fund, sort of the halfway point on our high net worth, our private banking platform was an SDG fund. And so we saw a significant inflow into our products, a significant uptick in terms of the percentage of financing of projects that we're doing, from everything from renewables to in and out. So we had an incredibly busy year, I think really encouragingly 2021 has started, if anything even faster. And I think we've had some fantastic tailwinds in terms of, for example, China's net zero commitment towards the end of 2020 and now the US rejoining Paris, so this is clearly a mega trend. There's been some contrary in the market about whether it's a bubble or not, I think we're literally just at the beginning of this; it's very much going mainstream. And you very kindly mentioned, I think, the proudest moment I've had in banking, actually, which was StandChart’s commitment to fund $1 billion on a non-profit basis for our clients that are actively involved in the fight against COVID. And we have some really impactful, fantastic stories. We've done everything from finance PPE (personal protective equipment) production out of China, to medical provisions, so medicine provision manufacturer in Bangladesh, to helping companies shift production, we helped a steel manufacturer shift and to make oxygen tanks.

ED: But it was not charity, wasn't it? It was still a business. Run by me the risk elements of running a program like that, a billion dollars commitment worldwide and then who comes to talk to you? What are the conversations like and what you need to look out for in terms of risk as a result?

DH: First of all, you're right, it's a non-profit, but it is still a loan. So it's not a grant so we do need the money to effectively come back to us. The margin that we charge on it, though, was a fixed margin across any client anywhere, of any kind of risk type. And it's a really tight margin. So the modelling that we had to do at the very beginning was to work out roughly what a portfolio would probably look like, on an industry, geographic and credit grade split, and then say, okay, well, this is roughly what potential risk of this fund will be. But there are actually a couple of other aspects of risks that were also quite full for long. And one of the ones, and I think this is really true central finance overall, is if we say it's going into the fight against COVID, it really needs to, like you've got to kind of effectively a risk that you fund something and it goes into something completely different. So we established a whole governance structure and checking process where we had developed an impacts checklist to say, okay, this industry into this country, this has a high impact. And you know, clearly, a country that's had a very heavy hit from the pandemic, or is particularly low income gets a higher weighting. And then we have to build into both the sort of audit process and the documentation and number of checks to make sure the funding was going definitely to that thing and it was ring-fence to do so. So that was the second issue. So I think getting that balance between the two was really key.

ED: Some of the things that you're learning in the process are going to be applicable going forward.  You're going to have flooding, you're going to have typhoons, you're going to have you know, islands being flooded out, and things like that. Now, the thing is that it is still a moving target, isn't it? You commit a commitment last year, are you still running that program right now? Have you increased the amount that is being committed to this? And the fact that the first three months of the year will look very different from the next three months, the next three months? You are talking supply chain changes, and the countries that need the vaccine are very different from the countries that needed the PPEs. So this moving target thing, right, how are you dealing with that and is the program still running?

DH: Yes, the program is absolutely still running. And to your point, but it has evolved. At the beginning of the crisis, one of the things that we were hearing back as a big bottleneck was PPE, you've just talked about and there's a big focus around, how do we scale that? Going further into the crisis then there was a particular issue around certain medication that was potentially sort of alleviating the symptoms, or ventilators. So we funded quite large, actually the single biggest chunk of the funds so far has gone through the creation of ventilators. Now we're pivoting very much to how do we scale the vaccine? So the vaccines are there. How do we finance the supply chain particularly into low income countries where they haven't had the opportunity yet to, or the ability even to secure directly from the manufacturer? So we're working very closely with a number of different people across Asia, Africa and the Middle East in terms of that deployment. 

ED: So what's coming back to you in terms of a brand, a core customer pool? What's staring back at you right now from that program and the kind of engagements that you are creating, as a result? What is being created right now, you feel as the sustainability, head of the organisation? What do you sense in terms of what is your organisation becoming as a result? What can you honestly say; it has had an impact in the bank?

DH: The first thing is that the bank genuinely just wanted to make a difference and felt this was a crisis. I don't think we went into this with any other aspiration than saying, look, we have to contribute to what is a crisis, global crisis, a crisis particularly for the markets that we operate into? How can we do that? Well, one of the things that we can do clearly is just by financing the stuff that needs to happen as a reaction. We're very thoughtful about trying to be there for our clients, as many of our clients also wanted to go through the same thing. But that may have required capital expenditure or operational costs that they didn't have at the time. And so this loan kind of provides that bridge for them to then rejig their operations to do that. What's coming back is an awareness of the change that we can really have, and our ability to do that in some extraordinary markets that really need, that were going through some really tough time. So if anything, it just underlines this point that the bank Standard Chartered can play a really powerful role during these sorts of crises and changes, and then we can really support our clients when it really matters. 

ED: Who are going to be the winners, when COVID eventually phases out and in terms of financial institutions, the institutions that are taking advantage of what the pandemic is making institutions do? How do you think it’s going to play out post pandemic? How much of it is going to be rewarding for StanChart and how much of it is as going back to business as usual?

Digitalisation and sustainability are the two biggest trends

DH: The two big trends that were there before the pandemic hit us that got massively accelerated through the pandemic, and I can only see accelerating further are ‘digital’ and ‘sustainability’. And the companies that are going to do really well, I think, in the next sort of coming horizon are the ones that have the biggest pivot into those two things, digital and sustainability. And certainly, that's something that we have absolutely internalized. The third one I mentioned, in terms of central finance, specifically, we've seen this big growth and this big focus around the records that have been hit and everything else, which is really positive because we do need more capital to move into this space. But really, the next wave is going to be focused on okay, how do I ensure that we're having the real impacts that these bonds are, the debt has been raised, the equity that's been raised is really happening. So the next bounce of the ball in sustainable finance is very much going to be about focusing on driving impacts where it really matters. How do you move the needle on climate change, for example? Well, over the next decade, the thing that's going to move the needle biggest will be an investment into Asia and pivoting Asia as a whole, its business models, its manufacturing capability, and everything else to a low carbon future. And I think that's a huge opportunity. And it's one that StanChart is completely focused on trying to help drive.

ED: Of the regulators that you speak to, which one's very helpful, and you can see that there is a dynamism both ways and are there regulators who are also still sort of trying to sort their way out in trying to understand impact and finance?

DH: I have to say, we're all still trying to figure it out before sort of about what the regulator's needs to do. As an industry, I think we've got to make this easier. There is an alphabet soup of different definitions, acronyms, standards floating around what ESG is. And I think actually one of the things that really helps drive a better, more effective market, moving capitals, you mentioned is kind of education and, b, a standardisation. And then, three is transparency. And that's one of the things that we've really been very much trying to live by example. So that's why we've got our definition of central finance, our framework is up on our website, anyone can use it, anyone can download it. That's why our impact report goes out every year. And that's why we're very much articulate. And so I think the finance industry, frankly, has to get its own house in order. You are seeing a number of regulators move. The Europeans have sort of set the tone in terms of the EU sale finance taxonomy. That is a really coherent and thoughtful piece of regulation. However, it is not appropriate for non-European markets. Where I encourage both Europeans and other regulators think about is, okay, well, how do we take that and then put it into an Asian or more broadly, an emerging market kind of context? So that is driving capital line to those things, and recognising that, say, Bangladesh, is not in the same place as Belgium, and has slightly different challenges and has a slightly different pathway to the net zero. But I think you are seeing regulators really stepping up to this challenge as well. It's interesting that Hong Kong, for example, put out a white paper on sustainable finance in June last year, the height of all these issues. And it shows you that the regulators very much are sort of agreeing with the view that the pandemic has accelerated this forward. And as we think about how we go back better, or how we come out of this stronger, we do need more capital to move into these more sustainable areas. And that is a shared challenge, not just for the banking industry, but for the regulators and investors as well.

ED: Actually, one of the regulators whose position on impact and environment will have a global impact is the UK regulator. Now with Brexit, and the fact that the EU has done far more deeper and more meaningful work with the taxonomy, is it just a matter of exporting the taxonomy to the UK and then globalising it? There are differences in understanding some of the goals, and especially because in the EU, there's a lot more government subsidies for environmental and impact. What do you see are the calibration work that needs to be done there?

DH: Yes, I think I think this is a really important point, because on one hand, to grow a market, to grow an industry, sustainable finance, one of the things that will really help is a standardization of regulation. So we don't want a multitude of different regulations in this space springing up. But at the same time, the effects of the climate is about science, I mean, there is literally a defined pathway from a scientific basis of how much carbon you need to take out of the system, in order to be aligned in different countries. And so we need to effectively get that balance right between a consistent global set of standards that everyone can get aligned to that will facilitate the flow and allocation of capital but at the same time, recognising some of the individual country differences. So there are two broad groups that are playing a really important role here. One is the network for greening the financial sector. So the NGFS (Network for Greening the Financial System), which is a collection of central banks, and has a very wide representation and that is being very thoughtful and is kind of pushing forward on this space. And the other is now the, what's emerging, and the UK has just joined it is International Platform on Sustainable Finance (IPSF), which the Europeans have kind of created, and the work stream on taxonomies is being led jointly by the Europeans and the Chinese. And so we're going to see both of these two really starting to try and set some of these global standards and to really support the growth of this industry more broadly. 

And COP26, which is going to be hosted in the UK and I think you're gonna see a lot more in the run up to that a lot more focus on that. And one of the areas where I think, again, we need to see further development is in creating a credible deep carbon market. One, because I think, frankly, we need to see an effective carbon price, which needs to be much higher than where it is at the moment. And then a good price signal will then start shifting capital accordingly. And the other thing is that to hit our commitments around reducing emissions and moving towards net zero, the first priority has to be business model change has to be actually taking carbon out of processes. But there are some really hard sectors that we don't yet have the technology to do that with. And so if you look at steel manufacturer, or even things like cement, we haven't yet got scalable solutions. There's some emerging technology, but they're not fully scalable. So in the short to medium term, we then need to offset that, which is why I think carbon offset markets are really important. And is why Bill Winters, our CEO, is co-chairing the task force that is launching carbon markets, which is a big component going into COP for the end of this year.

ED: Do you think that the whole carbon agenda was actually originally moving way too slowly? Was it the problem of monetising that market that would have given it a bigger impetus? What I'm also trying to test with you here is really, the noble goals of becoming more impact oriented, and all that, and the business objectives that you can meet, that you will be rewarded as an institution that there is profit in there. So what do you think could have happened? And this is a personal opinion, more than an institutional opinion, could have happened in the carbon market that could have made it move faster? Or do you think that it's going to move faster now as a result of more concerted efforts?

DH: I think it's definitely going to move faster going forward. And even if you look at the number of companies and institutions that have made net zero commitments in the last 12 months. And you're going to see, again, that accelerate with the change of administration in the US, China's net zero commitment, and then the move towards COP26 (26th UN Climate Change Conference of the Parties) at the end of the year. So we have seen a greater awareness and a greater focus from the private sector on the need to move to net zero. And that will drive companies and institutions to then start saying, okay, if I can't get there in the medium to the short term, what steps do I need to take? Well, I need to start thinking about credible offsets. The big issue that we've seen in the offsets market is it's not transparent, it's not deep enough, and it tends to be over the counter. So there isn't a kind of quotable market out there. And that's very much what the task force that is launching carbon markets is looking to do — how do we create a credible, deep market that really can get scaled. And I think there's a big opportunity for Asia here, because Asia contains some of the biggest natural carbon sinks, both in terms of forests and sort of mangroves and sea grass, as well as actually being the centre for potentially some of the technological innovation that we're going to see to really drive this, I think, you know, China, for example, played a huge role in driving down the cost of solar and hence, its ability to get applicable elsewhere. I think we now need to see that same kind of cost curve reduction in technology happened and things like CCUS (Carbon capture, utilisation and storage), hydrogen, and other areas. So that for me is a big opportunity for Asia. And one way I think the carbon markets actually can help start driving more capital into these kinds of new technologies, for example, to really bring them through that process much quicker than we saw in renewables and solar and wind.

ED: And in fact, I'm curious about this because, think about this bitcoin moves much faster than the carbon credit market. And the motivation for bitcoin was in fact really fictional. Now the whole love of bitcoin and all that, and I'm a big fan of it. But what drove that and what didn't drive the carbon credit market makes me curious, like, what is required to build a market.

DH: I think bitcoin users, I may get this wrong, so as I speak under advisement, but I think bitcoin uses the same amount of power as Austria as a country does. From a sustainability perspective, I'm a big fan of technology and I think there's a lot that can be solved. Well, to root out of the climate crisis is going to be through technology ultimately, but we do need to be thoughtful about these new technologies to come on and making sure at the start, that they are sustainable. And so there's a lot in digital ledger technology, bitcoin at the moment, I think may have gone, not the most of sustainable one at the moment.

ED: So Daniel, the thing that I'm really curious, just based on what you just said, which is that the bitcoin and cryptocurrencies absorb so much energy and energy, you know, depreciating. And then you have carbon credits, which did not move as fast a market as bitcoin. At the back of my mind, I'm thinking like, what was it about bitcoin that gave it its community, its investors, it's derivative market on top of the underlying asset and everything, which carbon credit never evolved and took a long time and it's still not there?

Disruptive jump in price of carbon 

DH: Well, on carbon credits, I think there's a multitude of different issues. But I think in terms of the markets themselves, what I point out in terms of bitcoin, which shows this right, the prices don't move gradually, they move over a period of time, and then suddenly, you see a discontinuity, a big jump. And I think the same thing is going to happen in sustainable finance around the impact of carbon prices. Carbon prices need to shift for us to be aligned to kind of net zero. And on average, I think if global carbon prices around, say, $4, they need to be at $75 to $100. When those regulations start coming in that actually change the price of carbon, then I think you're going to see the market not adjust gradually, you will see a significant jump up. And there's already science that that's going on. And I would encourage all your readers to watch very carefully how the debates in both the European Union and US evolve around this carbon adjustment tariff that both administrations are talking about, because that'll be the first time you see if you like the cost of imports or exports, and being driven by the carbon price. I think that's the beginning, I think carbon prices will move upwards. And I think that will then lead to a significant shift in capital allocation in the markets. 

ED: Amazing. That's a very good perspective. What you're saying is that if there's volatility, there’s a market?

DH: What I'm saying is the markets don't tend to move in a very linear gradual way, they tend to move over a long period of time, where you may see ups and downs of volatility, but then a structural shift happens or people recognise that a structural shift is going to happen. Carbon pricing is that structural shift, it is coming. It's just a question of when, and I think you can be set on one side of the market and positioned for it at some stage, or you can hope you'll catch it at a later date. But what we've seen through sustainability is this is accelerating much quicker than any of us expected.

ED: Last question. Is going up the league table important to you? I mean, you're not anywhere on the league table at the moment, and that's what your competitors or your detractors will say. What needs to come out to show that you're a major global player in impact and ESG?

DH: I think it's a very fair challenge. I mean, what I would say is, I don't think league tables are really reflecting an ability to affect change. To me, that's the key thing. So when we're raising these green bonds, and sustainable ones, anything else, I think they're a really powerful tool, but a tool in order of what? A tool to drive capital, to supporting either a shift to better low carbon, climate friendly business models, or to increasing sustainable living standards, achieving the Sustainable Development Goals. So we're not setting a sort of a target in terms of league tables. I think, over time, you'll see league tables themselves adjust to trying, you know, to be impact weighted, if you like, in some consideration. But absolutely, what I want to do is make sure that when our clients and customers think about sustainable finance, think about sustainability, we are number one, in their perspective, so that for me, that will be the judge for the future of Standard Chartered. And it's something that, you know, I think we've got a lot of good momentum, focus and innovation to really connect it.

ED: Daniel Hanna, we're gonna hold you to that, okay. And we'll probably do another conversation next year, and just do an update to see how you've been moving along. And by next year, the agenda itself would have evolved. And we would have a better perspective, whether the pandemic-related euphoria on impact on ESG will then settle into a more definitive trend that will transform financial services, your bank, and every bank in the world.  So thank you very much for spending that time with me and explaining what you're doing.

Keywords: Sustainable Finance, SDG, Carbon Footprint, Opportunity 2030, Bitcoin, ESG, Equator Principles, Green Bonds, Blue Bond, RWA, Covid-19, Pandemic, Vaccine, Brexit, NGFS, COP26, Ppe


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