WWF - Enabling Long Term Sustainable Investments by Timothy Hassett at GIB Summit
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Transcript of WWF - Enabling Long Term Sustainable Investments by Timothy Hassett at GIB Summit
![Page 1: WWF - Enabling Long Term Sustainable Investments by Timothy Hassett at GIB Summit](https://reader034.fdocuments.net/reader034/viewer/2022051818/54bc8c2e4a7959c0508b45cc/html5/thumbnails/1.jpg)
Enabling Long-term Sustainable Investments through Financial Regulation
Timothy Hassett
Director Sustainable Finance
World Wildlife Fund - US
21 May 2013
© Kevin Schafer/WWF-Canon
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Objectives
What Regulatory Frameworks are needed to enable Long-Term Sustainable Investments?
How to Mainstream Sustainability in Financial Regulation and Policy?
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BASEL ACCORDS
Drive the Global Regulatory Environment for Banks.
Not designed to cope with the realities imposed by the Anthropogenic Era, which creates business opportunities and risks.
• Private Sector Finance should support more clean technology transactions
• Private Sector Finance should incorporate environmental and social issues in all transactions
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Supporting More Clean Technology
Significant Sustainable Infrastructure Must be Financed to stay below 2C Climate Change
Investing in the Clean Trillion*• $1 Trillion per annum through
2050• $281 Billion in 2012
Does the Investment Gap Result from Financial Regulation?
Can Financial Regulation serve as Catalyst for Clean Technology Investments?
*CERES
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Does Investment Gap Result from Financial Regulation?
Liquidity or Capital or Both?
Liquidity?
• Liquidity Coverage Ratio (LCR) is:• High Quality Liquid Assets (HQLA) divided by• Total 30-day Net Liquidity Outflows
• LCR requires• 100% liquidity to be held against un-funded commitments to SPVs
(outflows)?• Haircut on loans to non-financial customers (inflows)?
Please refer to Basel Accords for exact definitions and details
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Does Investment Gap Result from Financial Regulation?
Liquidity or Capital or Both?
Liquidity?
• Net Stable Funding Ratio (NSFR) is:• Available Stable Funding divided by• Required Stable Funding
• NSFR allows for maturity transformation, but requires long-term liabilities to support long-term assets• Long-term project finance assets force Financial Institutions to
extend the maturity structure of their liabilities?
Please refer to Basel Accords for exact definitions and details
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Does Investment Gap Result from Financial Regulation?
Liquidity or Capital or Both?
Capital?
• Basel III enhances the quality and quantity of capital to Risk Weighted Assets (RWA)o 4.5% Common Equity Tier 1 (increased from 2.0%) o 2.5% Common Equity Tier 1 for Capital Conservation Buffer o 2.5% Common Equity Tier 1 for Countercyclical Buffer (potential)
• Long-Term Infrastructure Transactions can have higher Risk Weightings due to:- Completion Risk - Country Risk- Performance Risk - Tenor
Please refer to Basel Accords for exact definitions and details
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Potential Regulatory Solutions
Creating a New Asset Class for Long-Term Sustainable Transactions:
• Employ Sustainability Infrastructure Rating for qualification• Show relationship of Rating to lower expected loss
Making Long-Term Sustainable Transactions more Liquid
Making Long-Term Sustainable Transactions less Capital Intensive.
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Potential Regulatory Solutions
Making Long-Term Sustainable Infrastructure Transactions more Liquid.
• Insuring Transferability in Loan Documentation
• Standardizing Contract Terms (ISDA)
• Including in definition of HQLA for the LCRo Eligible Central Bank Collateral
• Reducing the Required Stable Funding factor on qualifying Sustainable Infrastructure Transactions for the NSFR
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Potential Regulatory Solutions
Making Long-Term Sustainable Transactions less Capital Intensive.
• Incorporate Sustainable Infrastructure Ratings in the Internal Ratings Based (IRB) Approach to determine RWA
• Create lower risk category under the Standardized Approach
• Encourage inclusion of Sustainability Ratings by Credit Rating Agencies
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Potential Regulatory Solutions
What if a Sustainability Risk Rating does not reveal a lower expected loss?
• Due to lack of sufficient data.
• Because the data does not provide this result.
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Potential Regulatory Solutions
Model the Resiliency Impact on Bank Portfolios of Sustainable Infrastructure Transactions in:
• A future carbon constrained environment• A world impacted by climate change
Sustainable Infrastructure Transactions would make a Financial Institution more resilient in an Anthropogenic World.
Basel Liquidity and Capital Requirements should integrate this and not penalize, but promote thesetypes of transactions.
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Mainstreaming Sustainability in Basel Accords
Failure to integrate Environmental and Social Sustainability issues in financial decisions creates market distortions.
Basel Accords should mandate their inclusion to assure the correct risk-return relationships are identified.
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Mainstreaming Sustainability in Basel Accords
Mandating its inclusion in Basel Accords could be accomplished similar to the way Operating Risk was incorporated in Basel II.
• When Acceptable Environmental and Social Risk Management Policies and Systems are in place, no capital penalty.
• If Acceptable Environmental and Social Risk Management Policies and Systems are not in place, a capital penalty equal to X% of 3-year average positive gross income.
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Questions to Consider
• Do the Basel Accords deter Long-Term Sustainable Investment?
• Could the Basel Accords be used to incentivize Long-Term Sustainable Transactions?
• Is action required to ensure ESG is included in risk ratings?
• How could momentum be built to modify the Basel Accords quickly due to the opportunities and risks created by the Anthropogenic Era?