G20: people, planet, prosperity

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• MA: Michael Avery – TV and radio personality and Business Watch host on Business Day TV

  OR: Olivia Rumble, Director of Climate Legal

  SF: Saliem Fakir, Director of the African Climate Foundation

  CM: Chris Mitman, Head of Export Finance at Investec Bank.

• Introduction

  MA: Welcome, you're watching Climate Conversations on Business Watch with me, Michael Avery as we build up to COP26 to discuss whether we're turning the tide on climate change brought to you by Investec.

  And with over 9 million online mentions of COP26 that's the UN Climate Change Conference taking place in Glasgow from the 31st of October to the 12th of November already in circulation, you'd be forgiven for feeling a little lost in all of the hype.
  

  Well, we've cut through the hype to get to the real issue so far in this series with Minister Creecy about what the overall focus is going to be for the South African government heading into this so-called super COP. We've debated the race to net zero and whether the science is congruent with the promises and the greenwashing and the looming climate finance fight and how this is all shaping responsible investing.
  

  Now there’s just a few days to go before the 26th Conference of the Parties kicks off, we're previewing the all-important Group of 20, G20 Leaders’ Summit, which is going to convene this Saturday and Sunday in Rome, Italy. And for this year, the G20 under the Italian presidency is going to focus on three broad interconnected pillars of action people, planet, and prosperity. 
  

• 1:29 Outcome of July G20 meeting

  MA: And I'm joined now by Olivia Rumble, Director of Climate Legal our content consultants. Saliem Fakir, Director of the African Climate Foundation and Chris Mitman, Head of Export Finance at Investec Bank.

  Olivia, kick us off, I mean, what might add another P to the three Ps of the G20, that is climate politics. But before we talk about that, what was the outcome of the G20 environment and climate and energy ministers meeting back in July?

  OR: Thanks for asking Michael and hello to all the listeners. The G20 plays quite an important precedent setting role so we can gauge the temperature in the room of particularly how developing countries are feeling about key climate change issues ahead of the conference.

  So there was the G7 meeting in July, and at the G7 developed countries committed to fairly ambitious outcomes. And so as a precursor to the G20 meeting, there was agreement amongst the G7 around things like phasing out fossil fuel support for overseas development by 2021, there was agreement to develop ambitious climate plans consistent with a 1.5-degree future and there was agreement to start phasing down coal rapidly. 
  

  Unfortunately, a few weeks after that the G20 met, so obviously we now have developing countries coming to the party. And the finance minister, sorry, the environmental ministers agreed that whilst they recognize that climate change is less under a 1.5-degree scenario, they didn't commit to a 1.5-degree scenario. And that has important precursors for the level of appetite and ambition by developing countries in the COP.

  And the same plays true for some of the other issues that the developed world was ready to commit to. So for instance, India and China were unwilling to agree on phasing out or phasing down international coal support overseas, there was a lot of tension around the phase out of fossil fuel subsidies, and there's been complete pushback on agreeing to a 2040 target to phase down coal completely.
  

  So you might recall that Antonio Guterres asked for developing countries to phase down coal by 2040 in March earlier this year, and particularly India and China, Saudi Arabia, Turkey, the usual players in this space, pushed back on that commitment and that unfortunately, sets a bad tone for the messaging of COP this year.
  

  What the host of the G20 said in Naples was, hopefully that the G20 summit happening this weekend will take these issues forward a little bit. So with the requisite political will, we're hoping to see something a little bit more ambitious over the weekend, but I'm mindful that the agenda is quite packed.
  

  So for example, countries will be negotiating a global tax treaty, debt relief, particularly for developing countries in the wake of the Covid endemic, and liquidity support.
  

  So there are some serious and very pressing issues that need to be packed into a very tight weekend immediately before the COP so it's going to be tough.
  

• 05:11: Are climate targets achievable against the geo-political backdrop?

  MA: And it's interesting to see how the Chinese and the US are collaborating on sustainable finance bringing them close together at a time when geopolitically relations do seem tense.

  Saliem, one could certainly be forgiven for thinking that global markets are finally mobilizing to solve humanity's greatest challenges from climate to poverty.
  

  We look at ESG assets under management, they've been growing at 30% for five years, they now total 37 trillion US dollars. Meanwhile, a fifth of the world's 2000 largest public companies have set net zero carbon targets others are racing to do so too.
  

  But BlackRock's former head of sustainable investing has described ESG as a giant societal placebo incapable of driving real change. And I think many corporate net zero pledges are being called out for lacking any credible action plan for relying on ineffectual offsets and also for pushing the goal out by decades.
  

  Do these commitments amount too much when we look at the broader politics of climate change and what's been committed to?
  

  SF: I think the only good news is that definitely the world is seeking to move towards a decarbonized economies, particularly the major economies, and there are very good reasons for that.

  Partly, it's got to do with the high dependency on fossil fuels, which has to be lowered there's industrial new industrial capability that can come on the back of decarbonisation, particularly, if you consider the sort of attempt to surge production of hydrogen globally. And we've got renewables costs coming down that's also driving by the way, these new asset classes, and investment in them.

  But I think the real nub is how fast can countries move and are willing to move. There's big talk about the advanced economies, particularly the Western liberal economies. But if you look at the nationally determined contributions, it's still far short, right?

  So post COVID, we still see emissions rising, there might be coal phase out in some of these countries, and no new commitments to coal but there's intensification of gas, etc.
  

  And emerging economies and particularly countries like China don't want to be pushed into a corner where economic security and energy security is going to trump climate change. And we've seen the crisis in China with power cuts, etc, and cost of electricity going up in Europe.
  

  So these transition discussions have to be based on two main political things, realism of what that means within countries and whether the constituencies even in countries like Germany, and Europe, and so on, have the appetite for a rapid transition, because there are cost implications for a very disruptive process. So that's the one issue.
  

  The second thing is that there is no real big cooperation happening between the two big emitters, particularly the US and China, which can actually solve the world's problems, they also have the financial resources to do that.

  The US on one hand is trying to push China to do harder commitments and faster commitments, including the rest of the world. But China is very careful about how it phases out coal, so it has offered to not finance any coal outside of China but there's no real commitment to stopping rapid coal deployment in China itself so there's, in fact, some gearing up going on.
  

  And the US has a big problem of actually funding its new climate initiatives, because internally domestically it doesn't have the support and two senators are actually holding it at ransom at the moment, in their inability to pass this.
  

  So this is the real situation. This is the real politics. It's not, you know, a great expectations in Charles Dickens novel. This is, this is how the world is going to actually have to deal with this transition in stops and starts. 
  

• 09:17 How export and agency finance can help support SDGs

  MA: And it makes it a very complex and very fraught conversation as we head into the G20 and indeed COP, where we know Chinese President Xi Jinping is not going to be present because he is busy campaigning for re-election as head of the CCP. So all of this plays into it.

  Chris, I want to bring you in now, we just saw a white paper published by the International Chamber of Commerce, on the role of export and agency finance and the role that it can play in meeting the challenges of delivering the sustainable development goals including climate action. What is this market and what role do you see it playing?
  

  CM: Thanks, Michael. Just picking up on some of the comments from your other guests here I think, obviously it's a big focus on what to do about the existing high emissions from the already developed nations I think that's key. But the SDGs the clues in the name it's like the sustainable development, development won't stop. So there are markets which finance development, and some do it responsibly and some do it less responsibly so there's two things happening here. How do we transition developed markets and how do we support development of emerging markets?

  And I think if you look at it, everyone's heard of IMF, World Bank, IFC, MIGA, Asia Development Bank, African Development Bank, those multinationals roughly finance about 250 billion a year of infrastructure and everyone's heard of them.
  

  The one market no one's heard of, well maybe on this call they have but we'll find out, is the export credit market, it does a similar amount of finance, amazingly, another 250 billion. So what that market does and doesn't do has a real impact on how countries develop their infrastructure.
  

  So this white paper is really and so to pick up on that Michael, it's a really old market it's been around for 100 years, long before the term SDGs even existed it had practices and procedures for “do no harm” and analysis for the projects. They financed, they looked at debt sustainability, they looked at value for money, they looked at strict anti-bribery and corruption, they only pay for work done by the contractor, they don't just write a billion-dollar cheque and give it to someone and say please spend this wisely.
  

  There's controls and processes in place. But historically, it made it quite hard to access but actually in today's world its exactly what people want to see. 

  And I think the key point about why has this market decided to produce a white paper, well these agencies and banks do a lot of financing in the market and they're all as we all are, as individuals and as corporates trying to react to COP26 to the SDG agenda.

  Sustainability is everywhere and everyone's at different stages on the evolutionary path. And I think some banks in the market and some export credit agencies are super advanced, they're on the moon, they've actually made it to Mars, whereas others are still on the ground working out how to put wheels on a cart.
  

  And I think that it's the point of the white paper was to provide a snapshot of the best practice in sustainable lending in this market. And also seek independent recommendations about how the market can improve further from where it is now and further contribute towards the goals.
  

  And there's two problems to it, what should the agencies do perhaps more of to make that happen and what perhaps should they do less of? And already, we're seeing a whole load of reactions to this, we saw the OECD recently announced they're not going to finance coal fired unabated coal fired power stations, which is a great step forward.
  

  Also, we saw the Chinese announced before that they're not going to export coal fired power technology anymore. So we're seeing a lot of really quite dramatic historically steps being taken by these agents in the market to say what they're not going to do. What as a bank who lives in Africa, what we're super excited to see is also, let's see what you can do to get more sustainable infrastructure on the continent in Africa?
  

• 13:45 Export finance can crowd in impact investment for Africa

  MA: Because we know and Olivia, maybe just to bring you in before the break, that there is a yawning gap between the 100 billion US dollars that's been promised by developed countries and we know that only 70 to 80 billion has indeed been delivered and what actually needs to be invested at an annual level is somewhere between 100 billion and up to a trillion dollars annually.

  What do you make of the export credit finance market now entering into the conversation? What does it indicate to you about the nature and the maturing climate finance and sustainable finance market?
  

  CM: I think a really good question. I think there's a never the twain shall meet approach to the market. I mentioned the development bank world who the word development's the clue. And then we got the export finance market where the clue is in the name as well. And there's been this sort of, how do we collaborate, but actually, both markers are involved in development.

  They just measure the outcomes in slightly different ways. And I think that if you look at the authors of the paper who got behind it, we have 16 banks basically commissioned this paper, international banks, who generally wouldn't expect to see playing nicely in the playroom together, they're not made that way, coming together.
  

  So each one of them taking individual action but saying, hey, wait a minute we should do more than this and we should as an industry see if we can change the regulatory framework we work with to go much further than any one banks action or inaction on that point.
  

  It doesn't mean you don't get called out on what you're doing individually, but it's about how do you set the framework for deploying more debt sustainably in these markets. And that's evidence by the Rockefeller Foundation who backed this white paper, their job is you know, they were philanthropic, they were one of the largest donors before up to World War Two, they know this, they coined the term impact investing, they backed this white paper as well, because they believe that export finance can crowd in the sort of impact investor money which is so badly needed in Africa.
  

  Because export finance has all those controls you're looking for whether you like it or not, most infrastructure in Africa is financed on government balance sheet. It's just a statement of fact even in Europe, dramatically large percentages are still financed by the government, even though we think that the private sector does everything, it doesn't.
  

  So the governments are going to be financing the infrastructure, you need to see finance tools, which can help us spend that money wisely, make sure it goes to the right projects, they don't get over indebted, export finance has all those characteristics.
  

• 16:29: Will we see new global alliances emerge at the G20 conference?

  MA: Olivia, well over 100 nations have submitted new or updated plans to curb their emissions but these are certainly nowhere close to the level of ambition needed to limit climate change to one and a half degrees and meet the goals of the Paris Agreement.

  According to the UN, we do see perhaps some leaders holding back to unveil bold new plans at the event itself. Given the behind the scenes lobbying that we've seen from Saudi Arabia, Japan, Australia, and others who've been lobbying the UN to play down the need to rapidly move away from fossil fuels, what new global alliances or groupings are we starting to see emerge prior to COP26?

  OR: Apologies. It's a great question, Michael. I think we're still seeing relatively the same players, particularly from Africa. So the AGN is still very much the locus of our negotiations. But it's interesting to see how the US is coming back to the party, it's very much renaissance now that the Democrats are back in power, and Biden has done a very concerted effort to replenish the relationships that were lost during the Trump era.

  There's been a lot of consensus building over the last year. And it's interesting to see the degree of alliance happening now between the US and EU.
  

  A particular point that has been coming up a lot in the news is this idea of carbon clubs that are negotiating as much smaller blocks and at the COP. So for instance, you might be familiar that the European Union will be implementing from the beginning of 2023 a CBAM, a carbon border adjustment mechanism.

  So effectively, it's an import tax on fossil fuel heavy imports to try and level the playing field between EU and other imports going into the EU who don't necessarily have a carbon price from their country of origin.
  

  And the US has also been mooting a similar type of mechanism. And to a degree, there's a degree of alignment between the two, whether or not that particular proposal will ever get through Congress is another issue in the US. But the fact that at the highest level, there's some alignment around using trade measures, effectively as a stick to push developing countries into pricing carbon is one type of new alliance that we're seeing. 
  

  There's a lot of concern, as, for example, least developing countries would then be prompted to also put a price on carbon and many just don't have the data or the administrative infrastructure to do that, or at least can't manage the cost. So at the same time, you're also seeing other blocks, like for example, the V20, or the Vulnerable 20 take a quite robust stance at this particular COP.

  They're putting forward quite strong positions around the need for climate finance, particularly if they're being asked to put on carbon prices in a world where they will be required to price their exports to the EU and potentially the US.

  They're putting forward very, very strong positions around the need for capacity building, support, relaxation of conditionalities around climate finance. So you're seeing LDCs take on a particularly strong role at this COP at least in my personal view.
  

• 20:14 A just energy transition: South Africa’s G20 stance

  MA: And Saliem just to bring you in on South Africa's stance as we head into the G20 and the COP, we've obviously had Minister Creecy being quite vocal.

  We do though seem to have some mixed messaging from the DMRE saying that we mustn't be dictated to in terms of conditionality and the climate envoys were here recently, and that certainly, optically didn't look like we're singing from the same hymn sheet. How has South Africa prepared itself and how are we heading in terms of the real politics into this crucial period?

  SF: I think South Africa is beginning to champion perhaps a new kind of climate diplomacy because it's recognising that the climate issues are not pure just environmental issues, they're actually broader economic issues.

  So there's a convergence of the economic and environment, which I think is really interesting. And it's reflected also in the establishment of the Presidential Climate Commission, which was established at a conference or investment conference where the President was asked to set up the commission in order to deal with what is called a Just Transition aspects of coal phase out particularly for South Africa, which is highly dependent on coal.

  And for the last three years, you know, as even as ACF, we've worked very closely with Meridian Economics and others to develop a piece of work called the Just Energy Transition Transaction, which the special envoys came here to discuss and ask South Africa to at least try to draw down on some of the global concessionary finance. 
  

  And as Chris has pointed out government has to play a bigger role in setting up the mechanisms to leverage private funding and to de-risk these projects through government guarantees and actually essentially running proper procurement processes as well.

  So there is now this JET thing that is going to be profiled at COP26. There'll be some hard negotiations on how that combination of grant concessional finance will be drawn down on to deliver particular kinds of infrastructure needs, like increased grid capacity, repurposing of coal plants, and expanding the renewables program in South Africa.
  

  That doesn't necessarily have to be led by Eskom, but it will support Eskom's power crunch, as you know, we're sitting with power cuts at the moment. So it's very promising it's a leading initiative globally and it could be a great example for other emerging economies, particularly with countries like Indonesia, and others who are also facing this challenge of coal phase out particularly with older coal plants.

  So it's still early days, let's say Chinese saying says it's still we're not clear where the future is going yet but it's a very promising development, if I can say that.
  

• 23:16 OECD trade guidelines

  MA: And as we heard from Eskom CEO, Andre de Ruyter, yesterday in that press conference with Minister Pravin Gordhan, it's going to be seeking 30 billion US dollars in terms of a longer-term strategy to ensure that Eskom can not only deal with its balance sheet issues but start to transition away from coal that coal phase out and invest in new grid capacity and new transmission capacity.

  Chris, coming back to your earlier comments, the OECD sets out guidelines for the orderly use of finance to promote trade and exports and these guidelines are they helping or hindering delivery of the SDGs, including climate action?
  

  CM: I think yes and no to both of those things at the same time. The OECD arrangement is a remarkable document in terms of trying to regulate the orderly use of finance and development of infrastructure and it's a testimony to its original authors.

  And it's been maintained up to date but until about five years ago, they were leading on this, and the banks were behind. The last five years has seen almost no tangible changes to the OECD rules and everything else has overtaken them debt capital markets, the financial markets of banks has surged ahead.
  

  So fortunately, that arrangement is now up for modernisation it's been discussed at the EU and at the OECD and we hope the white paper will be another document will feed into that. But at this stage, it doesn't really discriminate between good exports and infrastructure and bad, it looks at the harm in delivering them and “do no harm” IFC equation principles, OECD common approaches, but it doesn't really look at the outputs of the projects after they've been built as a measurement tool, which is what we as investors and impact investors want to see.

  Will the outcomes and outputs of this infrastructure be socio economic, in the location of the project? So I think on the flip side, they were leading until five years ago. 
  

  And if you look at wind and solar, which is still relatively new technology, we see it around everywhere, but the people who quietly banked the wind turbines from Vestas in Denmark and Siemens in Germany were export credit agencies backing their exports to scale that technology and then deliver it at scale to the market.

  At Investec we know that first-hand, we've developed wind farms in South Africa and elsewhere. We know the challenges and risks developers take in trying to get projects off the ground and the role that ECAs played were huge in giving us a comfort that finance will be there on time they're backing their country's technology, etc, etc.
  

  And it's highly likely those same agencies built all the mobile phone networks we use today in the 90s, still relatively recent technology, they backed Nokia and Ericsson who had all the installed phone networks like 60% market capacity long before Huawei came in started more recently building those out. So they have a role to play in the evolution of green technology going forward.
  

  And so as a bank, if I decide to develop a wind farm, I get 18-year repayment terms, the OECD allows me to get 18-year repayment terms or drinking water projects 18 years. But if I want to build a hospital in Ghana I can only get 10-year repayment terms, like every other piece of infrastructure.
  

  The irony is the wind farm makes money the hospital costs money, so you build it then it costs more money to operate. Under the backdrop of the debt standards relief programs post Covid that have been rolled out, affordability in debt extended tenures for social infrastructure is one thing the white paper really brings out to the fore.
  

  It can't be stressed enough that the direct immediate impact on people's lives in Africa from social infrastructure is often underestimated I think in the West and the support for that is really required.
  

• 27:31 Conclusion

  MA: Absolutely important point and I know Investec is a key shareholder in Revego as well, has great experience in this space, Chris Mitman, Head of Export Finance at Investec Bank thank you very much for joining.

  Olivia Rumble Director of Climate Legal and our content consultants and Saliem Fakir, Director of the African Climate Foundation for this conversation on climate change.

  I'm hoping the next two weeks will herald a step change in the ambitions and actions of countries in addressing what is humanity's greatest threat. But what makes me hopeful is that there really is another path being driven by innovators in the private sector as well.

  You've been watching Climate Conversations on Business Watch with me Michael Avery as we build up to COP26 to just put a lens on whether we're turning the tide on climate change, and it's brought to you by Investec.

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