Kopi Time E103 - Helge Muenkel on climate finance

He is responsible for developing the bank's overarching sustainability framework. He also chairs the group Sustainability Council which comprises of senior D BS leaders across business and support units. Helga represents D BS in several global and regional working groups such as the World Business Council for sustainable Development, the industry advisory panel of the ASEAN S joint sustainable financing working group and the ma s convened Green Finance Industry task force.

So quite a few hats you wear Helga. Welcome to Cope Time. Thanks

this famous 1.5 C scenario. So global temperatures will rise by 1.5 C as compared to pre industrial levels. And that's quite significant. It's not just a technical number, it actually has real world impacts. So 400 gigatons roughly we have left until we get there. If we don't change the way we play live and work today, we are roughly emitting 50 gigatons or thereabouts per annum. So simple math, we have around eight years or so

left until we hit that famous 1.5 C limit. And again, this 1.5 C, it's not just a technical number, it has a real impact on the communities, especially here in Asia. So that simply means we have a lot to do in a very, very short time frame. So ultimately, you can consider this within another industrial revolution, only this time at the speed of the digital transformation. So we need to completely rewire the way we organize our life, rewire, the way we organize

our economies lightening quickly. So action matters and it matters at scale and at speed. So what do we now need in order to finance that stuff really, really quickly, there are all sorts of different studies out there from think tanks, science and industry groups. But if I simplify this a little bit, then one study tells us we need roughly nine trillion us D per annum to invest in our energy systems and land use systems per annum per year between now and 2050 the nine

trillion you can break down. So a certain amount of money we already spend today, we spend a certain amount of money on existing energy infrastructure, which also by the way includes fossil fuels because we can't switch them off tonight and also already existing investments in clean tech. But we need an additional. So out of the total of nine, we did an initial 3.5 trillion to invest in our energy systems and land use systems. So these numbers are quite staggering three

really staggering. So we need a lot of money at a very, very short, within a very short period of time.

So if you want private sector to unlock Capex to put money on the table, to build new infrastructure and if you want private capital providers to finance that you want to know what is the direction of travel. So here government can play a really, really critical role, not only setting out net 0 2050 targets but going much, much deeper. How do we actually want to accomplish this? Singapore?

Does this actually very, very well. We have created industry round tables where we all come together in one room and discussing how are we decarbonising Singapore. But we need to see much more of that on a global scale to create policy certainty. And for example, in Europe, they have decided on a stick regulation regulation regulation, including a carbon price

in the US different approach. They use the carrot, one of the biggest checks in corporate history where they said we have now this inflation reduction Act where they support um the investments in clean tech and so on and so forth. In Asia. We don't yet have this on a micro scale as such. So we need more of that. The second key challenge is we actually spoiler alert don't have a lack of capital. I actually think we have enough capital in the system from private and public sector combined.

The problem very often is that the risk return profiles of these new products or new projects that we need to do are a bit challenging for providers of private capital like ourselves. We do a lot, but we could do even more. And there are some solutions that are going to talk about maybe uh in a bit. A third challenge is um tradeoff decisions, especially in Asia. We need to be mindful that we not only need to tackle the climate crisis, but there are billions of

people we need to take care of as well. We need to have socio economic development, we need jobs and all these types of things and they are interconnected issues. We need to be quite mindful around that agenda and then another one is simply capacity building. Uh Sometimes we sit in a, in a banking room and we look at power point slides and we know all the numbers, but we still need people to actually do it. We need a plumber, we need an engineer, we need a mechanic to repair an ev we need

bankers and all this. So capacity building is a key issue as well. So if I draw a line, there are all these challenges and we tackle some of them quite well. Some of them maybe not yet. Well, but if I look at numbers, it was a yes but answer right that I started with. So last year, it already was very clear that we are investing more and more in renewable energy. For 2023 the I A the International Energy Agency expects that we invest roughly $1.7 trillion in clean tech

and we invest roughly one trillion in fossil fuels. So that's a total of 2.7 trillion. Remember my, my nine trillion, the positive news is this number is going up and you see a tilt in the ratio. So a number of years back for every dollar we spend on fossil fuels, we spend roughly a buck on clean tech. Now for 2023 the I A expects we spend a buck on fossil fuels and 1.7 bucks for renewables and clean tech more broadly. That's great news. We just need to get this up probably to 1 to 4.

So for every buck on fossil fuel, we probably need four bucks in clean tech. So this is my yes but answer. So money is flowing. Not yet at the scale we need and not at the ratio we need, but we are slowly seeing momentum.

So can we create a blended finance structure where you get a bit of public money in, for example, as a first loss piece or as an equity piece or whatever to ultimately crowd in private capital and depending on what leverage ratio. So for one buck of public money, how much bucks of private capital do you get you then ultimately get to the solution? So I think it's a combination but the majority will have to come from private sector. Yes, I think

the phrase uh blended finance. So let's break that down a little bit. Uh There are all sorts of ways to fund a project. So I'm sure there are all sorts of ways to fund the climate uh transition project as well. So we've got bonds and blended finance and grants, carbon credits. Give us a sense of, you know, which one is big these days, which one is cashing momentum and what they are actually.

by renewable energy. We all know it's clean. We all know we need to do much, much more of that. On the other side, the red traffic light, let's call it dark, dark brown, think of electric electricity generation by power. It's really, really dirty and no matter how much effort you put in, there's never going to be a commercial viable solution to make it clean or cleaner. So we don't want to do it. So the only question is when do we stop doing it?

But there's this gigantic pile in the middle, the ember power of the traffic light which we call transition. So it's stuff that is potentially brown light brown or whatever the shade of brown might be. But with the right efforts and the right technology, you can make it ultimately clean. Now, having this traffic light on our minds, the world has come together and we have broadly agreed on what is this dark green stuff and what is this brown, dark

brown stuff? So we're good on that. So money is flowing there and we're flowing into the green stuff and we see money flowing out of the dark brown. The issue in the middle is that we have not yet come together as a global planet and agreed upon what is a credible transition. What is a credible transition activity and so on and so forth, work is being done.

So it's not that nothing has been done, but there's no global agreement and we really need to unlock this because more than 90% of our economic activities today are in this orange bucket. So we don't tackle this. We're not gonna save us on this planet. So that's

one area of looking at it. This transition is really a key focus area and then looking at the various instruments, I mean, there are use of proceeds instruments where I give you money and you can only use that money for a specific purpose, like you're financing a green building or you're financing uh an electric vehicle and so on and so forth. There are other instruments which we call sustainability late, I give you money and you can use it for

whatever you want to do. It's a general corporate purposes facility, for example. However, the interest rate on this financing is not fixed. So depending on your performance versus pre agreed uh sustainability KPIS, the interest rate might go up and down. Um And there are many, many other types of financing. There are of course loans, there are bonds, there are trade facilities. Um There are carbon credits which we also think is a very important tool in the toolkit to

unlock capital, uh and so on and so forth. So they're actually a wide variety of instruments that we can deploy. You mentioned, blended finance and why is blended finance so important I mentioned at the start. One of the key challenges we have is the risk return profile of certain projects. So we are a fairly sizable bank here in the Asia Pacific region. And we are financing a lot more than half or around half of our power portfolio is

already in renewable energy. But also we sometimes face situations where we struggle with a risk return. So blended finance is in simple terms, you have a bucket of public money and you have a bucket of private money, put it together. And ultimately, by combining it the way that Everest cost of capital comes down and you attract private capital by virtue of having the public money in there. It's a very, very

important way of unlocking more capital flows. Uh It's by the way, a product that we've known for decades, so many of these instruments actually are not new, blended finance for sure, not right. So the only question is if you go back to the very start of our conversation, eight years left until we hit the 1.5 C, how can we scale it at speed? That is really the

key question. So we have all of those. So for example, in blended finance, it's really all about can we agree on a certain template and then we do it again and again and again, we're not renegotiating and starting with Adam and Eve, but really doing it on the base of a template. I know it's a bit simplistic because every country is different, every asset is different, but we need to really scale blended finance to unlock the capital. We need

different things. So they want some degree of hand holding from the public sector to your point, you can lower the cost of funding of a project by putting some public money in the bucket. But if I look at it from the public sector's perspective, it would be like, well, econ 101 tells me that I just need to get the pricing right. So I will just do heavy carbon taxing and the private sector can figure things out. Why hasn't that approach worked? Is it because we don't

have a very good way to trade carbon yet? Or there are other rigidities that I have not thought through, but maybe you can help us understand.

don't have it on federal level in the US. So around 80% plus or miners are not covered by a carbon tax. So the question is very valid and a

really good one. The only answer I have is it's probably a political will situation because coming back, especially in Asia Pacific, talking about the just transition, the interconnectedness of issues, how hostile situations can become, I can only assume it's politically sometimes really, really difficult to implement these measures given the implications it has, right?

But in real life, whether it is a political issue that you talk about or just a matter of, you know, sort of measuring the impact and putting the right price, not that straightforward as we have seen with carbon exchanges around the world, including Europeans Union's experience and China's experience with putting a tax on carbon. You just mentioned the phrase just transition to unpack that because we got a bit of a loaded phrase during the cop meetings. We hear a lot about it, particularly

from developing countries. There's some degree of impatience. I'll give you one example, I was in Indonesia recently and it seemed to me it was very clear that the government or the government officials there who were at that meeting basically expected a lot of grant money from the West because they feel that's the best thing for the West to do, having polluted the world. Now, they're putting all this pressure on developing countries. So break down the just transition concept for us a bit.

fresh water and fresh air. It means you have access to medical services, you have shelter and all these types of things. But secondly, we also need to assure that the way we do this is within planetary boundaries so that the people that are very young today or not even yet born can also live well. So this is this intergenerational fairness which humans in my humble view have always struggled with it in history. So humans have been extraordinary in the things we have done,

but very often intergenerational unfair. So sustainability bringing it back means that 9 billion people plus live well with all the things I mentioned. But we also do it in a way that future generations can live well. That to me is a simple concept of sustainability. So if you take an action, for example, on climate, you need to be mindful of the implications it might have on the other sustainability goals. So that's a simple

fact around the just transition. And I think one thing that's not often talked about is this intergenerational fairness thing. So you're not only doing it today, but you're actually doing it for good. So that's to me the simple way of looking at it. Sure.

we want to achieve all the SDGS. So from your perspective, this this ethical question that what is the burden for a developing country which is not responsible for pollution but still needs to do its share of adjustment.

And in the most recent iteration in 2022 there was a report again being published and on page two or sorry, on page 10 of the third working paper, you will find a graph that tells you that globally historically accumulated greenhouse gas emissions, 39% of these arose from Europe and North America. So roughly 40% of all the greenhouse gas emissions that are already up there originate from these two regions. That is the historical responsibility

that we are always talking about. And actually even still today, if you calculate greenhouse gas emissions on a per capita basis, then still Europe today is much dirtier than various parts of Asia, which by the way is not too surprising because of course, you see that more developed nations typically have higher greenhouse gas emissions, economic

you see an amazing GDP growth. So in terms of future sources of emissions, it's very clear we probably gonna account for more than half global greenhouse gas emissions very very soon. So taking these two things into account historical responsibility, but also how the future will look like. I think we simply need some help from developed nations. Acknowledging the fact of what happened in the past, which science tells us,

you know, is a matter of fact. So what I would see is the developed nations providing know how and capital for developing nations to accomplish this trust, just transition one template that I really like is this just energy transition partnership, Jack. So it arose at COP 26 in Scotland. And the basic idea is that G7 countries provide money to a developing nation for empowering that developing nation to transition to

a lower carbon society. It started with South Africa. Now we are discussing it with Indonesia and Vietnam, both of which is in our backyard and maybe India is the

next one. So again, the basic idea is G7 provides capital and hopefully know how and these countries are better equipped to transition, giving them also some breathing space to buffer the implications on for example, certain social dimensions that we discussed, right, for example, certain jobs because let's not forget in this transition to a low carbon society, they are going to be winners and losers.

Yeah, if I break it down, if you are a 50 year old engineer at a coal power plant, it is very unlikely that you overnight become a solar PV engineer or a mechanic that can repair electric vehicles. So it is simply a fact. So we need to make conscious choices. How can we support them? How can we take them along? So by way of having these templates, the just energy transition partnerships, jet P, I think I got the name wrong at the start. Um We actually have a nice template on how we

could actually move forward to accomplish this. Maybe just

or so and how optimistic or energized. You are by banks role in transition and climate transition.

it alone. So everyone has a distinct role to play and banks, I would say have at least two critical roles. One is simple, the simple in in in theory is the reallocation of capital. So you reallocate capital away from polluting activities towards low carbon activities. That's one thing. The other one is really innovation.

We can also foster innovation. It's not only uh technological innovation in the field of renewable energy or energy efficiency or the production of steel or the production of cement, we can also be innovative. How can we be innovative? For example, with regards to financing structures, we mentioned blended finance where we can actually really tweak it here and there to make it work to really scale it at speed.

Uh We can be innovative in finding digital solutions to empower our retail customers to be more aware around sustainability and to also take conscious choices which in aggregate can have an impact. We also always think beyond our client base. So for example, we are a proud founding shareholder of Climate Impact Xcix, which is a Singapore headquartered but global carbon market and exchange, which has set up platforms that facilitate the buying and selling of high

equality integrity are carbon credits. So there are a lot of things we can do in the field of innovation ourselves. So capital, innovation both very, very critical and it needs to work in tandem with the other ecosystem partners. And I very loosely mentioned earlier that Singapore is doing this very well. So if I double click on that in Singapore, the Prime Minister's office in Singapore in coordination with other regulators.

For example, the MA S which is our financial regulator convenes and brings people together in a room, government regulator, private sector, finance sector to really discuss how are we gonna do this because this interplay of these players is really very important now ground that Singapore is a bit smaller. Uh and maybe the political situation in Europe and in the US is a little bit more complex, I understand, but it's actually a really interesting template on how you

could do it. Just get everyone in the ecosystem into a room,

We have in the private sector now, more than 5000 Corporates that have either already implemented or committed to implement science based decarbonisation targets around 25% of that by the way is, sits, sits in Asia and then if you look at the finance sector, we have for example G fans which is a of financial institutions from different areas. So insurance companies, pension funds, banks, asset managers, asset owners, etcetera that in totality right now

have an A am of around $150 trillion. So government, private sector, finance sector, everything is moving. Look at the community at large when I was very young, I didn't have gray hair back then. In Germany. We were all, you know, huddling in the lower ground. We were all like lower, we were young teenagers and we discussed this book. The Limits of Growth was actually written in the seventies sponsored by the Club of Rome. But the eighties were a bad time to discuss sustainability.

The Soviet Union just collapsed and everybody looked at the US and that was kind of the role model, profit maximization. Uh growth, growth, growth was key and sustainability was a bit brushed to the side. Fast forward, 35 plus years, the awareness in the community at large is quite staggering and you can slice and dice the community. Of course, in different areas, the younger people for sure are very, very much aware of what's going on and also more

and more willing to do something about it. Of course, I know it's different between developed countries and developing countries uh and so on and so forth because there are different considerations and constraints. But I think the awareness in

the community large also rising. So I think the train has left the station and what I really like about the Inflation Reduction Act, I think it's actually a genius piece of work and it's a genius piece of work because it got support from a vast amount of Republicans, right? Because ultimately, firstly, the name is quite amazing Inflation reduction Act, which of course is, is a good sell, right. But secondly, it actually creates job jobs in the US on the ground.

You can criticize this if you zoom out and you have a super national view, that's a fairly heavy industrial policy piece that they have implemented. So you can be very critical about this from outside of the US. But within the US, it will probably generate jobs. And I find it hard to believe that if there was a Republican president, that they would pull it back if there are actually jobs being created

money and the permits and that sort of stuff. So I was reading an interview about of the Governor of California and Gavin Newsom. He's expressing frustration that some of the money that should be. California is going to Texas and other places. Here we go to that competition and surely that would not change if Washington DC scene were to change. Uh Absolutely, I want to talk about coal momentarily, but before I go there, um you talked about the role of banks

in general. Can you use a little flavor about the banks in China? Because you know, without China's progress, we're not going to be able to make any meaningful change on green transition, given their size and scale and industrial footprint. How is Blender finance, climate change, finance and banks, you know, all working out in China?

they typically deliver it. So my feeling actually is that China is very strategic in the way it approaches sustainability. Yes, there's a lot of coal. Yes, they might even add a few coal power plants but they are investing so heavily in renewable energy. Last year, they increased renewable energy generation by 26%. And this additional generation was roughly half of the world's edition

in that area. The Chinese are very smart around electric vehicles, the entire value chain around this and I could go on and could go on. So I think they are very strategic. I think they also see it as a important domestic policy tool. So I wouldn't be too concerned about China as superficial as this might sound and the banks will simply be there also to facilitate that. Do we see Chinese banks as vocal as maybe European banks

or also ourselves. For example D BS, we have one of the most comprehensive and ambitious decarbonization targets for our lending and financing activities. Yeah, we have those targets by 2030 all of which are science based, very, very detailed. How are we going to do this? Um Not many banks in China are even remotely on these types of levels, but I would still claim it's all interconnected and ultimately they will deliver

what the government is saying they're going to do. And I have great confidence actually that they're going to deliver.

engine of growth is climate transition. So whether it is, you know, redoing their urban grid or the ev uh ecosystem that you talked about or renewable energy generation, whether it's wind or nuclear or solar, it's like if they want to grow at four or 5% that's the only viable area that they have left. So there's a convergence of interest and what is right for

the world. So, yeah, I think I I share your perspective on China very much um recently, uh the last two months to be precise every Friday, you and I met virtually sometimes in person and we talked about coal and banks roles in it and we wrote a paper so share with our audience what we wrote about and what are the bottom lines in that paper? First

in those couple of weeks? So why did we write about coal at the very start of our conversation, I talked about the 400 gigatons of greenhouse gas emissions. We have left until we hit the 1.5 C uh temperature limit. Now, if we leave coal untouched and right now, we have around 5000 operational coal power plants in Asia Pacific, 86% of which measured by our capacity are in China and in India. And then we have other countries like Indonesia

also fairly, fairly significant. So if we leave them untouched, then two thirds of our carbon budget will be exhausted just by the coal power plants. So we haven't yet talked about the mobility sector. We haven't yet talked about production of steel and cement and all those types of things, two thirds gone just because of the coal power plants. So that's not even your entire energy system. It's one portion within

the energy system. So if you invest a lot in clean tech and we have to do this, it's mission critical, you're not gonna meet the schools and the Paris goals are just as a reminder to keep temperature rises to well below two degrees Celsius. So what we wrote about ultimately is a bit, why do we have to do this and how are we gonna do this? And phasing out coal is unbelievably complex on at least three levels. The first one is how do we assess

a certain opportunity? For example, there are risks like leakage. If we phase out a coal power plant in Northern Sumatra, what prevents the government from building a new one in East Java or I could name any other country for that matter? Or a company that operates a coal power plant agrees to phasing out a coal power plant in one country but build a new one in another country. So there are all sorts of what we call leakage risks. So how

do we assess a certain opportunity? What are the commitments on country level on company level? How do we assess a specific asset, the specific coal power plant? Is it worth a while? How can we really do it? So it's really, really, really complex. So let's assume we've done all of this. We have a great project. Then the next one is, well, we can't just shut down coal, can we?

So if we are really, really successful in phasing out fossil fuels, but at the same time, we're not rebuilding renewable energy, then people don't have access to affordable energy. And earlier I talked about 17 UN SDGS. One is we need to have access to affordable clean energy. So you need to do this right away, but that's not always easy. So a coal power plant might be in a geographical location where there is no wind or solar potential.

So how do you deal with these situations? There are solutions but I'm just saying it is something to need to be looked after. And the third one is there are also other social dimensions, right? I think you very nicely wrote about the implications on jobs and the entire ecosystem that is built around coal power plants in various countries. Entire communities depend on that coal

power plant. So if you shut it down, many, many people will lose the jobs, kids might not be able to go to school anymore because the parents lost the job. So how do we deal with that? So all of this I think can be solved, but it's really, really complex. And that's ultimately what we wrote about.

future generations, the costs are immense. So if you were to take them into account and ultimately calculate the NPV today, then actually you see that taking action today um is becoming ever more convincing. So we talked a little bit about this intergenerational fairness, which as I mentioned earlier is not a stronghold for human beings. Generally, we've always struggled a little bit with that.

So who's gonna be left catching that bill? The bank doesn't want to lose its investment and the asset owner doesn't want to lose their investment

And one key consideration was financial viability, like how do we structure this in a way that we incentivize everyone to do the right thing because it's really hard to negotiate, for example, hair cuts or, or things like this. But here one critical element indeed is this blended finance structure.

So if I simplify this a little bit, we need a new pool of capital and this new pool of capital has a lower return requirement than the existing pool of capital that finance the existing core power plant. So this differential in these two allows you to actually shut it down earlier, you are satisfied with less future cash flows arising out of power purchase agreements. Um But in order to do this new package, you then need different layers of capital, you need

public potentially public money or multilateral development banks. Like for example, the Asian Development bank is very, very active in the Spain. And then one really interesting lay of capitalist philanthropic capital. So they are actually big global philanthropies foundations in the world that actually support these types of financing. And then if you merge it all together, you can create these lower return requirements

and actually make it work. One other option is a highly contentious topic, but we think worthwhile looking at the generation of carbon credits that might arise out of this action, the action is a phase out core. Yeah, so there's not gonna be more greenhouse gas emissions because I shut the coal power plant actually down. We can translate this and it needs to be transparent, it needs to be credible and all

these types of things. But we can create a methodology based on which we say, OK, we saved quotation mark this volume of greenhouse gas emissions because we shut down early. We allow carbon credits to be generated. You can sell them in the market and actually generate additional revenue. So that could be a

very interesting construct as well. And given the contentious nature of carbon credits, uh we just need to make sure it's the right methodology, it's credible and everyone really is very clear on how we can do this, but that's roughly the the idea. Absolutely

no 2050 we're gonna be uh net zero. So from government point of view, there's a huge focus and an acceleration of targets and so on and so forth. So that's actually very, very promising. We are also blessed in Singapore by having extremely smart regulators. I think the MA S hands down is probably the best financial regulator I could think of very strategic always thinking in ecosystems. How can we bring everybody together? What are the future?

So solutions, how we address our problem statements. That is quite amazing. Also in the society at large, I mentioned before I stepped in here that I had the honor and pleasure um recently with the minister to be on stage and we were grilled by a couple of 100 of young people that ultimately questioned. Are we doing enough? And they were really pushing very, very hard. So I can see, especially in the younger part of society, there's definitely growing awareness.

So it's all sounds very positive, right? But let's be also honest, we don't really have an excuse. Singapore is a very rich country because of an amazing, amazing economic success story ever since it was founded in 1965 probably an economic success story that is unmatched in the world to be very honest, build on extremely smart people doing this extremely well and we have very good education, right? So we have a lot of capital. We have really a lot of smart people, so we really got to

do it. If Singapore can't accomplish that, then I would be very pessimistic about the world. But I'm optimistic that Singapore will actually further advance and also act upon its targets.