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EU Climate Transition Benchmarks - Solactive Interview with Professor Andreas Hoepner, Ph.D. - YouTube
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Hello to everyone, who is watching.
I'm here today with Professor Andreas Hoepner
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to talk about the EU Paris Climate Aligned and Climate Transition Benchmarks.
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Professor Hoepner is a professor of operational risk
banking and finance at University
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College Dublin and an independent member
of the European Commission's Technical
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Expert Group on Sustainable Finance.
Hello Mr. Hoepner.
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Thank you for having me.
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Thank you!
The European Commission has just
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published a draft delegated regulation,
picking up most of the recommendations
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of the Technical Expert Group. Could you
give some background on that process, the
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work of the technical expert group, and
your personal role?
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Sure. So, the Technical
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Expert Group was appointed in summer 2018.
There are 35 members, 32 of them represent
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the organisation's, for instance, in
Germany, Allianz Global Investors and VW,
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and others; and three of them are
individuals, and that's Paolo Masoni,
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Brenda Kramer, and myself. So individuals
represent themselves, while others
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represent organisational roles, which means if
you represent an organization and
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you leave the organisation, they would
nominate someone else. We then had four
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sub groups: two for climate disclosure and
green bonds and two for the taxonomy and
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trajectory each. And the taxonomy, people may have heard about it, is
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effectively a list of activities that
are considered green and, thereby,
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available, or suitable for subsidy to say,
and the one that I was part of the
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Climate Transition Benchmark Group, where
we are basically developing, in many ways
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inventing, minimum requirements for
benchmark set for the IPCC's 1.5 degree
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to eject.
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Thank you for these insights. Coming to
the EU Climate Transition and Paris
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Aligned Benchmarks, could you briefly
introduce what are the main goals and
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ideas of the two new types of benchmarks?
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Absolutely. So existing low-carbon
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benchmarks are lower carbon than the
mainstream benchmark, so they may be
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twenty, thirty, forty, percent below
mainstream benchmark, in terms of greenhouse
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gas emissions intensity. The challenge
was that if that if the world emits
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more - so the world goes on the wrong
direction - and the mainstream benchmark
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is rising, then being 30% below
mainstream benchmark still means if your
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actual emissions are rising and we're
not gonna achieve our Net Zero 2050 Goal,
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which the European Commission committed
to in 2018 and the European Union member
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states, except Poland, committed to it in 2019. So to actually achieve Net Zero by
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2050, which means that were effectively
balancing the emissions that we have as
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a planet, the remaining emissions that we
have the planet against the emission of
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things, natural things, or
technological means to capture emissions,
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we have to invent an investment style
that has effectively declining balancing
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green-house gas emissions so that gradually
goes down following the IPC trajectory.
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And this investment style as climate investing and the two
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benchmarks representing it is the climate
Transition Benchmark and the Paris Aligned
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benchmark. They simply differ in, if you want so, severely off the trajectories -
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they both have a 7% trajectory - but the
starting point for the Climate Transition
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Benchmark, so-called CTB, is at minus 30
percent. The starting point for the Paris
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Aligned Benchmark is at minus 50 percent.
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Great, thank you.
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And from your perspective, are there any
areas of the methodology that are worth
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highlighting?
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Yes, there are several. So to
start with if climate change was a
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disease, say cancer, and fossil fuels
Scope 3 emissions are the actual
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cause. So when you look at what really
causes climate change is fossil fuels
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Scope 3 emissions that cause the vast
majority of the problem; there are some
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emissions from cement or the farming
sector that also are unrelated
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to fossil fuel Scope 3 but they're
the minority.
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So, we are immediately introducing
coverage of Scope 3 emissions from the
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fossil fuel sector that means that
fossil fuel companies, their suppliers... All
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suppliers, not only utility suppliers as part
of scope 2 but what other suppliers as
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well. And most importantly, their
customers, and so the use of that product
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is included in the computation of the
index. Including Scope 3 emissions
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from day one and then other Scope 3 emissions after two or four years -
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or even a benchmark administrator, once
earlier - is the first huge difference to
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existing approaches. The second
difference is that were actually aiming
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to focus on absolute greenhouse gas
emissions. So, either it's reductions in
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absolute greenhouse gas emissions for
unlisted fixed income securities or it
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is greenhouse gas intensity measures but
then with an inflation adjustment, which
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is equivalent to a reduction in absolute
greenhouse gas emissions and the IPCC's actual curve,
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obviously, is also absolute greenhouse gas emission, because aprenden have two
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years total greenhouse gas emissions, not
greenhouse gas emissions scaled by a
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certain factor. And to give an example
with the scaling: when you look at
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countries for instance. Most countries
are making commitments to the Paris
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Agreement to reduce the absolute greenhouse gas
emissions, some countries, say in Africa,
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are committing to reduce their
greenhouse gas emissions divided by GDP.
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The challenge with that is of course if
GDP grows a lot, the greenhouse gas
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intensity can be declining, but the actual
greenhouse gas emissions are much higher.
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So, the focus is on absolute greenhouse gas emissions and really following the IPCC.
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And when it comes to intensity, we're
dividing by enterprise value, including
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cash, which is a balanced measure of an
investor's worthiness of that particular
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security. We're not dividing by revenue,
because revenue bias is in favor of
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coal and greater oil and gas
companies and these ones are the ones
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that have low market multiple to revenue
ratios since their revenues are worse
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little due to the stranded assets.
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That's indeed very interesting,
and I'm sure,
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very valuable for our clients,
so thank you.
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What is your expectation for the
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impact of the Paris aligned and climate
transition benchmarks on the indexing
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ecosystem, investing in general, and, last
but not least, the environment?
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So, let's start with the indexing
ecosystem. We're very pleased to have
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seen the launches of Paris Aligned and Climate Transition Benchmarks by MSCI, by let's say
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Solactive, the study concept by
Dow Jones/S&P, the ideas from FTSE and
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Bloomberg. So we're very pleased to see
the vast majority of relevant index
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providers putting forward very good
concepts and taking on board also, as of
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today, those indexes that are already live
have an impressive performance, and that
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was not only due to the shock to oil
companies and the Covid crisis but also
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to the general construction I would
argue. So for the indexing environment, I
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think that's great, it's effectively a
new concept of index, because it's a
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declining balance on absolutely
sustainable index not only relatively
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better than the benchmark, but absolutely
more sustainable than it was last year.
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That's maybe a very important point to
highlight. A relative sustainable
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benchmark, a relatively sustainable
benchmark, is more sustainable than the
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plain index in a given year. But it's not
necessarily more sustainable than itself
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was last year. An absolutely sustainable
benchmark is more sustainable than the
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plain index in the given year and more
sustainable than itself was last year.
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And so, for the indexing environment,
that's a new philosophy, and I'm pretty
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sure that will be very popular.
Generally speaking, the concept of
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climate transition investing, however, can,
of course, be applied anywhere.
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You didn't necessary have to build an index,
you can use it with an active fund.
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In fact, some active funds are claiming they're already doing it, and they're 60, 70,
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percent below benchmark. So for investing
overall, we think that climate transition
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investing will be a philosophy that
investors will likely want to adopt if
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they're aiming for absolute
sustainability and for Net Zero by 2050.
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When we're looking at the impact that
this has on the environment, I'm very
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positive that the impact it will have on
the ability of fossil fuel companies to
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refinance themselves, especially to the
fixed income indexes and to activity on
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bank loans, will be significant in a
sense that digging and drilling will
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become more expensive. And that's
certainly a good thing for the planet.
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Perfect.
Thank you very much for taking the
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time to explain the work of the
technical expert group and the European
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Commission and, especially, for sharing
some of your views with us in this
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context.
It's much appreciated. Thank you very much.
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Thanks.
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