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FIA, ISDA and SIFMA: Capital markets are crucial for climate investment

Capital markets must transition towards a greener economy, according to the heads of the industry’s leading trade associations.

“Our markets [will be] critical for making sure that we can get to the Paris accord goal of a degree and a half Celsius reduction by 2050,” said Walt Lukken, president and CEO of the Futures Industry Association (FIA), who spoke in a panel during the Institute of International Finance’s (IFF) Climate Finance Summit.

“[There is] strong investor demand for ESG targeted investments, whether it's a sovereign wealth fund or a teacher's pension fund,” said Scott O’Malia, CEO of International Swaps and Derivatives Association (ISDA). “Investors are sending a clear message that they want change and environmental policy, social reform and changes in government.”

Kenneth Bentsen, president and CEO of Securities Industry and Financial Markets Association (SIFMA) , said that in order to meet Paris Agreement targets, there will need to be as much as $150trn  worth of investment over the next three decades.

“We have a really good market structure basis in the US and globally to build upon. We don't need to build a new market structure. But there's a lot of work that's going to have to be done. Every indication is that the Biden administration is going to be pursuing work in that area just as we've seen regulators in Europe and other jurisdictions do.”

Certainty for the climate market

In a statement, all three associations, along with the IIF and six other financial trade organisations, pledged to support the transition towards a low-carbon economy.

The ultimate goal is the development of an international standard for ESG reporting in capital markets to drive convergence.
“We want to make sure that all of the trade associations work together to drive consistent market outcomes,” said O’Malia. “We want to make sure that the rules and regulations are also consistent across the jurisdiction.”

Without standardisation markets will be less efficient in capital allocation.

“The more clarity we get under standards, taxonomy and rules of the road, both at the exchange as well as the regulatory level, then the economic factors and power of markets can really come to bear to help to drive prices and drive capital to where it needs to go to benefit societal needs,” Lukken said.

US regulators like the CFTC’s Market Risk Advisory Committee (MRAC) are already looking at ways to incorporate best practices in existing capital markets to new green products while also taking note of climate stress testing being conducted internationally.
However, given the potential size of the market along with uncertainty in modelling, regulators will need to tread carefully as not to disincentivise investment in climate finance.

“Traditional regulators are going to have to be careful in their approach,” said Bentsen. “We don't have a lot of data and we're dealing with models with really long tail times. We need to be cautious in our approach, at the end of the day, we're trying to create capital formation.”

O’Malia agreed and admitted that capital markets must innovate and evolve to assist with the transition to a low-carbon economy.
“This is a 30-year problem, we're going to solve,” he added. “We can’t anticipate that we're going to know every answer today.”