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From the library of the New York Stock Exchange at the corner of Wall and Broad Street in New York City, you're Inside the ICE House, our podcast from Intercontinental Exchange on markets, leadership, and vision in global business. The dream drivers that have made the NYSE an indispensable institution of global growth for over 225 years.
Audio:
Each week, we feature stories of those who hatch plans, create jobs, and harness the engine of capitalism right here, right now at the NYSE and at ICE's exchanges and clearing houses around the world. And now welcome Inside the ICE House. Here's your host, Josh King of Intercontinental Exchange.
Josh King:
It was a usual hobby of ancient cultures to try to defy the forces of nature. My friend Neil Wallen would often use the legend of King Canute rolling back the tide to describe any manner of modern human folly. In less apocryphal sense, earth dwellers across centuries have tried to create a sense of order for the seemingly unpredictable, powerful, destructive, but also life giving impacts that are terrestrial climate has had on our prosperity.
Josh King:
The universal truth that underpinned all these mythologies is found in the reality that a wet spring can bring forth a plentiful crop yield, but a hurricane can also level a sea coast village. The gods, therefore, required honor. In Ancient Egypt, it was Geb, the Earth god, who enabled crops to grow. In Roman Mythology, Ceres was the goddess of the harvest, a job handled by the god Hou Tu in Chinese mythology. Bowing in prayer to Mother Earth was central to early civilization with healthy levels of fear and respect afforded to her.
Josh King:
An upset god may send a monsoon to wipe out your fields, or a contented one would deliver a bountiful harvest. Now, it turns out that our ancestors were half right. Success in agriculture isn't at the discretion of a fickle omnipotent being, but depends instead on using data to best analyze the weather, nutrients, and other scientifically quantifiable metrics. On the other hand, people have had a far greater impact on climate and weather than any other thing on earth.
Josh King:
Perhaps now with the onset of climate change, the impact of which can be seen in array of off the charts natural disasters, we're once again showing our respect for the planet by investing in renewable fuels, recycling and conserving our natural resources. At the vanguard of this wave is our capital markets. We're putting a real value on nature as a key driver behind innovation in sustainable finance.
Josh King:
And to help us unpack what it means to place a value on nature, as well as on carbon and how to help mitigate climate risk are two of ICE's sustainable finance experts, Gordon Bennett and Brian Matt. Our conversation with Gordon and Brian is coming up right after this.
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Connecting the opportunity is just part of the hustle.
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Opportunity is using data to create a competitive advantage.
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It's raising capital to help companies change the world.
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It's making complicated financial concepts seem simple.
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Opportunity is making the dream of home ownership a reality.
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Writing new rules and redefining the game.
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And driving the world forward to a greener energy future.
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Opportunity is setting a goal.
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And charging a course to get there.
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Sometimes the only thing standing between you and opportunity is someone who can make the connection.
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At ICE, we connect people to opportunity.
Josh King:
Our guests today, Gordon Bennett and Brian Matt, are two of ICE's sustainable finance experts. Gordon, now a three time guest and certifiable friend of the pod, is managing director of ICE's utility markets, which includes ICE's ever growing environmental markets. Brian is head of ESG advisory for the NYSE. Previously, Brian was head of ESG at IHS Markit and global head of strategy at Ipreo, which IHS Markit acquired in 2018. Welcome, Gordon and Brian, Inside the ICE House.
Gordon Bennett:
Thanks, Josh.
Brian Matt:
Thanks Josh.
Josh King:
Guys, before we take a deep dive into what's going on in the world of sustainable finance and the environmental markets, both ICE and the NYSE. Let's start with both of you sharing how you rose to the roles you have now. Let's start with Brian, whose last appearance on this podcast predated his move to ICE.
Brian Matt:
If I'm right, that was episode 139, but I will say I had to go look it up. At the time, I was at IHS Markit heading an ESG advisory group within the broader IHS Markit umbrella. I've been involved in ESG space back to my days at Ipreo, as you mentioned. Around 2015 is when I started working more specifically in the ESG space. Beyond that, I've been involved in corporate investor relations, helping companies tell their investment stories to the investment community since 1998.
Josh King:
Now, Brian, Tesla is not a NYSE listed company, but had it been, how would you be working with Tesla and talking to them about now being a kicked off of the S&P 500 ESG Index?
Brian Matt:
I published a newsletter each week. Our newsletter actually decided to call ourselves an Elon-free zone, given that there was really nothing new that we could add to the program. That said, really companies like Tesla have a number of different important factors, key material items that are really going to be used to determine their valuation over time, that are financially material.
Brian Matt:
With those items, ideally, any company should be identifying what those are, taking a look at how they can mitigate any risks, but also identify opportunities potentially to grow additional revenue to strengthen the bottom line, et cetera. That's the type of work that investors are concerned most with. Oftentimes though, those same questions and same answers to them come from other stakeholder groups as well.
Brian Matt:
Oftentimes you get a win-win when it comes to looking at how those issues show up against employees, against customers, suppliers, governments, regulators, or any other stakeholder group.
Josh King:
Gordon, would you be able to remember off the top of your head the episode numbers that you've appeared on the show before?
Gordon Bennett:
No. I'm sorry. No. They were memorable other than the numbers.
Josh King:
For those who are not going to go back into our archive and relisten, update our listeners on your journey to this auspicious moment.
Gordon Bennett:
I'm in New York this week because we're actually hosting a carbon markets dinner at the NYSE, which is pretty cool. It's a major selling point for the organization. People love to come to the floor. We're organizing a dinner to help us curate the products in the carbon credit market. We held one a few weeks ago in London and this is the New York leg. That's why I'm here.
Josh King:
Beyond the literal question of whether you took United or British Airways to Manhattan, what actually brought you to ICE?
Gordon Bennett:
I had a good relationship with... I think we talked about this last time. Dave Gooden kind of brought me to ICE. I worked at Spectron, an energy broking company, and I built a good relationship with Dave. I was having thoughts about a different career move. I picked up the phone to Dave. I was sort of saying, "I might be looking to do something different in the future. If you're looking for someone, my hat's in the ring," and he kind of said, "Well, I've got something for you now." And three months later, I was sitting at ICE.
Josh King:
Well, it's great to see you in person with a shirt and tie. I mean, for the last two years, I've seen you in, I think, is your attic space with all of your fine black and white photography behind you.
Gordon Bennett:
Yeah, no, it's great. It's cool to be here in person.
Josh King:
How is doing your job in the middle of COVID?
Gordon Bennett:
It was interesting. My tea is scattered around the globe, so we're not really together. But working on teams, you got to basically build relationships and stay together whilst being apart. It was kind of weird when you started to go back into the office because you'd go and see someone that you know you hadn't physically seen for two years, but it was like you saw them yesterday.
Gordon Bennett:
The difficult stuff is when you're wanting to interact with customers and particularly new customers with new stuff. You kind of want to be in the room and sort of feel the pulse and see their reaction. That was the most challenging thing about COVID, but it's great to get back on the road again.
Josh King:
I guess since the last time we talked to both of you, I don't know if you did a Google or a Nexus search on the phrase net zero, but it has now become I think one of the most repeated phrases in financial, as well as policy circles. For our listeners who sort of hear it and might think it's more in the jargon space, what does net zero really mean, and why are companies and countries so seemingly aggressively committed to it?
Gordon Bennett:
I've got my own quote actually. April was Earth Day, and there's a fellow Scot called Ian McHarg. He was a major contributor. Apparently he was a bit of a celebrity in the US. It was in the '60s, so before my time, but he apparently hosted his own CBS talk show. But he was one sort of the Founding Fathers of Earth Day and he's got his own quote, "Let us green the earth, heal the earth, and restore the earth." Very consistent with what you were saying.
Gordon Bennett:
Net zero is really about greening and healing the earth by conserving the world's atmospheric carbon budget. You have to take it back to first principles. You need to start with the science. Net zero, what is net zero and why commit to net zero? It's a mitigation pathway to address climate risk today. Climate risk, people seem to be landing on one and a half degree pathway, so we can't hit one and a half degree. Greenhouse gas emissions are the cause of that.
Gordon Bennett:
We need to basically preserve or conserve the world's carbon budget, atmospheric carbon budget, and committing to net zero is really about balancing that carbon budget. That's about carbon cycles, which is really CO2 in and CO2 out. To protect the carbon budget, we need to reduce CO2 into the atmosphere and we need to increase CO2 out of the atmosphere. It's all about the science.
Brian Matt:
I'd say from a company perspective, each company is looking at their own approach to whether you call it a net zero or carbon neutral or whatever type of goal. Really a lot of companies are just starting to do this work for the first time to measure their own carbon footprints. The standard Scope 1, Scope 2, Scope 3 GHG protocol defines how companies are evaluating their own carbon footprints.
Brian Matt:
Of course, we've seen activity from the SEC recently that may push companies towards not just being required to measure this consistently on an annual basis, but also disclose it and disclose more detail about if you have a net zero target, what does that entail? What's your transition pathway away from a higher carbon footprint? There's a lot taking place on this. That, of course, really does come down to the definition of what net zero was to start with.
Josh King:
Brian, you were kind enough to include me in the dinner, the Sustainability Advisory Council, the New York Stock Exchange, and curious what you are seeing about sort of information sharing. Do you see progress being made here, or are people going really down their own paths?
Brian Matt:
I'd say especially in certain industries. A couple that stand out to me, the cement industry, the airline industry, the steel industry. There's a few industries out there that have generally worked together to come up with their own industry pathways, where they've looked at existing technology today, potential technologies coming down the road, and then where they sit relative to their customer and supplier chains, and then really try to lay out a pathway that each of their constituent companies can set themselves against.
Brian Matt:
Not every industry is as centralized as those. There are some that are much more diverse. The software industry, of course, much more diverse, but also potentially a lower carbon footprint overall. A lot of different approaches to carbon reduction. There's plenty of different approaches that companies have taken, but I really think the first steps to it is simply acknowledging the need to evaluate your carbon footprint, after that, the need to address, reduce, or potentially conduct some type of management process or offset process around it.
Brian Matt:
That's universal across all companies. Then it's the how you get there that diverges between companies and industries.
Josh King:
Here at our own company, ICE next year is going to mark 20 years of involvement in environmental markets. I think it began in 2003. ICE partnered with the Climate XChange to launch environmental markets spot contracts, then bought the Climate XChange outright seven years later in 2010. And yet these markets, Gordon, really are still unknown to so many folks. How did environmental markets come about? And what is their purpose?
Gordon Bennett:
The genesis of pricing pollution is really in the European cap and trade program. I think that's the most well known environmental market in the world and its job is to price the negative externality of pollution. I suppose if I had my US hat on, there was the SO2 and Knox program that predated it. So you could say that that was actually the Founding Father of cap and trade market. It wasn't CO2. It was SO2 and Knox. I suppose they both lay claim to sort of setting up environmental markets.
Gordon Bennett:
But it's quite interesting, if I even go back how... I've been involved in them for 15 years, but the way that I think about environmental markets has completely transformed over the course of the last two. It evolves consistently or constantly. 18 months to two years ago, we were selling carbon allowances and renewable energy certificates without really giving a thought as to what they were doing. And then that sort of moved into, okay, we're pricing externality.
Gordon Bennett:
Really over the last sort of two or three months, now we're thinking about it in terms of the carbon budget and the carbon cycle and really sort of holding in on the science. I think that makes it a lot more powerful and gives you a real sense of purpose. Environmental markets today are really providing price signals across the carbon cycle. A carbon allowance is pricing the negative externality of pollution. That's all about trying to reduce CO2 into the atmosphere.
Gordon Bennett:
A renewable energy certificate is pricing the positive externality of not contributing to the carbon budget. Our latest contract, which is the nature-based carbon credit contract, is really about pricing the positive externality of sequestering and storing CO2, so CO2 out of the atmosphere. When you start to describe it like that, it's got a whole different sort of momentum behind it, I think.
Josh King:
My colleagues who work more closely with you in London, Becky Mitchell and Veronica Slumka, worked with you on the announcement about the nature-based solutions carbon credit futures contract. For folks sitting at home, how does that contract kind of go about helping preserve ecosystems?
Gordon Bennett:
It is based on the very standard and it's called AFOLU, which is Agriculture, Forestry, Other Land Use, but really it's about carbon capture and sequestration and storage. It's nature doing its job in the carbon cycle and taking CO2 out of the atmosphere. We are providing a price signal for that. A tree shouldn't just be valued on its value of the timber. This is about putting a value on conserving it rather than chopping it down, which is important.
Gordon Bennett:
Again, if you think about the carbon cycle, we're going to make it hard for ourselves if we're not conserving and incentivizing investment in natural capital to capture and store that CO2.
Josh King:
I'm interested to know about the methodology behind calculating how much carbon has been captured by any given project or initiative. Can you tell us about that?
Gordon Bennett:
The precision in which you do that is certainly one of the challenges with nature. If I try and answer that in terms of renewable energy, when you're producing wind or solar, it's basically a meter, right? So you know how much renewable energy you've put into the grid. That's precise and it's objective. When you're getting into nature, it's far more complex. Maybe the lack of precision means that I think some people are holding back.
Gordon Bennett:
The whole monitoring reporting and verification process and being more precise and maybe digitizing it I think will help sort of unlock it and scale it.
Josh King:
Digitizing a technology play.
Gordon Bennett:
Yeah, absolutely, yeah, in the same way the... These credits are manufactured at the end of the day. These are certificates, but there's lots of things that have to happen before the certificate comes out, and I can sell it to you and you can take it and retire it. The way that we understand it today, it can take years for these credits to be issued. If you have to wait years for your credit to be issued, then maybe you would be asking questions. Is this real?
Gordon Bennett:
If that sort of manufacturing process can be digitized and become more real time, again, like a rec, then I think that would really help sort of scale the investment in natural capital.
Josh King:
Earlier this year in the first quarter of 2022, ICE launched its Global Carbon Index Futures contract, which provides access to the world's most liquid carbon markets through a single instrument. Can you give us some insight into this contract and how it works?
Gordon Bennett:
It's an aggregate of our foremost liquid carbon allowance, futurist contract. It's really a play on effectively global price for pollution. Think about it as a sort of a store of carbon value. In the last example, when we're seeing perhaps people are holding back a little bit around investing in the carbon credit market because things need to happen for people to be comfortable with it, or if a company is sort of a pre-compliance entity, like the EU ETS, the compliance program's going to double in size.
Gordon Bennett:
Rather than buying an allowance or a credit, you can store this value in the index future. And then you can realize the value and then go invest in the credit or the allowance somewhere down the line. It's a good sort of... If you think carbon pricing is going to go up because of net zero, it's a good hedging instrument.
Josh King:
I mean, that's probably a good segue for Brian. I mean, how does the NYSE fit into this whole conversation?
Brian Matt:
I'd say for NYSE, our goal is to make sure listed companies understand everything that they need to go through to, again, measure, manage, target, and then report on their approach to climate. A couple pieces that Gordon speaks about already, just in terms of thinking about the carbon pricing that exists today and how you make decisions on it. That global carbon price is something that many companies actually mirror internally as sort of a shadow carbon price that helps them make corporate finance decisions.
Brian Matt:
Does this type of investment that we're going to make have additional risk around it based on a much higher carbon output? If so, is there a stronger approach to be made for some other type that has a lower carbon output? A lot of that is taking place inside companies. Our goal, of course, is then to give companies the tools that they need to be able to compare themselves against other companies, see what those other companies are doing, then be able to tell that story to the investment community.
Brian Matt:
I'd say carbon pricing is an important piece of that. I'd say companies right now are oftentimes... There are so many newer companies that are just entering the market and just starting to understand this space. I think things like the sessions that we do here with Gordon really help to educate that market and bring up to speed a lot of smaller companies that have never really looked at their carbon output before and start them down the process of thinking about managing it.
Josh King:
I'm curious about the companies that list on the NYSE and how they begin their plan. What's the light bulb that goes off at some of these smaller companies, Brian, who say like, "Maybe I'm reading major headline risk for the big oil companies, the big transportation companies. But Hey, I'm just a smaller listed company. Why do I need an ESG plan?"
Brian Matt:
In just about every case, it's either a call from one of your largest investors, or it's a call from one of your largest customers. Other stakeholder groups will show up in that process, but what really tends to drive the conversation inside the company is once your largest investors are pushing you to evaluate and verify your carbon footprint and are pushing you to disclose such that they can look at their entire portfolio.
Brian Matt:
Of course, BlackRock, Vanguard, State Street, other large investors have been pushing for companies to do this for some time. BlackRock has supported the TCFD approach, which requires companies to look at just climate risk overall, physical climate risk, transitioning risk, et cetera. That's really from the investor perspective.
Brian Matt:
From a customer perspective, there's a lot of situations where a company may see its largest customer simply ring in with, "Yes, as part of this upcoming contract, we would like you to show us your verified carbon footprint and potentially set future science-based targets," for example. After that, those really trigger a company to then make the decisions and start thinking about, "I need to go through the evaluation process.
Brian Matt:
I need to conduct the measurement, and then produce any future reporting out there that helps to fit those stakeholder needs," and potentially after that build out a company's own target setting process.
Josh King:
Brian, everyone wants to be on the podium of the New York Stock Exchange ringing the opening bell. Everyone wants to be invited to Gordon's dinner on the floor of the NYSE tonight. Everyone wants to be a member of Elizabeth's Sustainability Advisory Council of the NYSE, but there's a long path before you even can do an IPO or a SPAC merger and become listed on the New York Stock Exchange.
Josh King:
These companies that are now sort of in the process of thinking about their life as a public company, the disclosures that they're going to have to have, the staff and resources that they'll need in the ESG space. What kind of planning and work goes into that?
Brian Matt:
As of right now, the way the SEC's March climate proposal looks, that climate proposal would apply to essentially every US listed company to date, every 10-K filer, but would also apply to form S-1 filers, new registrars coming public on the NYSE, or to S-4, or to other new listings coming out of the NYSE. It is something that assuming the rule goes forward as designed today.
Brian Matt:
It's entirely possible that pre-IPO companies may have to start going through a carbon footprinting process and start to evaluate their approach to at least climate risk, if not, producing a target setting process and providing more detail around targets. Essentially SEC has pushed this a bit earlier in the process. I'll say it also does line up well with international regulators. The ISSB, International Sustainability Standards Board, was set up under the IFRS Foundation and is designed to line up a number of the different global reporting standards.
Brian Matt:
That organization released its climate proposal four days after the SEC's. A lot of that lines up very closely, especially when it comes to the TCFD recommendations, the requirement for companies to set up oversight of climate risk at board level, at management level, and then produce a view of both physical and transition risk. It's something that's happening globally, not just within the US.
Gordon Bennett:
I think what will be interesting is whether sort of non-compliance entities start to treat their net zero commitment as a liability. If you're under a compliance cap and trade scheme, it's a polluters pays model. You know who the polluter is. You know how you calculate how much you've polluted. You know what you need to buy to basically pay for that pollution. You know when you have to retire it. The voluntary market doesn't really have any of those.
Gordon Bennett:
I think what will be transformational if corporates not under a compliance scheme start to treat them as liabilities, because then you're looking at price risk, price risk management. You're looking at having to buy a carbon credit or another instrument to compensate for your liability. That will make a huge difference if it comes.
Brian Matt:
Yeah, and also potentially hedge over different timeframes. There's a lot of different approaches that probably bring more liquidity into that market too.
Josh King:
What factors or processes do you use to assess the extent to which ESG concerns are appropriately factored into a company strategy?
Brian Matt:
In general, companies will have a set of material issues that are important to them specifically. For ICE, generally, we'll think of first and foremost data privacy, cyber security. Those type of issues are among the most important to us. Human capital management is very important to us. There are certain other issues that are not as important. Healthcare companies may have a focus on just providing access to medicine out to less advantaged audiences.
Brian Matt:
Those will be a little bit different for each industry, I think because we're always operating in the mindset of an investor. Usually what you're looking at is, what does the company talk about in these spaces? What are the issues that a particular company talks about? What do similar companies across the industry and what do the leaders in each space talk about when it comes to these particular topics?
Brian Matt:
It can really start to stand out if a company that's been in the market for 10 years really is missing one or two items out of a much broader materiality assessment, as you would refer to it. We usually use ICE ESG reference data on our platform, ESG Viewer, just as a baseline to show what companies are disclosing. And then we start from there and you can dive a little bit deeper into looking at SASB Standards at TCFD disclosures and other items that don't fit as well into a pure data structure.
Brian Matt:
And that's really where you can get to make some recommendations to companies as to where to take their program next.
Josh King:
After the break, Gordon, Brian and I are going to dive deeper into what's happening in global environmental markets and the role that exchanges can play in the journey toward net zero. That's all coming up right after this.
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Josh King:
Welcome back. Before the break, my colleagues Gordon Bennett and Brian Matt and I were discussing recent developments in environmental markets in ESG. September 2021, the New York Stock Exchange and the Intrinsic Exchange Group announced the launch of a new nature-based asset class, a Natural Asset Company. How did this partnership come about?
Brian Matt:
NYSE has been talking to Intrinsic Exchange for probably two years prior and had been looking at some of the ways that IEG had essentially thought to bring valuation to all of the ecosystem services provided by nature. If you think about a landscape, the landscape will provide items that we do a pretty good job of valuing today in some markets. Gordon's pretty good with his organization measuring carbon sequestration and what's the appropriate price that can be placed on that.
Brian Matt:
But landscapes provide a lot more than just items that we can measure in a particular market. They'll also provide flood protection. They'll also provide landslide protection, biodiversity. There's a number of different services out there. At this point, I believe there's around 37 different ecosystem services that can be measured where an existing type of valuation has shown up either in academia or from a legal perspective.
Brian Matt:
If you were to take a plot of land, a landscape, and you were able to isolate that ecosystem services provided by that landscape, then offer an equity interest in ownership of those ecosystem services, offer that out to investors looking for a pure play directly into nature, essentially contributing their capital directly to preserving or expanding natural capital.
Brian Matt:
Then take the proceeds and provide that capital into an organization that is required to use it to benefit, produce either the same or greater value of ecosystem services. Then simply structure the company so it looks like any other company, a management team, a board of directors, but also report on the ecosystem services valuation periodically, potentially on an annual basis. That's what the structure looks like to date.
Brian Matt:
At this point, we're still looking... We still have to seek out regulatory approval here, but we've had very strong interest from both companies, as well as investors in this type of process.
Gordon Bennett:
I think this is a great tool. I get excited when Brian and the Intrinsic Exchange Group talk about it, because I didn't really appreciate the power of an equity before we started talking about Natural Asset Companies. You invest in equities, but companies are heterogeneous where every company's different, but you can go to the New York Stock Exchange and you can see the value of a company. Nature-based projects are also heterogeneous.
Gordon Bennett:
The carbon credit that we have on the derivative exchange is really only solving for carbon capture and sequestration and storage, whereas Brian says the NAC is solving for a whole host of other ecosystem services. I think that is an amazing tool to value natural capital.
Josh King:
How did you begin thinking about it and what sort of... As you listen to Doug Iger, who we had back on episode 261, or Michael Blaugrund, who was really instrumental in bringing the Intrinsic Exchange Group into the NYSE, or Brian's conversation. How did your own sort of evolution of thinking take place?
Gordon Bennett:
Well, just through the description of what it was doing and referring to these sort of lots of different things that nature does. It's not just about the carbon cycle. The discussions we were having with customers designing our carbon credit, the challenge was that the project-based credit market is heterogeneous. You're trying to use like a commodity like contract that is more akin to homogenous asset class. It was just a sort of a light bulb moment and go, "Okay, this is an equity. What are equities? What are equities good for?"
Gordon Bennett:
They're perfect for heterogeneous asset classes. They've got a link between the equity and the carbon credit because one of the revenue streams of a Natural Asset Company could well be the carbon credit. It's a revenue stream. And also in terms of when you think about valuation in the same way as if you're doing a valuation model of a company, it's based on a whole host of assumptions. It could include commodity prices, interest rates for an exchange. The derivatives exchange is providing a value or price for those assumptions.
Gordon Bennett:
The more precise you can be in evaluating it on a quoted market means that in theory you should be able to drive extra value out of the asset. You sort of come full circle and you think about how the equity and the carbon credit and our other derivative markets sort of compliment each other.
Brian Matt:
Gordon, you always talk about the fair value hierarchy. Having an equity instrument that's available easily for investment within an equity mandate opens you up to a very wide range of investors and hopefully helps set effective pricing that can then offer a mark against the value of nature more broadly, again, to help companies and sovereigns look at the value that they have in the ecosystem services today.
Josh King:
Gordon, you sit on the side of the business that focuses on derivatives at ICE. Brian, you're more on the equity side. What do you think as you guys talk together is the connection between derivatives and equities? Are we seeing that connection in any of the products that we have available and have been discussing today?
Brian Matt:
For me, the derivatives markets when we look at carbon pricing today tend to be some of the most effective ways to measure carbon pricing and provide that back to companies to help make decisions. It's very difficult to produce, as Gordon was saying before, a company who is purely in the business of just carbon sequestration, or is purely just in the business of water purification to be able to put a mark against that.
Brian Matt:
The derivative's markets do that fairly effectively and in a liquid enough way that it can be used for companies to make decisions.
Gordon Bennett:
Yeah, it comes down to valuation. As Brian said, we're both sitting at the top of the fair value hierarchy. We're just valuing. We're giving transparency price signals for different things. I think that's the key is that they're complimentary tools all trying to... I suppose what's new about the Natural Asset Company is it's valuing an externality of ecosystem services almost. Our derivatives markets are being more precise and what externality the individual items that they're valuing.
Gordon Bennett:
I would make one important comment though, that although they're derivatives markets, in most instances, they're certificates. They're they're credits. They are physically delivered. The vast majority of the products that sits in ICE's environmental markets are physically delivered. People are using them to either comply with their mandate or with their commitments to their investors. Because sometimes people think, "Oh, derivatives are just purely hedging instruments and they're financially settled."
Gordon Bennett:
These have a real world purpose. They're the credits that sort of prove that you've captured the carbon or that you've delivered carbon free electricity.
Josh King:
Before the break, we were talking about regulation and ESG and the role that the SEC is increasingly trying to play. Let's jump across the pond. In Europe, we're seeing policy changes as well with the EU loosening its green standards where renewable energy initiatives can be realized without really having to be accountable to an environmental impact statement. I mean, Gordon, Brian, any risk of unintended consequences if we put speed to market ahead of the impact on an ecosystem or habitats?
Gordon Bennett:
Yeah, that's a good question. I'm not sure if I'm fit to even answer it. That's one of the challenges around net zero is the sheer complexity of it. There isn't an expert in net zero because you need to be engineering, scientists, economists politics, geopolitics. It's a great question about unintended consequences. I think some of the changes are allowing nuclear and natural gas to be sort of classified as green. I think they're just pragmatic.
Gordon Bennett:
If you become sort of a net zero zealot and say that you've got to basically just shut down energy today that's coming from a hydrocarbon, then there are definitely unintended consequences of doing that and there is risk associated with that. Net zero is energy transition. We talked a lot about nature, but the larger component of net zero is energy transition. That's going to be hard.
Gordon Bennett:
The great thing that ICE has is it's got a wonderful energy portfolio as well. Again, a bit like how the equity complements the derivative, the energy compliments the environmental portfolio.
Josh King:
Talking about net zero zealots, as you call them, Gordon, we had Mark Carney on this show in the wake of Glasgow's COP26 Conference last year. No pragmatic fellow is Mark. He is a pragmatic fellow. Despite all the work that went into the lead up and the during COP26 and the aftermath, pundits are still saying we are at a 48% chance of the Earth's annual temperature is going to exceed that 1.5 degrees of Celsius of warming compared to the pre-industrial levels between now and 2026. Is this a case where we just have to keep calm and carry on or worry like hell?
Brian Matt:
Enough companies have had their eyes opened, again, partially through investor or other stakeholder demands, but COP26 was in one sense, somewhat of a commercial for the concept of net zero and for companies to start the process if they haven't already of looking at their approaches. As you have that type of headlines coming out every day, you're going to have comments from your board members.
Brian Matt:
You're going to have comments from other leading investors, leading stakeholder groups. The fact that there is dialogue around hopefully improving the transparency in the voluntary carbon markets in that part of the organization, as well as hopefully with companies starting to work more effectively internationally with sharing information with each other.
Brian Matt:
Companies that are going to be required to gather Scope 3 information may be able to gather it more effectively if there's industry level communication, where industries can share information confidentially with each other and have a little more transparency to be able to expand out their mitigation efforts.
Gordon Bennett:
I think there's a lot more momentum and it continues to build. There's more governments. There's more corporates who are saying that they are going to commit to net zero. There's more momentum there. What's interesting, what's currently going on with geopolitics, what will that mean for net zero and energy transition? A little bit before my time, but sort of the Arab oil embargo of the '70s really created an L&G market because the Japanese didn't want to be exposed to oil effectively.
Gordon Bennett:
I wonder, okay, what is this current crisis going... What industries it's going to generate? I suspect that it will generate a new an industry, like a hydrogen market, that people might have been on the fence before. But when they have energy security in mind, they're going to get behind it from a policy perspective like people got behind renewables. Look, it's not going to be smooth. It's going to be uncertain because of the complexity.
Gordon Bennett:
It's a massive infrastructure project, so you don't just build the infrastructure to deliver net zero in a few years. You're not. That's the challenge. You're not really going to know for quite some time, but I think you've got to be optimistic.
Brian Matt:
There were some interesting comments coming back immediately after the war started in Ukraine. I was at Zurich at a conference that's focused on the energy industry. The entire audience there was shocked how quickly the European governments could agree on things after watching them not easily agree on things for a very long period of time. The European governments wind up almost instantaneously on pushing more for energy independence, making whatever decisions are necessary to separate themselves down the road from dependence on Russia.
Brian Matt:
There's also been comments out recently that might suggest some of the environmental impact statements and other items for new projects when building out renewables. It might be the type of thing that countries and companies are going to be able to work together on to be able to shorten the timeframe to bring a new project to market in the renewable space. As you see things like that, it is a reminder that governments and companies hopefully have the same goals in mind here.
Brian Matt:
There's always been a difficulty in getting them all on the same page and working towards that same goal. Hopefully a shared demand here starts to break down some of those barriers.
Josh King:
Won't be too long before we have a good read on this. I mean, this November 2022 COP27 is going to take place in Sharm El-Sheikh, Egypt. I haven't been back to Sharm since I went there with Bill Clinton to the Summit of the Peacemakers in March 1992, telling Shimon Peres, King Husain, Hosni Mubarak, and Boris Yeltsin, Yasser Arafat where to stand. It all seemed so much more hopeful back then, a little straightforward, a little easier.
Josh King:
As the world reconvenes there, what do you think the key priorities need to be? You just mentioned companies and governments together, but brass tax, what should we be looking at when the world comes to Sharm El-Sheikh?
Brian Matt:
Standardization, harmonization comes up consistently across my universe. The fact that much of our industry, much of the reporting for companies has started to standardize on TCFD in terms of reporting physical and transition risks. I'd say anytime there's an opportunity to push more for standardization, you saw some of that with Article 6 coming out of COP26 as well, any time you gather any of those kind of organizations together, the hope is you produce more opportunity for harmonization, especially between countries and then between industries.
Brian Matt:
The more organizations we get on the same page here, the better. Looking at the same carbon price instead of 50 different carbon prices, for example, is one way to think of it.
Josh King:
Guys, as we wrap up, we've covered a lot of ground on ESG and sustainable finance, but curious, looking out onto the horizon where you both think the smart money should be. Brian, maybe also do we risk having anti-ESG backlash? We saw some of it last week around the Tesla news and on some sides of the political spectrum questioning.
Brian Matt:
I'd say very shortly we'll see rules brought forward. They already exist in Europe and SEC is expected to present some of them as well the target greenwashing from investors. Essentially investors have to say and then do what they tell their beneficiaries when it comes to ESG evaluation of companies. I think the fact that we've seen progress on this already in Europe, the SFDR requirements for portfolios, so far have investors presenting a lot more information about how they make those decisions.
Brian Matt:
At minimum, there'd be political opponents for just about anything that you would produce, but I'd say that does require the investment community really to put their money where their mouth is and use this information that they're using to make better decisions. I'd say we're going to see more movement pushing on investors around greenwashing in the US soon, but made much in the way there in Europe.
Gordon Bennett:
The ESG labeling I think seems more directed to that sort of the investor community, but I bring it back to the carbon cycle and what environmental markets are doing. We're not trying to say that these have an ESG label. We're saying that these are providing price signals to allocate capital efficiency efficiently across the carbon cycle to reduce CO2 in and increase CO2 out. The ESG label for me is not actually relevant if you're framing it by the carbon cycle and the carbon budget.
Josh King:
Where do you think, Gordon, ICE is heading next with environmental markets and what makes you excited for the part of the business?
Gordon Bennett:
We're going to increasingly... We're going to develop the portfolio around project-based credits, and we're going to be focusing in on providing more price signals across carbon capture and storage for sure. We'll probably have a look at the credits in respect of reduction. Now, if you had such a thing as a global sort of compliance cap and trade program, you wouldn't really need to go into the reduction space where people are effectively getting paid to fuel switch from coal to natural gas.
Gordon Bennett:
In a compliance market, you're still paying for your pollution. But again, if you want to be pragmatic, then there's not going to be a global cap and trade. In some countries, that's the way to incentivize the fuel switch. We'll increasingly have a look at that reduction in credit space. Although in the beginning, I don't really like the sound of that because you're effectively still getting paid to pollute. But again, if you put your pragmatic hat on, if it's going to result in less CO2 into the atmosphere, then it's a good product.
Josh King:
You say how much the environmental markets have changed in just the last two years, Gordon. Where do you think can you project we'll be in two, four, six years?
Gordon Bennett:
Well, maybe not as precise as that, but I think going back to the earlier point around companies basically treating their net zero commitments as liability. That emissions profile, I think more companies will treat those as liabilities and have to go and buy an asset to compensate for that, regardless of whether it's written down somewhere in a voluntary standard.
Gordon Bennett:
I think the direction of travel from investors and stakeholders is if we're going to get to net zero, we're going to have to increasingly treat those as liabilities and pay for them.
Josh King:
Brian, what's next for the New York Stock Exchange and our work in this space?
Brian Matt:
I'd say over time, the mandatory disclosures, as well as standardization starts to give you a very good view of really all NYSE listed companies and how they're approaching climate today. One of the comments you hear very often in the ESG space is that at some point, ESG investing just becomes investing. If every company is approaching its carbon footprint, potentially looking to manage it, target it, etcetera, is it really then still ESG investing?
Brian Matt:
There's certain approaches that you could take within that if you're looking to invest in impact, if you're looking to invest in companies that generate green revenue. There's a lot of ways to take that. But at minimum, when it comes to climate risk, I think companies have already taken the mantle in many cases and are really just following along with stakeholder demands for it. That's certainly not slowing down anytime soon,
Josh King:
Not slowing down anytime soon. Well, I hope, Brian, you start speeding up soon so we can get you back to the office. Thank you so much for joining us remotely for this episode of Inside the ICE House. Would've loved to have it all face-to-face. Gordon Bennett, great to have you here in New York City. Looking forward to hanging out with you a bit more in the next couple days during your visit. Great to have you guys both around the microphone for Inside the ICE House.
Gordon Bennett:
Thanks, Josh.
Brian Matt:
Thanks.
Josh King:
And that's our conversation for this week. Our guests were Gordon Bennett, ICE's managing director of utility markets, and Brian Matt, head of ESG advisory at the New York Stock Exchange. If you like what you heard, please rate us on iTunes so other folks know where to find us. And if you've got a comment or question you'd like one of our experts like Gordon or Brian to tackle on a future show, email us at [email protected] or tweet us @icehousepodcast.
Josh King:
Our show is produced by Pete Asch and Veronica Slumka, with production assistance from Ken Abel, Steven Ramanchik, and Ian Wolf. I'm Josh King, your host, signing off from the library of the New York Stock Exchange. Thanks for listening. Talk to you next week.
Audio:
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Audio:
Nothing herein constitutes an offer to sell, a solicitation of an offer to buy any security, or a recommendation of any security or trading practice. Some portions of the preceding conversation may have been edited for the purpose of length or clarity.
