SUSTAINABLE FINANCE AN OVERVIEW Sustainable Finance: An Overview Sustainable Finance: An Overview Ju.
2020-10-15
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FOSSIL FUEL FINANCE REPORT 2020 CLIMATE CHANGE Banking on The organizations authoring the latest edition of this annual report want to acknowledge the extraordinary circumstances of this moment, given the terrible impacts of COVID-19 on lives, health, and livelihoods for people around the world. As we write, the urgent need to respond to the pandemic and resultant economic impact is rightly taking priority, and may do so for some time. However, climate change remains an existential threat that, like the coronavirus, will require unprecedented global action in solidarity with those most vulnerable. We believe that the data and analysis in this report will prove useful in addressing that threat with the seriousness that it deserves. March 18, 2020 Executive Summary Introduction Banking on Fossil Fuels League Table Key Findings MAP: Case Studies Tar Sands: Line 3 Pipeline Tar Sands: Tecks Frontier Mine Arctic: Arctic National Wildlife Refuge Offshore: Guyana Fracking: Wink to Webster Pipeline Fracking: Vaca Muerta LNG: Rio Grande LNG, Texas LNG, and Annova LNG Coal Mining: Turw Mine Coal Power: Payra Port Expansion: Amazon Oil Climate Impact: Miami Policy Scores Summary Overall Oil yet funding for top coal power producers is not dropping rapidly enough. Financing is led by ICBC and Bank of China, with Citi as the top non-Chinese banker of coal power. This report maps out case studies where bank financing for fossil fuels has real impact on communities from a planned coal mine expansion in Poland, to fracking in Argentina, to LNG terminals proposed for South Texas. Short essays throughout highlight additional key topics, such as the need for banks to measure and phase out their climate impact (not just risk) and what Paris alignment means for banks. Traditional Indigenous knowledge is presented as an alternative paradigm for a world increasingly beset with climate chaos. Novembers U.N. climate conference in Glasgow, on the fifth anniversary of the adoption of the landmark Paris climate agreement, will be a crucial deadline for banks to align their policies and practices with a 1.5 Celsius world in which human rights are fully respected. The urgency of that task is underlined by this reports findings that major global banks fossil financing has increased each year since Paris, and that even the best future-facing policies leave huge gaps. Additional resources are available at: RAN.org/bankingonclimatechange2020. Over the past year, fossil fuel finance campaigning has caught fire. The role of banks, money managers, and insurance companies as drivers of climate change via their fossil financing, investing, and insuring is garnering unprecedented attention. Awareness is soaring that private-sector banks too are “carbon majors,” alongside the fossil fuel producers themselves. The climate movement is spotlighting an urgent and growing problem: since the adoption of the Paris agreement in late 2015, the 35 banks in the scope of this report have provided $2.7 trillion in lending and underwriting to the fossil fuel industry, with annual fossil financing increasing each year. JPMorgan Chase became the first bank to blow past the quarter-trillion dollar mark in post-Paris fossil financing, with $269 billion in 2016-2019.1 To bend the financing curve towards phaseout, banks must adopt policies restricting their fossil finance, and here there is positive and accelerating good news. Twenty-six of the 35 global banks in the scope of this report now have policies restricting coal finance, and a growing minority now 16 also restrict finance to some oil and gas sectors.2 The global financial system runs on endless amounts of data on risk and return. And no risk to the profits of individual companies and the financial system as a whole is greater than that posed by the climate crisis. While banks are beginning to account for the physical and transition risks associated with climate change, another important climate-related risk is reputational risk. Financial institutions increasingly understand that with regard to their ability to attract new customers and to hire and retain employees, its not smart to be seen as directly financing the destruction of life on earth. And right now there are large numbers of people taking to the streets to make sure that potential customers and employees are well aware of which financiers are the worst climate villains. While banks and other financial institutions are rapidly waking up to the severity of these climate risks to their own bottom lines, the climate movement is driving home the fact that by increasing financing of fossil fuels, banks are responsible for an extremely high risk of massive harm to the planet and its people that is, banks and the financial industry at large have enormous climate impact. Financiers need to cut their climate impact with the same urgency as they may act to reduce the risks of their exposure to areas impacted by repeated floods and fires. Keeping the Money Flowing This report measures that climate impact, and the numbers are damning. Overall fossil fuel financing from the 35 banks covered in this report to 2,100 fossil fuel companies has grown each year since the adoption of the Paris Agreement in late 2015.3 Finance to 100 of the biggest expanders of coal, oil, and gas fell by 20% between 2016 and 2018, but last year bounced back at a shocking 40%.4 JPMorgan Chase was the worlds worst banker of climate chaos by a huge margin in each year between 2016 and 2019. While JPMorgan Chases total fossil finance fell slightly from 2017-2018 and 2018-2019, the gap between JPMorgan Chase and the next worst bank actually grew massively between 2018 and 2019. Citi and Bank of America were second- and third-worst in 2019; Wells Fargo was fourth, after being the second-worst fossil bank in 2018. Total fossil fuel finance from both Citi and, in particular, Bank of America rose substantially between 2018 and 2019. Taking total finance over the past four years, Wells Fargo was in second worst position, 36% behind JPMorgan Chase.5 Though the U.S. banks dominate the global league table, they are not alone in their banking of climate destruction. The worlds fifth biggest fossil funder is Canadas RBC. Japans biggest fossil funder since Paris is MUFG, and Chinas is Bank of China. In Europe, Barclays is the biggest funder of fossil fuels over 2016-2019 though last year, French bank BNP Paribas took the place of biggest fossil banker in Europe, which is ironic given the banks talk of climate action.6 This report shows the only somewhat bright spots in terms of declining finance are in coal mining and power the areas where bank policies restricting financing have been in place the longest. Finance to the top 30 coal mining companies declined by 6% between 2016 and 2019; finance to the top 30 coal power companies shrank by 13%. In both cases, the biggest absolute drops in coal finance came from the Chinese banks though the four Chinese banks still account for more than half of total finance to the top coal mining and power companies. Credit Suisse is the biggest non-Chinese funder 4 B A N K I N G O N C L I M A T E C H A N G E 2020 INTRODUCTION - Banks Climate Half Measures are Not Enough 5 of coal mining over the last four years, though its funding has been on the decrease since 2017.7 Though UBS saw massive increases in its financing for coal mining last year, it was one of only a handful of banks with reductions in financing for the top 30 coal power companies in each year since 2016 the others being China Construction Bank, Deutsche Bank, and BPCE/Natixis.8 Our data show that Citi has been the worst coal power funder outside China over the past four years, although its amounts have declined in each of the past two years. Bank of America is the eighth biggest funder of coal power from 2016-2019, but an almost doubling of its financing between 2018 and 2019 means that it was the largest non-Chinese coal power funder in 2019 (showing the toothlessness of its April 2019 policy barring funding for developed-world coal power projects).9 BNP Paribas also doubled its coal power finance over the past year, underscoring the point that even the strongest policies among those analyzed in this report still have a long way to go. JPMorgan Chase and SMBC Group were the only banks with increases in coal power finance in each year since 2016.10 Bank finance for tar sands shows major variation from year to year. 2017 was a big year for tar sands financing as the sector consolidated, and though finance from all 35 banks analyzed here has fallen since then, 2019 levels remain higher than 2016. Over the past four years the big five Canadian banks provided two-thirds of finance from the banks analyzed in this report to the top 35 tar sands extraction and pipeline companies. The only non-Canadian bank in the worst six tar sands banks from 2016-2019 is JPMorgan Chase, in third place behind TD and RBC.11 JPMorgan Chase is also the biggest funder of Arctic oil and gas from 2016-2019. However taking just 2019 numbers, Barclays was the worst bank for fossil fuels in the Arctic, narrowly beating Citi in second worst place. Overall Arctic oil and gas funding from the 35 banks in this report grew by 34% in the past year.12 Financing for offshore oil and gas grew more rapidly than any other spotlight fossil fuel sector over the past year, with a leap of 134% between 2018 and 2019. JPMorgan Chase is the worst offshore oil and gas bank since Paris. Taking just 2019 financing, BNP Paribas is worst, with Citi second worst and JPMorgan Chase third.13 JPMorgan Chase is also the worst banker of fracking from 2016-2019. In 2019, however, it was second worst, just behind Bank of America. Wells Fargo and Citi were close behind in third and fourth places. Total fracking finance from all 35 banks grew by 3% in 2019, an improvement compared to 19% and 21% growth in the previous two years.14 Morgan Stanley was the worst banker of the 30 biggest LNG companies from 2016-2019, although in 2019 it was narrowly beaten to the top of the league table by Mizuho. JPMorgan Chase was the second worst over the past four years. ICBC, Bank of China, and Deutsche Bank were the only banks whose LNG finance fell in each of the past three years.15 This report shows that the private banking sector as a whole continues to take a position of extreme irresponsibility in the face of the climate crisis. While coal finance is slowly shrinking, this trend is being more than compensated for by growth in finance for the oil and gas industry. P HOTO : WI K I P E D I A C O M M O NS Policy Acceleration Phasing out fossil financing will require banks to adopt restriction policies, and they are increasingly doing so in response to pressure to stop fueling the climate crisis from the public, from inside the financial system, and from regulators and legislators. Most of the policies address coal, but a growing number are now starting to restrict some oil and gas funding, especially for tar sands and Arctic oil and gas. Under the scoring system used in this report, the banks with the best scores for their overall policies across the coal, oil and gas sectors are all European, led by Crdit Agricole, RBS, and UniCredit. The leading non-European bank is Goldman Sachs, in 12th place. And yet, even the banks with the strongest policy scores among their peers have a long way to go in order to align their businesses with the goals of the Paris Climate Agreement.16 The five Canadian banks included in our analysis are all in the bottom ten for their overall fossil policies, as are the four Chinese banks.17 Crdit Agricoles strong policy score comes from its June 2019 commitment to stop working with companies developing or planning to develop any new coal infrastructure, whether that be in mining, services or power. It also pledged to phase out all coal from its portfolios by 2030 in the EU and OECD, and by 2040 in the rest of the world.18 Crdit Agricoles prohibition of coal developers is highly significant as more than half of the 258 companies that German NGO urgewald has identified as having plans to build new coal power plants are not traditional coal-based utilities.19 Most banks coal policies, which restrict only direct finance to coal mines and power plants, or to companies with a high share of their revenue from coal, would fail to limit funding to these diversified companies. Two recent improvements in coal policies from the big U.S. banks came from Goldman Sachs in December 2019, and JPMorgan Chase two months later. While these policies are both a step forward, they are still weaker than required, in particular because they address only finance for coal projects and for some coal mining companies.20 There is a wide gulf between most bank coal policies and what is needed: Crdit Mutuel, Crdit Agricole, and Socit Gnrale are the only banks that earn more than half the possible policy points in the coal sector.21 The situation is even worse for oil and gas. BNP Paribas is the leading bank on oil and gas, but earns only a quarter of the possible points.22 While many European and two Australian banks have policies restricting some tar sands financing, none of the big Canadian banks that dominate tar sands finance have adopted any restrictions nor have Barclays and JPMorgan Chase, the biggest non-Canadian tar sands funders.23 Twenty bank policies analyzed also restrict Arctic oil and gas finance, but all but six focus on finance for projects and do not limit corporate funding for the oil and gas companies that have the most Arctic reserves under production.24 Bank policies on other oil and gas subsectors are few and far between. Two of note are from BNP Paribas and UniCredit, which both restrict finance for fracking and LNG projects and companies.25 Altogether, policy improvement is accelerating: of the banks with the five strongest policy scores, all introduced improved policies since May 2019.26 There is a clear trend of banks strengthening their policies over time, often starting with tepid policies that only address coal projects, and building on them by, for example, adding restrictions on corporate finance in coal and adding prohibitions on oil and gas, often starting with finance in the Arctic and/or tar sands. We need to see this trend rapidly accelerate. The remaining loopholes in the coal sector must be closed, more and tougher restrictions on the Arctic and tar sands must be adopted, and restrictions must be ramped up across the rest of the oil and gas industry. While drawing increasingly restrictive red lines around the most egregious parts of the fossil fuel industry is impor
2020-10-14
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Supported by Landscape of Green Finance in India Report August 2020 AUTHORS Jolly Sinha Analyst, Climate Policy Initiative Shreyans Jain Analyst, Climate Policy Initiative Rajashree Padmanabhi Analyst, Climate Policy Initiative This report was led under the guidance of Mahua Acharya Asia Director, Climate Policy Initiative ADVISORY GROUP Copyright 2020 Climate Policy Initiative www.climatepolicyinitiative.org All rights reserved. CPI welcomes the use of its material for noncommercial purposes, such as policy discussions or educational activities, under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported License. For commercial use, please contact adminsfcpiglobal.org. Kanika Chawla, Director, CEEW Centre for Energy Finance Rajasree Ray, Economic Adviser, Department of Economic Affairs, Ministry of Finance Balawant Joshi, Managing Director, Idam Infrastructure Advisory Private Limited Sharmila Chavaly, Principal Financial Adviser, Northern Railway, Government of India 1 Landscape of Green Finance in India ACKNOWLEDGMENTS The authors wish to thank the following people for their contributions as members of the review group, in alphabetical order by affiliated organization: Mr. Balawant Joshi (Managing Director, Idam Infra), Mr. Dipak Dasgupta (Distinguished Fellow, The Energy and Resources Institute), Ms. Kanika Chawla (Senior Program Lead, Council on Energy, Environment and Water), Ms. Sharmila Chavaly (Principal Financial Advisor, Ministry of Railways) and Mr. Vinay Rustagi (Managing Director, Bridge to India). The authors are grateful to the Climate Change Finance Unit, Department of Economic Affairs, Ministry of Finance, Energy Efficiency Services Limited, Green Rating for Integrated Habitat Assessment (GRIHA) Council, Ministry of Environment, Forests and Climate Change, Ministry of New and Renewable Energy, and the National Institution for Transforming India (NITI) Aayog for sharing valuable data contained in the report. Finally, the authors would like to thank and acknowledge contributions from Angela Falconer, Chavi Meattle, Federico Mazza, Dhruba Purkayastha, Labanya Prakash Jena and Tiza Mafira for their advice, internal review and data analysis; Angel Jacob and Elysha Davila for editing, and Josh Wheeling for graphic design. ABOUT CPI CPI is an analysis and advisory organization with deep expertise in finance and policy. Our mission is to help governments, businesses, and financial institutions drive economic growth while addressing climate change. CPI has six offices around the world in Brazil, India, Indonesia, Kenya, the United Kingdom, and the United States. ABOUT SHAKTI SUSTAINABLE ENERGY FOUNDATION Shakti Sustainable Energy Foundation seeks to facilitate Indias transition to a sustainable energy future by aiding the design and implementation of policies in the following areas: clean power, energy efficiency, sustainable urban transport, climate change mitigation and clean energy finance. For more details, please visit www.shaktifoundation.in. The views/analysis expressed in this report do not necessarily reflect the views of Shakti Sustainable Energy Foundation. The foundation also does not guarantee the accuracy of any data included in this publication nor does it accept any responsibility for the consequences of its use. For private circulation only. 2 Landscape of Green Finance in India SECTOR Green Finance REGION India, South Asia KEYWORDS Landscape, Green Investments, Private Finance, Public Finance RELATED CPI WORKS Global Landscape of Climate Finance 2019 Uncovering the Private Climate Finance Landscape in Indonesia 2020 IDFC Green Finance Mapping Report 2019 Accelerating Green Finance in India: Definitions and Beyond CONTACT Mahua Acharya mahua.acharyacpiglobal.org Jolly Sinha jolly.sinhacpiglobal.org Media: Angel Jacob angel.jacobcpiglobal.org 3 Landscape of Green Finance in India FOREWORD In India, economic growth, environmental protection, and social goals are inextricably linked. While policy makers rightly focus now on safely restarting segments of our economy amidst the COVID-19 crisis, several other threats lie in wait. Last year our capital city was already closing schools, flights, and handing out masks for a different public health issue: air pollution, which had reached unprecedented and extremely harmful levels. Even more worrying is climate change, which extends long-term and only gets worse with time. Increasing storms, heat waves, and floods will impact India harder than almost any other nation, with up to 4.5% of our GDP annually at risk according to a report by McKinsey Global Institute. These issues are daunting ones in a country that is struggling already to lift millions out of poverty. The good news, however, is that there are solutions available today. Clean power, low-carbon transport, energy efficient buildings, and climate-smart agriculture are areas that can create clean, healthy, and safe jobs for millions, leading the way to a greener future. This report is groundbreaking as it is the first time we have a benchmark of the level of green finance in the Indian economy and a tracking system to keep that updated. While there is increasing data on air pollution, emissions, and green job creation in India, there is little to no comprehensive information available on whether or not the financial sector is keeping pace with Indias green economic development goals, or which sectors are being financed adequately or under-served. This information would be invaluable for policy and investment leaders working to scale up investments for sustainable and transformational impact. We thank the team at Climate Policy Initiative for taking on this project in such a robust and structured way. The findings are clear: While India has made terrific progress in growing its green sector, particularly in renewable energy, much more needs to be done to create transformational change. We very much hope that this study allows for that next step. Anshu Bharadwaj Chief Executive Officer, Shakti Sustainable Energy Foundation Mahua Acharya Asia Director, Climate Policy Initiative 4 Landscape of Green Finance in India CONTENTS 1. Executive Summary 5 2. Introduction 12 2.1 Rationale and Objective 12 2.2 Scope and Methodology 13 2.2.1 Definition 13 2.2.2 Sectoral Coverage and Instruments 14 2.3 Data Gaps and Limitations 16 3. Overall Findings 18 3.1 Sources 19 3.2 Instruments 22 3.3 Sectors 24 3.3.1 Power Generation 24 3.3.2 Sustainable Transportation 27 3.3.3 Energy Efficiency and Power Transmission 29 4. Concluding Observations 32 4.1 Next Steps for Research 34 References 35 Annexure I 38 Green Bonds Market in India 2016-2018 38 Annexure II 40 Case Study: Bureau of Energy Efficiency (BEE) 40 Case Study: Energy Efficiency Services Limited (EESL) 41 Case Study: National Thermal Power Corporation (NTPC) 42 Annexure III 44 Green Building Investments in India 44 Annexure IV 45 Government Schemes and Initiatives 45 5 Landscape of Green Finance in India 1. EXECUTIVE SUMMARY In September 2019, India announced its target to reach 450 GW of renewable energy generation capacity by 2030, making it one of the most ambitious targets in the world. Indias Nationally Determined Contribution (NDC) estimates that the country will require INR 187 thousand crores (USD 2.5 trillion) from 2015 to 2030, or roughly INR 12 thousand crores (USD 170 billion) per year for climate action. While Indias energy sector is one of the fastest growing in the world and has been attracting substantial investments, meeting the countrys climate goals will require proportionate, transformative investment increases at sectoral level. Strong financial support and timely policy interventions from the Government of India have played a crucial role in accelerating the growth of the countrys renewable energy sector. But given current rates of penetration and the overall health of the sector combined with slowdown created by the COVID-19 pandemic, the government will have to find new and alternative ways to finance the transition and incentivize private sector participation to scale up investments for a sustainable and transformational impact. International finance is also likely to come with “green strings” attached. Therefore, identifying and analyzing key sources of finance, the instruments used for mobilizing and disbursing funds, and their ultimate beneficiaries become critical for diagnosis, planning and monitoring green investments in the country. The Landscape of Green Finance in India is a one-of-a-kind study undertaken by Climate Policy Initiative that presents the most comprehensive information on green investment flows in the country in FY 2017-FY 2018. The study tracks both public and private sources of capital and builds a framework to track the flow of finance from source to end beneficiaries. This report helps understand the nature and volume of green financial flows in the country and identifies the methodological challenges and data gaps in conducting a robust tracking exercise. KEY FINDINGS Green finance flows in India total INR 111 thousand crores1 (USD 17 billion) for FY 20172 and INR 137 thousand crores (USD 21 billion) for FY 2018. The average stands at INR 124 thousand crores (USD 19 billion)3 per annum, while the total tracked green finance for the years 2016-2018 amounts to INR 248 thousand crores (USD 38 billion). 1All figures are represented in INR Crores. One Crore equals 10,000,000. 2All tracked years are financial years (April 01-March 31). 3Throughout this report, unless otherwise stated, the average end-of-year exchange rate of INR 65/USD. has been used to convert United States dollars (USD) to Indian Rupees (INR) and vice-versa. 6 Landscape of Green Finance in India Figure ES1: Breakdown of investment by source Figure ES2: Breakdown of source of finance by origin and channel of delivery International 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 10% 5% 29% 56% InternationalDomestic Domestic Private Public Private Public International 7 Landscape of Green Finance in India DOMESTIC SOURCES OF FINANCE During the years 2016-2017 and 2017-2018, domestic private investors contributed the largest share (63% and 51%) of about INR 139 thousand crores through debt and equity respectively. Commercial financial institutions accounted for 40% of these funds4. Nearly all the funds were directed towards renewable energy development in the country. Public finance was disbursed either by the central governments line ministries and state departments (37%) or by dedicated public sector undertakings (PSUs) (63%). The bulk of public finance was directed towards the power generation sector (70%) followed by energy efficiency and power transmission (20%), and sustainable transportation (10%). Expenditure on climate mitigation activities undertaken by dedicated PSUs more than doubled in FY 2018 from FY 2017, while the budgetary allocations increased by 36%. This can largely be attributed to the several initiatives and schemes introduced by the government of India. PSUs are important channels for the disbursement of funds for the central and state governments, bond markets, and international development agencies. They also operate as a critical source of green finance themselves. Therefore, to avoid double counting, this study only tracks the actual annual expenditures reported by these PSUs in their annual financial statements5. INTERNATIONAL SOURCES OF FINANCE The share of international public finance in tracked green finance remained nearly the same during both FY 2017 and FY 2018 at 10% (INR 12 thousand crores). Official development assistance (ODA)6 and other official flows (OOF)7 were disproportionately split between bilateral and multilateral agencies (75% and 25% respectively). The majority of bilateral funds (56%) went into the sustainable transportation sector, as loans for infrastructure development of metro rail projects. Delhi and Mumbai metro rail projects received the lions share of these funds (45% and 25% respectively). On the other hand, multilateral funds were targeted at the development of solar parks and rooftop projects (40%) in the country. The study tracks two sources of international private finance, namely, foreign direct investment (FDI) and philanthropy during FY 2017 and FY 2018. The funds allocated through these sources were disbursed via equity and grant instruments respectively. Foreign Direct Investment in the renewable energy sector crossed the USD 1 billion mark in 2018. The FDI (INR 12 thousand crores) for both years was allocated almost exclusively to the clean energy sector and was almost equally split between solar and wind energy projects due to the presence of advanced markets. While FDI inflows into the clean energy sector have 4While we recognize that certain percentage of the commercial debt may have originated internationally via External Commercial Borrowings and Non-sovereign debt, lack of any data on the subject has necessitated the classification under domestic finance. Refer to the methodology for details. 5See methodology documents for more details. 6OECD defines Official development assistance (ODA) as government aid designed to promote the economic development and welfare of developing countries. Source: https:/data.oecd.org/drf/other-official-flows-oof.htm#:text=Other official flows (OOF) are,development assistance (ODA) criteria. 7OECD defines Other official flows (OOF) as official sector transactions that do not meet official development assistance (ODA) criteria. 8 Landscape of Green Finance in India been steadily increasing (Mercom, 2020), they still account for only 1% of the total FDI flows into the economy. INSTRUMENTS The study reveals that while the public and private actors provided finance via a range of instruments, simple straight debt was the predominant instrument. Of all the finance tracked, the primary instrument used to channel money from state budgets was in the form of grants- in-aid and budgetary allocations (90%) for direct mitigation activities like procurement, installation, construction, renovation and maintenance of facilities, indirect activities like research and development, and administrative expenditure. The government also invested sizeable amounts through several dedicated PSUs. These PSUs, in turn, not only utilized the grants for supporting essential indirect activities such as research and development, and capacity building (53%), but also leveraged these funds in the market directly to finance projects through debt (40%) Figure ES3: Breakdown by sources SECTORS AND SUB-SECTORS In line with global trends, the power generation sector remains the primary recipient of the tracked green finance in 2017 and 2018, representing nearly 80% of the annual flows. The industrys maturity enables deeper investment potential in the sub sectors, specifically into solar PV and onshore wind power, w
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Task Force on Climate-related Financial Disclosures Overview 4 2 The Need for Climate-Related Financial Disclosure 3 Potential Financial Implications of Climate Change 5 The Task Force on Climate-related Financial Disclosures 7 Demand for Climate-Related Financial Disclosure 11 Climate-Related Risks and Opportunities 13 The TCFD Recommendations 17 TCFD Recommended Disclosures 19 Guidance on Implementing the TCFD Recommendations 23 Sector-Specific Supplemental Guidance 25 Implementing the TCFD Recommendations 27 Benefits of Implementation 29 Select Resources on the TCFD Recommendations 31 TCFD Supporters 33 Overview of the TCFD 2019 Status Report 35 Examples of Public Sector Developments 37 Contents 3 The large-scale and complex nature of climate change makes it uniquely challenging, especially in the context of economic decision making. Further, many companies have incorrectly viewed the implications of climate change to be relevant only in the long term and, therefore, not necessarily relevant to decisions made today. Those views, however, are changing as more information becomes available on the potential widespread financial impacts of climate change. In December 2019, Bank of England Governor Mark Carney noted that “changes in climate policies, new technologies and growing physical risks will prompt reassessments of the values of virtually every financial asset.” Companies and providers of capital, therefore, should consider their longer-term strategies and most efficient allocation of capital in light of these changes. Organizations that invest in activities that may not be viable in the longer term will likely be less resilient to the transition to a lower-carbon economy and their investors will likely experience lower returns. Compounding the effect on longer-term returns is the risk that present valuations do not adequately factor in climate-related risks because of insufficient information. Investors, lenders, and insurance underwriters need adequate information on how companies are preparing for a lower-carbon economy. More effective, clear, and consistent climate-related disclosure is needed from companies around the world. The Need for Climate-Related Financial Disclosure The Need for Climate-Related Financial Disclosure 2Source: The Economist Intelligence Unit, “The Cost of Inaction: Recognising the Value at Risk from Climate Change,” 2015. 1 Source: Munich Re, “The natural disasters of 2018 in figures,” 8 Jan 2019, and “Hurricanes cause record losses in 2017The year in figures,” 4 Jan 2018. corporate-news/media-information/2020/causing-billions-in-losses-dominate-nat-cat-picture-2019.html Natural catastrophe losses intensified by climate change (2017-2019)1$640b up to $43t Value at risk as a result of climate change to manageable assets by 21002 4 Mark Carney, UN Special Envoy on Climate Action and Finance and Michael R. Bloomberg, TCFD Chair “ Now is the time to ensure that every financial decision takes climate change into account.” Mark Carney, UN Special Envoy on Climate Action and Finance, Governor of the Bank of England, December 2019 5 Potential Financial Implications of Climate Change Potential Financial Implications of Climate Change Rise in Natural Catastrophes and Chronic Environmental Shifts f Macroeconomic shocks or financial losses caused by storms, droughts, wildfires, and other extreme events, or by changing weather patterns over time f Unanticipated financial losses resulting from climate change (e.g., the effect of rising sea level on credit secured by coastal real estate) could impact the global financial system Transition to a Low-Carbon Economy f Risks associated with an abrupt adjustment to a low-carbon economy, such as rapid losses in the value of assets due to changing policy or consumer preferences f Climate-related financial risks could affect the economy through elevated credit spreads, greater precautionary saving, and rapid pricing readjustments 6 5 Climate Change is a Financial Risk Climate-related risk is non-diversifiable and will have a financial impact on many companies: “ Climate-related risks are a source of financial risk and it therefore falls squarely within the mandates of central banks and supervisors to ensure the financial system is resilient to these risks.” Network for Greening the Financial System, First Comprehensive Report, April 2019 Capital and Financing Assets and Liabilities ExpendituresRevenues 7 G20 Finance Ministers and Central Bank Governors asked the Financial Stability Board (FSB) to review how the financial sector can take account of climate-related issues. The FSB established the Task Force on Climate-related Financial Disclosures (TCFD) to develop recommendations for more effective climate-related disclosures that: f could “promote more informed investment, credit, and insurance underwriting decisions” f in turn, “would enable stake- holders to understand better the concentrations of carbon-related assets in the financial sector and the financial systems exposures to climate-related risks.” The Task Force on Climate-related Financial Disclosures The Task Force on Climate-related Financial Disclosures 8 Chapter name 5 9 Industry Led and Geographically Diverse Task Force The Task Force on Climate-related Financial Disclosures 17 7 8 Experts from the Financial Sector Experts from Non-Financial Sectors Other Experts The Task Forces 32 international members, led by Michael Bloomberg, include providers of capital, insurers, large non-financial companies, accounting and consulting firms, and credit rating agencies. 10 11 Demand for climate-related disclosure has increased significantly since the release of the TCFD recommendations in 2017. Many private sector financial institutions, investors, and others continue to make progress on incorporating climate-related disclosure into their financial decision-making. For example, over 370 investors with more than $35 trillion in assets under management committed to engage with the worlds largest corporate greenhouse gas emitters to strengthen their climate-related disclosures by implementing the TCFD recommendations as part of Climate Action 100 . Demand for climate-related disclosure from investors and others is critically important. In particular, large asset owners and asset managers sit at the top of the investment chain and, therefore, have an important role to play in influencing the organizations in which they invest to provide better climate-related financial disclosures. Demand for Climate-Related Financial Disclosure Demand for Climate-Related Financial Disclosure “ It is necessary for all parties in our investment chain, from portfolio companies to asset managers, to support TCFD so that asset owners like us can properly access our portfolio. I am convinced that TCFD will continue to evolve as a major framework for such disclosure and strongly recommend all corporates to join.” Hiro Mizuno, Executive Managing Director and CIO Japan Government Pension and Investment Fund, February 2020 12 In addition, public sector leaders have also noted the importance of transparency on climate-related issues within financial markets. Climate-related risk is increasingly the subject of new reporting requirements, such as the European Non-financial Reporting Directive 2014/95/EU, stress testing, and regulatory guidance based on the TCFD recommendations. Several national governments and public sector organizations formally support the TCFD. “ The NGFS emphasises the importance of a robust and internationally consistent climate and environmental disclosure framework. NGFS members collectively pledge their support for the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). The NGFS encourages all companies issuing public debt or equity as well as financial sector institutions to disclose in line with the TCFD recommendations.” Network for Greening the Financial System First Comprehensive Report April 2019 1314 Climate-Related Risks and Opportunities Climate-Related Risks and Opportunities The Task Force identified several categories of climate-related risks and opportunities. These include potential financial impact to assist investors, and companies consider longer-term strategies and most efficient allocation of capital in light of the potential economic impacts of climate change. Risks Transition Policy and Legal f Carbon pricing and reporting obligations f Mandates on and regulation of existing products and services f Exposure to litigation Technology f Substitution of existing products and services with lower emissions options f Unsuccessful investment in new technologies Market f Changing customer behavior f Uncertainty in market signals f Increase cost of raw materials Reputation f Shift in consumer preferences f Increased stakeholder concern/negative feedback f Stigmatization of sector Physicial f Acute: Extreme weather events f Chronic: Changing weather patterns and rising mean temperature and sea levels Strategic Planning Risk Management Financial Impact Cash Flow Statement Balance Sheet Income Statement RevenuesExpenditures Assets & Liabilities Capital & Financing 15 Opportunities Resource Efficiency f Use of more efficient modes of transport and production and distribution processes f Use of recycling f Move to more efficient buildings f Reduced water usage and consumption Energy Source f Use of lower-emission sources of energy f Use of supportive policy incentives f Use of new technologies f Participation in carbon market Products & Services f Development and/or expansion of low emission goods and services f Development of climate adaption and insurance risk solutions f Development of new products or services through R&D and innovation Markets f Access to new markets f Use of public-sector incentives f Access to new assets and locations needing insurance coverage Resilience f Participation in renewable energy programs and adoption of energy-efficiency measures f Resource substitutes/diversification “ Climate change presents global markets with risks and opportunities that cannot be ignored, which is why a framework around climate-related disclosures is so important. The Task Force brings that framework to the table, helping investors evaluate the potential risks and rewards of a transition to a lower carbon economy. ” TCFD Chair, Michael R. Bloomberg, June 2017 16 17 The TCFD Recommendations The TCFD Recommendations The TCFDs recommendations were published in its 2017 report, in addition to supporting materials to assist with implementing climate-related financial disclosure. The TCFD 2017 report, supporting materials, and recent status reports are available at fsb-tcfd.org/publications/. DRAFT FOR DISCUSSION PURPOSES ONLY Recommendations of the Task Force on Climate-related Financial Disclosures i Recommendations of the Task Force on Climate-related Financial Disclosures June 2017 Final Report Recommendations of the Task Force on Climate-related Financial Disclosure i June 2017 Implementing the Recommendations of the Task Force on Climate-related Financial Disclosures June 2017 Recommendations of the Task Force on Climate-related Financial Disclosure i The Use of Scenario Analysis in Disclosure of Climate-Related Risks and Opportunities June 2017 Technical Supplement This report provides context, background, and the general framework for climate-related financial disclosuresit is intended for broad audiences. The annex provides the next level of detail to help companies implement the recommendations. The technical supplement is a further level of detail of detail that can be helpful for companies in considering scenario analysis. 18 In its work, the Task Force drew on member expertise, significant stakeholder engagement, and existing climate-related disclosure regimes to develop a singular, accessible framework for climate-related financial disclosure. The recommendations are structured around four thematic areas that represent core elements of how organizations operate: Governance Strategy Risk Management Metrics and Targets “ The work of the TCFD shows the power of voluntary engagement from the private sector and how it can complement public sector regulations. A remarkable endeavor, the TCFD has developed global standards that are now being used by a significant number of corporations around the world” Christian Thimann, TCFD Vice Chair and CEO and Chairman of the Management Board, Athora Germany, February 2020 19 TCFD Recommended Disclosures The TCFD Recommendations Key Features of Recommendations The four recommendations are supported by specific disclosures organizations should include in financial filings or other reports to provide decision-useful information to investors and others. Disclosure under the strategy and metrics and targets recommendations in financial filings is subject to a materiality assessment, although all organizations are encouraged to disclose publicly if practicable Adoptable by all organizations Designed to solicit decision-useful, forward-looking information onfinancial impacts Strong focus on risks and opportunities related to transition to lower-carbon economy 20 Risk ManagementMetrics and Targets Disclose how the organization identifies, assesses, and manages climate-related risks. Disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities where such information is material. Recommended DisclosuresRecommended Disclosures a) Describe the organizations processes for identifying and assessing climate-related risks. a) Disclose the metrics used by the organization to assess climate-related risks and opportunities in line with its strategy and risk management process. b) Describe the organizations processes for managing climate-related risks. b) Disclose Scope 1, Scope 2, and if appropriate, Scope 3 greenhouse gas (GHG) emissions, and the related risks. c) Describe how processes for identifying, assessing, and managing climate-related risks are integrated into the organizations overall risk management. c) Describe the targets used by the organization to manage climate-related risks and opportunities and performance against targets. GovernanceStrategy Disclose the organizations governance around climate-related risks and opportunities. Disclose the actual and potential impacts of climate-related risks and opportunities on the organizations businesses, strategy and financial planning where such information is material. Recommended DisclosuresRecommended Disclosures a) Describe the boards oversight of climate-related risks and opportunities. a) Describe the climate-related risks and opportunities the organizat
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Green Finance Framework J U N E 2 0 2 0 Contents PART 1 Creating a Water-Secure World 1 1.1 Company Overview 1 1.2 Approach to Sustainability 3 PART 2 Green Finance Framework 9 2.1 Use of Proceeds 10 2.2 Process for Project Evaluation and Selection 13 2.3 Management of Proceeds 14 2.4 Reporting 15 2.5 External Review 16 Annex 17 XYLEM GREEN FINANCE FRAMEWORK 1 PART 1 Creating a Water-Secure World 1.1 Company Overview Xylem Inc., together with its subsidiaries (“Xylem” or the “Company”), with 2019 revenues of $5.2 billion and approximately 16,300 employees, is a leading global water technology company. The Company designs, manufactures and services highly engineered products and solutions ranging across a wide variety of critical applications primarily in the water sector, but also in electric and gas. Xylems broad portfolio of products, services and solutions addresses customer needs across the water cycle, from the delivery, measurement and use of drinking water to the collection, testing, analysis and treatment of wastewater to the return of water to the environment. XYLEM GREEN FINANCE FRAMEWORK 1 XYLEM GREEN FINANCE FRAMEWORK 2 Xylem has three reportable business segments that are aligned around the critical market applications they provide: Water Infrastructure, Applied Water, and Measurement enable water operators and communities to build resilience by helping prevent stormwater pollution and lower greenhouse gas emissions; and improve water affordability by helping water operators reduce water losses and optimize water system assets. Xylem is harnessing the power of data, analytics and decision intelligence to transform water management and deliver powerful water, energy and cost savings for its customers and the communities they serve. Building a Sustainable Company: Xylem knows that in order to be a company that advances sustainability, we have to be a company with a strong financial foundation that executes with discipline today while also focusing on the future. Xylem operates its business with integrity, minimizing its environmental footprint, ensuring the safety of its people and quality of its products, promoting an inclusive and diverse culture, and partnering with suppliers and organizations that share its values. The Company still has much to do but is fully committed to this purpose. Empowering Communities: Xylem creates social value by providing water- related disaster relief expertise, technology and equipment to communities in need; educating and raising awareness about water challenges; inspiring the next generation of water stewards; and tapping into the passion of its workforce and stakeholder volunteers to give time to local water-related causes. XYLEM GREEN FINANCE FRAMEWORK 5 Sustainability Reporting An important aspect of the overall approach to sustainability is our reporting. The Company reports extensively on its sustainability performance. Its 2019 Sustainability Report was prepared in accordance with GRI Standards. Material Topics for Xylem To advance its sustainability strategy, Xylem conducts a periodic materiality assessment to identify and prioritize issues deemed most important by its stakeholders and the business. The 2018 assessment resulted in the categorization of material topics into three key areas: Opportunities for Differentiation Issues that Warrant Close Attention Issues to Monitor BUSINESS EXPOSURE TO NATURAL DISASTER POLITICAL, SOCIAL Give 1% company profits to water-related causes and education Xylem set ambitious new sustainability goals aligned to the three key pillars of its sustainability strategy, called the 2025 Sustainability Goals XYLEM GREEN FINANCE FRAMEWORK 8 Given that sustainability is core to Xylems business strategy, the Company has sought to align its financing with its overall sustainability profile Alignment to the UN Sustainable Development Goals Xylem aligns its sustainability efforts with the United Nations Sustainable Development Goals (“SDGs”), a universal call to action to end poverty, protect the planet and ensure that all people enjoy peace and prosperity by 2030. The full SDG mapping is provided in Table 4 of the Annex. Sustainability Governance The Board, primarily through the Nominating and Governance Committee, provides oversight of the overall approach to sustainability, corporate responsibility and social value creation. The Xylem Environmental, Social and Governance Committee assesses strategic sustainability issues, seeks to improve sustainability performance, provides recommendations to Xylems SVP, General Counsel or (b) provides adaptation solutions that () contribute substantially to preventing or reducing the risk of the adverse impact of the current climate and the expected future climate on people, nature or assets, without increasing the risk of an adverse impact on other people, nature or assets. Article 12.1 (a)Protecting the environment from the adverse effects of urban and industrial waste water discharges, including from contaminants of emerging concern such as pharmaceuticals and microplastics, for example by ensuring the adequate collection, treatment and discharge of urban and industrial waste waters; Article 12.1 (b)Protecting human health from the adverse impact of any contamination of water intended for human consumption by ensuring that it is free from any micro-organisms, parasites and substances that constitute a potential danger to human health as well as increasing peoples access to clean drinking water; Article 12.1 (c)Improving water management and efficiency, including by protecting and en- hancing the status of aquatic ecosystems, by promoting the sustainable use of water through the long-term protection of available water resources, including through measures such as water reuse, by ensuring the progressive reduction of pollutant emissions into surface water and groundwater, by contributing to mitigating the effects of floods and droughts, or through any other activity that protects or improves the qualitative and quantitative status of water bodies. * Position of the Council at first reading with a view to the adoption of a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on the establishment of a framework to facilitate sustainable investment, and amending Regulation (EU) 2019/2088 - Adopted by the Council on 15 April 2020 ST 5639 2020 REV 2, https:/eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CONSIL:ST_5639_2020_REV_2&qid=1591466733873&from=EN Annex XYLEM GREEN FINANCE FRAMEWORK 19 Disclaimer This document is intended to provide non-exhaustive, general information. This document may contain or incorporate by reference public information not separately reviewed, approved or endorsed by Xylem and accordingly, no representation, warranty or undertaking, express or implied, is made and no responsibility or liability is accepted by Xylem as to the fairness, accuracy, reasonableness or completeness of such information. This document contains information that may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-look- ing statements by their nature address matters that are, to different degrees, uncertain. Generally, the words “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “contemplate,” “predict,” “forecast,” “believe,” “target,” “will,” “could,” “would,” “should,” “potential,” “may” and similar expressions identify forward-looking statements. However, the absence of these words or similar expressions does not mean that a statement is not forward-looking. These forward-looking statements include any statements that are not historical in nature, including any statements about the capitalization of the company, future strategic plans and other statements that describe the companys business strat- egy, outlook, objectives, plans, intentions or goals. All statements that address events or developments that we expect or anticipate will occur in the future are forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause actual results to differ materially from those expressed or implied in, or reasonably inferred from, such forward-looking statements. Many of these risks and uncertainties are currently amplified by and may continue to be amplified by, or in the future may be amplified by, the novel coronavirus (covid-19) pandemic. Xylem has no obligation, and undertakes no obligation, to update, modify or amend this document, the statements contained herein to reflect actual changes in assumptions or changes in factors affecting these statements or to otherwise notify any addressee if any information, opinion, projection, forecast or estimate set forth herein changes or subsequently becomes inaccurate. This document is not intended to be and should not be construed as providing legal or financial advice. It does not constitute an offer or invitation to sell or any solicitation of any offer to subscribe for or purchase or a recommendation regarding any securities, nothing contained herein shall form the basis of any contract or commitment whatsoever and it has not been approved by any security regulatory authority. The distribution of this document and of the information it contains may be subject of legal restrictions in some countries. Persons who might come into possession of it must inquire as to the existence of such restrictions and comply with them. The recipient is solely liable for any use of the information contained herein and Xylem shall not be held responsible for any damages, direct, indirect or otherwise, arising from the use of this document by the recipient. 2020 XYLEM, INC. All RIGHTS RESERVED
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Sustainable Finance in Asia Pacific Regulatory State of Play 3 March 2020 Page 2 Disclaimer The inf.
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Green Finance Impact Report 2020 2020 Green Finance Impact Report 3 Table of Contents Introduction . 2 Key highlights . 3 Summary of green metrics . 4 Macquaries green financing transactions . 6 Approach . 8 Green impact . 11 Macquarie and green investment . 12 Glossary . 16 Appendix 1: GIG Green Impact Report . 17 Appendix 2: PWC Assurance Report . 29 2020 Green Finance Impact Report 2 Introduction Macquarie Group Limited (“Macquarie or MGL”) is pleased to present its Green Finance Impact Report for the twelve months to 31 March 2020. This report relates to the MGL 2018 2,100 million loan facility of which 500 million constitutes as green financing (“green tranches”). It provides information on the environmental benefits (“green impact”) of the eligible projects1 which have been notionally allocated2 green tranche financing. MGL is also pleased to note it has raised its second green financing transaction in March 2020, a US$300 million Samurai loan facility in the Japanese market of which US$150 million constitutes as green financing. This loan was not drawn at the 31 March reporting period and is not covered by this report. The approach presented in this report is consistent with Macquaries Green Finance Framework (“GFF”) which was developed in accordance with the APLMA3 Green Loan Principles. Macquarie has utilised the expertise of its Green Investment Group (“GIG”) Green Investment Ratings team to demonstrate the green impact of its eligible projects. The full Impact Report is available in Appendix 1. Macquaries GIG is a specialist in green infrastructure principal investment, project development and delivery, green impact advisory and the management of portfolio assets. Its track record, expertise and capability make it a global leader in green investment and development, dedicated to accelerating the transition to a greener global economy. 1 See glossary for definition of eligible project 2 See glossary for definition of notional allocation. 3 Asia Pacific Loan Market Association. 2020 Green Finance Impact Report 3 Key highlights 500m of green financing drawn at March 31 from 19 financiers across the globe GIG Carbon Score: 3,462 AA The portfolio is forecast to produce over 8,000 GWh per year enough to power over 1.9 million households for a year6 The Green Finance Framework has been developed in accordance with the APLMA Green Loan Principles Over 2,400 MW of renewable energy capacity generated from the eligible projects allocated to, in development, construction and operation The portfolio4 is forecast to avoid greenhouse gas emissions of 3,462kt CO2e per year equivalent to taking over 1.1 million cars off the road5 Independent Assurance provided by PwC over Macquaries compliance with the Green Finance Framework 13 projects were allocated funding from the green tranches during the reporting period 4 The portfolio refers to the 13 eligible projects which were allocated green financing throughout the reporting period. 5 Year on year increase in cars off the road is not due to change in portfolio but rather due to the updated conversion factor calculated using a petrol car based on data from UK Government Greenhouse gas reporting conversion factors. See www.gov.uk/government/collections/government-conversion-factors-for-company-reporting for further detail. 6 Calculated using the average household electricity data for the relevant country of the underlying projects available from the World Energy Council, and based on 2014 data (see https:/www.worldenergy.org/data/). 2020 Green Finance Impact Report 4 Summary of green metrics Throughout the reporting period 13 projects were allocated funding from the green tranches, delivering a significant green impact and achieving a Carbon Score of 3,462 AA. Throughout this report the green impact and associated metrics: 1. incorporate all the eligible projects which have been notionally allocated green tranche financing from 1 April 2019, to 31 March 2020 (the “portfolio”). This is in line with the Green Loan Principles and allows full transparency and disclosure of each project that has been supported by the green tranches. 2. reflect the total green impact derived from 100% of those projects that have been notionally allocated green tranche financing, and not just the proportional impact of the green tranches. This approach has been adopted, as the GFFs Management of proceeds described on page 9 does not support proportional allocation due to the revolving allocation of the use of proceeds (i.e. as above, projects may not necessarily be supported by the facility for the entire reporting period). GIG Carbon Score The GIG Carbon Score is GIGs standard mark for communicating the impact of low carbon infrastructure in helping to reduce greenhouse gas emissions. While other measures of GHG emissions only consider the emissions produced during a projects operational phase, the GIG Carbon Score also considers the emissions across the projects entire lifecycle. The rating shows the aggregated GIG Carbon Score for Macquaries green tranches is 3,462 AA. The rating of AA reflects the low lifecycle carbon intensity of the wind and solar power projects notionally allocated funding (see page 7), and the mix of project locations in lower carbon intensive grids (e.g. UK and Sweden) and higher carbon grids (e.g. Taiwan and Poland). Projects located in countries with higher carbon intensive grids achieve higher ratings, reflective of the effectiveness of GHG emissions reduction. The GIG Carbon Score also shows the quantified greenhouse gas emissions avoided (3,462 kt CO2e/yr), which indicates the portfolio lifecycle emissions avoided relative to the counterfactual (a scenario in which the projects were not built).7 This globally applicable approach allows investors to compare the relative performance of projects using an emissions avoided measure. Full details of the GIG Carbon Score methodology is provided within the Green Impact Report in Appendix 1. 7 For renewable energy projects, the GIG Carbon Score is a measure of a projects lifecycle GHG emissions compared to the emissions of energy taken from the local grid. AAA AA A B C D E GIG CARBON SCORE kt CO2e AVOIDED (ANNUAL AVERAGE) 3,462 AA 3,462 2020 Green Finance Impact Report 5 Portfolio renewable energy capacity The portfolio is forecast to avoid greenhouse gas emissions of 3,462kt CO2e per year equivalent to taking over 1.1 million cars off the road9 The portfolio is forecast to produce over 8,000 GWh per year enough to power over 1.9 million households8 for a year 8 Calculated using the average household electricity data for the relevant country of the underlying projects available from the World Energy Council, and based on 2014 data (see https:/www.worldenergy.org/data/) 9 Year on year increase in cars off the road is not due to change in portfolio but rather due to the updated conversion factor calculated using a petrol car based on data from UK Government Greenhouse gas reporting conversion factors. See www.gov.uk/government/collections/ government-conversion-factors-for-company-reporting) for further detail. 645 MW of renewable energy in operation 1,570 MW of renewable energy in construction 209 MW of renewable energy in development 2020 Green Finance Impact Report 6 Macquaries green financing transactions Climate change and the associated legislative and regulatory responses present significant challenges for society and the global economy. Green financing has an important role to play in supporting the global energy transition, and investor appetite for these products is rising. In June 2018, Macquarie issued a 2,100 million GBP loan facility of which 500 million constitutes green financing. The green tranches were issued in accordance with Macquaries GFF. The GFF was established to demonstrate how Macquarie and its entities intend to enter into green financing transactions10 to fund projects that will deliver environmental benefits to support Macquaries business strategy. In March 2020, Macquarie issued its second green financing facility, a US$300 million facility into the Japanese market. Of this, US$150 million (Tranche A) constitutes as green financing and was issued in accordance with Macquaries GFF. For the purposes of this report, the green impact of this facility is not discussed as the facility was drawn down after the 31 March 2020 reporting period end. Macquarie GBP Facility Macquarie Samurai USD Facility TrancheTranche A1Tranche B1Tranche A IssuerMacquarie Group LimitedMacquarie Group LimitedMacquarie Group Limited Issue Date13 June 201813 June 201830 March 2020 Maturity Date13 June 202113 June 202330 March 2025 Original Tenor3 years5 years5 years Total Volume250m250mUS$150m StructureRevolverTermTerm Initial Drawdown Date31 July 201926 July 20189 April 2020 Drawn Volume as at 31 March 2020 250m250m0 Use of Proceeds In accordance with Macquaries Green Finance Framework In accordance with Macquaries Green Finance Framework In accordance with Macquaries Green Finance Framework The details of Macquaries green tranches are as below: 10 See glossary for definition of green financing transactions. 2020 Green Finance Impact Report 7 Eligible ProjectsLocationTechnologyStage Percentage of Macquarie Funding11 Total Capacity (MW) Total GHG emissions avoided (kt CO2e/yr)14 BLE MalaysiaMalaysiaSolarConstruction1002 verturingen Wind Park SwedenOnshore WindConstruction10023541 East Anglia OneUKOffshore WindConstruction16% 12,13714980 Energy Pratham Godo Kaisya JapanSolarOperation1007 Eolica KiselicePolandOnshore WindOperation100B73 Formosa 1TaiwanOffshore WindOperation50128207 Formosa 2TaiwanOffshore WindConstruction75376625 Rampion Offshore Wind Farm UKOffshore WindOperation25400578 Lal Lal Wind FarmAustraliaOnshore WindConstruction208401 Lohas Ece Brown K.K (Tochigi) JapanSolarConstruction1008 Lohas Ece Brown K.K (Nagano) JapanSolarOperation10010 Zajaczkowo WindfarmPolandOnshore WindOperation100H62 Murra Warra Wind Farm 2 AustraliaOnshore Wind Pre- Construction 50 9468 Total2,4243,462 11 Reflects the share of the projects funded by Macquarie green financing at the time of allocation. 12 The funding percentage was subject to variation during the reporting period. As at March 2020, funding to verturingen Wind Park, East Anglia One, Formosa 1, Formosa 2 and Rampion Offshore Wind Farm was 50%, 13%, 25%, 26% and 0%, respectively. 13 As at March 2020, Macquaries interest in East Anglia One was 40%. 14 In an update to the 2019 Macquarie Green Finance Impact Report, projects that commence operations after July 2019 adopt an updated (v2.0) marginal grid electricity emission factor to calculate avoided GHG emissions, in line with International Financial Institutions IFI approach to GHG accounting for renewable energy projects. In most cases, this has the effect of reducing the estimate of avoided GHG emissions for projects previously evaluated with the v1.0 marginal grid emission factors. For the reporting period April 2019 to March 2020: MGL GBP Facility Tranche A1 was drawn down on 31 July 2019 and allocated to from this date until the end of the reporting period. MGL GBP Facility Tranche B1 was drawn down and allocated to throughout the entire reporting period. MGL Samurai USD Facility Tranche A was undrawn and not allocated to during the reporting period. The eligible projects which have been notionally allocated funding from the green tranches during the reporting period are summarised in the following table. 2020 Green Finance Impact Report 8 Approach The GFF under which the green tranches were issued was developed in accordance with the APLMA Green Loan Principles. It was supported by a second opinion external review by Sustainalytics and was noted to be credible and impactful. The framework is based on four core components: 1. use of proceeds 2. process for project evaluation and selection 3. management of proceeds 4. reporting Use of proceeds Under the GFF, the use of proceeds of each green financing transaction is notionally allocated against the financing or re-financing of eligible projects which provide clear environmental benefits. The GFF explicitly recognises several broad categories of eligibility for projects with the objective of addressing key areas of environmental concern such as climate change, natural resources depletion, loss of biodiversity, and air, water and soil pollution. The proceeds from the green tranches have so far been applied towards financing solar, offshore wind and onshore wind projects across the globe. Going forward, we may extend the use of loan proceeds to support further renewable energy, energy efficiency, waste management, green buildings and clean transportation projects. Activities and lending to an industry or technology which directly involves fossil fuels, nuclear or biomass suitable for food production are specifically excluded under the GFF. 2020 Green Finance Impact Report 9 Process for project evaluation and selection Macquarie has established a Green Finance Working Group (“GFWG”) who have responsibility for governing and implementing the GFF. The GFWG currently comprises representatives from the Environmental and Social Risk (“ESR”) team and the GIG Green Investment Ratings team who hold the in-house environmental expertise, as well as representatives from Risk Management Group - Credit, Financial Management Group - Group Treasury and Macquarie Capital. Business units will identify potential eligible projects based on the criteria in the GFFs use of proceeds. Potential eligible projects are submitted to the GFWG for review and confirmation that they qualify under the GFF. This includes the preparation of a suitable Green Opinion15 provided by the GIG Green Investment Ratings team where appropriate. The Green Investment Ratings team is responsible for confirming that the projects: fall within one of the eligible project categories defined in the GFF are anticipated to provide clear environmental sustainability and/or climate change mitigation benefits in terms of the contribution to one or more of GIGs Green Purposes16. In addition to meeting the green loan eligibility criteria, all projects are assessed under Macquaries group wide ESR policy and ESR assessment tool during the investment decision process. The ESR policy and tool provide a robust due diligence process and evaluate ESR issues including labour and employment practices, climate change, human rights, resource efficiency, pollution prevention, biodiversity and cultural heritage. The approach is based on international guidelines including the International Finance Corporation Performance Standards. Reporting This report is designed to
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Network for Greening the Financial System Technical document A Status Report on Financial Institutions Experiences from working with green, non green and brown financial assets and a potential risk differential May 2020 NGFS Technical document MAY 2020 This report has been coordinated by the NGFS Secretariat/Banque de France. For more details, go to and to the NGFS Twitter account NGFS_ , or contact the NGFS Secretariat sec.ngfsbanque-france.fr NGFS Secretariat NGFS REPORT 2 Executive summary 3 Introduction: Why focus on potential risk differentials between green, non-green and brown? 6 1.Classification principles 7 1.1. What is green and what is brown?7 1.2. Most respondents use a voluntary classification or principle8 1.3. Alternative views on the use of the taxonomies and classifications10 2.Respondents views on the risk aspect and risk assessments performed by the industry 10 2.1. Various motives for engaging in climate- and environment-related issues10 2.2. The results of backward-looking approaches are not conclusive yet on a risk differential 12 2.3. Forward-looking approaches may be a better tool for capturing this emerging risk. 15 3.Integration of climate- and environment-related risks into risk monitoring appears to be a challenge for the respondents 15 3.1. The path towards integration into risk assessment and monitoring15 3.2. Identified challenges and obstacles17 Tentative conclusions and high-level messages to financial institutions 19 Appendix I : Defining green and brown sector, asset, activity and value-chain aspects 21 Appendix II : Case study: Practical application internal classification 25 Appendix III : A summary of the Chinese taxonomy 27 Appendix IV : The Brazilian classification framework 28 Acknowledgements 29 Table of Contents NGFS REPORT 3 Executive summary A point-in-time survey of how financial institutions are tracking green, non-green and brown risk profiles It is important for financial institutions to consider all relevant risks in order to avoid suffering unexpected losses. Such losses could potentially have a negative impact on the stability of the financial system. Against the backdrop of the increasing impact from climate- and environment- related risks in the financial system1, financial supervisors need to understand how these risks are taken into account by supervised institutions. Therefore, with the help of a select group of financial institutions, the NGFS has performed a survey to assess whether a risk differential could be detected between green, non-green and brown2 financial assets. This survey focuses on the work performed by financial institutions to track specific risk profiles of green, non-green and brown financial assets (loans and bonds), develop specific risk metrics and analyse potential risk differentials. It aims to present a point-in-time snapshot of current practices among financial institutions, based on the information these institutions have obtained up until now. Forty-nine banks from the following jurisdictions have submitted their answers (anonymised in this report): Brazil, Belgium, China, Denmark, Finland, France, Germany, Greece, Japan, Malaysia, Morocco, the Netherlands, Portugal, Spain, Sweden, Switzerland, Thailand, the UK, and one supranational. We have also received answers from five insurance companies in Malaysia. shows that the institutions have not established any strong conclusions on a risk differential between green and brown The striking result from the study was the diversity of methods, results and motivations for whether to undertake a climate- and environment-related risk assessment. Most of the institutions have undertaken an operational commitment towards greening their balance sheets, with 57% of the respondents undertaking commitments that affect their daily operations either by limiting their exposure to brown assets or by setting green or positive-impact targets. However, the survey responses highlight that the underlying justification is not based on an attested financial risk differential between green and brown assets but rather on a more diffuse perception of risks. Most banks tend to consider their actions to be part of their corporate social responsibility or mitigation measures for reputational, business model or legal risks. Backward-looking studies on a potential risk differential have only been performed by five respondents. Another three respondents (banks) indicated that they conducted backward-looking analysis with ESG or energy rating of housing loans, but not strictly using green or brown criteria. In both cases, they failed to reach strong conclusions on a risk differential between green and brown assets. These studies have been limited to sub-sectors and performed on a project-basis rather than at counterparty level. Overall, it appears that it is only possible to track the risk profile of green, non-green and brown assets in very few jurisdictions. An important reason for this is that the prerequisites, e.g. a clear taxonomy and available granular data, are not yet in place in most jurisdictions. These results illustrate the challenges for banks and insurance companies to assess their exposure in the absence of common classifications and the inherent limits of backward-looking analysis in a rapidly developing area. 1 See NGFS first comprehensive report “A call for action: Climate change as a source of financial risk”, April 2019 2 As of yet, there are no clear, uniform definitions of the commonly used terms “green”, “non-green” and “brown” are being used . We abstain from adhering to any particular definition. Please see section III. NGFS REPORT 4 Using national or international taxonomies and/or principles is the most common approach for classifying green and brown assets In its first comprehensive report, the NGFS established the need for a clear taxonomy3 as a prerequisite for a better understanding of possible risk differentials between different types of assets4. Given the the lack of an official taxonomy in the majority of jurisdictions, the most common approach among the respondents has been to implement and use an international or national classification in the form of a voluntary classification or principle. The second most frequent approach is to use an internally developed classification. There is a wide variety of approaches to classify assets, the most common being to classify the assets by the use-of-proceeds method. The survey shows a growing use of climate- related taxonomies among the respondents: only 15% of the respondents did not use any taxonomy or voluntary principle, and the majority of them are considering implementing an international/national taxonomy in the future. but there are some challenges to overcome when classifying financial assets The majority of the institutions only apply their internal classification to a part of their assets within each asset category (bonds or loans). Several respondents highlight that they encounter different challenges when trying to classify different types of assets (e.g. loans, bonds, investments). For loans in particular, whilst the classification of single purpose loans (e.g. within project finance) may seem quite obvious, loans for general corporate purposes have a weaker direct link to a physical asset or a project and seem more difficult to classify. Lack of harmonised client data and a lack of internal resources are other main challenges Many respondents stressed the lack of harmonised client data as the main obstacle for defining the greenness of an asset. One root cause identified by some respondents is the lack of legal disclosure requirements for companies to report verified data on a sector-specific basis, but respondents also highlighted some limitations of international or internal taxonomies and classifications. The respondents stressed the internal challenges posed to their organisations. The integration of climate- and environment-related risk assessment into their usual risk analysis requires the build-up of internal knowledge as well as investment to adapt existing IT systems to track this emerging risk. Different views on methodologies for assessing the effective riskiness of green and brown assets The respondents provided a number of comments on what methodology characteristics are important for assessing the effective riskiness of green or brown assets. In particular, diverging views were expressed with regard to the question of compatibility with existing methods or models. Some respondents take the position that climate-related risks can be considered in existing internal rating-based approach (IRB) standards, while others feel that the different timeframes do not allow for this5. Some respondents highlighted the need to consider long horizons in a forward-looking approach through scenario analysis and forward-looking assessment of relative riskiness. In terms of the development of methodologies for the assessment of the vulnerability of counterparties to climate- or environment-related risks, respondents broadly agreed that the methodologies should consider key environmental issues that could impact the repayment ability of clients or the value of an asset. For economic sectors, the sensitivity to key parameters could be assessed. However, according to some institutions, it may be necessary to go deeper than the sectoral level and perform risk assessment at an individual or corporate level. Some institutions are currently working on integrating counterparty ESG factors into their credit processes and, subsequently, their risk management frameworks. 3 A taxonomy can be defined as a system for organising objects into groups that share similar qualities. 4 See NGFSs first comprehensive report, “A call for action: Climate change as a source of financial risk”, April 2019, Recommendation No 6. 5 The IRB model uses a time horizon of one year, but climate risks are expected to fully materialise over a longer time frame. NGFS REPORT 5 Respondents mentioned a variety of environmental risk monitoring measures including ESG scoring, Risk Appetite Statement (RAS) limit setting, an internal capital allocation model, and environmental veto systems. and some respondents have entirely different views A few of the respondents consider monitoring of the specific risk profiles of green or brown assets is not and should not be a priority in their on-going work on climate-related challenges. Some institutions also raised doubts on the relevance of monitoring risk profiles based on green and brown classifications and insisted on other more decisive risk factors. Forward-looking studies still at an early stage Forward-looking studies to assess how different climate scenarios can affect different kinds of activities and assets were performed at the portfolio level by twelve respondents (22%). Of these forward-looking studies, scenario analyses and stress tests are the most common. These types of analyses are typically at an early stage and often stem from international initiatives such as the TCFD and the UNEP FI pilot, in which some respondents participated. Tentative conclusions and high-level messages to financial institutions The survey does not allow us to conclude on a risk differential between green and brown assets. Overall, it appears that in all but a few jurisdictions the prerequisites for tracking the risk profile of green or brown assets are not yet in place. The vast majority of institutions cannot yet conclude on the relationship between greenness and credit risk, pending further analyses, which require a better tagging of exposures and meaningful performance data. With those prerequisites in place, it should be possible to expand the risk management tools already in use for more traditional risk categories to comprise climate-related and environmental risks. Given the increasing magnitude of climate change and its impact on the financial system, forward-looking methodologies are necessary to assess the impact on individual financial institutions. NGFS REPORT 6 Why focus on potential risk differentials between green, non-green and brown? Most local and regional prudential frameworks are based on BCBS and IAIS1 standards for banks and insurance companies. The BCBS guidelines Principles for the Management of Credit Risk2 state inter alia, that banks should identify and analyse existing and potential risks inherent in any product or activity3. Against the backdrop of the increasing impact from climate and environmental risks on the financial system4, supervisors need to better understand how and to what extent such risks translate to financial risks. An important part of this work is to analyse the potential risk differentials between green, non-green, and brown financial assets and how financial institutions take these risks into account in their credit assessments. If, for example, a consistent link between brown financial assets (such as loans or bonds) and higher default rates could be established, financial institutions holding such assets would need to safeguard themselves against this increased default risk. This would mean for example, closer risk monitoring and setting aside more economic capital.5 Regulators would probably also need to consider increasing regulatory capital requirements6 held against these assets in order to safeguard financial stability. In 2018, the NGFS performed a preliminary stock-take of studies conducted by market participants on credit risk differentials between green, non-green and brown financial assets. The findings showed that it was not possible to draw any general conclusions on potential risk differentials based on the studies conducted so far. These studies also pointed to differing results depending on the financial assets that had been surveyed, the geography and the underlying factors the study had been able to control for. Based on this, the NGFS pointed to the need for further fact-gathering and analyses. The NGFS therefore decided to perform an exploratory data collection from selected institutions. The original intention was to analyse the collected data, and assess whether a risk differential could be detected between green, non-green, brown and non-brown financial assets. However, due to the lack of relevant and comparable data, the scope and methodology were slightly altered. In the end, this survey does not allow a conclusion on a risk differential between green and brown assets. However, it provides a useful and encouraging snapshot of the current practices among a sample of financial institutions around the globe to monitor climate-related financial risks and the challenges these institutions are facing. Scope and methodology of the exercise The scope has been to collect information from financial institutions7 on how they have responded to the need to take the emerging climate-related risks into account in their risk assessment. Given that a
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ISSN: 1962-5361 Disclaimer: This Philadelphia Fed working paper represents preliminary research that is being circulated for discussion purposes. The views expressed in these papers are solely those of the authors and do not necessarily reflect the views of the Federal Reserve Bank of Philadelphia or the Federal Reserve System. Any errors or omissions are the responsibility of the authors. Philadelphia Fed working papers are free to download at: https:/philadelphiafed.org/research-and-data/publications/working-papers. Working Papers A Survey of Fintech Research and Policy Discussion Franklin Allen Imperial College London Xian Gu Central University of Finance and Economics and the University of Pennsylvania Julapa Jagtiani Federal Reserve Bank of Philadelphia Supervision, Regulation, and Credit Department WP 20-21 June 2020 https:/doi.org/10.21799/frbp.wp.2020.21 1 A Survey of Fintech Research and Policy Discussion* Franklin Allen Imperial College London Xian Gu Central University of Finance and Economics and the University of Pennsylvania Julapa Jagtiani Federal Reserve Bank of Philadelphia First Draft: April 21, 2020 Current Draft: May 28, 2020 Abstract The intersection of finance and technology, known as fintech, has resulted in the dramatic growth of innovations and has changed the entire financial landscape. While fintech has a critical role to play in democratizing credit access to the unbanked and thin-file consumers around the globe, those consumers who are currently well served also turn to fintech for faster services and greater transparency. Fintech, particularly the blockchain, has the potential to be disruptive to financial systems and intermediation. Our aim in this paper is to provide a comprehensive fintech literature survey with relevant research studies and policy discussion around the various aspects of fintech. The topics include marketplace and peer-to-peer lending, credit scoring, alternative data, distributed ledger technologies, blockchain, smart contracts, cryptocurrencies and initial coin offerings, central bank digital currency, robo-advising, quantitative investment and trading strategies, cybersecurity, identity theft, cloud computing, use of big data and artificial intelligence and machine learning, identity and fraud detection, anti-money laundering, Know Your Customers, natural language processing, regtech, insuretech, sandboxes, and fintech regulations. Keywords: fintech, marketplace lending, P2P, alternative data, DLT, blockchain, robo advisor, regtech, insuretech, cryptocurrencies, ICOs, CBDC, cloud computing, AML, KYC, NLP, fintech regulations JEL Classification: G21, G28, G18, L21 *Author contacts: Julapa Jagtiani, Federal Reserve Bank of Philadelphia, Ten Independence Mall, Philadelphia, PA 19106, julapa.jagtianiphil.frb.org; Franklin Allen, Imperial College London, f.allenimperial.ac.uk; and Xian Gu, Central University of Finance and Economics, and the University of Pennsylvania; xianguwharton.upenn.edu. Comments are welcome. The authors thank Mitchell Berlin and Bill Wisser for their comments, and thanks to Erik Dolson, Adam Lyko, Dan Milo, and Andes Lee for their research assistance. Disclaimer: This Philadelphia Fed working paper represents preliminary research that is being circulated for discussion purposes. The views expressed in these papers are solely those of the authors and do not necessarily reflect the views of the Federal Reserve Bank of Philadelphia or the Federal Reserve System. Any errors or omissions are the responsibility of the authors. No statements here should be treated as legal advice. Philadelphia Fed working papers are free to download at https:/philadelphiafed.org/research-and- data/publications/working-papers. 2 1. Introduction The rapid advance in financial technology (fintech) in recent years has played an important role in how financial products and services are produced, delivered, and consumed. Fintech has become one of the most popular discussion topics recently, primarily because of its potential disruption to the entire financial system. There has been a dramatic digital transformation in the financial landscape. The term fintech is, however, a broad term, and it tends to mean different things to different people. The goal of this paper is to describe the various aspects of fintech and its role in each segment of the financial market and the associated impact on consumers and the financial system overall. A great deal of data have been collected in recent years. For example, as of 2016, IBM estimated that 90 percent of all the global data was collected in the past year. The amount of data collection accelerated even more between 2016 and 2020. There have been new opportunities for data to be monetized, such as through data aggregation. Big data (including data from nontraditional sources and trended data) have been collected and used widely, in conjunction with advances in artificial intelligence (AI) and machine learning (ML) for digital identity and fraud detection, sales and marketing, security trading strategies, risk pricing and credit decisions, and so forth. More than 2 billion consumers are currently excluded from financial systems around the globe (especially in less developed countries such as Bangladesh, Nigeria, and Pakistan) who could potentially benefit from the use of more data and complex algorithms to access credit. There also have been new questions related to data ownership and the ethical use of data, such as who should have control over the ability to aggregate, use, and share data to safeguard consumer privacy and to avoid systemic misuse of consumer data. Cloud storage and cloud computing have also played increasing roles in payment systems, financial services, and the financial system overall. Financial data and payment data have been stored in the cloud, and cloud computing has made it possible for many fintech innovations, such as real-time payment and instantaneous credit evaluations/decisions. Firms no longer need to commit a large investment (usually unaffordable for smaller firms) to in-house technology, but they could outsource to the cloud computing service providers and share the cost with other firms. This leveled the playing field; size is no longer the most important determinant for success. Consumers preferences have also adapted to prioritize faster services and greater convenience and transparency through online services and applications. There have been concerns among regulators about the impact on the safety and soundness and stability of the financial systems (e.g., the impact 3 on the payment system when a cloud service platform is rendered nonoperational, the exposure to a greater risk of cyberattack, and other similar events). Blockchain and smart contracts are the buzzwords in the fintech community, partly because blockchain is the technology underlying bitcoin transactions. Blockchain and other digital ledger technologies (DLT) have also been used in creating various cryptocurrencies, initial coin offerings (ICOs), other payment applications, and smart contracts thus, leading some to believe that blockchain has the potential to become the mainstream financial technology of the future. There has been some disappointing evidence on the role and potential of blockchain in that it may not be as disruptive as initially expected, and one of the main obstacles seems to be its scalability. For example, bitcoin transactions take about 10 minutes to clear, and it is expected to take longer as the block length gets longer over the years. While thousands of tech start-ups and other tech experts have been working to resolve the issue, permissioned blockchain platforms have benefited some segments of the economy through their use for identity detection, supply chain management, digital-asset-backed lending, and securitization. Fintech activities have been progressing quickly, penetrating all areas of the financial system. Fintech has produced great benefits to a large number of consumers around the world and has made the financial system more efficient. The rapid growth of bank-like services provided by fintech firms has raised potential concerns among bank supervisors. There have also been legal challenges and concerns associated with fintech around consumer privacy and the potential fintech disruption to overall financial stability. While fintech could greatly improve credit access and enhance efficiencies (providing faster, better, or cheaper services) in the financial system, risk cannot be completely eliminated. In this paper, we provide a comprehensive summary of what research studies have found so far, what the experts (academic, industry, and regulators) are working on, and the potential evolving nature of fintechs impact on consumer privacy and well- being, the structure of the financial and payment systems, the role of financial intermediation, and the effectiveness of existing regulatory policies. The rest of the paper is organized as follows. In Section 2, we discuss recent enhanced systems for credit scoring using AI/ML and alternative data, the roles of marketplace lending and peer-to-peer (P2P) lending, and digital banking and investment services. Section 3 discusses how fintech has played a big role in digital payment, such as e-wallet and allowing a large number of the unbanked population around the world to be included in financial systems for the first time. The roles of alternative data in financial inclusion, improving credit access, and more accurate risk pricing will also be discussed. 4 Section 4 describes the roles of blockchain, other distributed ledger technologies (DLTs), and smart contracts. As mentioned earlier, these have been the underlying technologies for cryptoassets and initial coin offerings (ICOs), which will be discussed in Section 5. There are frictions in the current payment system, especially cross-border payments. Consumers have come to expect faster or real-time payments with minimal fees. Digital currencies could potentially deliver these, and the payment processes have been involving rapidly toward a cash-lite (or potentially cashless) economy. Section 5 will also discuss the developments around the potential for central banks to issue fiat digital currencies, so-called central bank digital currency (CBDC). This idea of CBDC acknowledges that trust is the most important factor in payments, and private sectors may not be able to accomplish the goal of originating and supporting the value of the digital currencies it issues. There are also fears around CBDC: Several key considerations need to be incorporated into CBDCs design to avoid adverse impact on the financial system and the ability to conduct effective monetary policy. Section 6 deals with fintechs roles in securities trading and markets, such as the high- frequency trading or program trading that uses big data and ML algorithms to deliver superior performance. Section 7 discusses the impact of fintech on cybersecurity, which has been one of the top concerns among corporate CEOs and senior management teams. While the advanced technology has delivered vast benefits, the technology has also allowed for more sophisticated cyberattacks. Given all these innovations and rapid digital transformation, the existing regulations need to adapt to keep up with the new financial landscape. The increasing roles of BigTech and cloud computing in financial services, their potential impact on interconnectedness between financial institutions, and how these activities are likely to evolve in the near future are discussed in Section 8. There are just a handful of providers for all financial institutions, and these providers are currently not subject to supervision by bank regulators. There have been concerns about quality control, data security, and a possible conflict of interest that need to be addressed in the new fintech regulatory framework. Some of the technologies have also been used to assist regulators in regulatory compliance examination, such as the natural language processing (NLP) and the ML techniques used in RegTech, which will be discussed in Section 9, along with the various factors to be considered in designing fintech regulations to protect consumers and the financial systems while continuing to promote responsible fintech innovations. Finally, Section 10 provides conclusions and policy implications, such as those related to open banking policy, ethical use of consumer data, and whether a cashless economy is expected in 5 the near future. Quantum computing has also been transitioning from theory into practice, with potential implications/disruptions in the financial services industry and the overall economy in the coming decade. It is debatable whether the future mainstream financial technology will be blockchain and DLTs, quantum computing, or something else and how the industry and policymakers can best be prepared to keep pace with evolving technologies and the new adoption. We will also discuss potential directions for future fintech research. 2. Credit Scoring, Digital Banking, and Marketplace Lending 2.1 Credit Scoring Using AI/ML and Alternative Data Credit scores, such as FICO scores (or Vantage Scores), have served as the primary factors in credit decisions, especially for credit card applications. Previous studies, such as Mester, Nakamura, and Renault (2007) and Norden and Weber (2010), have documented the importance of consumer credit history and other financial and accounting data in credit risk evaluation by lending institutions. However, about 26 million American consumers have thin credit files or do not have bank accounts (unbanked); thus, they do not have FICO scores because of an insufficient credit history. More recently, there has been a breakthrough in which consumers default probability could be estimated not only from their official credit history or credit ratings but rather from more complex statistical methods using AI and ML techniques, along with (nontraditional) alternative data. These big data and complex algorithms have been rapidly adopted by fintech lenders to overcome the limitations of traditional models and data in evaluating borrowers credit risk and their ability to pay back loans. Fintech lending, which started in personal lending after the recent financial crisis, has expanded to cover small business lending and mortgage lending in recent years. Previous research studies that compare traditional default prediction models with more advanced techniques using AI/ML seem to suggest that there are significant lifts in predictive ability. Jagtiani and Lemieux (2019), Goldstein, Jagtiani, and Klein (2019), and Croux, Jagtiani, Korivi, and Vulanovic (2020) have documented that the information asymmetry, which used to b
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