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'America First' Creates Uncertainty Over U.S. Role on Global Financial Standards

S&P Dow Jones Indices

Considering the Risk from Future Carbon Prices

S&P Global Ratings

COP24 Special Edition Shining A Light On Climate Finance

S&P Global Ratings

Plugging the Climate Adaptation Gap with High Resilience Benefit Investments

Empowering Public Private Collaboration in Infrastructure

'America First' Creates Uncertainty Over U.S. Role on Global Financial Standards

The world is waiting to see how the "America first" agenda promulgated by President Donald Trump's administration affects the role the U.S. plays in advancing international financial industry standards.

Under Trump, the U.S. has made some swift decisions to exit international institutions. The State Department recently announced the withdrawal from UNESCO, the United Nations' educational, scientific and cultural organization. Trump pulled the U.S. out of negotiations for the Trans-Pacific Partnership, an international trade agreement, and the president also moved to withdraw the U.S. from the Paris climate accord.

But the administration's stance on international financial standards has been more nuanced, according to some participants at the Sibos conference in Toronto. The uncertainty over whether President Trump will loosen financial regulation has slowed progress on the Basel Committee on Banking Supervision's revisions to the way banks calculate risk, changes that have been dubbed "Basel IV."

However, since President Trump has taken office, the U.S. has helped with the shaping of some international standards, said Shaun Olson, a senior derivatives adviser for the Ontario Securities Commission. He said years-old mandates, including those around over-the-counter derivatives, are moving forward.

"It's been business as usual," he said.

But the future is more uncertain. Olson said it has become more difficult to understand which new regulations and requirements policymakers will pursue. It is also unclear if the U.S. will actually put international standards that are being developed into place because some key regulatory positions have remained vacant since the Trump administration has taken over.

"Implementation ... could be delayed if there are vacancies," Olson said.

Olson was not the only one to say the U.S. continues to advance international standards. Karla McKenna, director of market practice and standards for Citigroup Inc.'s markets and securities services, noted that the Consumer Financial Protection Bureau and the Treasury Department's Office of Financial Research have moved ahead with adopting legal entity identifiers, data similar to a barcode that can identify parties in financial transactions.

McKenna said she expects the U.S. to keep playing a role in areas that can promote global stability. "Where it makes sense to keep America's markets and the other markets safe, I'm still seeing some forward progress," McKenna said.

But the Trump administration's main goal is to generate growth in the U.S., not promote global stability, said Aaron Klein, a Brookings Institution fellow and policy director.

Klein, who worked in the Treasury Department during the Obama administration and on the U.S. Senate Committee on Banking, Housing and Urban Affairs when it was chaired by Democratic senators Paul Sarbanes and Christopher Dodd, said the U.S. previously viewed global stability and global growth as beneficial to the country in the long run.

"That core tenet is not shared by the current inhabitants in the White House," he said. "Instead, the core idea is: 'This is a global competition.'"

Klein said he believes it is only a matter of time before the U.S. starts withdrawing as a leader, and even possibly as a participant in some global forums on international financial industry standards. He expects the first moves will come subtly with the U.S. ending the promotion of new ideas and raising skepticism on the advancement of others.

However, the Trump administration could find that staying involved in global forums is the best way to support the "America first" agenda, said Jeff Bandman, who held leadership positions with the CFTC before founding consulting and advisory practice Bandman Advisors.

"There is an effort to kind of use these international forums to advocate areas where there's concerns that American interest or the ecosystem is being harmed," he said.

Bandman said an example of this came in the Treasury's recent capital markets report, which called for changing the capital treatment of centrally cleared derivatives under Basel III's supplementary leverage ratio. Bandman also noted that the CFTC has maintained its leading role in the policy standing group for the Committee on Payments and Market Infrastructures and the International Organization of Securities Commissions.

From Bandman's perspective, it seems that the U.S. is taking the stance that financial markets are interconnected, and that it is important to have an international consensus on technical issues. Still, Bandman believes leaders of regulatory bodies will have to explain to the White House why being involved in global forums is consistent with the administration's agenda.

"You do need to have a good answer on why staying engaged and advocating vigorously is in America's interest," Bandman said.


Considering the Risk from Future Carbon Prices

Along with the advent of the 2015 Paris Climate Agreement has come a growing understanding of the structural changes required across the global economy to shift to low- (or zero-) carbon, sustainable business practices.

The increasing regulation of carbon emissions through taxes, emissions trading schemes, and fossil fuel extraction fees is expected to feature prominently in global efforts to address climate change. Carbon prices are already implemented in 40 countries and 20 cities and regions. Average carbon prices could increase more than sevenfold to USD 120 per metric ton by 2030, as regulations aim to limit the average global temperature increase to 2 degrees Celsius, in accordance with the Paris Agreement.

S&P Dow Jones Indices launched the S&P Carbon Price Risk Adjusted Indices to embed future carbon price risk into today’s index constituents.

Read the Full Report

COP24 Special Edition Shining A Light On Climate Finance


− Green loans are evolving, with the Climate Bond Initiative forecasting nearly $1 trillion in green bond issuance by 2020.

− Despite the uptick in green bond and loan issuance, the market still remains relatively small, especially compared to the universe of assets comprising CLO 2.0 transactions.

− In our view, a green CLO market has large growth potential, boosted by regulatory initiatives and emerging interest from both issuers and investors in 2018.

− We built a hypothetical rating scenario for a green CLO to compare and contrast the underlying portfolio and structure with a typical European CLO 2.0 transaction.

− Our hypothetical green CLO analysis showed that green loans may have different fundamental characteristics to corporate loans, such as lower asset yields, higher credit quality, and higher recovery rates assumptions.

The global collateralized loan obligation (CLO) market has experienced a rebirth (2010 in the U.S. and 2013 in Europe). New issuance continues to increase due to investor familiarity with the product, as well as low historical default rates. While a market for green assets, such as green loans and bonds has been established for a while, although still of a relative size, a sustainable securitization market is still in its infancy. Considering the challenge in financing the amounts, S&P Global Ratings expects green CLOs to play a role in increasing the private sector presence in the sustainable finance market.

Following the Paris Agreement that came into force in November 2016, 184 parties have ratified the action plan to limit global warming. For this purpose, developed nations have pledged to provide $100 billion (about €87 billion) annually until 2025. As part of this deal the EU has committed to decrease carbon emissions by 40% by 2030. In March 2018 the European Commission (EC) proposed the creation of environmental, social, and corporate governance 'taxonomy', regulating sustainable finance product disclosures, as well as introducing the 'green supporting factor' in the EU prudential rules for banks and insurance companies.

Read the Full Report

Plugging the Climate Adaptation Gap with High Resilience Benefit Investments


- Adaptation financing needs to substantially increase to address the higher impact of extreme weather to society due to climate change.

- Adaptation projects are typically cost effective and bring wide range of resilience benefits.

- To demonstrate the value of resilience benefits to various stakeholders we consider that it is important to quantify those benefits based on a robust modeling framework.

- We expect that due to the large size of the adaptation gap and constrained public finances,private investment would need to make a considerable contribution to adaptation financing.

Dec. 07 2018 — We believe the recent surge in economic damage from extreme climatic events may focus the attention of public authorities about the need for adaptation investments and accelerate investment in this area.The United Nations Environment Program (UNEP) forecasts adaptation costs in developing countries at between $140 billion and $300 billion by 2030, and $280 billion and $500 billion by 2050. That is approximately 6x-13x above the amount of international public-sector finance available today--just to meet 2030 costs.

Over the last two years,the world has seen a flurry of extreme weather, which has exposed the vulnerability of many countries to these events. Climate change may make matters worse, irrespective of whether we manage to keep global warming to 2 degrees Celsius or not. Attention to climate change adaptation is therefore increasing, especially about how to finance it, given the need to raise enough public and private investment to fortify exposed countries and communities against the potentially devastating effects of physical climate risk.

Read the Full Report

Watch: Empowering Public Private Collaboration in Infrastructure

S&P Global CEO Doug Peterson speaks with Maha Eltobgy from the World Economic Forum, on their joint study that looks at how greater collaboration between the public and private sector can accelerate national infrastructure programmes.