139. Can private capital help build a more climate resilient world?

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1:02Well, hello and welcome back to the Long Short Amos podcast exploring the ideas, the investment trends and policy development shaping the alternative investment industry. I'm your host, Tom Keogh. And I'm Drew Nicol. Climate change has become one of the defining investment issues of our time. Here in London, we're experiencing another summer of prolonged heatwaves. And that's the case right across the continent. Record temperatures, while the world at large has been increasingly subject to frequent extreme weather events. And at the same time, the investment challenge has become increasingly clear.

1:43That is, building a more climate resilient world will require trillions of pounds and dollars of investment over the coming decades. Yet governments cannot finance that challenge alone. Increasingly, attention is turning to private capital and to institutions capable of mobilising it. So today we're asking one simple but hugely important question. Can private capital finance a more climate resilient world? Joining us to explore that question is Leslie Masdorp, Chief Executive of British International Investment, the UK's development finance institution. Under Leslie's leadership, the BII has placed climate investment at the heart of its strategy while helping to mobilise institutional capital into emerging markets.

2:33Leslie, you're very welcome to the longshore. Thank you for having me, Tom and Drew. Very welcome. So to begin, I imagine that many listeners will be familiar with the concept of government-sponsored foreign aid and then on the other side of the spectrum with private investment into emerging markets. But British International Investment sits somewhere between those two worlds. For those that are less familiar with development finance institutions, can you just start by explaining how the organisation works, the role it plays in that cross-section of financing, and ultimately what your core mission is?

3:18Thank you very much. So development finance institutions emerged in the aftermath of the Second World War. Specifically, the World Bank was created in 1944 together with the IMF, and these were the first real true global institutions. At that time, of course, the reconstruction of Europe after the war was the central mission of those institutions. A few years later, the UK created an institution, which is still what BII is today. at that stage it was called Colonial Development Corporation. The UK, you would recall, have had a global footprint throughout what is known as the Commonwealth. The name changed from Colonial Development Corporation to Commonwealth Development Corporation and a number of years ago became BII, but it's essentially the same organization.

4:05So this is a sovereign UK government owned, funded by taxpayers originally, and it has a mandate to invest throughout the emerging markets. But let me be very clear, the institution is not a recipient of aid in a traditional sort of aid sense. It has capital, receives capital injections, it has received historically from the UK government, but it invests in businesses. We invest in private enterprise in these countries. These businesses in turn, you know, employ people, they grow, they pay taxes in those governments, and we generate a return. To give you a concrete number, in the last decade, we've generated about a billion pounds in profits over the last decade.

4:53But throughout the 80 years, our mandate has been to, and to quote the founders in 1948, it was to do good without losing money. This was literally the single sentence that was used when the business was created. Today, there's a more sophisticated articulation of that, but it is still very much the same. We invest and we search for development impact, but at the same time, we seek a commercial return. Dare I say it, that should be the mantra for all investors, really, right? To do good without losing money. Well, certainly don't lose money in the first instance, but do good mean doing public good, right, Leslie?

5:33That is exactly right. That is exactly right. Because think about it, and I can frame this, for example, today through a, if you like, almost a national security lens. If we don't, as DFIs, as BII, or as the African Development Bank, or the World Bank, if we don't invest in, for example, fragile and conflict states, let's take a country like the DRC, where there's a war today, or you take countries that emerge out of conflict and war, like Sierra Leone. If you don't invest in those countries, you create a vacuum. Vacuums, ordinarily, as you know, will get occupied by something. It will be the seedbed of extremism, of illicit finance, of illegal flows of migration, or I can list a long list of things that happen when you don't have functioning markets, right?

6:21Eventually, it will have spillover effects inside the UK, inside Europe. It is therefore, very clear in the short, medium and long term interest for the G7 governments and for the developed countries and for the United Kingdom specifically, since we're talking about the UK, to be fully engaged and to use institutions like BII to fulfill this role. We invest in these businesses. We create and shape markets in these countries. We make these countries investable over time. So we almost create a new asset class by entering in those markets because your traditional commercial institutions will consider a lot of these sub-investment grade markets as uninvestable from their fiduciary lenses.

7:08But through our efforts, through our investments, we create the kind of stability and economic prosperity which produces functioning markets that creates the conditions for your commercial institutions to then enter. So we de-risk those markets to use a different framing. And spoiler alert, you are doing good without losing money. And we'll go into some elements of that. But certainly, pointing to your recent annual report, you've been making decent returns for your various projects. But we talked a little bit about this, Leslie, in the introduction, and that's, you know, we are experiencing yet another one.

7:49I mean, it's a series of heat waves, maybe just a prolonged heat wave. Here in London, we've gone 40 days without rain, which I think is getting into standards where we're getting close to breaking historic records there. And you've got record temperatures as well across the continent of Europe. But as I've said, we are being experienced, the world that is experiencing more these big events impacting various changes in climate and so it's no longer I put it to you that it's no longer something that investors are thinking about several decades away this is affecting people today it's affecting markets and policy today or if it isn't it should be so investors are our understanding is they continue to incorporate climate risk into portfolio construction, not because of sustainability objectives or regulation, but because they recognize all of this as materially a financial risk.

8:50So do you think we're then at that inflection point as an investor? Has climate investing moved from being that niche area of finance to now being how long-term investors should be allocating capital? we have obviously been on a journey for some time um tom as you uh know at least you know over the last 20-25 years climate have been sort of central to the uh investment uh discourse you had the creation of firms you know already in the 90s and early 2000s a firm like generation for example asset management was created um but i'd say probably 2015 with the paris um accord that was probably the most defining moment that sort of raised the profile and raised the global consciousness around climate and also the awareness within the investor community that climate or the recognition of the existential risk associated with climate change, that that has to be integrated in every investment decision.

9:56So I'd say it's at least probably, you know, a decade and a half old, this kind of concept that you ignore at your own peril the existence of the climate crisis. It is the single biggest threat to global economic stability. And unless we have a focused set of strategies to combat the climate crisis, you will be undermining your investments. You will be sitting with, you know, stranded assets over the next 30, 40, 50, 60 years if you are only invested, for example, in emission-heavy fossil fuels, for example. So in short, there is no question that the financial sector as a whole needs to be reconfigured, needs to be reimagined, needs to be retooled to take account of this change.

10:50It's not an environmental issue. It's not an economic issue. It's not an issue around agriculture and food security. It's a globally interconnected set of challenges. What we do as BII is using our capital in such a way that we can be a catalyst to effect or to bring in more private capital, not just to recognize, but to also identify the significant opportunities associated with the energy transition. For example, as you know, there is now a very established, very, very large sector in renewables, in solar power, in wind power, in battery storage. You have, you know, large businesses today, which represent significant economic opportunity throughout the world for businesses to invest in.

11:41There's electric vehicle industry that is also growing to become some of the global icons of the world, from Tesla right through to BYD in China. There's massive new multinationals that have emerged as a consequence of this endeavor to combat the climate crisis. Leslie, as someone who's been in this space for a while, I'd be really interested to hear a little bit more about how your own thinking has evolved throughout your career. Because if we look back over the past decade or so, or maybe even longer, as you mentioned, there's been this real journey that the narrative around climate investing and sustainability and what's often described as ESG investing has been on to the point where it was on almost no one's radar to the point where several years ago, it was all anyone was talking about for a long time, either from an environmental sort of ethical perspective or from the financial opportunities as you mentioned and and then now we've sort of moved on where the the pendulum has maybe swung back a little bit again maybe maybe you disagree but that seems to be my perception but in terms of as I say your own thinking was there a particular moment when you realized how important the climate change was fundamentally going to be in terms of changing world's financial markets and the way people are investing and the core underpinnings of an investment thesis?

13:17Sure. I mean, I, you know, spent the formative part of my career in public policy during the transition to democracy in South Africa. But then in 2002, early 2002, I joined Goldman Sachs and I was on the International advisory board of Goldman. What really helped me a great deal then, you know, being in the investment bank, but being sitting around the table with people who are much more farsighted, who were looking at, you know, the mandate of the firm, you know, obviously to pursue and maximize its own profits, but through a very long-term lens. This is about long-term greed, to use the phraseology.

13:54At that time, the chairman of the international advisors was a guy called Peter Sutherland, he was the chairman of BP at the time. And BP, as you know, was actually one of the number one or two global companies by market capitalization. I learned a great deal from him. But people like him and others were so farsighted at that time already. They were talking about how they need to be more forward-looking in terms of the sustainability agenda. Of course, a few years thereafter, as I mentioned, in fact, David Blood, he just left Goldman as I joined. He then formed Generation Asset Management. So already as I started my investment banking career, I was exposed to the idea that there's significant business and economic opportunities that have been identified then, this is about five years ago, as part of the sort of sustainability agenda.

14:52Of course, it got completely mainstreamed, you know, I would say five to six years after that, where the firms that have identified defined asset class, they allocated resources as a distinct sort of allocation of their capital strategic asset allocation models, those firms started to outperform. I mean, firms like Generation have done extremely well investing in green and sustainable assets. In short, it's not a linear kind of progress over the last three decades. There's been moments of sort of ups and downs, but the trajectory have been upwards. I mean, I'd say, as I mentioned earlier on, the Paris Accord was the single biggest global moment because there was the first legally binding compact by international governments committing themselves to a path of reducing their emission footprints.

15:50Obviously, the concept of net zero was born then. And then I would say the COP in Glasgow was another significant moment. The COP in Glasgow, the reason why it was so important, and Mark Carney, who's now the Prime Minister of Canada, he was, as you know, Governor of the Bank of England, played a major role in kind of embedding this consciousness into the financial sector. So this notion that the financial sector as allocators of capital have a vital role to play to engineer this big economic transformation. Mark Carney was really one of the brains behind that kind of idea. And I'd say by then, by the Glasgow COP, which the UK hosted, it was already firmly embedded.

16:35that capital, whether it's asset managers, pension funds, sovereign wealth funds, institutional investors, have a significant role to play to drive this transformation process. In other words, finance can be the catalyst for this bigger change that needs to happen in society. And that is reflected as well in terms of the conversations that we have with our investors across AMOS membership. the conversation among investors as we see it now when it comes to climate has really changed or is changing. Much of the initial conversation was around climate risk and downside protection. Now we're hearing more from investors as to getting a better understanding around climate transition and where opportunities may lie in that space, whether that's in energy transition or whether that's in climate technology, climate adaptation, anything to do with the infrastructure around all of that.

17:39Where do you see then the greatest investment opportunities over the next, say, let's say 10 years? Are there any areas I believe the market is still not looking at closely enough? No. I'd say that we have had now more than two decades of success in what is broadly called climate mitigation. This is putting in place a large globally sort of recognized new sector, sort of the renewable energy sector that, you know, has created some, you know, big global institutions. So we as BII, we out of the roughly$2 billion that we invest every year, 40 % is geared towards climate. So we have a big footprint in, I mean, I just came back from Egypt a few weeks ago, where we've invested in a wind project, the Gulf of Suisse wind project, which will generate 1.1 gigawatts of power once it's done, providing electricity to over a million homes in Egypt.

18:46So through this project, we not only provide electricity and clean power to people who don't have electricity, but it also stimulates economic growth and economic development. So wind power, solar power, battery storage, as these technologies have, as the cost curves have moved in the right direction, these are now the cheapest forms of power. So, you know, it is the most economical and the most efficient and therefore the best technology to deploy. So that box we can tick, that train is moving and it's a stable asset class and, you know, institutions can allocate capital to that easily. That took time to evolve because it's any new asset class, there's no familiarity with it.

19:27There's a lot of work that's required to create the kind of metrics, you know, benchmarks so that institutional investors can comfortably put their money there. We are now moving into the next phase, which is adaptation and resilience. It's no point having, you know, infrastructure if every, you know, couple of years you're going to have floods and hurricanes that destroy that infrastructure. You know, you need resilient infrastructure. You need flood-resistant roads and flood-resistant agriculture. And you need to ensure that you are protecting the assets that you have built from the impact of adverse climatic conditions.

20:08So this notion of climate adaptation and resilience is now becoming more mainstream. Why? Because insurance companies are sending the price signal. Let me give you an example. Whether it's hurricanes in Miami and Florida or whether it's wildfires in Los Angeles and California. If areas, if the premiums will increase, people will simply no longer go and live in areas that are going through cycles of wildfires, right? Or if areas become uninsurable, the market signals will simply direct that people will no longer want to live there. So you've got to protect yourself against the hurricanes, against the floods, against the typhoons and so on.

20:50So the next phase in the climate domain is around making sure that adaptation and resilience is part of the design of infrastructure. When you build anything, it has to be built in such a manner that it is resilient. So that's the second piece. The third, and we're not quite there yet because it's not yet an investable asset class. Think about it like this. To build a resilient infrastructure, you cannot project the cash flows and create a financial instrument out of it because you're simply avoiding losses into the future. But with a power project, you build the power. Once you can produce the electricity, I can project for the next 10, 15, 20 years over the life of that project, there will be cash flows because people will be paying for that electricity that has been produced.

21:42With adaptation resilience, it's a bit more difficult. So we still need to design appropriate financial instruments. And there's now a phase of innovation that have been unleashed. There's a huge amount of thinking going into how do we make adaptation and resilience an investable asset class. The next, the third area where there's new development required is in this whole biodiversity nature area. At the moment, there's no cost to, you know, chopping down every forest in the world, right, because you're just chopping them down. But, you know, you are creating massive damage to the ecosystem and to nature and to natural capital by doing that.

22:21So we need to be able to create a financial value to that sort of deforestation. So we need to, for nature, in order for nature to become an investable asset class, we need to create a financial set of instruments that people who are listening to this podcast can monetize and can actually say, okay, I'm going to, alongside BII, invest in the protection of the forest in the Congo or the protection of the forest in Indonesia and so on. I guess what I'm saying is that our role as the DFIs, BII, the World Bank, Asia Development Bank, all of these institutions, we see our role as being catalytic. We want to not invest in building a portfolio of clean and green projects.

23:08We want to do that as well. But more importantly, we want to be catalytic. We want to de-risk these investments in such a way that we improve the risk return profile so that they can become more investable for your commercial players. So that it's not calling on morality on the need for us to be conscious of the damage we're doing to the environment. It's also you're doing that, you're having the impact, but at the same time, you're going to make a commercial return. And today in a WIND project, this project I mentioned to you now early on, in Egypt, for example, that's 1.1 gigawatts of power, it's easy for an asset manager to invest alongside us.

23:46But for a natural capital asset, it's still difficult because we don't yet have the financial architecture to monetize some of those in a way that finance can understand. And long term listeners will, their ears may have pricked up there when you're talking about financial instruments that enable this type of investing. I would encourage those that haven't to go back to our insurance linked securities episode, which does speak to part of the financial planning that can go into supporting these types of projects, especially in emerging markets. But Leslie, I really want to pick you up on a point that you made there about that quite sophisticated concept of, and although it may seem simple, it's sometimes quite difficult to play out in reality, this idea of planning for the thousand year storm, or not the hundred year storm, but the thousand year storm, proverbially speaking, when you are building these infrastructure projects, as you say, It's no good building a road that washes away every flood season or what have you.

24:56There is this interplay here between climate resiliency and economic development and long-term prosperity. You sort of need to hold all three factors in your mind as you are planning out these big multi-year projects that may only begin to generate revenue, as you say, many years down the line, be it a wind farm or something that sort of produces goods in some way like that. where are we though if i can push you to speak in generalities where are we broadly when you're speaking to investors or or those or prospective investors how sophisticated is their understanding of this need that there's this yes you can build this cheaply this way and it will last five years or you can, you know, in build some of the modelling around what, you know, as Tom mentioned, we've had wildfires in Europe in places that we never used to and drought and what have you and all these factors, not just building for the environment as it is today, but as it's going to be in 5, 10, 15, 20 years.

26:07Broadly speaking, are people able to conceptualize this in the way that you've articulated it? Is there a big education process still underway? Where are we?

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27:17Gourmet Thanksgiving flavors with the quality you want. Only at Whole Foods Market.

27:26I would say, to a very good question, I would say that there's been considerable progress that has been made. Certainly the leadership of the industry have a very sophisticated and advanced understanding of the issues. I serve currently on an emerging markets and development economy. It's called EMDE Task Force, which the Minister for Development in FCDO and the Minister in the Treasury created. We have the large pension funds, the large insurance companies here in the UK, or members at sort of CEO level, all of these folks. they understand fully but I said there's still a gap in translating the understanding into financial instruments that can be scaled and that can be repeatable and that that has the sort of ability for people to allocate to it within their sort of asset allocation models so in other words it hasn't properly been embedded yet into the it is still at a cognitive recognition if you like so we are still on that journey part of the journey is requires us as a development finance industry to undergo some changes now what do I mean by that we as an institution we originate we have people on the ground in many parts of the world we invest in Invest in about 60 countries throughout Africa, sub-Saharan Africa, over 45 countries we invest in.

29:00We invest in Asia. So we do transaction by transaction deals. We originate these assets. We create and invest in solar projects, in EVs. We have a motorcycle, electric motorcycle firm that we've just invested in Ethiopia that I went to go and visit two months ago and so on. Each of these are individual transactions. They're quite small in relative terms because a large institution do not have the ability to invest in or do due diligence on an individual project. They want to invest in an asset class. They want to deploy capital on a much bigger scale. So we are not appropriately structured right now to be matched with these large institutions.

29:49So what we are working on at the moment is to create more scalable financial structures, investment platforms, which will make it possible for your credentials and your Lloyds of London and these large per pension funds to invest alongside. I'll give you a small example. The International Finance Corporation, which is the private sector arm of the World Bank, they just launched a new securitization platform. They call it emerging markets securitization program. It was a billion dollars worth of transactions they've done where they've pooled some of their existing loans, assigned them into different tranches, if you like, or risk profiles, to use a different word.

30:32They take the first loss piece, which kind of absorb any first losses. There's a MEDS piece, and there's a senior tranche. The senior tranche, incidentally, even though these loans come from a lot of emerging markets, the senior tranche has an investment grade, a AA investment grade from Moody's. So it's a very simple proposition to take that senior tranche to any pension fund in the UK, and they will invest with their eyes closed. Why? Because it's got a AA credit rating from Moody's, right? So that was a little financial innovation. You take loans originated by the DFIs from developing countries that are probably single B, in some cases even single B minus, or the double B minus, whatever the rating is, but all sub-investment grade, and you make them investable by tranching them into these different risk profiles.

31:21So that's kind of a simple innovation that was done in order to crowd in institutional investor capital. And then in the process, by offloading that credit risk to these institutions, you are freeing up your own balance sheet capacity, which means you can then go and do more investments in the sort of climate finance domain. In short, we need to create sizable, repeatable sort of asset classes that can be of scale so that your big institutions can invest$500 million with their eyes closed or a billion dollars because they cannot invest in, you know,$20 million tranches because this is not how they are structured.

32:02And there's a number of very good examples. BII earlier this year did a transaction with Allianz, the big insurer, a billion dollar blended finance structure, where we only came up with the first$40 million. dollars. We then brought in other institutions, BII did, we brought in Inter-American Development Bank, their private arm, we brought in the Danish kind of equivalent of BII, the Canadian equivalent, and we put together a$150 million first loss tranche or junior tranche. That then was, we were able to mobilize$850 million from institutions because we are absorbing the first losses. We We created a risk return profile that is more acceptable to the institutions.

32:49That kind of financial innovation is what is enabling us to bring in much larger volumes of capital so we can do what we do at much greater scale. So we're still on this journey and it will take some time, but there's a lot of progress that has been made. so Leslie on that point just to pick up that point around mobilizing capital at scale because I've heard you say that a few times now in this episode and you've also mentioned that in many of your comments that you've made as well when it comes to the bigger picture and how you view all of this and how private investment needs to tackle this issue we spend a great deal of time speaking with the institutional investors at AIMA.

33:37And one of the themes that I've talked about already is their appetite to invest in climate transition. And the challenge, as I've talked to you already, for them is to try and explore opportunities and find those opportunities that meet the return expectations that their trustees set, their boards set, and at the same time fitting into their governance, liquidity and risk frameworks and how they will go about investing in all this. What have you learned about what investors need in your capacity before they are prepared to invest more confidently in these climate-related opportunities, particularly in the DFI space?

34:23Yeah, I think, as I mentioned earlier on, the first thing that we have learned is that we need to create platforms investment platforms of sufficient size and scale because these institutions do not get out of bed for you know 30 40 50 80 million dollars style transactions right it's not how they are structured that's the first point the second point we have recognized that we have to do some financial engineering to create a kind of at least some investment grade sort of features in order to attract your large institutions to invest. Exactly the example I made earlier on with the IFC, which of course is helped by the fact that they are a AAA institution and already with, you know, ATE a track record and being a AAA, which is the highest rated financial institutions in the world, they already give that sort of comfort.

35:19So creating investment grade structures. Thirdly, a track record that that asset class has performed. So whether it is power in energy transition, there is considerable potential for us to create much bigger sort of investment platforms. Because as I said earlier on, you know, you pick just one asset in Egypt that I referenced, for example, which is, you know, a 1.1 gigawatt project. If we can pull that together with several other projects of that kind, we can probably bring in a few institutions to take on 20 or 30 percent of that project, which is, I think, over 1.5 billion dollars in size. So that's the third sort of area.

36:05And then finally, we are the ones with the origination capability. We have offices in all of these markets. The pension funds, asset managers here, they don't have offices in Mumbai and Bangalore the way the way we have or in Nairobi or in Cairo or in Vietnam, Indonesia, Philippines. We invest in all of these markets. We have the origination capability. So there's a need to kind of for that complementary, we need to draw on each other's strengths, if you like, in a complementary fashion. We have the origination capability. We have people in the ground who understand these markets. We also have an understanding of the policy and regulatory frameworks.

36:46We know where there are risks of, let's say, you know, if there's going to be a change in government in particular areas, sometimes there's going to be policy and regulatory changes which could impact, for example, on the stability of, let's take renewable energy. If you feel that there is a risk that the new government might not honor those contracts, that would be a risk factor that we will need to address. So we know all of the things that we have to, the frictions that we have to remove for the bottlenecks to make it more possible, create more of an enabling environment for these institutions to come in.

37:26So we have gone through a painstaking process of identifying the bottlenecks because the onus is on us to create the, we can't expect the institutions to be creating the conditions for them to invest. We have to make it opportune for them to step in. I can't help but, as you were speaking there, I can't help but think that in some ways what you're articulating is the absolutely essential role that BII is playing now in terms of providing not just capital, but education and confidence to financial institutions and in some sense taking on that first loss risk. And you really are at the absolute center of the wheel when it comes to creating these deals and, as you say, providing on the ground expertise and all of that.

38:16But with what you were saying a little while before, as financial innovation develops, securitization and other products, which are topics close to AIMA's heart in Europe and elsewhere and something we're quite unapologetically championing, it feels like there's a time when your role will be less essential or that the pipes will enable larger financial institutions to take on these deals directly because of their familiarity as you say the products are there etc when you look ahead do you well first of all do you do you agree that that your role may change in in maybe not tomorrow but but down the road and if So sort of how do you see that landscape shifting in terms of BII's role and generally the facilitation of the financing of climate resiliency in emerging markets, etc?

39:20I mean, I would say that we are most definitely now entering a phase where we are trying to design new capital market or financial market instruments that can enable the significant expansion of the available finance to tackle the climate crisis. Right. So so for sure, the role of the DFIs over time will change as we become more and more successful. If we are able to direct larger pools of capital, it will in all likelihood, there will be a inclination for that capital to go towards your more middle income countries or countries with features of middle income status. What do I mean by that? It's easier for your credentials and your alliances and your credit agricoles and all of these big investors, BlackRock and so on.

40:13They will feel much more comfortable to invest, you know, in India, in Vietnam, Philippines, Indonesia, much less. They will be much less inclined to go and invest in Sierra Leone or Burundi or Mali or Rwanda and so on. We will still have a significant role to play as BII to invest in those markets that are more frontier markets. So if you just structure and delineate the different sort of categories, there's higher middle-income countries, middle-income countries, lower middle-income countries, least developed countries, and below that you've got frontier markets, which is why BII has an explicit mandate to allocate at least 25 % of our capital to frontier markets.

40:55And why do we invest there? We invest there because, as I said right at the beginning, if we don't shape and create markets, and here it's not about designing financial instruments, it's literally creating markets from scratch where they don't exist, right? So that market-shaping role, we will play a much bigger role in those more least developed countries. At the moment, it's 25 % of our allocation. Over many, many years to come, that allocation could increase because, I don't know if you know this, but by 2030, and the World Bank does a lot of very useful analysis, but I've seen a number of the concentration of extreme poverty.

41:35and the people who will be defined as sort of extreme poor will live in what's called fragile and conflict states. Let me break that down for you. You know, poverty is not just poverty. There's kind of a geography of poverty, right? There's people who are poor in India, for example, but India is a fast-growing economy, the fastest-growing emerging market. You still have the largest numbers of extreme poor people living in India as a geography, but over the next 15 to 20 years, they'll be able to deal with that challenge. China has over the last 35-40 years managed to decisively deal with extreme poverty.

42:11Poverty in future over the next 10-30 years will be concentrated in areas where there's conflict and fragility. So this is like the DRC, places like northern Nigeria and there's a number of other countries where there's just deep intractable civil strife and so on. That's where the extreme poor will be concentrated. No amount of financial engineering will lead to BlackRock going to invest there, right? That's where the DFIs will continue to keep an eye on because, as I said earlier on, those are the pockets and will become the epicenters of future crisis. your illicit flows of finance your illegal flows of migration your terrorism and extremism will come from those areas that's why we exist why we have such a fundamental long-term role to play as DFIs in creating the conditions of stability over a more through more longer term lens so Leslie if the DFIs private investors and governments succeed in working together for this outcome and you have a more climate resilient world what does that world look like to you and what gives you the greatest degree of confidence that we're going to get there if any at all i think that the sheer recognition that um climate is not some you know ideologically charged or let me just take one step back i would i would say that uh probably maybe you know if you go back to 2015 when the Paris Accord at the time, I think it was said that 99 % of all scientists in the world, you know, accept that climate change is manmade, meaning that this is not some, you know, hype that it is real, that you can demonstrate that the emissions that are been, that is causing this damage have come from, you know, industrialization, from human effort and so on.

44:11The the public recognition that climate is real. It's not some politically charged. So today, there's some places in the world where it's still a bit polarizing to talk about climate. But even in the United States, let's be very clear, even in the United States, a lot of local cities, municipalities, states have active programs in place to build resilient infrastructure. It's not an academic discussion about is climate real. People know they face the wildfires, they face the hurricanes, they face the real extreme physical risk of climate. But more importantly, as I also said earlier on, I think that the insurance industry is going to be the vital lever that will shift consciousness over the next number of years to come.

45:01And this recognition for me happened when I was on a panel with Zurich Insurance, I think, during London Climate Week. I think the insurance industry, because they have the most sophisticated, they understand risk the best, their models are the most sophisticated. Right. And remember, you can't rely on historic data to project into the future. Right. So so as they factor in the physical risk of climate, it will you be able to see literally heat maps of which areas will become completely uninvestable. What will happen? People are not going to deploy their capital. You're not going to invest your money into real estate and buy a holiday home in a place that there's no insurance.

45:44So the sheer recognition of what's happening in climate, the extreme heat that you spoke about right at the beginning of the program, every citizen recognizes this, whether their government takes it serious or not is academic. Market signals will direct them for a change. So that's where my optimism comes from, that it will be market forces that will drive behavior, independent of whether you have a government that believes climate change is hoax, for example. I can't help but be pleasantly surprised that throughout this conversation, it's fundamentally a hopeful message that you've, or even a confident message, as you say, that's come across here, that the tools we need, both financial, technological, and otherwise, are already here.

46:36You seem to be broadly confident that we will get the financial products in place and build the piping, as it were, and there is a will and a way. And as you say, ultimately, market forces will in some ways make it inevitable, which is very different to the types of conversations you normally have around climate change, the inevitability being to some degree doom. Yeah, that's exactly right. That's exactly right. That's exactly right. I wanted to add that, you know, I mean, I spoke to Julia Hogger during London Climate Week. She's the CEO of the London Stock Exchange. This idea that London also can be, as all the ingredients, the City of London in terms of the ecosystem with the legal, the risk, the audit, the professional services associated with the City of London, the London Stock Exchange, the strong position on climate that this government have, that the ingredients are there for the economy.

47:36for London to be the kind of hub, global hub of green capital markets. And therefore, I'm even more hopeful as BII sitting here, we obviously, you know, a firm that exists and talk about climate every day. We have people, young people here who could go and work for, you know, private for JP Morgan or, you know, Merrill Lynch or Goldman Sachs. They work here because they want to touch and feel the impact that we have through the investments that we make. I am very confident also that this city has a disproportionate role that it can play because of the sheer size of London in terms of global capital markets.

48:14So it's very hopeful. And listening to the LSEG, listening to Julie Argett and listening to their ambition, they do want the city to play that role. It will require some more fancy footwork and engineering and sharper coordination. But the ingredients are there. We certainly have the leadership. the leadership of the Stock Exchange whether it's David or whether it's Julia at the LSE, EBRD, the European Bank for Reconstruction and Development ourselves the City of London Corporation, we have all the sort of elements of a more coordinated sort of leadership core driving this agenda that exists in the UK And Leslie, where can listeners get to read and hear more about the work of the BII and the work that you do in climate transition website that we can point to?

49:04Yeah, so the BII website, of course, which is British International Investment, www.briishe-internationalinvestment.co.uk. We are very active as BII, working with industry today. As I said, we participate with most of the large pension funds in various sort of task forces. we we work closely of course with the Ministry of Energy Desnez we work closely with FCDO the Foreign Commonwealth Office and we now have a new foreign secretary who comes from the energy portfolio who's you know recently announced I read a Guardian piece over the weekend where he said that climate and development will be core to the UK foreign policy agenda now that's very strong statement, a very powerful beacon that he has set out there with regards to the repositioning of the UK going forward.

50:03So we take a lot of comfort from the policy direction that have been put in place by the UK government. And we also host events from time to time where we invite industry. I would say from the new five-year strategy that BII announced in April, there's three broad strategic pivots that we announced, but the single biggest one is this idea of private capital mobilization. So we are very open to listen, to have dialogues with private industry, and I encourage people to reach out to us. We would love a dialogue because this is a period where we need kind of a laboratory style innovation to come up with new ideas.

50:46Well, certainly we will point our listeners to your website and to the content that you produce. Leslie, thank you again for joining us today on The Long Short and continue doing good. Thank you very much. I enjoyed the conversation with both of you. Thank you so much, Tom. Thanks very much for having me through. The Long Short was brought to you by AMA, the Alternative Investment Management Association, the global representative for the alternative investment industry. As always, you can get the latest episodes by subscribing to The Long Short on Spotify, Apple Podcasts, Google Podcasts, and Amazon Music, or by streaming episodes directly from our website, amir.org.

51:25Thanks for listening.

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