Speaker 1:
From the library of the New York Stock Exchange at the corner of Wall and Broad Streets in New York City, you're Inside the ICE House, our podcast from Intercontinental Exchange on markets, leadership, and vision and global business, the dream drivers that have made the NYSE an indispensable institution of global growth for over 225 years. Each week, we feature stories of those who hatch plans, create jobs, and harness the engine of capitalism right here, right now at the NYSE and at ICE's exchanges and clearing houses around the world. And now welcome Inside the ICE House.
Pete Asch:
For those who work and live in New York City, the start of fall isn't marked by the changing of leaves, but rather the road closures and traffic delays that accompany the UN General Assembly. Since 2009, those delays have also been joined by international leaders from business, government and civil society attending Climate Week NYC. Run by the international nonprofit The Climate Group, Climate Week NYC catalyzes commitments to reduce carbon emissions, promote sustainability initiatives, and adapt to environmental challenges. Part of the week's programming includes ICE's annual Climate & Capital Conference held with Gitterman Asset Management and Accenture, that's NYC ticker CAN, held right here at the New York Stock Exchange.
This year's event will be centered around three interconnected themes; adaptation, innovation, and regulation. A highlight of the events program is our guest today, Deutsche Bank's Kamran Khan joining Elizabeth King ICE's president of sustainable finance for fireside chat on using debt markets to fund adaptation and transition. Our conversation with Kamran Khan, managing director and head of ESG for Asia-Pacific at Deutsche Bank, previewing his chat with Elizabeth, the state of ESG in Asia and across the globe, and how his current role allows him to combine all aspects of his career from policy to business will be right after this break.
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Pete Asch:
Our guest today, Kamran Khan, is the managing director and head of environmental, social and governance for Asia-Pacific at Deutsche Bank, NYSE ticker DB. Previously, he established the World Bank Group hub in Singapore and led the World Bank's infrastructure finance practice in East Asia. Over the course of his career, Kamran has led investments in sustainable developments across Asia, Africa, Latin America, and Eastern Europe. He's also led an impact fund targeting companies focused on achieving UN sustainable development goals and was appointed by the Obama White House to serve as the head of global investments and operations at the US Millennium Challenge Corporation. Welcome Kamran, Inside the ICE House.
Kamran Khan:
Pleasure to be here.
Pete Asch:
We spoke a couple of weeks ago getting ready for this conversation, and you said that when you travel, you always try to make time for students. And I know yesterday you sat down with some students at Columbia University. What did they ask you?
Kamran Khan:
I think the key thing that the students or young people in general ask for is, A, is this for real? Or are you all folks just making it up and then it's going to fade away like all the other fads? Right? So assuring them that this is very real and it's driven not by some sort of morality police or non-specific ideas about what is good and what is bad. It's really driven by creating value for companies, creating value for consumers, and making sure that it's a risk adjusted discussion. So when we say sustainability, especially in the business world, what we're really talking about is making the business more profitable, more attractive, better managed, more transparent so that shareholders can feel good that, on a risk adjusted basis, their investments are good.
Consumers can feel good that the products that they're buying from different brands are produced in a responsible fashion without destroying the environment or social fabric of the location where they're being produced. So that's what this is about and this is what young people want to know. How do I connect this? I know this is the right thing to do, but is it also the right business thing to do? And how do you combine the two? And I think that's the challenge of communicating this sustainability movement to common people. And that's why I'm here to make sure that I do my part.
Pete Asch:
You were at Columbia yesterday. You're with us today. Earlier today, you were with the Indian Embassy. Tomorrow, you'll be at the climate and capital event. What else are you planning on doing in New York this week during UN Assembly week?
Kamran Khan:
Well, true to my starting comment, I am here to talk about what's happening in Asia in the sustainability movement, why Asia matters and how it matters. But at the same time, I also know who pays for my salary, which is my clients. So I am meeting a number of clients as well. That's part and parcel of what we do. Again, when you think about sustainability, if you just think about it as a right thing to do or the good thing to do, it's then going to probably lose appeal after a while when some other new topic comes in.
But if you can bake that into the operating model of a company or an individual like myself, then you say, "By doing sustainability, I do better in my business. Which means the more better I do in my business, the more sustainable my business becomes." It's the same thing with me as an individual, right? If I am creating value for my employer by doing sustainability, then I will have a job long term, and I'll be able to have the impact that I really wish to have. But if I become a cost center, then it's just a matter of time before somebody says, "I can't handle this cost. You just cost too much."
Pete Asch:
This week is, I mentioned, Climate Week NYC. The theme is, "We Can. We Will." Sounds like they're bit a little off of a slogan from Barack Obama from a few years ago. I want to hear him debut that 15 years ago and get your reaction to it.
Barack Obama:
For when we have faced down impossible lies, when we've been told we're not ready, or that we shouldn't try, or that we can't, generations of Americans have responded with a simple creed that sums up the spirit of the people, "Yes, we can."
Pete Asch:
For many, climate change seems like impossible odds, but here at ICE, and it sounds like from earlier conversation you as well, we think that a combined effort, one using billions of dollars many already committed, can overcome those odds. How do we ensure the right solution implemented and we go from we can to we will?
Kamran Khan:
Yeah. So I think having worked for President Obama, obviously I'm biased. But I must say one additional aspect of that is not only that we can and we will, but we must. We don't have a choice. When you talk to young people, they know that very, very clearly. And I think that the world is getting to know that. All you have to do is look at your news. All one kind of catastrophe after another, natural catastrophes are happening. I think it's hard for people to argue now that no, nothing is changing, climate change is not real. So it's very real and it's very imminent. The threat that faces us is not a theoretical concept anymore, it's pretty well visualized at this point almost, certainly quantified.
So I think the question really is, how do we get this urgency into the process? And this is why I was saying financial sustainability of this movement is just as important as the sustainability impact it's trying to get. So if I can make a client company or a bank like Deutsche Bank, most of our clients, I would say 95% of them are significant size. If I as a bank can make them more sustainable in the way they practice their business, then every day that they operate, they become more sustainable. And the more sustainable they become, hopefully the more profitable they become. Then that's a self-perpetuating model. You don't have to then police anybody, you don't have to say, "Hey, you didn't do this right." They will do it because it's good for them.
And this is what the free market is all about. This is why we're here in the New York Stock Exchange's fantastic building. What are the market drivers? And I think that's really going to be the key. A, how do you communicate the need to the right people so that the market demands are increased for these types of practices? And then, how do we incorporate these ideas into the business practices so that they increasingly over time become more and more sustainable.
Pete Asch:
And what you're describing is a lot of your background. You mentioned you worked with the Obama administration, you're with Deutsche Bank now. You combine this policy with business, with this view of sustainability. Where did that interest come from? Was sustainability a big part of the Khan house growing up, or is this something you came across later?
Kamran Khan:
Very interesting. The Khan house growing up was a very modest endeavor. I was born in Pakistan, grew up in Pakistan in a very middle class family. We were not talking global politics usually. But I was brought up with very strong values on how to conduct yourself and how to take responsibilities for things that go beyond what is good for you. And so I eventually, through different strokes of luck and hard work and prayers and whatnot, I ended up in the US in college. And then as I was going through my undergrad, I discovered economics, which I had not in high school ever studied. And I loved it.
And then I got involved in development economics. Coming from a developing country, it came naturally to me that I should be trying to figure out how to make developing countries do better so people who live there can have a better life. And so from that, I've been quite involved. But then at some point, I had to make realistic decisions to say, just having a desire to help even a set of countries called developing countries, just having the desire to help is not enough. You need to have the skills to help. And so that took me more towards hardcore finance. So eventually, I did international commercial banking for a while in Washington D.C.
Then I went to graduate school. And then when I came out of graduate school, eventually, I ended up on Wall Street with investment banking, doing mergers and acquisitions, doing technology banking, which really honed my skills on how to think through business issues, financing issues. And then, at some point, I also did some strategy consulting, which gave me a good sense of how do you hold presence in a C-suite discussion, how do you convince, how do you sell ideas, not just products, but ideas to people? How do you make what you are trying to say, the value proposition, adaptable to the realities that people across the table from you are dealing with?
And it's the same conversation you have with a minister in a country or head of state when you're talking about economic policy and you say, "You need this policy because it's good for your people. And in often the case, also good for your politics." So that combination comes naturally. And ESG is, or sustainability, certainly ESG banking is a space where you need all of these components to be successful. And I must say I wasn't sure in my lifetime I would find a job that will combine all of different eclectic components of my career into one until this ESG movement started to gain momentum and I said, "Hey, there is a job that actually thrives on these very separate looking experiences. If you can combine them all together, it can make you very, very successful."
And I'm very, very grateful and lucky to be alive at this point in time in world history where you can actually earn a living doing this.
Pete Asch:
Yeah. And you mentioned as ESG is becoming a thing, your career is taking you across Pakistan, educating the US, work in the US, and you go to Singapore, Switzerland, China, just to name a few of the countries you worked in. As you're spending time with these different geographical regions, how does that contribute to your own perspective on ESG and sustainability?
Kamran Khan:
Yeah, so very good question. I have two perspectives. One, the split is developing country versus developed country perspective. So what does a developing country need? So I was just on a round table, discussing energy transition in India and the US-India relationship. And one of the comments I made was that, a country like India, when you ask the question how are you going to pay for this transition? One key driver is through trade and exports. But then, their concerns are also very clear, which is, am I going to be able to sell my products to developed economies if developed economies start putting barriers to trade based on ESG standards? If they say, "Oh no, your product is not sustainable enough to be imported here." That becomes a pretty significant issue.
And I think in months and years to come, you'll see a lot of these debates moving from the COP meetings or the UN meetings or the World Economic Forum kind of meetings to the World Trade Organization meetings because they're converting into something else. So that's one aspect of the difference of perspectives. The second is, regardless of which country you're in, public versus private. What role should the public sector play, government should play, versus what role is there for the private sector? And here, the discussion pretty much splits between what is referred to as adaptation versus mitigation.
So let me explain. Mitigation is, you say, we as a species in our economic activity are spewing out a lot of emissions which is causing this damage to the environment, right? So when we say mitigation, we say, how do we mitigate that? How do we emit less? How do we pollute less than we have been doing? Okay? Adaptation is about, okay, so we have been polluting the environment that has caused some damage. Damage is going to result in catastrophes and different events, natural disasters that are going to affect people. How do we adapt to such changes in the global environment?
So there, the perspective for the public sector by and large, I think, is moving towards adaptation. That is their responsibility. So if you have people living in flood prone planes and there are going to be more floods, it's the government's responsibility to figure out how to take care of people who cannot take care of themselves very easily in such circumstances. Now, if you look at mitigation, like I said, the emissions by and large come out of economic activity. You manufacture something, you create energy out of fossil fuel, that's creating that emission. So the responsibility for reducing that emission, to check that damage that's being caused, should necessarily rest mostly with the private sector.
Now, the public sector has a role to play, which is to say, "I want to create the right laws, right incentives for you to do the right thing, Mr. Business. But the responsibility for doing it is yours." And you see different countries trying different approaches. So US has a very incentive-based structure, the famous infrastructure bill from last year. I mean, it provides significant incentives for companies to do the right thing, trying to change the incentive structure. European Union has a much more of a rule space structure where they are saying, "We will tax you, we will penalize you if you don't do the right thing."
I am not saying they don't have incentives. They also have incentives, but it's sort of, if you had to pick who's more on the rule side and who's more on the... like carrot and stick. Right? So EU probably has more stick than carrot. US has probably more carrot than stick. So that's a second split of perspectives, the public versus private. And then, let's not forget the rich versus poor. Again, it transcends country, and whether it's a developing country or a developed country, you'll have the same kind of relative imbalance between the rich and the poor in a developed economy like United States as you would in some developing country. Because the natural catastrophes, if they keep coming, guess who is less prepared to handle them?
I mean, you're living paycheck to paycheck and something terrible happens, you are much less prepared to handle and adjust around it. Versus somebody who's got plenty in the bank. You're like, "Okay, yeah, sure, I lost one month of work, but that's okay. I had enough saved. I can deal with it." But then if you didn't have that margin, you're going to suffer. So I think we have to remember that. While I talk about financial sustainability and business approach to this, there is a very, very baseline human element that underlines the climate change, and we cannot forget that.
Pete Asch:
So you're looking at this, you have these ideas, you're thinking about where impact can happen, rich versus poor, developing versus developed nations. And we're going back three years now. You take this job. It's a new job, head of ESG for Asia-Pacific at Deutsche Bank. Why was that the right direction for you considering all the options you had with your background? And where does that team fit into the overall structure for the company?
Kamran Khan:
Another very interesting question. So let me give you a little bit of a background. So as you know, I work for U.S. Agency for International Development. I work for the World Bank. I work for US Millennium Challenge Corporation. And I also had an impact fund. All fantastic jobs. I've always taken that as a very serious responsibility on me. Let me give you a little background on that. I look at my late father who worked very hard all his life and he provided for us and that he's the reason I'm here sitting in front of you. But I don't think he ever loved his job, but that was the best job he could get, and he hung on it because he knew the family needed it and he thought, "Okay, that's my job as the father to provide for the family."
So I've always felt that it is my responsibility to always be totally happy with my job. And when I'm not happy with a job, when I'm bored or when I feel like I'm not learning enough, I'm not being as creative, then it is my responsibility to find another job. And so that's how I've always made my career moves, in terms of what do I want to do next then, rather than hang on to something that just feels right, but you're not 100% happy with it, right? With that background, let me come to your actual question.
In all of these jobs, I've had fun. So when I woke up in the morning, and I still do today, I wake up in the morning, I'm like, I'm grateful for my job, I'm happy, I'm excited about what I'm going to do today. But many of these roles I've had, the one thing missing. I did some fantastic projects, fantastic impact. But they were always limited in terms of scale. So World Bank, I would do, at the most, maybe a billion dollars worth of projects in a year, and that's a huge year. And there'd be like X number of projects, four or five projects at the most. Usually three or four. And then you say, okay, when you're done with one of these, it takes you a year or so to get this thing done, financed and all that.
And then you say, okay, now this needs to be done 200 times to really have impact, in any country. You do a project, you say, "Okay, oh, we built this great toll road." Okay great. But they need-
Pete Asch:
There's a lot more roads.
Kamran Khan:
... 500 such roads, right? How are we going to do that? But I finished that and I'm already onto my next project, which could be water or some other sector or some other country. So I was always cognizant of the fact that I'm doing great demonstration projects, I'm creating the models, but how do I scale that up because that's really going to bring about change. And that brings me to your, again, specifically the question. I came to Deutsche Bank because I thought, "Okay, I want to go to a platform where I can do this stuff at scale. And prior to the ESG movement, So I would say as early as four years ago, there was no platform in the private markets where I could come and get that scale.
But today, it exists. And that's why I said I'm very grateful to be alive today because I can apply all of those things I learned doing one project at a time in development finance institutions or multilateral institutions, but I can do them at massive scale now. So here, there are weeks when I'm involved in more than a billion dollars worth of transactions. So you can imagine if I do my job right and my team does the job and we're actually incentivizing and advising companies to adopt truly sustainable practices which are good for them and good for the world, and you can do them at scale that is in billions, that is a huge driver of the right kind of change.
So that's why I came and that's why I love talking to young people to encourage them to think that way. To say, learn your craft. You can learn it at an NGO, you can learn it in a development finance organization. You can learn anywhere. Then try to figure out how do I scale that. And you got to think big, right? I mean, the world needs big thinking. We can't do little piddly things on the side and pat ourselves on the back and say, "Hey, what a great job I'm doing." I did that for a long time. And even when I did it, I felt like, "How about the impact? I got this one project. How many people will one toll road serve?"
It does serve a lot of people. Those people are very happy they have a toll road when they didn't have one before. But to really, really have transformational change, we need the private sector to drive this change.
Pete Asch:
And within Deutsche Bank, to fuel that change, you launched the ESG Center for Excellence, which began two years ago, that focuses on these ESG transactions. What does a typical deal look like from the center and how is that different from maybe a similar size deal that does not have an ESG perspective to it?
Kamran Khan:
When we say ESG deals, we're talking about a variety of different types of transactions. So it could be all kinds of ESG related bonds, so green bonds, sustainable development goal linked bonds, KPI bonds. KPIs meaning bonds that commit the issuer to specific metric. And they say, "Today, my emission numbers are X. And then by the time this bond is fully paid off, my emission numbers will be X minus Y, whatever that number is, and I'm willing to take a penalty if I don't stay on my promise curve." So that's all kinds of bonds. Then you have all kinds of loans. So this could be, you can structure the same way. Variety of loans. We do bilateral loans with just us and our balance sheet. Often we do syndicates with other banks joining us and structuring it. So that's the second type.
Third is derivatives. Becoming very, very prominent part of the ESG toolkit now, which is ESG linked derivatives, which have the same kind of commitments that the derivative sponsor is making, often with a penalty for not achieving those commitments. So what an ESG deal usually would look like is, it looks, on the one hand, like a normal, "Okay, you wanted to raise a bond or you wanted a loan? I make a loan to you, and I'll make the loan to you based on your credit and your ability to repay that loan and all that. Like the normal business process.
But then on top of that, I'm saying, "If you want to call your loan that I'm making to you sustainable, then you need to identify, A, what is sustainable in your business? What goes to the heart of the sustainability of your business model?" We're not talking about you saying, "I want to do good stuff, help the poor, give charity." No. Talk to me about your business. What makes your business more or less sustainable? That's how we identify those metric that are material to the sustainability of your business. Third thing you do is then you attach target for how are you going to improve those metric, make them more sustainable over the course of a transaction.
You build that into the documentation for the transaction. And there's some more details, like use of proceeds versus KPI or metric linked. But by and large, issuer is making commitments that are financial, which we are all very aware of, but also of non-financial nature. And often, there's a penalty for not delivering on the non-financial commitments. And that's the job of the bank that's structuring this or underwriting this to make sure that the transaction is structured the right way, and then the right level of accountability is put on the issuer. And then there's some accountability on the bank as well for doing it the right way.
And just like with any other financial product, I will not build a good brand because people say these guys call anything ESG, right? Just like, if you don't take, let's say, M&A seriously, you're like, "I got one deal right. The other one didn't go that well," you're not going to get a whole lot of M&A business doing that way, if a lot of your deals fall through or variety of different things can happen, right? Same way with ESG. If a lot of clients feel that after doing all of the hard work, they do a deal with you. And after the end of that deal, instead of them being recognized as emerging sustainable business, they are inundated with people writing about how they're not doing the right thing or they're greenwashing or what have you. That's going to give a bad mark for your reputation, and it'll go beyond just the ESG business. It'll go into other aspects of your work as well.
Pete Asch:
But there is one big difference. An M&A deal, you know if it went well because if it falls through or the stock price changes, a loan if the payments stop. You mentioned, even to get the loan, you need a credit score. How has the analytics and the data evolved to let you really say and put hard numbers on these sort of projects and have it not be, as you just alluded to, seen as greenwashing.
Kamran Khan:
Data is central to all of this. If you come to our office in Singapore, we have a separate office for the ESG team. It's super nice, by the way. And it does not look like an investment bank office. It has banners of sustainable development goals and so on and so forth. But one of the key markers there is a big banner that says evidence-based data-driven ESG. And that's our north star. This is how we define our business, which is, do we have the data? And before the data, as I mentioned to you, do we have the data on the right things?
And then once you've identified the right metric, do you have the data and do you have a reporting framework in place to ensure that this will be ongoing so one can actually substantiate the impact and substantiate the commitment that one is making? And that's, I think, coming into place very, very quickly. And this is obviously a non-financial aspect of this. Similar to how it has now come so much so on the financial side that we don't even think about it. Companies come out and say, "Okay. I promise X, Y, Z to the street on my EPS." And if they deliver below that, they get punished. I mean, in terms of their stock price and the amount of people who are interested in buying their stock and so on and so forth.
I would hope that over time, this will start to become the case on non-financial data as well. Today, the data is limited. So the area where, for example, we have the most legway in the sense that, I'm referring here to green bonds. So they've been around as an instrument for the longest time. Other instruments are coming in now, but green bonds started a while ago and they have improved over time. But there's a timeline data available on green bonds. And what we see, if you analyze, let's say, a company that issues a green bond and a standard bond, what you see is that, on a pari-passu basis, there is a discount on the green bond.
It's a little bit lower on the investment grade, much higher on high yield. And depending upon which years data you look at, it can go anywhere from five basis points to 15 basis points for investment grade. And then on high yield, we have seen it as high as 25, 30 basis points. Now, what's important here is to recognize that not only is the delta in the pricing quite visible in the one instrument that we can study, but when you look deeper and you look at the book building side of those same two bonds being issued by the same issuer, you find that the book on the green side is much bigger, usually one and a half to two X the book on the traditional bond. So that tells me there's more people looking for such instruments, and therefore, we should expect this pricing delta to keep increasing over time.
Now, it gets a little bit affected because of macroeconomic situation. But generally speaking, what we want to see and what we hope for is a market driver to say, "You issued a good quality ESG instrument. You have more people demanding it. Therefore, you're getting a lower price." Versus, "You're not very sustainable. Your cost of capital is high." And we're seeing that, the opposite side. So if you look at companies that are very significantly reliant upon fossil fuel, particularly coal related revenues, across the board, they either have already experienced an increase in their cost of capital or they fear for it.
Pete Asch:
Well, after the break, we're going to turn our attention to the global effort to combat climate change and advance ESG efforts. We'll be right back after this.
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Pete Asch:
Welcome back. Before the break, Kamran Khan, managing director of ESG for Asia-Pacific at Deutsche Bank and I were talking about his current role and his journey to it. Kamran, a few weeks ago, you attended the B20 event in India. I want to listen to Amitabh Kant, the G20 India Sherpa speaking on stage at it about India's priorities.
Amitabh Kant:
And the third key priority is climate action and climate finance because the earth may survive but we'll all go extinct. And therefore, a very concentrated action for climate action which requires climate finance is critical for the world. And this would require energy transition. This would require just an inclusive huge amount of energy transition. India has done its bid by doing about 185 gigawatts of renewable energy. We are the only G20 country to have met its NDC target nine years ahead of schedule, and the only NDC G20 country to have been on top of the clean climate index.
Pete Asch:
So as he said, why is India so well positioned to meet the needs of climate transition and what are some of the solutions that you're excited about coming out of that country?
Kamran Khan:
Yeah. So there's so much excitement. It was really a pleasure to see India execute the B20 and the G20 in a fantastic way, representing all of the emerging economies, not just India, and presenting a case for emerging markets into this movement. India has done a number of things right and they are part and parcel of the overall economic growth that we are seeing in India, which is all about execution, focusing on the right things, setting the right policies, and holding people accountable for executing those policies. Renewable energy has been a very important element of that.
If you look at India today, renewable energy is already priced lower than fossil fuel. This is quite incredible to achieve in a very short period of time. What a lot of people don't realize is that India has also substantially reduced the efficiency or the intensity as they call it, of emissions. So for example, intensity is like, for each dollar worth of GDP, how many tons of CO2 are you emitting? What is the CO2 cost of your GDP? And it has come down quite significantly from I believe 2005 numbers to now something like 25 or 30%. Please don't quote me on that, but I think it's in that range. If I'm not mistaken, no other country has achieved anything like that.
So then you say, okay, well, how did that happen? It happened because we now have a lot more renewable energy in India than most other countries that size do. And then also, uptake of natural gas and other non coal related fuels has been pretty big, both in transportation sector in particular as well as households. So the third thing that I think is quite significant to note about India is what is referred to as energy poverty. So how many homes have electricity. And that's a key metric for growth as well. And they are well up there. I think they achieved almost 100% by 2021, if I'm not mistaken.
So there are a number of drivers going through this change in India. But it's not an energy transition story, it's an economic growth story with energy transition built into it. Now, let's come to the second layer of this, which is, how does a country like India pay for this transformation? And one key way in which it's going to pay for that is through trade and exports. And I don't mean trade and export of just energy technologies or, people talk about hydrogen, and all of that is valid. I'm looking at much bigger picture, which is, in general, products manufactured in India.
The more renewable energy you have, the better the chance that your products are going to meet the sustainability targets for their destination. Because increasingly, you'll see countries saying, "Oh, I can't allow this particular product to be imported into my jurisdiction because it was not prepared sustainably." How sustainable a product is? And by the way, this concept of a product passport is very real now. So when a ship comes to the port, let's say from some country to the US, used to be you'd have this paper trail, lots of letters, banker's letters and so on and so forth. Now, you'll have a digital passport for the product. And that digital passport will have all the usual financial information, but it'll also have traceability on origin.
So is this product produced in a sustainable fashion so that the country that's receiving that product can feel comfortable that, "Okay, yes, all my requirements have been met for manufacturing goods," is increasingly dependent upon whether renewable energy was used in the production of that product or not. I'm not saying it's the only component, but it is a very, very key component. So for a country like India... And this is what Amitabh Kant was getting at, and I've known him for some time. He, I think, represents the reality very, very well in terms of what India has achieved.
I just want to highlight that what has been achieved will be good for the environment in India, would be good for India as a role model for other countries, but it'll also be very good for India outbound exports because it will allow India to drive its exports based on a very, very sound sustainability platform that it's building. And a lot of that platform depends upon the success India is having with renewable energy.
Pete Asch:
So you're in India a few weeks ago, you're also a infrastructure finance advisor for the G20. A lot of that policy is going to come from the government and be enacted by the private sector. Coming out of that meeting or just in general, what are some of the principle risks and opportunities that that organization is really trying to tackle this year as it looks to both, help countries grow their economies, but also deal with climate and sustainability?
Kamran Khan:
These kinds of conferences or organizational structures are very important to build consensus. Can all countries agree to an approach which is good for the collective whole? That's really where it comes down to. And for the B20, particularly the G20, I think your listeners should know this that usually when you have these kinds of big meetings, you have heads of states from all over the place, developed countries, developing countries, some of them have political differences, that negotiation is very painful, takes a long time. I've seen that happen on multiple occasions. And usually until the last second, which is the deadline by which the final communicate for a meeting like that is supposed to be finalized, then they do the editing and then publish it or announce it, it usually goes down to the wire, to the last second.
In the case of this G20 meetings, they managed to get this thing agreed almost a day in advance, which is quite remarkable. And it's remarkable from the perspective that India's leadership was able to get this kind of consensus bill that effectively. Okay? I want your audience to understand what is the value of these events. Then they have done quite a few things. There are people who would say not enough, and there are people say more than enough. Suffice to say, it is definitely a success. But let me just highlight a few things that are worth noting.
One, they added what I call the I for inclusion into the mandate of the G20. Which, prior to this, it was the G20, right? The biggest 20 economies. And the discussion there was, "Hey, you can't just set the rules for the whole world by having the 20 richest economies sitting around a table and deciding. You got to be more inclusive than that. So they have effectively added a G21 now. And the 21 is the African Union, which I think is a pretty significant change to the mandate. So now the African Union, which has quite a few countries. But they will come in and be involved in the B20 discussions going forward.
Those are the kinds of things that are structural changes. So every time the G20 meets, African Union will be there. So their perspective would be brought into this. That means there'll be more buy-in from the rest of the world for whatever the G20 say is the right path forward. So I hope I'm answering your question. It's really about building consensus around specific things. And there are many more things that need to be pushed through. And you'll see a lot of that continuing with the G20 in Brazil. I'm confident about that because Brazilians were there in pretty good force in New Delhi. And they spend a lot of time understanding what happened at the G20 and the B20 in India, and they're going to take that forward.
I think many of these ideas are very relevant for Brazil as well as they are for many other developing countries.
Pete Asch:
As you said, you had, for a long time, the G20 setting rules for everything else. And a lot of times, when we're discussing places like Asia, like Africa, like developing world, we describe them as a single entity. But for Asia in particular, it's far larger and arguably more diverse than any other region in the world. Do you expect that economic structures among countries, be at different states, some are developing, some are developed, that reporting standards will stay fragmented, or do you see more unification in that region?
Kamran Khan:
Great question. Look, the reporting standards cannot be standardized exactly the same. It'll take a long time before there's universal reporting standard. What you can have are standards for what is considered material. So like international gap. Everybody knows exactly what it is. Not every company around the world can follow international gap in terms of how they prepare their financials. But a certain set of companies, regardless of where they're based globally, are going to adopt that. I'm giving you that example, not to confuse people into thinking that there will be a sustainability gap anytime soon.
We do have an ISSB, the International Sustainability Standards Board that is setting up quite a bit of this work, but it'll take some time. And what they're doing is they're identifying material issues by industry to say, "If you want to talk about sustainability in industry X, these are the kinds of things you need to look at." And this is how those metrics should be defined so that everybody can talk from the same script rather than, when somebody says A, B, C, you don't know how they define A, B, C. So I think those definitions are being done. But not all of those will be adopted by each jurisdiction.
So particularly in Asia, as you probably know, Asia is a very competitive space. So when the SEC looks at what they want to, for example, regulate and how they want to regulate, they by and large focus on public interest, like investors, are they being protected adequately and so on and so forth, and they look at safety, and variety of these things. But they're not really worried about competition, right? They're not worried about, "Oh, who is going to take business away from the US to somewhere?" You could argue that, yes, they do have to worry a little bit about EU and so on, but it's really not as acute an issue as it would be for a country in Asia.
So if you have very, very strict ESG policies and you move too fast and start asking companies to comply with quite a few things well ahead of time, then there's a risk that those companies will start slowly moving across the border to some other country where the requirements are not so hard. If you have a very soft regime, then you take the risk that people think you're not serious about this sustainability stuff. And so big global corporation whose direct investment you want to attract will feel uncomfortable being there because they'll be like, "Okay, I don't want to run my business out of a country that's not considered serious enough."
So they have to manage this process and figure out not only what is good for investors, what's good for my market, but also what's important for my competitive strategy vis-a-vis other countries. So I don't think that we should be thinking about a universal rule that will be applied across the countries. What you will see are two types of models. One is, a very good example is the ASEAN ESG Taxonomy. So all the ASEAN countries which are smaller countries, they said, "Okay, we can't all build our own taxonomy. It's too expensive. Why don't we come up with a uniform taxonomy that we can all agree upon and then we can all apply on?" So that's one model.
The second model is a regulator looking at specific convention. For example, TCFD, which by and large looks at environmental risk going into financial investments. So a regulator could say, "You know what? This TCFD thing sounds like a pretty sound thing. Let's start implementing that." And a number of economies are starting to do that. And there may be some other similar conventions coming down the pike over the next months or years. So you'll have that, call it a off-the-shelf product that you look at and say, "Does this apply to my jurisdiction and the companies who operate in my jurisdiction? Can they handle it? What kind of training do I need to provide to make sure that there are consultants and advisors who can help companies comply with this rule? And then, let me find the most reasonable practical timeline for requiring companies to follow this particular guideline."
That's likely to be the case other than that regional model that I mentioned, which wouldn't necessarily take hold everywhere. I mean, other than EU and ASEAN, maybe the African Union at some point might end up with something similar, but I think the forerunner of all of that will be this off-the-shelf model.
Pete Asch:
Off-the-shelf model. We'll see how it works. As we wrap up, Deutsche Bank was the principal sponsor of the Responsible Investor Asia conference last year. In recapping the event, you wrote an article that said, and I'm going to quote you to yourself now, "Asia is the epicenter of global sustainable transformation. Nothing else will matter if we don't get it right in Asia." So a year later, how are you feeling about that challenge that you gave the region?
Kamran Khan:
I completely stand behind it. If you look at Asia, a significant, I would say, I think it's somewhere around 40-50% of global direct foreign investment or foreign direct investment goes to Asia. And it's been the case for decades now, at least two or three decades. So that means vast majority of new investment is happening in Asia. If you look at sourcing, which is procurement, where do the global companies buy the raw material or the intermediary products? Again, Asia is the biggest, biggest region for that, 30-40% of global. If you look at where exports originate from, global export, again, significant percent comes out of Asia.
So the real action for the whole world is in Asia. This is where things are being manufactured for all of us, regardless of where we live. This is where the things are being sourced from. Increasingly, this is where things are being sold also. So if we don't get it right there, what chance do we have as a civilization? If you get the wrong kind of investments in now... Let's say that a vast majority of new investments happening in Asia, new manufacturing facilities and so on, are not sustainable. Somehow we fail to incentivize Asia to adopt these practices. These investments will remain for who knows how many decades. And they will be producing the pollution that we all want to avoid.
It's like bad gas in your car. If you put bad gas that gives you jerks, you got to wait till that gas finishes before you can put clean gas. It is the same thing with economies and development. If you don't incentivize the fastest growing region of the world to adopt sustainable practices, then the whole world will have to wait until that bad gas finishes, and then there's a new cycle of new investments where you can then hope to inspire people to adopt sustainable practices. So yes, I stand by my words and I think that it's very relevant.
But the good news is that in Asia, not just the Asian companies, but many of the foreign companies headquartered in US, Europe and elsewhere who have pretty significant presence, commercial presence in Asia, are now actively thinking about how do I make my operations in Asia more sustainable. Often coming from the same pressure from the end consumer or the investors or their home regulators saying, "Okay, we want you to operate at this level, not just when you are at home, but also in all of the operations you have in other countries."
So that's driving change in Asia. Plus you have the Asian regulators starting to wake up and ask for similar things. But let me just end by saying the most important driver for all of this change is the consumer. People like you and me. I mean, especially true for younger people who tend to be left of center on this topic. If people like us start demanding that we only want to buy brands that are following responsible practices, sustainable practices, then that builds the pressure all across the chain. That becomes a key issue for the commercial side of a company.
So imagine a Nike or an Adidas or any of the apparel companies, their key customer is a youngish person living in an urban setting somewhere in the world. You could be in Sao Paulo or Jakarta or New York or Chicago or whatever. They have the same sensibilities. And they're not going to buy a T-shirt or a shoe with a brand that has a reputation for not being responsible. We saw that in 2020 when a lot of such brands were really, really penalized. So that gives me hope, especially the younger generation. Because they are going to become increasingly the dominant buying power of the world.
And I can tell you, they're not compromising, right? They're not saying, "Oh, it's okay." We heard a lot about the baby boomers and we talked about all these other generations that they got comfortable with the status quo. These young people are not comfortable with the status quo, mostly because it's just not a matter of, oh, what is good and what's bad? It's really about survival, right? I mean, it's very real, this threat. And I think they feel it. And I'm glad that they do.
Pete Asch:
Yeah. And that takes our conversation where we started, where when you travel the world, you make sure to spend some time with students to hear what they have to say. Thank you so much, Kamran, for joining us Inside the ICE House.
Kamran Khan:
It was my pleasure.
Pete Asch:
That's our conversation for this week. Our guest was Kamran Khan, managing director and head of environmental, social and governance for Asia-Pacific at Deutsche Bank, NYSE ticker DB. If you like what you heard, rate us on iTunes so other folks know where to find us. Got a question or comment you'd like one of our experts to tackle on a future show? Email us at [email protected] or tweet at us @ICEHousePodcast. Our show was produced by Isabella Bazzone with production assistance from Ken Abel. I'm Pete Asch, your host, signing off from library of the New York Stock Exchange. Thanks for listening. Talk to you next week.
Speaker 1:
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