Mr Winters, so far there has been no agreement on how to counter climate change. It seems to be difficult.

It is difficult; I think we can all recognize that there needs to be a global agreement on a system, it could be a carbon trade system or carbon taxation. If that global agreement was in place, it could work.

Why do you think so?

The proof of it being able to work is the European emissions trading system. It works, in a pretty small way in the context of the world, but it does work. Utilities have dramatically reduced their power emissions. China is coming up with his own system of carbon trading now. I would say it’s nascent, and for the world’s biggest emitter that could be a step in the right direction. But we also know that China has a net-zero target of 2060, so they are already a little bit behind compared to much of the rest of the world. But I think they are taking the issue more seriously now.

Where do we stand?

If there was a global agreement between governments that would be the easiest and most efficient way to do this. But there is no global agreement. And I venture to bet: When we come out of COP26 there still won’t be a comprehensive global agreement.

What’s your plan?

What we can do, and what the task force I’m chairing, the Taskforce on Scaling Voluntary Carbon Markets is doing, is all about getting an agreed set of global standards. Will everybody in the world exactly agree on what these standards are? No.

Why not?

For starters some people want different standards. And they‘ll be prepared to pay something to ensure that, in addition to being a legitimate carbon asset it also has biodiversity protection features or local employment features. What we’re building into the framework is the ability for people to pay more to get something that gives them more of what they want. But at the heart of it is what we call the core carbon principles, an agreed set of standards with a verification protocol and governance appropriate to a single global market.

What will this mean?

This could be an enormous game changer relative to what we have today, which is a very fragmented market with no agreed standards. Which is not to say that there are no standards. I think different standard setters have their own standards. But they are quite different. If you need evidence for that, you look at contracts which qualify for the EU Emissions Trading System are now trading at 50+ euros per ton. Contracts at the Chicago Mercantile Exchange (CME) are trading at 2-3 dollars per ton. The same carbon, the same effect on the planet.

Great arbitrage!

If you could deliver one into another part of the world, it would be. But you can’t, because they‘re two different markets. The real difference is: If you look at the CME, in the past five months they’ve launched three different contracts. They only accept contracts that have been approved by the Corsia consortium. That’s the group of airlines that came together over 15 years ago and agreed on some standards. They actually did really good work. But arguably they set the standards a little bit low.

What is the consequence of that?

The deliverables into that Chicago contract are trading at 3 dollars per ton. This isn‘t what we would agree to be the real cost of carbon, which is more like the European price than the Chicago price.

What would your core carbon principles do?

They would effectively disqualify a big chunk of the typically older projects that in some cases maybe never would have qualified as additive in terms of reducing carbon emissions. In other cases they’ve been surpassed by a lot. Some were made back in 2011, but they‘re still valid today. We want to set a high standard for the market. We’re not targeting a price, that’s not our role. But if we get an agreement on [the principles], we’ve got 450 members of this task force, 250 different organizations, all of the most thoughtful NGOs on the topic, I would say, the most experienced academics, many of the largest polluters, airlines, oil companies and shale companies.

But who will govern this?

We have a very specific framework for a governance body that we propose in a consultation paper that went out a few weeks ago. The governance body will consist of experts in the space, none of whom has a vested interest in the market.

How can you guarantee that?

There will be no emitters, no banks, traders or individual investors. Basically, it’s NGOs, academics and consortia of investors that have been set up specifically for getting to net-zero. One is the Net-Zero Asset Owners Alliance which is chaired by Günther Thallinger from Allianz. We also have Ben Pincombe from PRI, one of the founding investor networks behind Climate Action 100, a much bigger group of investors which are typically smaller but with a particular focus on protecting the planet. The governance panel will be advised by a panel of experts.

Any conflicts of interest there?

None of the existing verifiers or standard setters would be there unless they’d been out of post for two years or more. So we‘re trying very hard to make sure there’s complete independence of governance of this market that we’re proposing. And then there would be a consultation group with all the members. Up to now there are 250 corporate members of this task force. We hope that all of them will become members of this new market and many many more.

Why no carbon tax?

I think a carbon tax is a great idea. But that’s for governments to decide.

And they don’t agree on anything.

Six months ago we had Donald Trump.

And he certainly didn’t want to bring a carbon tax.

Surely not. I certainly hope we’re not going back to Donald Trump’s way of doing things, but who knows what the mood on taxation is going to be like in Germany, France, the United Kingdom or the US in a few years‘ time?

But as seen in the EU ETS carbon trading brings volatility corporates don’t need.

The weakness of the carbon trade system is that the prices are effectively centrally administered because the governments can decide how much to allow in terms of quota. So if they don’t like the price of 3 euros, they tighten the quota. When the price is 50-60 euros, they could loosen the quota if they wanted to. I don’t think they want to, but they could. It’s volatile, but it’s volatile around an administered framework. An outright carbon tax would be a substitute for a cap-and-trade system. But nobody is going to introduce a carbon tax unless they are assured that they are going to be protected from low [carbon] taxes in other countries.

What about carbon border tariffs?

The idea of a carbon tax combined with a carbon border tariff is a credible recipe. But that will run into WTO challenges. Government dealings are complicated, especially on a global scale. The private sector is complicated, but nowhere near as complicated as governments.

Countries like China have a point claiming that Western countries outsourced pollution to them.

Yes, that’s absolutely right. And I would welcome anything governments could do to push that in the right direction. I know that Mark Carney who initiated this task force is focused on a full range of things. Within the task force we very specifically said that we‘re not going to get involved in government policy. We’re not experts in that. We can’t influence it, and we’d just get bogged down. We’d rather focus on what the private sector can do by itself.

And that is?

The fact is there are tens, actually hundreds of billions of dollars which could go into these voluntary carbon markets. This could be money coming from people like Standard Chartered going into the hands of people who actually get carbon out of the environment, whether that’s people who are planting trees or people who are paid not to cut down trees or people who are investing in breakthrough technologies such as carbon capture or green hydrogen. That’s where the money needs to go. And the corporate world is getting ready to write the checks now. For the very reason that our stakeholders, starting with our shareholders, but also our employees, our clients are insisting that we reduce carbon ourselves as much as we can.

And there’s a lot of liquidity.

There should be a lot of liquidity. There should be a lot of demand for these credits. But I’d like to go back to the thought that a lot of the credits available in the world today are trading at very low prices. There’s a lot of demand, but not enough to soak up the surplus. And that surplus was created over ten years.

So there will be arbitrage.

There are organisations like the Science-Based Target Initiative (SBTI) and VCMI that are also going through a consultation process right now.These are extremely knowledgable environmental experts. They will effectively be the adjudicators on whether a corporation is honoring its commitment. So when Daimler stands up and says we’re going to be net-zero by 2050, this is our starting point, this is our annual reduction and this is where it’s coming from. There’s 10% left at the end and we’re going to use offsets. SBTI intends to be very prescriptive about what Daimler or Standard Chartered or anybody else can actually claim. This is an active debate. It’s called the corporate claims debate about what exactly you can give yourself credit for on the pathway to net-zero.

So what do you need?

It’s not clear yet. The only thing that’s clear is that SBTI intends to be extremely rigorous. SBTI is backed by hundreds of companies now. It’s many of the same people frankly that are members of our task force. And we’ve all said we want an honest and independent adjudicator. We don’t want company A to be able to sneak by with something that’s very cheap while company B is holding itself to a higher standard. I think times have changed; they really have. Now the corporate world is actually gearing itself up to dramatically reduce the arbitrage that‘s been there at various points over the past 25 years.

Where’s the prize for Standard Chartered in all this?

Number one is the avoided downside. Our markets are the most exposed to climate change. If we don’t do our part, if the world doesn’t do its part to get this right, very important markets for us like big chunks of India and Bangladesh will be either uninhabitable or under water. And there’s the theme of financing. We’re talking about 3 trillion dollars a year needed for the net-zero transition in developing countries. Only 10% of which is available. It’s a scary figure actually. It’s not just at the macroeconomic level. We surveyed all our MNC clients and they said 75% of their emissions come from their suppliers and they expect that two thirds of those in the emerging markets will struggle to meet emissions-reduction targets. When we asked the suppliers: Are you ready for what’s coming at you from Siemens, from Apple, from General Motors in terms of the requirement that you be sustainable? Because if you’re not sustainable, they’re not sustainable. And they have made a commitment.

So never mind if the Indian government isn’t pressuring you to meet your own commitment, or you don’t know how to measure it or whatever. If you can’t evidence to your customers that you have made the investment you are going to be pushed out of the market. 15% of the MNCs have already dropped suppliers where they didn’t identify a commitment in transitioning to net-zero. And they are just getting started. This is a huge issue for the developing world.

What about financing their transition?

From our perspective yes, we’ll finance them. We’re very good at that. We’re particularly good at blended finance where there is some state development money, some export credit agency together with banks and capital markets, these complex financings in particular in sustainable finance and project finance. Yes, there’s an opportunity to make some money in this. And also the carbon credits. One of the biggest incentives for a lot of companies that are undertaking these transitions is that they can generate some carbon credits for doing so. And that could be the difference between the project that’s financeable and the project that’s not. But honestly, if we don’t get this right, Standard Chartered doesn’t have a business model. Our markets will suffer tremendously.

What about your Middle Eastern clients. Aren’t they invested in a different way?

I thought the same until maybe two years ago. But when I talked to Saudi Aramco or Abu Dhabi National Oil Company they are 100% on sustainability anyway. Because their stakeholders are deciding that it’s critical, and that’s not just their governments, it’s also the capital markets. They won’t be able to run their operations for the same reason that Total, BP and Shell won’t be able to run their operations if they aren’t credible from a sustainability perspective.They also see a profit opportunity. Amongst the things they have other than a lot of oil and gas is sunlight.

To me the most exciting sustainable finance project that we’ve done is in Dubai in the desert. It’s called the Muhammad bin Rashid Al Maktoum Solar Park, and when completed it’ll be the biggest solar farm that exists. Three phases are complete and two more are under construction. We’re financing phases 4 and 5, but it’s phase 4 that’s really interesting. One quarter of it is conventional photovoltaic (PV) cells that produce power when the sun is shining. The rest uses the thermal solar technology comprising of arrays of large parabolic collectors and a giant circle of mirrors reflecting the light into a cauldron to the giant thermal tower in the middle.

What are you doing for this project?

The technology suppliers are American and Spanish. The owners are Saudi and UAE and others. The contractor is Chinese. There’s no multilateral or Export Credit Agency funding in that, but it’s a really complicated financing. The cost of power coming out of the PV cells is 2.3 cents per kWh which is a third of the cost of natural gas. The overall cost of power from the project when combined with the cost of the power that melts the salt that releases heat over night, effectively it’s a battery, to continue to produce power in the night time hours, is 7.3 cents per kWh. That’s still quite competitive. Obviously the technology is quite complicated. The capital expenditure is huge. But if this [technology] is rolled out more widely, we could power the earth.