This week, host Kristin Hayes talks with Kyung-Ah Park, who leads environmental markets and innovation in the newly formed sustainable finance group at Goldman Sachs; she also serves on the board of RFF. Previously, Park headed the Environmental Markets Group at Goldman Sachs.
As the episode title suggests, their conversation focuses on the potential to catalyze markets toward further investments in environmentally beneficial products and services. Hayes and Park talk about the definition of environmental markets and why markets matter in driving change at the scales needed.
An edited transcript of this episode also was published in issue 202 of Resources magazine.
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Top of the Stack
- The Uninhabitable Earth by David Wallace-Wells
The Full Transcript
Kristin Hayes: Hello, and welcome to Resources Radio, a weekly podcast from Resources for the Future. I’m your host, Kristin Hayes. This week, I talk with Kyung-Ah Park, who leads environmental markets and innovation in the newly formed Sustainable Finance Group at Goldman Sachs. We’re very lucky to also have Kyung-Ah serving on the board of RFF. As the episode title suggests, our conversation focuses on the potential to catalyze markets towards further investments in environmentally beneficial products and services. We’ll talk about the definition of environmental markets, and why they matter in driving change at the scales needed. Stay with us.
Kyung-Ah, thank you so much for joining us on Resources Radio. It's really nice to talk to you.
Kyung-Ah Park: Well, I'm happy to be here and thank you for inviting me.
Kristin Hayes: So Kyung-Ah, you used to be the head of environmental markets at Goldman Sachs. You're now leading environmental markets and innovation in the newly formed Sustainable Finance Group at Goldman Sachs. I wonder if I could kick off this podcast by asking you to define some terms for us, particularly the terms environmental markets and potentially as related to sustainable finance. I realize those probably have a lot of nuances and mean different things to different people, but how do you define those in your work at Goldman Sachs?
Kyung-Ah Park: Sure. So let me start with more of the conventional definition of environmental markets, which, as the nomenclature suggests, is about harnessing the power of the markets. Where in sort of simplified terms, the economic value is attributed to products and services and capital flows based on the value, really to enable better conservation and stewardship of ecosystems and environment. For example, you can put a value in the services that forests provide, whether it's carbon sequestration or biodiversity, that really creates incentives to conserve the forests, rather than cutting them down.
For Goldman Sachs, traditionally, our environmental markets have really been about harnessing the breadth of our core competencies as a global financial institution. Certainly on the capital dimensions of financing and investments, but also advisory, risk management, our asset management business, to really help address critical environmental issues including on climate change, and of course in a way that enables us to better serve our clients and generate a long-term value for our investors.
For example, we have a goal to mobilize $150 billion in financing investment to scale clean energy around the world, which is an important goal, in that when you think about climate change, energy is the largest contributor towards greenhouse gas emissions. It's also capital intensive, and bringing it down in terms of the cost curve has been a very important part of the scale-up, when you're managing or addressing climate change.
In terms of sustainable finance, the recent evolution, which is an incredibly exciting one, is in addition to climate change and environment, the business thesis more broader in sustainability has become incredibly compelling, including on inclusive growth. And we've been doing a lot on that front as well, whether it's in underserved markets with our Urban Investment Group, or investing in women-led businesses—and investment managers with Launch With GS, and also through our asset management business, where we now have $35 billion of assets under supervision, that are specifically dedicated to ESG—environmental, social, and governance—and impact strategies.
So the idea behind the formation of the Sustainable Finance Group is really to bring together these key pillars and the breadth of our capabilities as a firm and turbocharge our ability to serve our clients and capture growth, and really drive innovation.
Kristin Hayes: Can I just ask one more definitional question as we get started here? So you've mentioned a term that is new to me actually, something that I hadn't heard, but I imagine is continuing to grow in importance, and that's this concept of inclusive growth. So the inclusivity here refers to, sort of historically underserved populations?
Kyung-Ah Park: Inclusive growth is broader, in that it's everything from certainly underserved markets. It's also about inclusion on gender and diversity issues. But it's also things like, how do we help access to healthcare, access to financial services, as well as access to education? And so it's a very broad part of what we can do, in terms of both capturing the growth, the secular growth, that we are actually seeing, helping our clients, who are also increasingly focused on these initiatives and agenda, and then making sure that we play a meaningful part in terms of addressing our key societal issues.
Kristin Hayes: Okay. Well before I dive into a few more specifics related to environmental markets, I wanted to ask: How did you personally start working in this area? How did this become a focus of your career in financial markets?
Kyung-Ah Park: Sure. So I started working environmental markets now more than a decade ago. And before that, I'd been more of a traditional investment banker within Goldman Sachs. I very much loved my job with clients and transactions. But frankly, when I had my first child—and now I'm blessed with two children—I wanted to make the time away from home more impactful, given, at least for me personally, the opportunity cost of taking that time away for work went up. Fortunately Goldman Sachs had established our environmental policy framework in late 2005, and set up a new team to help implement the roadmap from that framework. And I got the opportunity to join the team. And it's been an incredibly rewarding journey in many ways. And perhaps, just to give you a personal tidbit, perhaps it was always meant to be, given I happened to be born on Arbor Day in South Korea, a day when the government really mobilized the public to help plan trees and reforest the country after many decades of degradation. So there you go.
Kristin Hayes: All right, it was destiny then. Well great. So let's talk a little bit more about the topic at hand. And you mentioned earlier the power of the markets to address climate change and other environmental and sustainable challenges. So can you say a little bit more about why, in your view, it's so critical to sort of harness that power to address some of these challenges?
Kyung-Ah Park: Yes. And let me step back and give you a sense for some of the numbers out there, in terms of what needs to be mobilized in the capital fund to address some of the key challenges.
So on climate change, an often quoted number is $1 trillion per year just on the clean energy transition that is needed to meet some of our key climate objectives. And then, when you think about the UN Sustainable Development Goals, which entails 17 key goals to really drive sustainable development globally, the number that is often quoted is several times bigger than this, so somewhere around the domain of $5 to $7 trillion per year. Now that number feels very daunting, and the public sector can't meet this alone, particularly given some of the budgetary constraints, but also the political inertia that we have, and the polarized environment that some of the countries live in.
So when you step back and think about what needs to happen, the good news is that there is actually significant capital out there, and more of it is getting harnessed for sustainability. If you kind of think about the public capital market in particular, which is incredibly deep and liquid, some of the numbers out there show that there's north of $150 trillion of capital outstanding, and there are a lot more financial tools that are unlocking greater capital flow from that market for green sustainable investments.
You also have institutional investors. These are some of the sovereign wealth funds, the public pension funds, that hold somewhere around $100 trillion dollars of assets and increasingly take into consideration environmental and social factors as well. And then, importantly, companies; these are strategic capital investments, companies who are investing in clean energy and other sustainability solutions, both as a way to de-risk, but more and more so to capture growth and innovation. So that's a reason why we definitely need to, obviously, harness the power of the markets and very much the private sector.
Kristin Hayes: But I do recognize that, or I've certainly heard that getting that private capital to flow into solutions, you just illuminated a number of ways in which companies, sovereign wealth funds, can and do, do that. And yet, it does seem like it's been a challenge to really get private capital to flow at the level needed as well. So what are some of the innovative mechanisms, the innovative finance mechanisms, that you know of, that are helping to ease that flow of private capital for some of these solutions? Are there any examples you can share with us?
Kyung-Ah Park: Yeah, the exciting thing is, in the past decade that I've been doing this work there's an incredible amount of innovation that is happening, broadly defined, but certainly on the financial and capital market domain. And let me give you a couple of examples of this. And let me start with what's called fixed income, which tends to be more the debt side of the ledger. And there's been a lot of focus and momentum around what is called green bonds. And these are very much no different than conventional bonds and very kind of simple, plain-vanilla instruments, where the risk and the return profile from the same issuer is exactly the same, whether it's green or conventional. The only real main difference being that you have a dedicated use of proceeds towards environmentally beneficial purposes and having reporting and transparency around the actual allocation of those proceeds and the impact it's having.
So this market initially started in sort of 2007, 2008, with multilateral development banks, namely the World Bank and the European Investment Bank, but it really came into the market in earnest in sort of 2013 and 14, when a set of principles were developed by a number of banks, which also included Goldman. And what's been exciting to see is that today, that market is, last year, almost $200 billion. This year, I think we're on the trajection momentum to well exceed this, and it now has a diversity of issuers, certainly multilateral development banks, but also companies, municipalities, sovereigns and across many different geographies. And then instruments have gone from not only green bonds, but social bonds, where it's about again, inclusive growth and social purposes. And then sustainability bonds, which combines both the green and the social.
So there's a lot going on in that market. And just going one layer deeper, in addition to kind of the plain vanilla corporate level or issuer level use of proceeds bonds, we've been also seeing things like securitization, project-level bonds, and performance linkages. And securitization as an example, just to explain it a little bit further, it's really aggregating smaller investments and projects into larger bonds that are non-recourse to the issuer, and then gets placed into the capital markets. And we happened to do the first solo-securitization in the world in 2013 in Japan. And one of the benefits has been that it's provided renewable developers with an alternative funding that tends to be longer-term and away from traditional bank markets to a diversified form of funding. So a good example of how you can open up greater capital flows.
Kristin Hayes: Okay. I wanted to ask one follow up question about, you mentioned that there's a more robust system of, for lack of a better term, sort of monitoring and verification for the use of the proceeds. So who actually does that monitoring and verification? Who's checking to make sure that the use of proceeds is in fact meeting the goals laid out in these green or social or sustainability bonds?
Kyung-Ah Park: Yeah sure. So the issue obviously is ultimately accountability, and given some of the reputational considerations around if you don't deliver, then obviously your reputational sustainability isn't great. First and foremost, the issuer owns and take the responsibility for this. But the market has evolved where you are seeing more independent opinions, and now the vast majority of green social sustainability bonds have these opinions associated with them, both at the front end when you actually do the green bonds and launch into the market. And then on the back end, once the actual allocations happens (at a minimum, typically every year), the issuers report through an impact reporting or the traditional sustainability reporting—including a green or a social sustainability section on the bonds allocation. And then some will also get that verified and assured by auditors or other verifiers as well.
Kristin Hayes: Okay. So it sounds like there's a very robust system for ensuring that those proceeds are used as anticipated.
Kyung-Ah Park: Yeah, I mean I wouldn't say very robust. It is robust for sure, certainly relative to where we were in the earlier stages of the market, but we also have to keep in mind that $200 billion sounds like a large number, but compared to the full breadth of the fixed-income market, it's a small drop in the bucket. And so we're still at the very early stages of that market development and we need to do more.
Kristin Hayes: So along those lines, in terms of thinking about where markets have failed, particularly in this area of environment, climate change, what would you say to folks who are asking: don't we actually need to do a lot more at a much quicker pace than markets have been able to achieve so far?
Kyung-Ah Park: Look, I think that's a fair observation or comment. And certainly when we published our environmental policy framework in 2005, one of the key things that we did up front is to recognize the urgency and the scale of the climate change challenge, and the need for us to collectively do more and for us to also, as a global financial institution, to step up, and hence why we established a very critical roadmap on that front.
But to step back, when you think about what markets are about and how markets and capital flows, the basics of finance 101 is that markets are highly efficient, and therefore capital flows to where there's the most optimized return for the risk that underlies it. And when you think about the climate equation, that optimal risk-return has to be in favor of low-carbon investments as well as more broadly in environment things like conservation and other environmental beneficial solutions. And at the crux of this, when you think about, again, the value and putting an economic value to it, you need pricing signals that reflect the true costs or the risk inherent in that system and what you're trying to actually mobilize capital for. And also importantly, taking that into account in a way that values it today, not way into the future, given that there is a lot of discounting when you think about the financial values of future cash flow and economic generation.
Now, specific to the climate change issue, emitting greenhouse gases is still very much free in many economies around the world. And even where there is pricing, you pay very little for it. And in some markets, they are still subsidies on fossil-based energy, so you actually have the reverse signal. And even on, just coming back to the environmental markets topic more broadly, forests and other environmental resources have a sort of classic tragedy of the commons, where individuals’ economic incentive to exploit and consume tends to outweigh the broader benefit of protection and conservation. Of course, Amazon forest fires is a prime example of it that is getting a lot of attention today.
Kristin Hayes: Sure, and I wanted to ask a little bit more. You mentioned that getting prices right is important. Certainly there have been moments in time when, at the federal level, and I think currently at the state level, the US has considered ways to put a price on carbon. How do you see the role of policy, in sort of complementing market mechanisms, in perhaps giving some of these signals that markets might not necessarily adopt for themselves? Can you speak to that a little bit?
Kyung-Ah Park: So policy absolutely has to play a more meaningful role and work in concert to help address these issues and provide the right market signal. And again, there's been a lot of focus, I would say increasing focus, even here in the US, around the question of putting a price on the externality of carbon. But also, again, just stepping back and pulling this conversation back to the broad environmental market as well. Putting value on other aspects of environment, whether it's things like ecosystem services of what nature provides, right, and there's a lot of other focus and efforts around this as well. And RFF has done some terrific work both on the carbon pricing question as well as more broadly around some of the values ascribed to ecosystem services.
Now having said that, one of the things that I think is important to recognize is putting a price on carbon is not a panacea. In some cases the pricing signals are muted. As we said earlier, there are many places that do have carbon pricing, but they tend to be much lower and therefore are muted. But I'll say even if you could increase that significantly, there are areas where there are market barriers or behavioral barriers. And energy efficiency is usually used as a very good example of this, where for a number of reasons, carbon pricing alone is not going to get a lot of energy efficiency going and therefore many governments have put standards and mandates into place.
I think the other area where I feel very passionate about, and this is in part driven by my focus on innovation, is when we think about the climate challenge and again the urgency, the magnitude, renewable energy has to be a very key component of it as well as energy efficiency and transport solutions, but we need a lot more, right? And so, this is where increasing investments in R&D [research and development], in aspects like carbon capture and storage, where the private sector is less well-equipped to singularly address this, it has to come into play where governments traditionally, particularly in the US, have played a meaningful role; for example, through efforts like the Department of Energy ARPA-E-type programs, and where government can really play a critical role.
Kristin Hayes: So I do always enjoy talking about innovation, because it feels like a particularly optimistic part of the conversation around climate change and sort of thinking about that optimism, maybe a good note, a good question to close on is, I wanted to ask what are some other ways to harness markets and sort of accelerate momentum, to get some of these technologies into the marketplace, and just to address these environmental challenges?
Kyung-Ah Park: Yeah. There's a whole range of examples, but in the interest of time, let me highlight just a couple. And one of the most important parts of the market and private sector leadership is, as I said earlier, companies and what they're doing around their own business model and how they're allocating capital, and the innovation that they're bringing. So, we're seeing a number of corporates—an increasing number of them, actually—setting up venture capital arms or actually partnering with venture capital firms in actually investing in disruptive technology, and combining this with a deep operating venture market access to be able to help bring those startup technologies quickly into the market and help scale the companies. And in particular, in clean tech and renewables and even in clean transportation, we are seeing a large number of examples of those that are being quite successful.
We're also seeing more kind of partnerships between what was traditionally viewed as competitors. And so it's really about cooperating and people call it the “coopetition” model, right, where competitors in industry are coming together to really join forces to invest in innovative technologies and really be able to drive again scale and market access. And in the oil and gas industry, there are a number of them, but the oil and gas climate initiative is a particular one that is also very much focused on carbon capture and sequestration.
And I also think about innovation from the dimension of other business models, where companies are now looking at ways to strategically reposition their business, whether it's for risk purposes and de-risk their business from areas that can get increasingly constrained, but also as an opportunity to capture growth in innovation. And again, as an example in the oil and gas sector, which has been really interesting, they are now going into renewable energy, electric charging stations, energy storage, and in some cases even retail utilities. So the whole electrification, which is traditionally the domain of traditional utilities who've also been at the forefront in some of these business model changes. And so it's an incredibly exciting time for innovation.
And then just one last thing I'd mention is there is a significant role for nongovernmental organizations to play, in terms of catalyzing more innovation and pooling and bringing together greater action. Now RE100 is a great example of this, where they brought many, many companies together to 100-percent-renewable energy. I think there is now close to 200 companies and that's galvanizing a significant amount of renewable energy globally. And companies who are at the forefront of this are not just talking about their own operation, but now also working with the entire supply chain. And so this is an incredibly important part of the innovation equation, and one that is really driving a significant amount of growth in the renewable energy scale-up.
Kristin Hayes: Well that is a relatively optimistic note to end on. And so that's great. Thank you for sharing those insights with us. So Kyung-Ah, thank you so much for coming on the podcast and talking with us about this topic. I know it's a complicated one. I think the world of finance continues to evolve rapidly and sort of the layperson is constantly learning how to keep up with the various changes, but it's great to hear from one of the experts about how things are evolving on the environmental market side.
And I guess I just wanted to close out our podcast with our regular closing feature, Top of the Stack, and ask you to recommend more good content, either on this topic or on sort of another related topic of energy, environment, natural resource issues that's on the top of your stack. Something that you'd recommend to our listeners.
Kyung-Ah Park: Yeah, so first and foremost, RFF does terrific work, and between this podcast and the various publications that RFF does, it certainly is on top of my stack.
Kristin Hayes: Oh, well thanks. That's lovely.
Kyung-Ah Park: And it's been a real pleasure to be on the podcast. But just one book over the summer that I've been reading, which, even for me, who's been spending a fair amount of time around environment and climate change, it's been an eye-opener, is David Wallace-Wells's book, The Uninhabitable Earth. I'm sure many saw his piece in the magazine, which got a lot of attention, and on the heels of it, he published the book, and it so happens that we had him actually as one of the guest speakers for our own program which is called Talks at GS, where we bring in thought leaders on very topical issues.
And he makes an incredibly compelling and honest assessment on climate change. And not to bring everybody on a downer, but how much worse it is than we all anticipate. And what I found in particular illuminating for me is how interlinked and pervasive the consequences are or will be—whether it's climate conflicts and the war due to drought and food shortages, immigration issues, which is of course already top of mind for many, and the displacement. And then even things like heat related deaths and lack of labor productivity, in addition to significant economic impacts.
And I'm sure many have heard this before, but I think it's worth underscoring that our generation, within the last few decades, really brought the Earth to this catastrophe. And we do have the next decade, where we can actually take responsibility and step up and take greater action and potentially be able to change the course of where we're headed, which is geared towards more the four degree world than the well below two degree world that IPCC and the scientists have come out and made the case for.
Kristin Hayes: Well, and I think again, the magnitude of the challenge, the urgency of the challenge is yet another reminder of the value of harnessing every single tool that we have at our disposal to act accordingly. So, Kyung-Ah, thank you again for joining us and I look forward to seeing you in about a months time at an upcoming RFF meeting. And it's been great talking with you.
Kyung-Ah Park: Yeah. Thank you for having me. It's really been a pleasure.
Kristin Hayes: You've been listening to Resources Radio. Thanks for tuning in. If you have a minute, we'd really appreciate you leaving us a rating or a comment on your podcast platform of choice. Also, feel free to send us your suggestions for future episodes. Resources Radio is a podcast from Resources for the Future. RFF is an independent nonprofit research institution in Washington, D.C. Our mission is to improve environmental, energy and natural resource decisions through impartial economic research and policy engagement. Learn more about us at rff.org.
The views expressed on this podcast are solely those of the participants. They do not necessarily represent the views of Resources for the Future, which does not take institutional positions on public policies. Resources Radio is produced by Elizabeth Wason, with music by Daniel Raimi. Join us next week for another episode.