Sustainability Speaker Series with Annette Nazareth, Governance Structure Co-Chair

Lesley Palmer

Welcome to the Mizuho sustainability series. Today we are so pleased to have Annette Nazareth join us to talk about getting to net zero, voluntary carbon markets and possible U.S. regulatory actions, all subjects of growing relevance to Mizuho, our clients and communities. We've spoken in previous sessions about net zero, meaning that we balance the greenhouse gas emissions we put into the atmosphere with the amount we take out. It is critical to get the world to a state of net zero emissions as soon as possible, and definitely by 2050, to limit the worst effects of climate change. It seems that lately new net zero commitments are being made each day by countries, cities, companies, and other institutions.

Lesley Palmer:

Mizuho has set a goal to become carbon neutral by fiscal year 2050. And just last week, we announced our membership in the Net-Zero Banking Alliance, an international initiative of banks aiming to align or lending an investment portfolios with net zero greenhouse gas emissions. To meet net zero commitments, more and more companies are looking at different solutions, including the voluntary carbon markets. Though largely defined at the moment, these markets are expected to see significant growth and the broader regulatory environment to evolve rapidly. So it's critical that corporations, investors and financial institutions stay current, and that's why someone like today's speaker, Annette Nazareth, is so valuable. Annette has been a recognized authority and financial services regulatory reform for much of her career, serving as a commissioner of the SEC from 2005 to 2008, and prior to that, as its director of trading in markets. While at the SEC, she worked on numerous groundbreaking initiatives focused on disclosure, reporting and reform.

Lesley Palmer:

A key player in financial services for much of her career, Annette has served as the operating lead for the private sector-led Taskforce on Scaling Voluntary Carbon Markets, and was recently named co-chair of the Taskforce's new governance structure, retaining her place at the center of carbon market conversations. She is a Senior Council of Davis Polk & Wardwell, until recently serving as head of the firm's DC office and head of the Trading and Markets practice. She's advised many domestic and international clients throughout her distinguished career. Speaking with Annette today is Adam Hopkins, our managing director and deputy general counsel responsible for capital markets legal, including equity, fixed income and futures business lines. Welcome to Annette, and over to you, Adam.

Adam Hopkins:

Thank you, Lesley. And I'd like to echo your comments and say thank you to Annette for joining us today. We're very grateful to have such an expert in the field to talk about a very important topic, and one which we could probably spend hours on, but we have our time limitations, and so with that, I'd like to jump right into it. Annette, if we could level set for the audience, can you explain at a high level what is the voluntary carbon market? Where did it get started? And how does it differ from the traditional Reagan cap-and-trade market?

Annette Nazareth:

Well, thanks Adam first for inviting me to speak here today. I'm so impressed that Mizuho is having this program and that you are prioritizing climate issues as one of your sort of important initiatives. You ask a very basic, but important question. I mean, what's the difference between the voluntary market and for instance the cap-and-trade market? Where did this market come from? I mean, the voluntary market goes back a bit to the 90s, and there has been sort of a growing interest on the part of market participants in finding ways both to reduce their carbon emissions and for those that they can't reduce themselves. And reduction is always, and should always be a first priority, engaging in the carbon credit or carbon offset market to assist others and to finance the reduction by others of the carbon footprint.

Annette Nazareth:

That market has not really taken off at the scale that we've needed it to. And I think in order to achieve our incredibly important climate goals of getting to net zero and to not have temperatures increased by more than 1.5% Celsius, which was part of the Paris Agreements. It's imperative that we marry not only the mandatory markets, which of course you'll see coming out of the UN agreements and otherwise, with voluntary markets. So we think that the voluntary carbon markets are an incredibly important contributor and ancillary part of getting to net zero. And our hope, frankly, is that if we create deep, liquid, robust, transparent, voluntary markets, that they could scale up 15 to 30 times in the next two to three decades, and really could assist substantially adding us to net zero.

Annette Nazareth:

So what's different between voluntary and mandatory? Obviously, you can sort of tell from the words. I mean, the mandatory markets, for instance, we've had cap-and-trade markets. That's when the regulators have indicated that there are certain industries that must get their emissions down and they're given actually sort of permits of how much they can use, and if they don't use that amount, they can sell their additional permits, but otherwise they're limited to what they can use or will have to buy from others. So it's like a taxing scheme. It's a mandated market. This is different, this is the voluntary market that we're talking about here today.

Adam Hopkins:

Thank you for that explanation, Annette. I think one of the terms you mentioned is very important and it's one which we hear more and more around the industry, and that is net zero commitment. Can you talk a little bit about what it means to make a net zero commitment and how the voluntary carbon trading markets play into that?

Annette Nazareth:

Sure. And I think Lesley in her introduction actually did a very nice definition of net zero. I mean, it's really the target of completely negating the amount of greenhouse gases that are produced by human activity. And it's usually achieved by, first and foremost, reducing emissions, but then also implementing methods of absorbing or carbon dioxide from the atmosphere to get to that last mile essentially. And the voluntary carbon markets are important for that very reason. You have a number of entities, I think Mizuho is one of them, that is, as Leslie said, committed to net zero. In order to it to net zero, it will, I assume, do its very best to reduce its emissions, but there are probably areas where it's very difficult for you to do that completely. And if you engage in the voluntary carbon markets you can rightly say that you're certainly on a path to net zero, because you are in addition financing the reductions by others, either in doing things like planting forests or scaling up sort of technology projects that could be very important done things like carbon capture and things like that in the air.

Adam Hopkins:

So there seems to be a bit of give and take here, where you're encouraging sustainable type behavior and technology on the one hand and those who have maybe higher producing carbon types business lines they can benefit as well to reduce their own net zero or their own carbon footprint.

Annette Nazareth:

Yes. But to be clear, and we do want to continue to emphasize this, first and foremost, we all have an obligation to do what we can to reduce our emissions. So this isn't just about sort of trading credits back and forth, but using the credits to get, as I said, to that last mile. We've all got to do our part in reducing our emissions to the full extent possible.

Adam Hopkins:

Let's transition a little bit to your work in this space, which has been extensive, and you've played a leadership role for some time now. Specifically you are co-chair of the IIF's Taskforce on Scaling Voluntary Carbon Markets, can you talk a little bit about the mission of that task force and the latest developments?

Annette Nazareth:

Sure. Well, the Taskforce on Scaling Voluntary Carbon Markets recently completed its work, and I'll talk about that very important effort. And we've now sort of transitioned and taken the work of the Taskforce forward by taking the recommendations and have formed a new governance body for a new legal entity that will be sort of a more permanent nature, and I'll describe that work. We haven't gotten official name yet, which is why I'm called and at the governance body, and there's some confusion between the Taskforce and the governance body, but this initiative, the Taskforce on Scaling Voluntary Carbon Markets, was started September, a year ago, so September 2020, and it was initiated by Mark Carney. One of the important funders was the IIF, the Institute of International Finance. Bill Winters, who's the chair of Standard Chartered was our chair and I was the operating lead. And the goal was really to bring together members from all over the sort of ecosystem, basically buyers, sellers, emitters ENGOs, all of these market participants, to come up with a blueprint for how one could scale voluntary carbon markets.

Annette Nazareth:

And so the importance there was on, first and foremost, how do we create a market that, as I said earlier, has a lot of integrity, that is liquid, transparent, and that can be scaled? Because we believe that, ultimately, to be successful and to reach our climate goals we really are going to have a marketplace where trading can occur at 30 to 50 times what's happening today. And to do that, there's a lot of work to be done on sort of market. How do we get that up and running? And among the things that we decided in our blueprint, which came out in January of last year, was that we really needed to focus on sort of what we call a Core Carbon Principle. What is a credible, measurable unit of carbon emissions reduction that could trade? And could trade directly and where you could have reference contracts off it, where there could be standardized trading.

Annette Nazareth:

And then how would we ensure that that was done in a way by scaling up or encouraging market infrastructure providers like exchanges, and registries, and market data providers, in some way replicate what we know are the important attributes of other trading markets. And so we focused on all those issues, a lot of focus on integrity, how would we set up processes to oversee this trading to ensure that it's credible, that people are meeting the standards that are being set? How would we create a governance process around that? And that ultimately is when we took the work forward for our final report, we really did focus on the governance, on the legal standards, things of that nature, and have now taken that forward and actually stood up a governance body which we believe has very high integrity, has some of the best people from across the globe, very diverse group who will work very hard on creating or signing off on the creation of these Core Carbon Principles ensuring that they're adopted, that they're followed, that there's integrity in that market.

Annette Nazareth:

So that's where we are. The governance body is quite, I think, well defined, that we have a board of 22 representatives, currently 19, with three spots being reserved for indigenous people, who we think are very important to have represented since so many of the projects are in the global south and other areas. We have representatives from basically across the globe representing ENGOs, other academics, and others who are very knowledgeable in this area. And then we have an executive secretariat who's going to really run this like a business. I mean, keeping the trains running and that are also very well known in this space. We have a senior advisory group of very important top officials from across the globe who will advise our group. And very importantly, we have an expert panel of very renowned people in this carbon space who are going to assess and really recommend to the board what the Core Carbon Principles should be for various types of projects.

Annette Nazareth:

And then ultimately we have a sort of a member group as well. That is just lots of people from across the ecosystem who want to be involved and who will advise us, we'll run ideas by them certainly they'll be, I'm sure, commenting on a lot of our work. I mean, I think we've got something that we've created that I can tell you is taking a huge amount of time to... And a lot of care went into standing up this group, but it is going to be sort of an ongoing living entity. I think of it like an international or global group, the likes of like an ISDA or something like that. I'm trying to think of something that would resonate with folks that say, "This is something that people recognize as the standard and the go-to place for this kind of effort."

Adam Hopkins:

Thank you. And for those in the audience who are interested in this field at all I suggest a great starting space is this blueprint from the IIF. It really does an excellent job at describing the market industry and describing what needs to happen. On that note, could you identify the most important factor? And when you talk about market integrity, does it need to start with transparency or is it standardization? Is it just liquidity and things will sort of come together once you gain the liquidity? Or is there one most important element to this market?

Annette Nazareth:

Well, I think with this market, the most important element is that there's really legitimacy to the credit. So there's real carbon reduction and removal. And that really goes to the... I mean, we care about market integrity, and obviously being a former securities regulator, I would define integrity very broadly to also include integrity of the markets and all that. But I think at base, and when you look at where there have been concerns in the past about this market, and I think we can't sort of skip over that. There have been a lot of concerns about greenwashing, a lot of concerns about people claiming that they're net zero or reducing their footprints, and they're basically engaging in projects that do not have legitimacy, they don't have permanence, we don't have a standard for how to measure what is a Core Carbon Principle.

Annette Nazareth:

And so I think that is really our north star for this purpose, because I think we all know how the rest work. We know how a legitimate market trades, what are the attributes of a market structure issue, right? What are the attributes of a legitimate market? First and foremost, we are saying it's got to be the product that's being traded essentially, the credit, but the rest of it will come because the rest of it we know it well, right? We know about transparency. We know about trade reporting, those kinds of things. We know about AML and money laundering, things like that that will be essential. But given the concerns that have existed thus far, I think the big value here is the Core Carbon Principle.

Adam Hopkins:

Okay. And you mentioned important word there, when we hear from detractors about this space the word greenwashing often comes up. Can you describe what that means and your feelings about it?

Annette Nazareth:

Sure. I think greenwashing is unacceptable. And I think that, unfortunately, there are some who because they have seen greenwashing in this space are very concerned about the very existence of voluntary carbon markets. And I think that's very unfortunate because I think you can separate it. Our whole goal here is to address those issues that have been a problem, and to create markets of high integrity with products of high integrity. And so, yes, greenwashing, as I said earlier, is a practice where market participants will claim that they've reduced their footprint, where actually they may be very large emitters of carbon and for very little money.

Annette Nazareth:

And they're not attempting to reduce, really, they're just looking to greenwash, essentially, to say that they're doing something they're not, and they'll buy credits, but the credits themselves probably also don't have any real integrity. So one of the things that we really need to do here is to standardize these products. And we don't really, to a large extent, have standardized language around a lot of this, and that's been part of the problem as well. We have a lot of well meeting people, but we don't always speak with the same vocabulary words, and I think that will hopefully improve over time as well.

Adam Hopkins:

Okay. And I think it's interesting for the audience that this market has really exploded in the past two years and it doesn't show any sign of slowing quite the opposite. So, while the integrity of the market is still continues to be built standardization and things you mentioned, more and more institutions like Mizuho are looking at this and they're wondering, "What do I need to do next? How do I react to this market? How do I get involved in this market?" Do you have any advice in that respect?

Annette Nazareth:

Well, certainly, as I said, we have sort of a member consultation committee of our new governance body, and we welcome participation in that. The member consultation committee is essentially sort of a remnant of the Taskforce. We had over 450 individuals and over 200 organizations that participated in the Taskforce. And a lot of that interest remains. And so those people and any others who would like to participate will continue their efforts and impact through our member consultation committee. So the that's one way to stay involved. And also, our goal is to not just scale up the markets, but scale up our website and have a website that really is informative and that people can look at and sort of understand what's happening, what the progress is, what we're doing. And we're hoping through that at transparency our feet are kept to the fire as well. We want to continuously improve and be held to high standards.

Annette Nazareth:

Well, I think to the extent that what we've done is sort of go back to first principles on markets. Yes, I think it could certainly be applied to other asset classes, other types of trading and other types of credit markets, methane perhaps. I mean, I'm not the expert on all of the possibilities, but I think that our work is very translatable into other market activities.

Adam Hopkins:

Okay. It remains to be seen. I think there's there's quite a future ahead for this market and anything that might use it as precedent. Let's shift gears a little bit and talk about the regulatory initiatives that are out there. Obviously, you have an enormous amount of experience being a former SEC commissioner, and the SEC seems to have taken a bit of a lead role at least in the U.S. on this market. Can you talk about those recent initiatives from the SEC what they mean and companies, including our clients, should prepare to get ready for them?

Annette Nazareth:

Well, that's a good question. I certainly have heard Chair Gensler of the SEC recently talk about where he thinks this is going to go. As you know, in the relatively recent past the SEC has looked at the disclosures that companies have made with respect to climate-related issues. And I think that their review in that area has certainly caused companies to realize that they better take a look at what their disclosure are, and to be sure that they're both correct and consistent. I think what became clear to the commission was that a lot of folks were saying things that didn't either didn't match what they were doing or their descriptions were not even consistent among their documents.

Annette Nazareth:

And so, I think there's been a lot more focus by corporations on that. I think we certainly have a sense that the SEC as a disclosure agency is committed to increasing the requirements on climate disclosure. I originally thought that the commission was like me to come out with a proposal on climate-related disclosure later this year. I think now it's probably moving to the first quarter. But that said, I think it's going to be very interesting and impactful for issuers, because even if all of those measure are not adopted, in the first quarter, folks are going to be working on their 10Ks. And I think that what you see the SEC expressing as an interest in what gets disclosed will probably in some ways inform how companies handle their disclosure and don't have to comply with it completely, but it certainly will be directionally interesting to see where the SEC might be going on disclosure in the first quarter.

Adam Hopkins:

Do you expect them to be more qualitative or quantitative, or should it depend on the company?

Annette Nazareth:

I don't really know for sure. I mean, when you look at the TCFD and what they have done, I mean, a lot of it is more qualitative. It's more process oriented. What's your governance? What metrics do you use internally? What are your targets? How do you manage risk in this area? What's your business strategy on climate? I mean, it seems to me that that kind of focus makes a lot of sense. I guess just based on my prayer experience, what would be challenging, I think for the commission, but I don't know where exactly they're going, is that, as I said earlier, I mean, we're still sort of struggling over, do we even mean the same things when we use some of these terms? And the SEC is not... I mean, they haven't invented the language around climate. So saying that they are now going to require metrics reporting... I mean, to me, I'm not sure we're at a place where we have a common understanding of how those metrics apply like a cross industries and things like that. So, it will be interesting to see how they handle this.

Annette Nazareth:

I also, given some of the newness of this, I know that's some folks have talked about, well, at the beginning, should this information be furnished or should it be filed? I mean, should there be liability attached to that disclosure? And there are lots of climate change advocates who think that there should be liability. I think it all depends on the nature of the reporting. I mean, to me, if it's really something where it's difficult to get the data it's hard to argue that there should be liability, but people have different views that, but we'll see. I think the other thing is that often when you have disclosure, I mean, you're interested in it for the individual company, but you also look across an industry. And if it's going to be interesting to see if you can come up with common enough metrics across an industry that you can compare one company to the other. I guess that's a next phase where I certainly don't think we're we're there yet.

Adam Hopkins:

I mean, it's fascinating. You talk about nomenclature, and standardization, and the SECs, definition of any one of a number of items versus others, but fundamentally this is a global trading market. So I would assume or would hope that the regulators would be coordinating with each other globally. Can you speak a little bit to that effort? And I think perhaps the task force plays an important role there.

Annette Nazareth:

Yes. I certainly would say that they coordinate, they're in touch with each other, they do talk about this I'm sure. I'm sure it's a big issue at the financial stability board. We certainly know in the U.S. across regulators there's been even very recently focused on the climate-related issues with the FSOC. But that said, I thought it was interesting that very recently Chair Gensler was asked whether he would sort of adopt the TCFD principles, or would he take the same position that regulators have in Europe, and he didn't commit to it being the same. It certainly would be taken into account.

Annette Nazareth:

And so, as you know, as an international organization with a footprint all over various parts of the globe, it's very challenging. And I think it is going to be challenging for multinational corporations to have disclosure requirements that are not the same, not exactly the same. And whether that means that you end up disclosing to the highest standard or the most owner standard. I mean, we've certainly seen that in other areas, including when derivative regulation went into effect and things like that. So, I guess I'm not overly optimistic right now that the U.S. will just say, "Well, we'll do what others have done." There'll be a very in depth analysis of it, and they'll adopt some and they'll go further probably in other places, or further or different in other places.

Adam Hopkins:

One other thing we hear in the news quite a bit lately is the infrastructure bill and the build back about legislation promoted by President Biden. Do we anticipate that any elements of that legislation will impact this market? I would assume it would be supportive at least, but are there any elements of legislation that specifically point to the voluntary market?

Annette Nazareth:

I'm not familiar with whether there's anything, honestly, that will directly impact the voluntary market. I think a lot of the impetus for voluntary market, frankly, is coming from below. It's coming from shareholders, it's coming from the community, it's coming from all sorts of participants in the marketplace who say, "We have to do more." I mean, that's what makes it voluntary, but what's so gratifying is that there's been so much more focus, and this program is evidence of that. So much more focus on the importance of achieving net zero, the importance of the climate crisis, and finding ways whether it's mandated by governments or not to do our part. And one would hope that... I mean, part of this focus on disclosure is also... Again, disclosure isn't mandating particular actions, but it will focus investors on the climate change issues as they impact the companies of they invest in. And I think that kind of knowledge will also in many ways, benefit the voluntary carbon markets as they're viewed as another way of contributing to net zero.

Adam Hopkins:

Thank you. Well, I should note that this discussion comes at a very opportune time, because this week is the beginning of the UN conference on climate change. Some important discussion about climate change, and generally, I think the voluntary carbon markets will come into play there as well. Can you talk about some of the goals or the outcomes that you would like to see from this conference?

Annette Nazareth:

Well, obviously, like everybody, I'm hoping that the conference is a success however that is defined and that we can reach consensus among multiple jurisdictions and how to each do our part to achieve our climate goals. We were in our taskforce and we'll continue in our governance body to... We're ancillary, as I said, we want to contribute to the reduction of greenhouse gas emissions, but we're not connected to the mandatory markets. We're not part of the UN process, although I think a lot of people who are active and cared deeply about the voluntary markets will be in Glasgow, I'm sure. But I think, if anything, our view is that we don't want to do certainly anything that's inconsistent. We want to contribute to a positive of solution.

Annette Nazareth:

I see us as even if we could be modular, if there are parts of this that the regulators ever want to take over, that's fine too. It's always a bit more challenging when you're involved in a market where you've got to get buy in and you don't have government authority. I'm not used to that, I'm used to being able to... And so we have to be really convincing to get people to do what we want and to be very, again, very transparent and build the interest and the consensus. So, if at some point this melds into, merges into, works more closely with the UN related markets, that would be fine, but right now we're sort of moving in a parallel track

Adam Hopkins:

Okay. And I see we're almost out of time, but I did want to ask you, looking forward five to 10 years, where would you like to see this market? And perhaps analogizing it to the securities market, or the derivatives market, or a wholly different market, how would you like to see it functioning?

Annette Nazareth:

Well, personally I'd like to see a much more scaled up voluntary carbon market, having multiple markets across the globe with utilizing the Core Carbon Principles, having transparency around the trading, having very good oversight of the adherence to the principles, so that it's not just that people say they did a contract with the Core Carbon Principles, but they also met and continue to meet those standards. So I think that's certainly one thing. Again, integrity will be absolutely key. One of the things about being the voluntary initiative is that I personally believe that to scale up these markets effectively we need a lot more standardization. What we have today, even with high quality credits that are traded, is that they tend to be done by market participants that are big and that have folks who work in their operations who can actually do the diligence on the projects, and are used to creating contracts that are complex, and maybe use some of the ISDA forms, but a lot of bespoke provisions.

Annette Nazareth:

You can't scale up if you have a lot of bespoke contracts. And so, we're not may and dating exchange trading. I mean, you can't do that, nor do we do that in most areas, but I think if we really create good reference contracts, make it easy for people to trade make, and they know that when they're trading a contract they don't have to go diligence. Just like when you trade IBM you don't have to go diligence, you there's a whole infrastructure around this that says there's integrity to that product. If we can do that, I think we'll see this market scale up many, many times, and in a way that I truly do believe we'll contribute to our desired goals of keeping within the Paris Agreements and limiting global warming to the full extent possible.

Adam Hopkins: 

Well, I think for what it's worth I tend to agree with you. I think that with the work the Taskforce has done with the efforts that the SEC and others have done, and with the voluntary commitments that many, many companies have made in the growing market I think it is going to be an enormous market going forward and we'll continue to grow on an exponential basis. So, I want to thank you again for your time today. It's been a pleasure. I know you're very busy, not just with the Taskforce, but with many other things. So, Mizuho thanks you and I thank you.

Annette Nazareth:

Thank you so much, Adam. Thanks for this opportunity.