# A Sustainable Future: Leonardo Martinez-Diaz, Senior Director for Climate Finance to John Kerry, on COP26 Negotiations

### Jason Mitchell talks to Leonardo Martinez-Diaz, Senior Director for Climate Finance to US Special Presidential Envoy for Climate John Kerry.

How is climate finance reshaping COP negotiations? Listen to Jason Mitchell discuss with Leonardo Martinez-Diaz, Senior Director for Climate Finance to US Special Presidential Envoy for Climate John Kerry, the most consequential outcomes of COP26; how to think about US domestic political dynamics around climate change; and why the financial sector is fundamental in the transition to a net zero global economy.

Recording date: 02 December 2021

Leonardo Martinez-Diaz

Leonardo Martinez-Diaz serves as Senior Director for Climate Finance to US Special Presidential Envoy for Climate John Kerry. Before that, he was the global director of the Sustainable Finance Center at the World Resources Institute, where he led a team working to promote the flow of public and private finance to environmentally-sustainable activities, including climate adaptation and mitigation. During the Obama Administration, he served as the Deputy Assistant Secretary for Energy and Environment in the U.S. Department of the Treasury, as well as Deputy Assistant Secretary for the Western Hemisphere. Prior to that, he served as Director of the Office of Policy at the U.S. Agency for International Development. He is co-author of Building a Resilient Tomorrow: How to Prepare for the Coming Climate Disruption.

## Episode Transcript

##### Note: This transcription was generated using a combination of speech recognition software and human transcribers and may contain errors. As a part of this process, this transcript has also been edited for clarity.

Jason Mitchell:

Welcome to the podcast, Leonardo Martinez-Diaz. It's great to have you here and thank you so much for taking the time today. So Leo, we have a lot to talk about, but I'd like to begin with some scene setting. I realized there's been a number of COP 26 summaries out there already, but I'm curious about what in your view were the most impactful announcements around climate finance and in particular, what does it set us up for going into COP 27 and COP 28, where we will ultimately see the results of the first global stock take of national contributions?

Leonardo Martinez-Diaz:

First of all, thank you so much, Jason, for the opportunity to share these ideas with your listeners. I think in Glasgow, before I talk about the finance specifically, I think it's worth saying that there was a qualitative change in the discourse. It was a really a different approach to how we talk about the climate challenge for a couple of reasons. One is the idea of limiting the Earth's temperature to the warming to 1.5 degrees Celsius was in Paris a secondary objective in the language. It was something we would try our best to achieve in Glasgow. It was a central preoccupation and the world rallied around that idea, partly because scientists have told us that the consequences of two degrees are still unacceptably negative and we have to do better. So 1.5 degrees was really at the heart of a lot of the conversation and that's different.

Leonardo Martinez-Diaz:

The second piece is of course reaching net zero by 2050 in order to keep 1.5 degrees alive. And therefore a lot of the thinking across the system, governments, private sector, civil society, is now converging around that idea of net zero by 2050. And that means cutting emissions globally by roughly half by 2030. And so that is the new north star. It is the central objective around which we are all beginning to organize and you see that reflected at the some extent in the NDCs and you're starting to see it reflected even more strongly in voluntary commitments of all kinds. So the finance has to serve that brand objective. It will be there to facilitate and enable that transition to net zero. So some of the most interesting pieces here are, for example, the financial institutions that are now signing up to net zero commitments at Glasgow, it was announced that institutions representing around $130 trillion have now pledged to have net zero assets or balance sheets by 2050 or in other cases earlier than that. Leonardo Martinez-Diaz: And so that's going to mean increasingly a process for asking what does that mean for financial flows for financial decisions? How are banks going to work with their clients? How are asset managers going to work with the asset owners to make this happen on the public finance side? There were a couple of things that are important here. One is the goal of reaching$100 billion per year for developing countries in finance for climate solutions. There's not a lot of confidence that we will meet that goal by 2023. It's not as timely as we would have liked, but the pandemic and frankly, the last administration in the US didn't make this any easier. So the world has come together in a very strong way to increase climate finance across the system. So we can meet that goal. And finally I'd say adaptation was extremely important in Glasgow.

Leonardo Martinez-Diaz:

There was a commitment to double the amount of money going into adaptation by 2025. And that's going to mean more resources for vulnerable countries to better manage the risks of climate change. And so I think these themes here will become also dominant in cop 27. You'll see a very strong focus on adaptation and resilience and the needs of those on the front lines of climate change, as well as a renewed effort to mobilise not just the billions, but also the trillions. How do we crowd in these large amounts of private capital that are waiting to be deployed to help enable that transition?

Jason Mitchell:

It's quite interesting. I think, as you alluded to, I think you saw two different sort of effects in terms of pulls, both in terms of timing, a how can we sort of pull forward some of these commitments and the cadence of commitments and how can we just from a temperature perspective, start to cap and lower that 1.5 to two degree original Paris commitment by 2050, but I want to kind of go back to this big abstract thing called finance by all accounts finance played, perhaps its most prominent role at cop 26. I say this personally, having been at some of the most consequential cops at Copenhagen and Paris as well. So I've seen sort of the highs and lows there, but I guess I'm wondering how do you balance the emerging influence because there are some critics around that, but how do you balance the emerging influence and interests of finance with public policy objectives, given some of the concerns that finance to some, not all, but to some, maybe co-opting the climate movement.

Leonardo Martinez-Diaz:

I think I'm not concerned about undue influence by financial interest at this stage in the conversation. I think in fact, we should welcome the fact that you have for the first time really financial institutions of all types, as well as financial regulators finally coming to the table to think about climate related risks and opportunities in a way that they haven't before this includes financial regulators, by the way, around Paris, the concept that climate risk was something appropriate for regulators to think about that. It was a legitimate concern of central banks. For example, that was a radical idea and it was not widely accepted even in a progressive countries today. It's a consensus. Now you can see it everywhere from the AMF to all the major central banks in the world and financial regulators in the major economies. And so we've come a long way in terms of introducing the concept of climate risk and opportunity into the financial community as a whole.

Jason Mitchell:

One thing that was very clear to me and I was there at COP 26 for the first week, but one thing that was very clear was the US one back credibility for its international diplomacy. Following the decision, obviously to rejoin the Paris agreement and its clear pivotal role in the COP 26 negotiations. Nonetheless, I'm just wondering to what degree is that compromised by the fact that climate remains a distinctly, and I say this as an American, unfortunately partisan issue still at the domestic level, but for instance, the infrastructure bill represents the first major investment in climate resilience, but it's the build back better bill that needs to pass, which will go a long way towards meeting the US is 50% emissions reduction by 2030 and set the pathway towards net zero.

Leonardo Martinez-Diaz:

Well, I'm confident that the bill will pass and that it will make an enormous difference to our climate practices and policies in the United States. It builds on the $90 billion that were in the recovery act of 2009. And which really is a cornerstone of these efforts and began a whole series of programs that will now be further expanded and, and renewed. We also have to think about what can we do today in a bipartisan way to address the challenge. And I think this is where the infrastructure bill is is useful. And this is where the work of mayors and governors is useful because they are close to the problem. They see both the risks and the opportunities. And so what we need to do now is to begin to show to the public how the transition to a net zero world has also benefits today, not just in the future, in the form of reduced climate change, but today in the forum of stronger industries, more jobs, better technologies and impacts on human health that are positive, impacts on our environment that are positive. And those benefits accrue today as well as in the long term. And that's what we need to do in order to convince people that the transition to a net zero world isn't scary or disruptive, but that it actually has all kinds of benefits that are going to make us safer and healthier today. And that's really the only way to persuade folks that this is really the right way to go. Jason Mitchell: It's interesting because it's a discussion I've had with your co-author Alice Hill of your latest book, but this idea of, you know, how does the US make climate policy less political, less subject to the whims of every electoral cycle? So, I mean, is that the secret to potentially devolve it in some way down to the local state level? It seems like climate is obviously a long-term issue that requires long-term planning and inter-electoral regulatory changes have effectively, you know, whipsawing company capital spending plans going forward. And I think there's got to be sort of a way to stabilise that. Leonardo Martinez-Diaz: The advantage of folks working in state and local government is that they have to deal with very practical problems, which has a way of helping you transcend some of these ideological rigid lines. So for example, in our book, we talked about Mayor Regalado in Miami, who as a longtime Republican changes his mind and eventually supports bond issuance by the city to invest in climate resilience. And the reason he changed his mind has has a set of many mayors around the country is that they are seeing the impacts firsthand. They're seeing how these damages are affecting their people, their economies, and they have to deal with them. And, it doesn't matter what you call these different impacts. They know that they have to find solutions. And that has a way of bringing folks together in a way that perhaps national politics hasn't at the same time, we can't just rely on state and local government. Leonardo Martinez-Diaz: There are certain things, especially in the energy transition that require federal action. And that's where president Biden's plan is going to be so essential. And I think it's, as I mentioned earlier, it's ultimately grounded on making the change. Less scary change of this scale is inevitably something that makes people nervous because it involves changing the way we've been doing things for a very, very long time as has been the case with the fossil fuel economy. And so the only way to really govern as political support is to demonstrate as secretary Kerry has often said that this is one of the greatest opportunities, economic opportunities in history for job creation, for technological innovation. And once we start to demonstrate concretely that this is not just a pipe dream, but a reality, then we'll be building that political support and it's already happened. And you can see that across the country, Texas, for example, is by far the largest wind energy producing state in the country. And they're witnessing some of the benefits of the renewable revolution and you see that solar rooftop, solar energy is actually quite popular in many Republican governance states because it allows folks to of course reduce their electricity bills and to be more independent and resilient. And so those benefits ultimately will shave the politics. Jason Mitchell: Article six of the Paris agreement, which addresses the creation of a global carbon market was a major focus area at COP 26 among a number of other issues. There was clear progress. I mean, the fact that we got to internationally transferred mitigation outcomes, ITMOs and share of proceeds relating to developing economies. But I'm wondering, can you pull back the curtain a little bit in those negotiations? What role did the US play in solving for article six again, which was sort of that last issue of the original Paris agreement that needed to be solved for? Leonardo Martinez-Diaz: Look, I think the the issue of article six is is highly complex, but at the end of the day, it's really about the integrity of carbon markets, right? To what extent can those participating in that market rely on the fact that the offsets reflect actual reduced emissions, that they're not double counting and that they're not adversely affecting how countries think about their NDCs and design their indices. And so all of the rules associated with article six really are about that. How do we create confidence in the market, a market that has in the past suffered from a lot of these problems and which today is simply not working the way it was once envisioned because folks just can't trust the quality of the emissions that are being purchased. And so I think the article six negotiations helped us move a step forward on that. Leonardo Martinez-Diaz: But now the question is how to build that market. And that will require a lot of work from different parties and a lot of transparency in order to demonstrate that the offsets that are being purchased really are going to have the trust and confidence of stakeholders. Obviously carbon pricing is going to be very important here. And while it's currently not the administration's policy to support one personally, and Secretary Kerry has said this as well, and Secretary Yellen at Treasury, uh, this is, uh, one of the most efficient ways that exists to be able to get emissions down through a market-based mechanism. This was an idea that initially came out of conservative think tanks. So it should in theory, enjoy widespread support. You know, I'm confident that it will return into the national conversation before long. Jason Mitchell: Yeah, it seems like there's such a strong, particularly economic argument for this, as you said, and not just economic, but also regulatory, you know, in sort of a past podcast episode with Acting Chairman Behnam from the commodities futures and trading commission. I mean, again, he sort of supported the growth of stronger, higher quality offset markets to solve for this issue. So it seems like there's wide ranging support, but what does that mean practically in the short to medium term? I mean, does that mean that we should expect more pragmatic sectoral CBAM carbon border adjustment mechanism arrangements, like the EU US steel agreement, you know, is sort of the short term solution to this issue? Leonardo Martinez-Diaz: There's a lot of work going on at the sectorial level on offsets, for example, in forestry, there's intense work to develop a methodology for counting and measuring emissions from reforestation and forest preservation. And so perhaps there may be a situation where you have sectoral level markets that are moving ahead of the general market and you see some innovation in pockets of the system that then can become more generalised. The conversation on trade I think is going to be increasingly sophisticated. Obviously what we care about is to find a way that that is ultimately going to reward countries that innovate in their industries to create the next generation of low carbon steel and low carbon aluminum and low carbon cement. And that we're not rewarding countries that are not doing what's necessary by exporting dirtier technologies that undercut the work of other countries, right, that are doing the right thing. And that's the intuition. And it's obviously complicated given the current state of the world economy, but, um, what's important is that the conversation has started and it's been being undertaken with great seriousness and increasingly more detailed than, than ever before. Jason Mitchell: Interesting, wanted to change lanes a little bit kind of touch on another sort of big blocking issue that is sort of followed a number of COPs, which is around developing countries and sort of their asks. Let me sort of, re-ask it, you know, while COP 26 reaffirmed the$100 billion climate finance commitment from developed to developing economies, developing countries, you would say still face as much as an annual people have pointed to as much as a multi-trillion dollar plus financing gap for climate mitigation, adaptation and resilience. How do you break down efforts to close this gap? In fact, I note that you on Twitter sort of pointed the fact that the US joined the ensure resilience, global partnership, USAID, green investment platform, et cetera. So, I mean, there are some initiatives out there, but what other possible solutions exist, especially with the growing imperative to address that one big kind of elephant in the room: loss and damages?

Leonardo Martinez-Diaz:

Well, the first thing is to ensure that the countries that have committed to contributing to the hundred billion and whatever follows it in post-2025 are doing our part. That's why President Biden announced this year effective quadrupling of US climate finance contributions relative to the levels of the Obama Biden administration. And that is putting the us in a much stronger position to argue that other countries should contribute as well. Uh, and it will help us meet the a hundred billion dollar goal as soon as possible. And so we need to make sure that we're empowering countries to spend more wisely and adjust international finance, but also their own resources. And that means I'm building up the infrastructure of data, for example, climate and weather data, arming folks with better modeling to understand where the vulnerable communities are. And, uh, and of course, to help export some of these technologies that are going to be crucial for the energy transition. And so it's a real, a real focus again on not just on more money, but also on how it's spent.

Jason Mitchell:

It's clear that regulatory approaches to sustainable finance are applied on a global basis in very, very different matters. The European Union's SFDR, the sustainable finance disclosure regulation for instance, does in my mind, two very distinct things. It provides protections against greenwashing, very necessary as I think we can all agree. And it also steers capital towards sustainable economic activities and away from unsustainable activities. And I'm wondering, just given your role around climate finance, how can the US manage to steer climate finance when its regulatory approach has traditionally avoided picking winners and losers among sectors? How do you think about the need for regulatory harmonisation across jurisdictions, even beyond that?

Leonardo Martinez-Diaz:

So Europe has been, I think, a pioneer in this space, they've come up with a framework for ultimately answering the question of what is green, right? What is a financial product that purports to be green or sustainable or carbon friendly or climate friendly, you know, their preoccupation has been, how do we provide confidence to the markets that these instruments are, what they say they are.

Jason Mitchell:

I kind of want to pick apart a little bit, the NGFS or the network for greening the financial system that kind of coalition amongst central banks. Because for me, that's actually quite important and sort of feeds into something that the US did that was particularly right through the global financial crisis more than a decade ago, because you find that stress tests as they did following the global financial crisis, they were pioneered by the US regulators they're important because they provide a more systematic way of understanding. You could say the effects of the complex and often interrelated exposure within the financial system. What's interesting, I guess to this point, is that next year, so 2022, the European Central Bank will start conducting a stress test on climate related risks with banks in Europe, expected to speak to how their balance sheets will evolve on a 30 year forward basis, reflecting that climate transition and stranded asset risks. So that's a big ask and it's incredibly ambitious, but also quite interesting. And I'm wondering how do you see the US revealing a higher risk premia in a manner that perhaps the markets have not yet acknowledged again, to the point that the US was sort of a leader in introducing stress tests following the global financial crisis?

Leonardo Martinez-Diaz:

I think the U S is now in the middle of a process to identify what are the best ways to encourage and empower our financial institutions to better assess and quantify climate risk and opportunity how to implement some of these tools that are being pioneered elsewhere and how to refine them. It's important to mention that this is a highly complex endeavor in many ways, more complex than the old style of the conventional stress tests that look at the more familiar financial risks, uh, here, we're talking about longer time horizons. We're talking about greater degrees of uncertainty, and we're talking about a more complex matrix of risks that could affect the economy in, in, in many ways, both in terms of physical risk and the transition risks. So this will be a tough job that will take a lot of mutual learning among the different countries and regulators.

Leonardo Martinez-Diaz:

The federal reserve has started work on this, uh, recent technical paper. I was just issued on stress testing and how women may think about stress testing in the context of climate related financial risk. The stock again has also seen a stress testing as a useful way to better understand these risks. And ultimately what's going to be crucial is that the financial institutions that are going to be running these tests begin to see them as a resource, as a benefit to them in order to identify the blind spots they might be facing on climate that are currently simply not showing up in any conventional risk assessment and the more they see it as a useful to them. I think the more likely, and the quicker you're going to see progress in this area. So we're hoping that over time, this type of exercise, plus more robust disclosure guidelines and a more literate and informed investing public will all work together to reveal where these risks are to better manage them and to reduce them over time in the

Jason Mitchell:

Book, building a resilient tomorrow that you co-authored with Alice Hill, you wrote about this virtual cycle where state and local governments in the U S keep reinsuring high climate risk areas without more stringent restrictions out of fear of basically litigation or protecting their tax base in some cases. And I'm wondering, what's your view on how we break this cycle so that federal taxpayer money only covers projects that are climate resilient.

Leonardo Martinez-Diaz:

I think it's ultimately a question of, um, making the risk visible, right, to trying to better quantify the risks that communities face that we're seeing in the flood insurance market, for example, and it has to be done however, with a strong eye to equity and to the social and economic impact of doing this right. Inevitably once you make climate related risk, more visible to everyone, there will be consequences associated with that. So the insurance premiums of waterfront property are going to increase, and that might affect both people that have big mentions on the beach, as well as low-income communities that also happened to be in a coastal areas, right? And so you have to deal with the equity implications of that. And that's why the administration is already moving towards ensuring that the insurance premiums for flood better reflect the risk, but that the burden of that increased premium falls proportionally on the wealthier households. And those are that have the third or fourth vacation home, right on the beach, rather than the folks who are making ends meet, but also happened to be very exposed to the risks. And so these issues of equity are going to be essential as we move towards a more climate informed market or these different types of risks.

Jason Mitchell:

It's such an important paramount issue to deal with, like you said, right? I mean, because in many respects it is actually a bipartisan issue. No one wants to see premiums go up or home equity values go down. And I'm wondering, is this solution at the federal level through codes, et cetera, standards, or does it necessarily exist at the local level?

Leonardo Martinez-Diaz:

Well, in the United States, we have a complex decentralized structure, uh, for some of these things, for example, building codes are mostly developed through industry associations and private entities, and the insurance markets are regulated at the state level. So all this create some complexity, but ultimately I think it's going to be important for a federal state, local governments and the private sector to work together, to figure out how we learn from these impacts and how do we move together in a more harmonized way so that, uh, even have situations of sort of regulatory arbitrage where you certain jurisdiction may have looser regulations than another one. And so you get riskier behavior of gravitating to certain parts of the country, which would not serve anybody well.

Jason Mitchell:

Yeah. One of the interesting discussions I had coming out of COP 26 was sort of a meeting with Lord Nicholas Stern of the Stern review. And he said something that was, I mean, in some ways, overly simplistic, but seem to particularly resonate with me, which was, we know what to do in the context of climate we're in a hurry. And the answer is international and he's clearly making parallels to post-war reconstruction. And so the economic multi-lateral international effort around that. And I'm just wondering with your academic political economy hat on, and I share that I'm sort of a big fan of political economy. How do you think about the argument that at some point we need to think about new post Bretton woods institutions to tackle climate change.

Leonardo Martinez-Diaz:

Secretary Kerry and Secretary Yellen have both been very strong on this. They've called for the multilateral development banks and the AMS to play a central role in climate in the transition, and to develop new tools and to mobilize private capital much more effectively than they have been doing until now both took secretaries Kerry and Yellen and have convened the presidents of the multilateral banks over the last few months to push and encourage and demand really better solutions to mobilizing private capital using our multilateral banks. There's a lot of potential there, a lot of, to certain extent, unused capacity that could still be put to work. And we are thinking of different approaches to try to ensure that these banks are doing everything that they can to enable developing countries, to live up to their climate commitments and to put, to work their technology and their innovation for mitigation and adaptation. And so we're going to keep working on this. I think the advantage is there's a renewed sense of urgency coming out of Glasgow, that it is going to serve as well as all of these institutions look around and try to figure out how they can do better,

Jason Mitchell:

You know, within the office of the special Envoy, how would you kind of characterize the projects going forward? What's your focus over the next several years?

Leonardo Martinez-Diaz:

The focus is going to be an implementation. Now that we have a framework coming out of Glasgow, we have priorities. We have a clearer sense of four. We need to go the next year. It's going to focus on as many practical applications of that as we can. Uh, how do we get the finance to flow to those key projects? How do we work with countries to prepare, uh, for even stronger commitments? How do we enhance the system of, uh, technology and innovation to help accelerate the process? So that's what the secretary Kerry is going to be spending most of his time and the rest of us along with him. And I think as we think about the next COP now, November later in 2022, that'll be, I think, where we want to be. We want to be able to look back at the year that just happened and to see some concrete examples of how, what was agreed in Glasgow is beginning to take shape on the ground.

Jason Mitchell:

That's it, that's a great way to end. So it's been fascinating to discuss what's most consequential coming out of COP 26. How to think about us domestic political dynamics around climate change and why it's so important to think internationally about climate solutions, especially into upcoming COP 27 and COP 28 conferences. So I'd really like to thank you for your time and insights. I'm Jason Mitchell, co-head of responsible investment at Man Group here today with Leonardo Martinez-Diaz, senior director for climate finance to the US special presidential Envoy for climate John Kerry, many thanks for joining us on a sustainable future. And I hope you'll join us on our next podcast episode. Thank you so much, Lee.

Leonardo Martinez-Diaz:

Thanks so much, Jason. Best of luck.