2 Views Presented at the 4th Global Infrastructure Basel Summit 21 & 22 May 2014. Read more about the world leading platform for Sustainable Infrastructure Finance at www.gib-foundation.org. Next Summit: 27 & 28 May 2015 in Switzerland

1. Enabling Long-term
Sustainable
Investments through
Financial Regulation
Timothy Hassett
Director Sustainable Finance
World Wildlife Fund - US
21 May 2013
© Kevin Schafer/WWF-Canon

2. Objectives
What Regulatory Frameworks
are needed to enable Long-
Term Sustainable Investments?
How to Mainstream
Sustainability in Financial
Regulation and Policy?

3. BASEL ACCORDS
Drive the Global Regulatory Environment for Banks.
Not designed to cope with the realities imposed by
the Anthropogenic Era, which creates business
opportunities and risks.
• Private Sector Finance should support more clean
technology transactions
• Private Sector Finance should incorporate
environmental and social issues in all transactions

4. Supporting More Clean Technology
Significant Sustainable Infrastructure Must
be Financed to stay below 2C Climate
Change
Investing in the Clean Trillion*
• $1 Trillion per annum through 2050
• $281 Billion in 2012
Does the Investment Gap Result from
Financial Regulation?
Can Financial Regulation serve as Catalyst
for Clean Technology Investments?
*CERES

5. Does Investment Gap Result from
Financial Regulation?
Liquidity or Capital or Both?
Liquidity?
• Liquidity Coverage Ratio (LCR) is:
• High Quality Liquid Assets (HQLA) divided by
• Total 30-day Net Liquidity Outflows
• LCR requires
• 100% liquidity to be held against un-funded commitments to SPVs
(outflows)?
• Haircut on loans to non-financial customers (inflows)?
Please refer to Basel Accords for exact definitions and details

6. Does Investment Gap Result from
Financial Regulation?
Liquidity or Capital or Both?
Liquidity?
• Net Stable Funding Ratio (NSFR) is:
• Available Stable Funding divided by
• Required Stable Funding
• NSFR allows for maturity transformation, but requires long-
term liabilities to support long-term assets
• Long-term project finance assets force Financial Institutions to
extend the maturity structure of their liabilities?
Please refer to Basel Accords for exact definitions and details

7. Does Investment Gap Result from
Financial Regulation?
Liquidity or Capital or Both?
Capital?
• Basel III enhances the quality and quantity of capital to Risk
Weighted Assets (RWA)
o 4.5% Common Equity Tier 1 (increased from 2.0%)
o 2.5% Common Equity Tier 1 for Capital Conservation Buffer
o 2.5% Common Equity Tier 1 for Countercyclical Buffer (potential)
• Long-Term Infrastructure Transactions can have higher Risk
Weightings due to:
- Completion Risk - Country Risk
- Performance Risk - Tenor
Please refer to Basel Accords for exact definitions and details

8. Potential Regulatory Solutions
Creating a New Asset Class for Long-Term
Sustainable Transactions:
• Employ Sustainability Infrastructure Rating for qualification
• Show relationship of Rating to lower expected loss
Making Long-Term Sustainable Transactions
more Liquid
Making Long-Term Sustainable Transactions
less Capital Intensive.

9. Potential Regulatory Solutions
Making Long-Term Sustainable Infrastructure
Transactions more Liquid.
• Insuring Transferability in Loan
Documentation
• Standardizing Contract Terms (ISDA)
• Including in definition of HQLA for the LCR
o Eligible Central Bank Collateral
• Reducing the Required Stable Funding factor on
qualifying Sustainable Infrastructure Transactions
for the NSFR

10. Potential Regulatory Solutions
Making Long-Term Sustainable Transactions less
Capital Intensive.
• Incorporate Sustainable Infrastructure Ratings in
the Internal Ratings Based (IRB) Approach to
determine RWA
• Create lower risk category under the
Standardized Approach
• Encourage inclusion of Sustainability
Ratings by Credit Rating Agencies

11. Potential Regulatory Solutions
What if a Sustainability Risk Rating does not reveal a
lower expected loss?
• Due to lack of sufficient data.
• Because the data does not provide this result.

12. Potential Regulatory Solutions
Model the Resiliency Impact on Bank Portfolios of
Sustainable Infrastructure Transactions in:
• A future carbon constrained environment
• A world impacted by climate change
Sustainable Infrastructure Transactions would
make a Financial Institution more resilient in an
Anthropogenic World.
Basel Liquidity and Capital Requirements should
integrate this and not penalize, but promote these
types of transactions.

13. Mainstreaming Sustainability in Basel Accords
Failure to integrate Environmental and Social
Sustainability issues in financial decisions creates
market distortions.
Basel Accords should mandate their inclusion to
assure the correct risk-return relationships are
identified.

14. Mainstreaming Sustainability in Basel Accords
Mandating its inclusion in Basel Accords could be
accomplished similar to the way Operating Risk was
incorporated in Basel II.
• When Acceptable Environmental and Social Risk
Management Policies and Systems are in place, no capital
penalty.
• If Acceptable Environmental and Social Risk Management
Policies and Systems are not in place, a capital penalty
equal to X% of 3-year average positive gross income.

15. Questions to Consider
• Do the Basel Accords deter Long-Term Sustainable
Investment?
• Could the Basel Accords be used to incentivize Long-Term
Sustainable Transactions?
• Is action required to ensure ESG is included in risk ratings?
• How could momentum be built to modify the Basel Accords
quickly due to the opportunities and risks created by the
Anthropogenic Era?