Pod Insights The Twenty Minute VC (20VC): Venture Capital | Startup Funding | The Pitch 20VC: First Republic; Management Responsibility or Result of Contagion in the System, The Future of Regional Banks, Will Interest Rates Go Higher | Net Zero, Where Are We? The Best and the Worst Actors with Mark Carney, Former Governor of The Bank of Engl About this episode Mark Carney is the Vice Chair and Head of Transition Investing @ Brookfield Asset Management, one of the world's leading asset managers with over $800BN in AUM. Mark is also United Nations Special Envoy on Climate Action and Finance. He has also served as Finance Advisor to the British Prime Minister. In addition to this, Mark is on the board of Stripe, PIMCO and The World Economic Forum. In a previous life, Mark spent over a decade as a Central Banker, most recently as Governor of The Bank of England and before that as Governor of The Bank of Canada. In Today's Episode with Mark Carney We Discuss: 1. Is The Banking Crisis Over? What Happened? Why does Mark not believe we are in a banking crisis? Why does he not believe the banking turmoil is over? Was SVB the fault of regulatory mistakes or management mistakes? Is FRB a damaged asset in it's own right or the result of contagion within the banking ecosystem? 2. The Impact of the Banking Turmoil: What Happens Now? What does Mark believe is the future of regional banks? Why does Mark believe we will see massive consolidation in banks coming soon? Should the Fed be guaranteeing all deposits automatically? 3. What Happens To The Macro Now? How does the banking turmoil impact growth rates? Will we definitely go into a recession now? What is the impact on monetary policy? Can the Fed raise rates even higher? What does this mean for the future of money? Why is it a silver bullet for stablecoins? If Mark could bet on China or the US for the next 10 years, who would it be? Does Mark believe the UK is in a weaker situation than ever? What about Europe? 4. The Future of Climate and Net Zero: Where are we at with Net Zero? Are we ever going to make progress? Is it possible to make progress without the cooperation of China? Why does Mark disagree and suggest China has done more than most to help the climate? Who is talking more than they are acting in the fight to save the climate? On the flip side, who is acting more than they are talking?
Transcript Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.
0:00 Speaker 00 No, this turmoil isn't over. We see it as we're talking today. FRB is under great strain. It is the case that almost one in 10 US regional banks would fall below their minimum capital levels if all of their assets were mark to market. I think there's going to be really a wave of consolidation. I would say go small or go home.
0:22 Harry Stebbings? This is 20 VC with me, Harry Stebbings. And as we speak, the banking turmoil continues. And there is no better guest to answer some of the most pressing questions of the day. He's spent over a decade as a central bank governor, first as governor of the Bank of Canada, and then as governor of the Bank of England. Today, he is vice chair and head of transition investing at Brookfield Asset Management, one of the world's leading asset managers with over 800 billion in AUM. He's also United Nations Special Envoy on Climate Action and Finance. And if all of this wasn't enough, he's also on the board of Stripe, PIMCO, and the World Economic Forum. Yes, I'm thrilled to welcome back to the hot seat the main man, Mr. Mark Carney. And I want to say huge thank you to Mark Evans for making this one happen today. Huge thanks for that, Mark.
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3:01 Speaker 02 You have now arrived at your destination.
3:04 Harry Stebbings? Mark, I am so excited for this. We had so much to discuss in our first episode that we simply couldn't fit it into one. And so first, thank you so much for joining me for a second time today.
3:14 Speaker 00 Harry, thanks for having me back. I wasn't sure you would ask me back, but yeah, there's lots to, lots to cover.
3:19 Harry Stebbings? I, I think this is the perfect time to have you back, Blundey. I have so many open questions. Before we dive into the core of the show though, I just want to do a Cliff Notes, which is really unfair, especially given your career. But what is the Cliff Notes on your career and the core highlights you'd dive into?
3:34 Speaker 00 Okay, quick Cliff Notes. I guess I'd say I've worked pretty much at the intersection of private markets and public policy most of my career. I started in the city just before the fall of the Berlin Wall, so probably before you were born. Rode the globalization boom from the, in Asia, in New York, a bit in Canada with Goldman. Then I became a central bank governor in search of a quiet life. I figured eight interest rate meetings a year and I could spend time with my family. And my timing was a bit off because I started a few weeks before Bear Stearns failed. And then obviously that cascaded into the subprime crisis and Lehman, et cetera. And so I got involved with the financial reforms after that, to picked up from where Mario Draghi left off on leading the financial reforms.
4:15 Speaker 00 Went to the Bank of England during the Euro crisis, Brexit referendum, focused a bit on climate when I was there, given the responsibilities. And now I'm back. More on the private sides. That was a long period on the public side, but a public side where working a lot, obviously, trying to fix and reform private markets. And now I'm back on the private side, focusing in a couple of areas, most of which relate to climate. So I work with Brookfield. We have big transition fund. We focus on going to where the emissions are and funding companies to get them down. I'm on the board of Stripe, a great fintech company and more. I work with companies like Watershed, which help with the mechanics, the ERP, if you will, of climate to help companies get down. And I do spend, just back on the public side, I spend about half of my time as a special
4:59 Speaker 00 envoy for the United Nations, it sounds great, for which they owe me, I get a dollar a year and they owe me three dollars. They're in the bad debt category. I've been doing it for three years. And in that regard, I work to organize the private financial sector to address climate change. But in a way, and the last point, which is, I guess, the theme of my career, in a way that gets the power of markets to deliver the things that people want.
5:21 Harry Stebbings? First off, maybe I wouldn't be single if I had the title of special envoy. This could be the secret unlocked by luck. I'm very envious of that. The second is well done for surmising an incredible career in about 150 seconds. But I want to start today on a call, which is in the last show, I said, Mark, I haven't seen a boom, and I haven't seen a bust, and I haven't worked through that cycle. I feel like that is changing. And so help me, Mark, where are we now and what follows a bust?
5:50 Speaker 00 Yeah, exactly. So I guess in the last time we were in the middle of a boom, or probably towards the end of a boom, and for students of economic and financial history, they'd be familiar with something called the Minsky cycles. It starts with something fundamentally good, some big innovation. It could have been the productivity miracle in the US at the start of the 2000. The first bits of financial innovation that helped to develop some prime lending is an example, blockchain and DeFi as another example. And so these are fundamentally good innovations, but ultimately, the growth turns to boom, turns to euphoria, and it turns to the phase that we were pretty close to. I think we were just on the cusp of last time we spoke, which is what this guy Minsky, the economist
6:33 Speaker 00 Like historian called the Ponzi phase, which is a phase that you recognize is a phase where you're lending against the asset that's at the center of the boom on the assumption that the asset is going to continue to rise. And so it's asset-based lending with price appreciation absolutely built in. And of course, at some point, there's Minsky moment, you turn to panic because the assumptions are removed and you lead into despair. We're at that phase, certainly, I think, in the DeFi crypto universe. And what's interesting about that phase is provided you'd avoided getting over levered in the Ponzi phase, what it brings is tremendous opportunity because the underlying innovation was real.
7:17 Speaker 00 It's still there. You've seen what works and what works less well. There are some assets that can be picked up and there's much, much less capital available to that's competing with you. And so this is the time after the boom, we've had the bust, and this is where opportunity comes really into play.
7:33 Harry Stebbings? Can I ask, can you provide me with an example of an innovation that went through this cycle, experienced this Ponzi realization moment, but had underlying value to the innovation that then was reborn efficiently? Because in my mind, it's just like people realize it's a Ponzi scheme and never come back.
7:51 Speaker 00 I'll give you an example of a financial innovation where that's the case. The collateralized loan market, CMBS, collateralized mortgage-backed securities, the assumptions underlying them got taken to ridiculous extremes, Ponzi extremes. The price appreciation built into those structures in 2006, 2007 brought the whole, literally, the house of cards crashing down. But the core innovation there lives on and I think has served the market quite well. And we've ended up actually with a much more robust, it's not totally robust, to be clear, but a much more robust, what some would call shadow banking system, I would call non-bank finance, that's providing a different channel of credit and actually, given what's going on in the banking sector, a very welcome example of credit.
8:36 Speaker 00 I think you're also asking, though, about a fundamental innovation that was going up.
8:43 Speaker 00 And down through the boom-bust cycle. And I think the example a little closer to home for me would be in hydrogen, where we've had a couple of those euphoric cycles. The last one was early 2000s. We're entering another, and I think a much more solidly grounded one. Time will tell, though. I can't actually give you the example of hydrogen fully deployed in a way that's mainstream commercial. I think it's coming. I think it's coming in the next few years. So maybe if you have me back in a few years, I'll be able to nail that question.
9:11 Harry Stebbings? And I will have a special envoy as a title by then. So we'll both have won. I wonder what, so you mentioned that you touched on the banking situation. Let's put it that way. We were talking before about FRB being in turmoil. I just want to understand where we are there, Mark. Is the banking crisis over?
9:26 Speaker 00 So you were always careful with your words. And you started with situation. You ended with crisis. I'd put it more in turmoil. I guess the quick answer to your question is no, this turmoil isn't over. We see it as we're talking today. FRB is under great strain. It is the case that almost one in 10 US regional banks would fall below their minimum capital levels if all of their assets were mark to market. So I think it's increasingly well understood that one of the challenges, the number of the regional banks, the extreme being Silicon Valley Bank. One of the challenges they have is they have a lot of actually quite high quality assets, but very low yielding assets. And they have, in some cases, massive franchise problems because of that.
10:11 Speaker 00 Because they're just, unless we go back to a low for long world, which I think is extremely unlikely. Unless we go back to that world, they're just going to have very large earnings headwinds going forward. So there are a large number of institutions, regional institutions in the US that have varying degrees of this problem. And the longer higher rates go on and the more deposits move to safer places, shall we say, perceived safer places. We're going to see more, at a minimum, I'll put it politely. We're going to see more consolidation in that sector. But, and here's the big but, this is a very different situation than what we went through 10 years ago. The system as a whole has more than six times the loss absorbency it had then. It has much higher liquidity across the system.
10:56 Speaker 00 Central banks are providing much faster support as needed for those who are impaired. There are many fewer, I should say, many fewer interconnections between the institutions. In 2008, everybody was connected to everybody else and nobody knew who was going to fall down next, but everybody was convinced that if somebody failed, it would bring others down. Those were reasonable assumptions, certainly during the panic. That's just not the case now. We're seeing individual problems. The contagion in the system is because of similar business models as opposed to interconnections that cascade through the system. So the turmoil, I would say it's turmoil, not crisis. No, it's not over because we're in a higher rate environment.
11:39 Speaker 00 We're going to have a tougher credit environment coming as the economy slows, but it's in an absolutely different order of magnitude of what we experienced in the past.
11:47 Harry Stebbings? That's quite refreshing in some ways. My question to you is, I had Bill Ackman on the show and he presented the view that essentially we need to guarantee all deposits in banks. And once you do that, you'll reinsert consumer confidence and turmoil will really be quashed in many ways. Do we need to guarantee all deposits in banks, Mark?
12:06 Speaker 00 I'll say a couple of things. One is that what we're seeing is that the current structure, which does not guarantee all deposits in banks, is proving time inconsistent. So under pressure, authorities are coming in and on a case by case basis, effectively guaranteeing all deposits in banks. So after you have a few of those, you ask the question, it's a fair question whether, well, shouldn't you just jump to the end state, which is to guarantee all deposits in banks? That's first point. Second point, there is a bit of an issue, which is somebody has to take that decision. It has to be duly authorized. And in the US, that requires an act of Congress. So the effective way to guarantee all those deposits is not going to happen quickly.
12:49 Speaker 00 Third, there is a bigger argument, and maybe we'll get into this, but I'll just put it on the table, which is something Andrew Bailey, the current governor of the Bank of England, a point, he made a seemingly esoteric point, but quite an important point around the nature of money. And his point was, in effect, most Most people don't realize that there's a difference between money that's created by a bank, a private bank inside money versus the money that when people used to use cash, that they would see the manifestation of money created by the central bank, but core outside money. Most people think they're absolutely interchangeable, which they are in transactions, but they assume they are in deposits or implicitly assume. And shouldn't we, the authorities, make that clear?
13:33 Speaker 00 Okay, last point I'd make, whether, let's say we take the Ackman Plan, I'll call it the Ackman Plan, and when the UK and the US elsewhere, we say, you know what, it's just not realistic that Harry VC and people like you or somebody running the corner shop who has their deposit in a bank is going to take time out to monitor the health of the bank and move that deposit when you start to get concerned about the creditworthiness. I think that is actually a realistic assumption. It's certainly totally unrealistic that individuals do that. Now, what we would have to do if we change the system so that all deposits were backstopped is to make sure that there is substantial capital at risk in the system.
14:15 Speaker 00 So somebody other than the supervisors in the central banks are monitoring those institutions. And that's why you need to have senior debt, that is, non-deposit debt, not re-characterized as deposit and backstop, and contingent capital or AT1 capital, different words for roughly the same thing, which is capital that is subordinated and would be bailed in once the equity holders are wiped out. And it's those pools of capital and the institutions behind them that's going to discipline the system or help discipline the system on top of what the boards and the management are supposed to be doing. So you need all of those components.
14:50 Harry Stebbings? So help me out here, in terms of that contingent group that's external to like the core savior, which would obviously be government-led, is that like a contingent of JP Morgan, Goldman Sachs, the biggest institutions who collectively come to rescue the banking system together with this guarantee? What does that look like? I'm sorry for being so naive.
15:10 Speaker 00 No, no, no, it's something we put in place after the financial crisis. So I said a few moments ago that the system- System as a whole has six times as much loss absorbency as it had going into the financial crisis. And that's a big multiple. A little less than half of that is contingent debt. So it's actually, there's various structures for this, but in effect, it's subordinated debt, which is owned by institutions, not other banks, actually. You don't want other banks to own it because that brings contagion. Let's say, I'll take an extreme example, JP Morgan fails and Goldman Sachs owned a bunch of their contingent debt. Then Goldman Sachs is going to be called into question because they'll take loss on that. So what you want is a different source of capital for it.
15:52 Speaker 00 And that to be an insurance company, its pension funds, they're the big buyers. Straight asset managers as well, they're the big buyers of, I'll call them AT1 securities, which is a number of people on the pod will recognize. They're the big owners of that and they are very sophisticated. And they do recognize that there are scenarios where they're going to end up owning equity in a stricken institution because it's failed. And in one extreme, which we saw with Credit Suisse, they discovered that they owned nothing, at least on the current version of what the Swiss authorities have done. So that's the way you have discipline in the system. And you have an additional level of protection before you get back to the state because you don't want the taxpayer to be second in line after the equity holder to prop up these institutions.
16:37 Speaker 00 That was the case, by the way, the taxpayer being second in line back in 2008.
16:41 Harry Stebbings? Mark, can I ask, you mentioned regional banks earlier. What's the future of regional banks in the US?
16:47 Speaker 00 Yeah, I would say go small or go home. It was always the US banking system relatively, very large number of institutions by number in the US. Barbell strategy was, it was dangerous to be in that awkward middle where you're a large regional and therefore you have a lot of corporate deposits above the minimum. They turn out to be much more flighty, what we saw with Silicon Valley, what we're seeing with First Republic. That's an awkward place to be. If you're a narrow regional, small, literally close to your customers, largely insured deposits, more stable funding base, you're okay, it's an okay business. You don't have a lot of growth opportunities or you're going to get consolidated up into some of those. Very large institutions. I think there's going to be really a wave of consolidation,
17:31 Speaker 00 another wave. This has happened over time, but will accelerate. And in part, it's accelerating because the competition, not just for the regionals, but also for the large institutions, is very much coming from fintech. And as a bigger picture point, the system is moving towards a form of narrow banking as a core competitor to fractional reserve banks. In other words, banks that create their own money and leverage up. And it's able to do that, the system's able to do that because of technological changes, which make things very easy to take customer money and back to back it quite efficiently into the money markets and provide better returns.
18:09 Harry Stebbings? Okay, so we see consolidation there within regional banking in the US. You mentioned Credit Suisse earlier. I do have to ask, and I have to thank Mark for this one, but he asked, how do you assess the balance of regulatory and bank management responsibility in the case of SVB and Credit Suisse?
18:25 Speaker 00 Yeah, it's a great question. You start with management responsibility in both. Management and boards are the first lines of defense. I would say in the case of SVB, it pains me to say this as a former regulator and supervisor, but much higher regulatory and supervisory responsibility in the case of Silicon Valley Bank because of a couple of things. One is they changed the rules in the US in 2018 and did away with some very basic protections that we apply everywhere else in the world. Stress tests, we, in the Bank of England when I was there, and subsequently, we stress tested the banks to a 4% increase within 12 months of interest rates all the way across the curve. Now, it seemed quite extreme at the time. It's more or less what has happened because of this inflation.
19:10 Speaker 00 But we stress tested everybody in the US. They said, well, no, people under 250 billion, which is a very large number, don't have to do things as severe as that. So that's the first thing. So they weren't doing that. Then they also lessened responsibilities around what are called liquidity rules or liquidity standards and buffers. And some of those actually protect against having the extreme mismatches that places like Silicon Valley had. Thirdly, in the actual practice of supervision, so even if you don't have those rules, even if you don't do the stress test, you just have to look at the books and the mismatches of that bank and say, this is irresponsible, it clearly was, and that was noticed but not
19:51 Speaker 00 acted on. So I would say in that case, apart from management, it's more supervisory. I would say in the case of Credit Suisse, the challenge, it's been a stricken institution for a number of years. It's had cultural issues, it's had real risk management issues, and the authorities there have been spending time, and when I was at the Bank of England, we spent time on this as well, putting in place as best as possible ways to minimize the risk to everybody else of Credit Suisse and maximize the ability that if Credit Suisse couldn't make it, so to speak, that it could be wound down in a relatively orderly fashion.
20:31 Speaker 00 And it wasn't perfect, but the fact is that when it hit the wall, the Swiss authorities, the international authorities had many more options than they would have had even a few years before to manage that situation. And it wasn't a great day for Credit Suisse shareholders or the contingent capital holders who absorbed the losses, but it meant that the depositors, the debt holders, and the franchise as a whole could be, the first two could be protected and the franchise could be folded into UBS, which would not have been the case, as I say, just even a few years prior to that.
21:06 Harry Stebbings? Incredibly unfair question. Is FRB a stricken asset with a damaged business book? Or is it a consequence of a wider macro banking turmoil situation where really it's being pulled into something that it doesn't deserve to be?
21:22 Speaker 00 On the balance, it bears more responsibility for the situation it is than the macro. And let me make a macro point, which is that, you know, if we go back to where we were whenever it was we spoke last time, 12, 15 months ago, we're just rolling into this period where the world's moving out of low-for-long interest rate environment, low volatility environment, which some had interpreted as low forever, including low vol forever, and had built up books of business, and in the case of FRB and SVB, very large books of business. That were low yielding, assumed low volatility for a very long period of time. And it wasn't prudent risk management. You should have been able to see that at the time.
22:06 Speaker 00 And now that we've moved into a different regime, it is a huge headwind on the franchise. Nobody has an incentive to reprice their own loan. They might as well keep the terms that they have. They're certainly not going to get them again. It's more a victim of its own situation. You could say, I guess, that the macro situation has changed quite dramatically. But one of the things you're supposed to do as a risk manager, you're certainly supposed to do this as a central banker, as a regulator, is think about the tail risks that others are not thinking about and what is possible, not what's most likely. And it was always the case that one of the very likely possibilities, one of the fat tails, was we would eventually get out of the liquidity trap, this low for long interest rate world. And to assume otherwise is irresponsible.
22:50 Speaker 00 Just like now, to assume that we're going back to that world after we get through this bout of inflation is also, in my view, an unrealistic assumption. You're just gambling for redemption on that one.
23:01 Harry Stebbings? That's what I wanted to ask you, which is like, when you think about what's to come and the consequences, when you think about the consequences of the banking crisis on monetary policy, how do you think that will look in the next 12 months?
23:14 Speaker 00 So I distinguish between a crisis and turmoil. So I'm still going to cling to that turmoil term, but it's nonetheless serious. Like, it's serious enough that it's going to, let's say, in the US, it'll probably slow growth by a half to three quarters of a percentage point is probably enough if people felt that the US economy was on the cusp of this narrow path between avoiding recession and having a recession. It's probably enough of a headwind that there will be a recession in the US. So that's material. In terms of monetary policy, I think what the central banks have done is to try to differentiate between what they need to do to keep the financial system functioning reasonably well and what they need to do to address inflation.
23:58 Speaker 00 So they provide liquidity to the banks, particularly in the United States, and that keeps those who have healthy enough business models to keep going, but they continue to raise interest rates. But the next point is that the degree to which they raise interest rates has changed. And if we had been talking at the end of February, early March, before Silicon Valley Bank, I would have said something to the effect of I think the Fed may have to go to 6% Fed funds. Now I think they'll probably stop at 5, 5 and a quarter. That's 75 basis points at a minimum of shift in the stance of monetary policy. And of course, the reason for that is that there is a headwind from what's happening in the regional banking system.
24:39 Speaker 00 It is half of consumer lending plus it's three quarters of the lending into commercial real estate. It's material for commercial and industrial lending as well. And the price of that lending is changing, but actually the very availability of land lending is in many cases coming to a stop and the Fed has to react to that.
24:57 Harry Stebbings? Mark, was the speed of rate hike, was it irresponsible? It was unparalleled to any other rate hike supposedly in the recent times?
25:07 Speaker 00 I think it was necessary. It has consequences. I think one of the assumptions that economists, not always financiers, but economists often make is that things move in a linear fashion, whereas certainly technologists knows that things get disruptive, there's quantum moves. And in finance, there are situations where it isn't the case that when you move from, certainly in this case, when you move from zero interest rates to 5% interest rates in a short period of time, it doesn't mean the cost of credit moves up lockstep with each of those moves. You get to positions where the availability of credit just stops from certain channels. We're seeing that in the regional banking sector. We'll see that in other leveraged parts of the system.
25:51 Speaker 00 I guess we saw it at the very start of this move. We saw it in leveraged crypto, which wasn't macro significant. So I think the responsibility of the authorities is to recognize that the faster things go, the more likely there are to be these, to put it politely, nonlinearities or sudden stops. And that needs to be taken into account.
26:12 Harry Stebbings? Yeah. Mark, if I put you in charge of the Fed, what would you have done differently?
26:16 Speaker 00 Well, so what the Fed did when we're in the depths of the pandemic, it effectively tied its hands and it said that we, the Fed, are going to target average inflation and we will not raise interest rates until we have the prospect of getting unemployment back to the level it was prior to the pandemic, including in various socioeconomic groups. And it also had an inflation condition as well. So instead of anticipating where inflation was going, it changed its decision rule to a backward looking's decision rule. That meant that they lost six to nine months probably of tightening, a time that could have been spent initiating a more gradual tightening,
26:58 Speaker 00 squeezing out some of the excess which built up in these late stages of a cycle. You get the excess building up, so there would have been less of that. Now, the big forces on inflation, the big global forces that help drive inflation to the high single digits, they still would have been acting. So we wouldn't have seen an appreciably different level in the short term of inflation. It would have been lower, but wouldn't have stayed at 2%. But we probably would have had fewer of these strains appearing in the financial sector. We'll never know.
27:27 Harry Stebbings? Mark, before we move to climate, which I do have to discuss, is there anything that you think is very important that you don't think enough people are spending enough time on, are aware of, are concerned by when you look at the banking crisis in the last six months, six to 12 months?
27:42 Speaker 00 I'll answer that. I think there's two consequences which might seem slightly inconsistent. I'll say them anyways. And one, maybe a little controversial, which is I think this probably puts a silver bullet into stable coins, even though this is a banking crisis. Because that model, and there's a lot of value in the link, obviously, between the core of the central bank balance sheet and the DeFi world or the NFT world and all that, I totally get that. But that model relies on absolutely flawless asset liability matching, not just 24/7, 365, but for decades.
28:21 Speaker 00 And what we see is that small deviations from that over time get caught out and can lead to a panic. We also see that the authorities have not been able to oversee money market funds, which is a version of this. Twice in the last 15 years, we've had huge money market fund crises in the US. Haven't been able to oversee relatively simple banks like SVB and FRB. And it just, when you put those realities together, the likelihood that there would be an accident over time with a stablecoin is pretty high. And the risk of that is unacceptable because it would be at the center of the payment system. So it wouldn't just be a question of who had a deposit.
29:05 Speaker 00 It would be, everybody would be affected by it. And of course, the only way that you can protect against that is to, in effect, staple the stablecoin to the central bank balance sheet, which is, in other words, that its whole asset side is matched, one for one. In that case, that's really a central bank digital currency by another name. So that's one consequence of it. I think the other consequence, and the reason why I try to say it's a bit inconsistent, is that I do think what this does lead to, though, is the system moving more towards wholesale finance, narrow banking in different pockets, and that the funding of banks will, over time, become more wholesale, less retail, more volatile, more credit differentiation.
29:50 Speaker 00 Monetary policy will end up having more traction for what it's worth. And the consumer, whether it's your fund, your companies, or you as an individual, you're going to see actually better rates as a consequence, better service as a consequence from that. But it's a pretty big change that will come from it.
30:04 Harry Stebbings? That is a pretty big change. And I was like, yeah, just leave me on the facts. Thanks for that, Mark. I do want to make sure, though, that we cover climate because you spend a lot of time on it and there's a lot of questions I just want to touch on, which is, first, what is new in net zero?
30:19 Speaker 00 What's new in net zero is that we're getting on track, actually, and that's not something I ever, I didn't think I would be saying this early. I'll give you some headline numbers, which is, seven years ago, when they had the Paris Accord, the world was headed to three and a half degrees. When we had the Glasgow summit just under 16 months ago, 18 months ago, it was less than two and a half degrees. Now, with the country commitments that are in place since then, it's 1.8 degrees. But what we have with the US IRA, with the European response, the Canadian response to the European and the American response. What's happening in Japan, Korea, on and on, is that a number of countries have put in place the policies to get on track, the key waystation between now and 2050 net
31:01 Speaker 00 zero, which is the end of this decade, 2030. And these are orders of magnitude of 40% to 50% reductions in emissions. To back that up, I'll just give you two data points. One is that the level of clean energy investment, so renewables and other investment, has tripled over the course of the last five years. It's on course to quadruple again over the course of between now and the end of the decade. And then if you look at what's happened in the auto sector and the rise of EVs, three, four years ago, about 4% of new auto sales were EVs. This year, it's looking like it's going to be closer to 20% worldwide. Those are huge numbers. And in most advanced economies, it's likely to be
31:44 Speaker 00 more than 1 and 2 by the end of this decade. So the new thing is that the inflection point that we need, we're living through them right now, and I'm not blasé, I'm not paying glossy about it, but it is pretty significant what's going on.
31:58 Harry Stebbings? I'm going to play devil's advocate here, Mark, which is incredibly bold of me, considering the size of your brain and considering the size of mine, but I'm going to do it anyway. Number one, when we look at kind of size of impact, Xi Jinping and China play a pivotal role. The man has spent his entire life climbing the greasy pole of Chinese politics, which is a challenging pole to ascend. He needs to focus on growth. What China does not have, where we are seeing millions of Chinese people being sent back to rural communities in a bid to them to find work. China is in trouble. He doesn't give a shit about climate. He needs growth. Do you agree? And can we make headway with China not really being...
32:41 Speaker 00 I disagree with, I'm going to disagree with the premise. Maybe I won't disagree with the, what he cares more about as a leader. He cares more about growth and in short term, climate. But he's, he and the country have made a very big bet on future growth relating to decarbonization. That's, it's growth for China, and I'll come back to why it's growth for China, but it absolutely central to... The competitiveness of the Chinese economy over the course of the next 25 years. Decarbonization and the two big drivers of competitiveness for China. And I'm going to back this up in a second, but I'll just make the core point, which is one of the pennies that has dropped for other major economies is that he's right.
33:24 Speaker 00 Xi's right about those drivers of competitiveness. What's motivating the IRA in the US, which is the big, for those who haven't followed it, the big climate bill, which is enormous, enormous in its impact. What motivated that? What's motivated responses in places like Canada and others? Yes, it's climate, but really it's about jobs and growth. It's about these industries. If you just harken back to what's happened in the auto sector and what is happening in the auto sector. If you're not building out an EV supply chain and you're an auto manufacturer, you're dead. That train is leaving the station, to mix my metaphor, and you need to be there so climate goes there. So in terms of, is that really manifest?
34:05 Speaker 00 China accounted for half of clean energy investment last year, about 550 billion US of the 1.1 trillion, so half in effect. Their renewable investment's grown at 50% a year. They have more than 50% of the EV market in terms of the flow there. They are one of the biggest, in fact, the biggest source of clean tech finances in China, and they're the dominant player in solar and wind, the supply chains for that. So he's getting growth out of that to personalize it. The country's getting, China's getting growth out of that. That's why he cares and that's, it's having the spillover effect on other countries who are realizing they need to care about it as well.
34:45 Harry Stebbings? Yeah, Mark, what a statement to say he doesn't care.
34:48 Speaker 00 I said he cares.
34:49 Harry Stebbings? I'm joking. No, I, okay, so I asked this question of Mr. Mark Evans, and he gave me a fascinating, and this was this week, so I'm going to compare your statements here. And I know, I said to him, you can long, you can invest in the future of one, the US or China.
35:03 Speaker 00 Oh, I know.
35:04 Harry Stebbings? A tiny period.
35:05 Speaker 00 You'd invest in the US. I'd invest in the US. Why would I do that? Partly that the, okay, we've got a track record and past performance isn't an indicator of future, but the main components of what has driven American exceptionalism over decades, more than a century, still are there, still, partly because of immigration, but it's still the case, though the quality of skills is amazing. The financial ecosystem, yes, it has VB and FRB, but it also has The whole VC complex, I won't tape myself by only naming one or two of them. Of course, you're by extension, my host here is part of that. It has still the best mechanism of creative destruction in the world, I think. There's some who argue European competition policy is now stronger. I'm not totally convinced.
35:50 Speaker 00 I'd noticed that US competition policy has just been reinforced. And it has, it has an ability to, it has a huge market and has ability to get market access. So it has all of that. And they've just pivoted. America, when it moves, moves big. And so in this space in climate, which is one of the big drivers of growth going forward, the US, in this space of the time since we last spoke, has gone from well behind Europe or the UK amongst the major industrialized countries in addressing climate change to putting in place the measures and now driving with the investment that they're definitely, they will overtake in the course of a few years. And then with respect to China, yes, massive market.
36:34 Speaker 00 Yes, they've got all these components. Yes, they're going to do well in this. But what comes with that is issues around property rights, consistency of government policy in some cases. They're just, I probably am better off leaving it in the why the US is so positive than enumerating a bunch of issues in China. But I think it's a simple choice.
36:55 Harry Stebbings? Can I ask you, for Europe, is Europe weaker than that?
36:57 Speaker 00 No, I don't think it is, actually. And on the face of it, it's obviously there's a massive shock with the war and the energy hit that comes with that. And there's reason to think that it might be, but I'm going to take the other side of this. First is that the financial system, this is unusual. I don't think I've ever been in a position in my career where I've been able to say the European banking system is in better shape than in most other countries and certainly the US in this case. But that is the case, so their financial system is solid. I know Credit Suisse failed, but had relatively unique circumstances. And the core of the system is strong. The second is to say that they're using most of the levers of policy now. So fiscal policy is not a permanent headwind to growth there. Thirdly,
37:42 Speaker 00 They've got a pretty good framework in place for the net zero transition. So the US is going to catch up, I think, pull ahead. But Europe's been doing pretty well there and that's driving, that's driving investments. So I don't think they're, I don't think they're weaker. And it's more than initial because it's been longer than a year. I think the European response to the crisis being the war has actually, has made them stronger. It will make them stronger in the medium term. It's accelerated some things that they needed to do.
38:11 Harry Stebbings? Can I ask Mark a really unfair one? And again, I'll blame Mr. Evans for this one because I can do. Which governments and big corporations are acting more than they're talking?
38:20 Speaker 00 Acting more than they're talking. Look, I would say a company like, and they talk about it, but a company like Walmart in terms of. Walmart's got, I'm not going to do them justice, but it's certainly well over a million SKUs in their various stores. And as a retailer, you ultimately take responsibility for what are called scope three emissions. So the emissions all the way through the value chain, which means you need to know what the emissions are of all those products that you're putting on the shelves at Walmart. And they are rigorously going through that and then working with their suppliers to optimize those and get them down. And I don't know that, given the complexity and scale of that business, you could talk enough about it and still. Given what they're doing, they're, they're saying less about it than what they're putting into place.
39:04 Speaker 00 In terms of governments, this is recency bias. I was in Australia a few weeks ago and I'd say that the shift at all levels of government in Australia is underappreciated. And that's a pretty can do country. So when you have a decisive shift, what we're seeing is a pretty big shift in activity there. And we'll hear a lot more about it.
39:24 Harry Stebbings? Which are talking more than they're acting?
39:26 Speaker 00 On the company side, I think big, big oil is talking more than they're acting. I don't think the scale of, of investment in the energy of the future, the relative investment there, which is a relatively small percentage of overall cash flow, is consistent with where the energy sector is going. They all have a lot of talk, but where the money's actually being put is not consistent with that. I'm going to give an example, I'm going to give it, it's a slight pre-commercial, you can edit this out, but I'll give an example on this. Which is that the reason I was in Australia is that Brookfield. Company I work with is leading a bid on a company called Origin in Australia. And it does a couple of things, but one of the core things, it is the biggest generator and retailer of electricity in Australia.
40:09 Speaker 00 So it's got about four and a half million customers. But most of its generation is coal and then they buy on a merchant basis in a bunch of gas generations. As a whole, it's a meaningful proportion of Australia's emissions, 7% of Australia's emissions as a whole. And Origin basically had a shareholder base that liked the dividends that came from that core steady business. But in effect, it's a transition trap because what they need to do for where Australia is going is to invest about 20 billion plus Australian in building up clean power, shutting down the coal and operating for another 50 years, not another 10, 15 years. So we've been able to come in, we've made a bid at a substantial premium to the undisturbed share price, 50% premium.
40:54 Speaker 00 And we're going to not have a dividend, we're not going to take a dividend out of it and we're going to, we're going to invest in that transition, the 20 billion plus, shut down the coal, move forward and give the thing a future and make a good return for, for our investors accordingly. I bring that out in part because it's an example of the value of going to where the emissions are and the scale of what that, but also to, to try to illustrate the broader point. There are a number of companies that aren't moving fast enough for where the world's going. And part of the reason is they have shareholder bases that have a different horizon and could get to the point where the terminal value of the, of the enterprise is being affected. And so what appears to be a good yield in the short term is actually quite a poor yield over the medium and long term.
41:39 Harry Stebbings? No, no, the subsequent question is very much the same as in technology then, is will those incumbents embrace innovation and move fast enough? Or will we see innovators embrace distribution and engage with distribution fast enough to challenge the incumbents? Where does the value accrue there in your mind?
41:55 Speaker 00 The history would say that it's the, it's more likely to be the latter. We see that time and time again in technology. We saw it in the steel sector, a classic example. It's, it has a fancy name, the innovator's dilemma. Clayton Christensen's work on that. You know, there are exceptions to this. Netflix is an exception to this. Amazon was an early days. Amazon was an exception. Microsoft, I guess, in technology would be an exception. So it's not destiny, but you really have to fight against it. In effect, you do have to cannibalize your business. You ultimately have to take the cash flows from a very nice business and invest on something that's not a sure thing. And that's hard to do.
42:33 Harry Stebbings? Final part of that question. Which governments are talking more than they're acting?
42:37 Speaker 00 God, this is, I am the United Nations special envoy. So I've got to be nice to my governments. Just to remind. I just want to remind, exactly. I'm very special. I would have said the US, but I can't say that anymore. I think it's a relative game. So I'd now say that the time has come for the next phase of what the UK is going to do. Maybe that's the best way to put it. So it's like anything, you can be out in front, but then others catch up to you, start to lap you. I think the UK has had a good track record, but I'll quote the, I'll quote the Climate Change Commission, which is this independent body that does an assessment of the government. It says that more than half, it does not yet have everything in place in order to reach its medium term targets
43:22 Speaker 00 and has given 300 different recommendations of what's necessary to do it. So I guess that would fall into the talk more than act.
43:29 Harry Stebbings? Well, that's good. I'll ask Rishi on the show when he, when he does come on, ask him about 300 different recommendations. That must be fun. I want to move into a quick fire, Ammar. So I say a short statement. You give me your immediate thoughts. We're going to start with one that I loved. I can't wait to hear this. What do you miss about not being a central bank governor?
43:48 Speaker 00 I miss, I guess I'd put, I miss being at the center. When there's things like what's going, what we've been talking about, banking turmoil, other things, being in the room, being able to influence it more directly for good or ill. And certainly during the time I was central bank governor. Yeah, at the centre and I like being there if I can be.
44:06 Harry Stebbings? I'm gonna be cheeky, but I feel like we have a rapport where I can be. Why are you not in politics, Mark? You seem like a gifted politician.
44:15 Speaker 00 Look, I'm trying to help break the back on climate and I'll do that by whatever means possible. And I've got seats at the moment where I can influence it. So I would say politics if necessary, but not necessarily politics.
44:28 Harry Stebbings? What do you not miss about being a central bank governor?
44:31 Speaker 00 I don't miss when the centre doesn't hold, the centre not holding. So I don't miss when things are spiralling out of control and you're not on top of it.
44:39 Harry Stebbings? What do you know to be true that others do not agree with?
44:43 Speaker 00 A lot of people don't like to think about nuclear and think that there's an easy route to shut it down. But in fact, we have to grow it by another 50% between now and 2050 worldwide.
44:52 Harry Stebbings? What have you changed your mind on in the last 12 months, Mark?
44:56 Speaker 00 Fusion power will be commercialised.
44:57 Harry Stebbings? Who's your mentor?
44:58 Speaker 00 I'll give you three, but it's a common thing. There's a guy I worked with when I was at Goldman Sachs named Craig Broderick. He was the head of the credit department. When I was a central banker, I would say Mario Draghi. And now that as an investor, Bruce Flat is the CEO of Brookfield. I think the common thing of all three of those individuals is that you have to both sweat the details and see the big picture, the challenge in whether it's managing risk or conducting policy or investing. It's not enough just to get the tectonic forces in the direction right. You actually have to have to do the work.
45:32 Harry Stebbings? Penultimate one, if you could change one thing in climate, what would it be?
45:36 Speaker 00 We started taking it seriously when you were born. I would say we need a big pool of capital, concessionary capital, to shoulder particularly foreign exchange risk in emerging economies. Let me explain that quickly, which is that two thirds of the emissions in the world now come from the emerging world. Now, that includes China's about 30% of global emissions. But you've got 35% plus of emissions coming from countries that most private investors never visit, don't have exposure to, don't want to know about, and would be taking quite large currency risks and it's unhedgable. And that means that a lot of the capital is uneconomic to get there. Now, there's other risks and there's other issues, but we need to have a big pool of capital that will hedge that out. It's not going to come from the private sector and given the time horizons.
46:21 Speaker 00 So we need, we need to design that. It's one of the things I work on the, on the side.
46:26 Harry Stebbings? Final one. We do this again in 2028, so five years out. Where's Mark then?
46:31 Speaker 00 God, that's a good question. I would like to think I'm no longer a special envoy because what the objective is, so I'm going to define it in the negative. I'm no longer a special envoy because I'm tired of not being paid by the UN, but more seriously because the kind of things I'm working on are just so run-of-the-mill, they're mainstream, that everybody does it. And that's when you have success is that this is just carbon competitiveness is just part of the value equation. It's part of the way things are analyzed and capital flows naturally. And so then at that point, what am I doing? I'm an intern at Harry VC by that point. That'd be fantastic.
47:07 Harry Stebbings? Mark, listen, I've loved this. I'm actually special envoy in five years' time. So alas, your job has gone. I've learned immensely and you've been a star, my friend.
47:19 Harry Stebbings? Again, a huge thanks to Mark for putting up with my very diverse and prying questions. If you want to see the full episode in full on video, you can check it out on YouTube by searching for 20 VC. But before we leave you today, are you building enough conviction to outpace other investors in this changing ecosystem? Tegus helps VCs get under the hood of their investments quicker, map evolving markets with deeper research, monitor the financial health of portfolio companies and even source new deals. Tegus is trusted by top firms like Redpoint and Spark Capital for everything from expert calls and transcripts to quickly surfacing insights across filings, comps and benchmarking. Find out why a majority of the top venture funds are using Tegus on a daily basis to differentiate,
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49:24 Harry Stebbings? where we do a the memo episode, breaking down the investment memo for OpenAI from Thrive Capital.
Previous 20VC: In AI Who Wins? Startups or Incumbents? What Happens to Wealth Inequality? Why Will $10BN+ Companies Only Have 10 People | Why Defensibility in Startups is BS & Speed is Everything? Why Large Groups Worsen Decision-Making with Sarah Guo Next 20VC: The OpenAI Memo: Why Invest? Is it too Late to Catch OpenAI? Are OpenAI's Models Truly Defensible? Does the Value in AI Accrue to Incumbemts or Startups - Application Layer/Infrastructure? What Happens with Regulation? with Vince Hankes @ Thrive Page updated September 29, 2026 · transcript and summary are machine-generated
