The Global Treasurer spoke to Bryan Pascoe, CEO of the International Capital Market Association (ICMA), to understand some of the key activities of the association, key developments and challenges in capital markets today.
Do you want to tell us a little bit about yourself and the ICMA?
I’m the Chief Executive Officer of ICMA, a role that I’ve occupied for three years. Prior to that I spent most of my career as a capital market practitioner in large global financial institutions holding scale roles such as Global Head of Debt Capital Markets and Group Treasurer, and have worked in Asia as well as Europe.
A bit of background and context on ICMA – we are a not-for-profit global trade association for participants in the cross-border debt capital markets. Our day-to-day work also incorporates the cross-cutting themes of sustainable finance, financial technology and digitalization.
Put simply, our work is directed into principal channels: building trust in capital markets; driving best practice and industry-driven standards in the market; and engaging with official institutions and regulators to advocate on behalf of our members. For example, if the industry has strong views on the likely outcome of a certain regulation, we work to make sure that the market efficiency is maintained while proportionate regulation is put in place.
We’re very international in nature, with over 620 members across 68 jurisdictions. We are quite unique in terms of our membership, to the extent that it covers all kinds of practitioners who are involved in the capital markets and bond markets. We have private and public sector bond issuers, bond underwriters, trading and broking firms, asset and fund managers, insurance companies, pension funds, sovereign wealth funds, credit rating agencies, and capital market infrastructure players such as CSDs, CCPs and stock exchanges. We also have law firms, central banks, consultancies and technology firms. It’s a very broad church and highly representative of all different elements of market practice.
What, in your opinion, have been the biggest changes that the capital markets have experienced in the last two decades?
The phenomenal growth of the bond markets has been a real feature of the last 20 years. We’ve seen the US Treasury Market go from around 5 trillion outstanding to now close to 30 trillion outstanding. Additionally, if you rewind to 40 years ago, there was really no Chinese bond market to speak of. Fast forward to now, and it’s the second largest bond market in the world, just behind the US. At the same time, we’ve also seen a huge growth in issuance in local currencies by emerging market borrowers, and by corporates and financials across the capital spectrum.
Another key change is the wave of regulation that has been written since the financial crisis of 2008. This has introduced increasing requirements and responsibilities around reporting and disclosure, and affected how different institutions can warehouse risk or take risk, how banks need to use their balance sheets, and how investors deal with counterparties.
And so while regulation has tightened significantly, the bond market in terms of its scale, relevance and structure of the bond markets is almost unrecognizable from the market that existed at the turn of the century.
Finally, the emergence of sustainable finance has been a huge and enduring influence on the capital market. ICMA has served as secretariat to the Green Bond Principles since their establishment in 2014. The scope has now expanded to include the Social Bond Principles, the Sustainability Bond Guidelines and the Sustainability-Linked Bond Principles. Collectively these are known as ‘the Principles’. These principles are now very much embedded as a consistent element of funding in sustainable format across most regions in the world, and represent around 15% of total bond issuance on an annual basis, close to 5 trillion in total outstanding. There’s been a major change in the way issuers approach the market, how they think about presenting their companies and driving value, and what investors think about when buying and allocating sustainable finance into their portfolios.
What do you foresee would be the changes in sustainable finance, and the broader market, in the coming decade and what would that mean for the global economy?
The mainstreaming of sustainable finance is already a key feature of the broader market and this will pick up pace as we look ahead given the huge funding requirements to reach sustainability targets and the role the private sector needs to play.
We continue to see new kinds of products come out, and there is a lot of focus on ensuring the standards of sustainability alignment are very high. Addressing transition finance needs has already emerged as a key theme and this will continue.
As we look ahead, the likelihood is that the market overall will grow. The direction of travel in Europe seems to be higher debt to GDP ratios, and there will be more borrowing from some of the larger governments. We see the same kind of trend emerging in the US as well. And along with this growth there are naturally some concerns about credit quality and higher risks as the debt burden increases.
Coupled with that is geopolitics, which in some cases is creating fragmentation and regionalization of markets around certain larger groups. Fragmentation in many ways is itself inflationary in terms of the impact that it has for supply chains and within the context of the real economy. Also, sustainable initiatives need investment, and growth and changes in technology, which will further weigh on inflationary pressures.
I think the reality is that the combination of geopolitics and the embedding of sustainable finance will mean that interest rates are perhaps likely to stay higher than they otherwise would. That can certainly lead to some fragilities in economic and market conditions, especially where debt burdens are high, and potentially lead to risks in particular around debt affordability and potential refinancing challenges down the line.
As we look ahead, many of the larger economies and also emerging markets will certainly continue to focus on bond markets to finance growth. And what we have seen in the last two or three years is changes in market structure. Different kinds of participants are entering and providing liquidity to the market. Electronic platforms and electronic processes are driving much greater volumes of activity in the market and we are seeing new entrants, in terms of hedge funds and other kinds of buyside firms, in the wholesale bond market. So, there’s quite a lot of change that’s taking place now in terms of market structure and I think that’s going to remain a feature.
Obviously, the hot topic of the day is AI. What do you think the role of AI may be in the finance industry?
The challenge with AI is that it’s such an amorphous subject right now. It will clearly affect all areas of the real economy – education, healthcare and capital markets as well. We are working with our members right now to define how we approach AI and what role we can play to help facilitate the best usages of AI in the capital markets – be that around risk and portfolio management, customer selection and engagement, improving data provision to support sustainable finance growth, streamlining of operational processes and dealing with reporting challenges. These are the key examples where we feel, from a capital markets’ perspective, that AI can be very helpful.
There is of course a vast array of other things happening in the technology space that have direct applications and implications for bond markets and capital markets. More broadly, there is huge potential to reduce costs and boost efficiencies using distributed ledger technology, tokenization of securities and central bank digital currencies. We’re working closely with our members, broader stakeholders, some of the central banks and the major regulators to define how these technologies can be used in a way that boosts efficiency and produces favourable outcomes.
One of the risks is that if technological advancements are done in silos by individual firms or in individual regions, they won’t have the interoperability or the ability to connect firms and different operators to drive efficiencies through the entire financial ecosystem. So, at ICMA, we aim to promote the consistency, harmonization and standardization of a lot of these positive initiatives that are coming out of the technology space.
Final thoughts?
One of the things that is currently holding the sustainable finance field back is the concerns around greenwashing. On the one hand, standards need to be high and ambitious, and we need to make sure that all companies, banks and other firms try very hard to make themselves sustainable in a transparent and credible way. But on the other, there is the risk of making judgements based on poor or incomplete sustainability data. I think we need to be balanced around the need to maintain standards at a high level, but not drive fear and a reduction in market activity because people are too worried about the disclosures, the reporting, and the greenwashing accusations that might be faced. Driving data improvements must be a central focus to build trust and further depth in the market.
The second thing I would like to reinforce is how important bond markets actually are as a method of financing sustainable economic growth. When you read the news, you notice a lot about bank lending into the real economy and how equity markets are trying to be boosted in terms of efficiency and size. But in reality, the bond market is bigger than both the lending market and the equity market – it’s just maybe not as visible. Notwithstanding some of the recent stresses and shocks the market is generally performing well through the cycle, but we must remain acutely aware of the impact of regulation and changes in market structure and keep a strong focus on building a resilient and liquid ecosystem.
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