06 April 2022

ICMA: ICMA Quarterly Report for the Second Quarter of 2022

The transition from LIBOR in the bond market; Russia-Ukraine: sanctions effects on markets; CSDR mandatory buy-ins: v 2.0; The GMRA: marking 30 years of ongoing service; Ensuring the usability of the EU Taxonomy; Diversity and inclusion measures at the Banque de France

Succeeding in uncertain times
by Jérôme Haegeli
A year we had hoped would represent a break from turbulence
has turned out darker than virtually everyone anticipated.
After two years of COVID-19 disruption, the invasion of
Ukraine has shocked us all and ratcheted up the uncertainty
level. As we look at the economic outlook, we are facing
significant new challenges: higher inflation than previously
expected, as commodities, energy and food prices feel the
pressure from the conflict; central banks tightening monetary
policy into slowing economies, and even the possibility that
1970s-style stagflation may return.

The geopolitical implications for international relations,
security and the global balance of power are likely to be of
even greater significance than the economic consequences.
The conflict in Ukraine has disrupted the international security
order, and a new order with a much stronger focus on defence
and energy security is taking shape.

This will have profound long-term structural consequences.
Changes in the geopolitical order, revisions of national
defence budgets and restructuring of energy supply chains,
especially in Europe, will redefine multinational relationships.
For example, Germany has already committed 0.3% of GDP to
offsetting the large increase in energy prices, and pledged to
reach the full NATO spending goal of 2% of GDP on defence.
The EU is discussing joint bond issuance to fund energy and
defence spending. We see this push for self-sufficiency in
energy, agricultural commodities and other areas structurally
raising prices for consumers in many countries.

ICMA is needed more than ever in this environment. Strong
capital markets are the bedrock of the global economy and
ICMA’s work underpins their transparent functioning and
supports market participants. As we see in these times of
high volatility and rapid change, it is critical that investors can
trust in the integrity of markets. I am honoured and delighted
to contribute to this essential work.

The regime shifts in the making have the potential to force a
dramatic recalibration in the landscape of ESG investing. The
cosy world of old ESG certainties is over. Former assumptions
regarding, for example, energy choices – gas in, nuclear
out – do not fit with a world in which funds used to buy gas
ultimately finance conflict. But if oil and gas are now akin
to blood diamonds, what rating will ESG investors place on
nuclear power? Similarly, the defence industry’s contribution
to security and societal resilience is now being acknowledged
and could find a home in ESG portfolios. I expect the
prioritisation of the “E” in ESG to adjust, to ensure that
the “S” of social requirements such as energy security and
defence is no longer neglected.

As new events create transformation in financial markets, it is
crucial to make sure the system is up to the challenge. There
are three key transformations that sit at the intersect of
economics and capital markets in which I believe ICMA’s work
will be crucial for the future. We call these the three “Ds”, of
divergence, digitalisation and decarbonisation.

Divergence within and between countries is a huge concern
as it creates different paths for economic recovery, economic
inequality and socio-economic opportunity. Our path forward
has to be socially inclusive.

Digitalisation – inclusive digital transformation – is essential
to “future proof” the world economy, make businesses more
resilient and reduce divergence.

Decarbonisation, the transition to a net-zero carbon emission
world, is needed to end carbon emissions and stop climate
change. ICMA’s work in this field is already innovative and
influential, such as the Green Bond Principles. Decarbonisation
of energy supplies has been given fresh impetus by the latest
geopolitical developments, as well as the energy price crisis.
The drive for energy security may accelerate this transition.
The global economic trajectory and strong capital markets
both ultimately rely on us understanding and providing
leadership in transitions like these. The global economy is not
more resilient today than before the global financial crisis.

Recent events are a stark reminder that assumed certainties
can evaporate at any time and we must be ready to manage
change.

Jérôme Haegeli is Group Chief Economist and
Managing Director, Swiss Re Institute, and a member
of the ICMA Board.

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