Battle of the Quants

Working with Bartt Kellermann and Selvie Shaqiri to help bring their very successful US format here to the UK.  Very interesting session today discussing this brief title – “ From the Ephemeral Quant to the Eternal Coin: Short Term vs. Long Term Considerations when Allocating to Quantitative Based Strategies”.  Thankfully, some of our thoughts on Long Finance really rang a bell, and folks seemed to be interested in Asymmettric Gain-Loss Recognition, Performance Policy Bonds, Confidence Accounting, Irreversible Time, Unburnable Carbon, Internal Growth Rate as a key regulatory pension metric, and Volatility = Sustainability.  Wow.  Great crowd.

Eternal Coin Treadmill

Battle of the Quants

Working hard to get elected and already finding that the number of speaking engagements is climbing sharply.  I’m speaking next week at Battle of the Quants.  This is a very popular New York event format which is coming to London a second time.  I’ve been given a succinct title – ” From the Ephemeral Quant to the Eternal Coin: Short Term vs. Long Term Considerations when Allocating to Quantitative Based Strategies”.  We’ll see how well this audience takes to Long Finance‘s thoughts on the long term.


What’s In A Name?

This week’s ESMA & EBA report, “Principles for Benchmark-Setting Processes in the EU”, garnered headlines such as “EU plots to grab control of Libor from London”. Such sensationalism simultaneously leads to over-reaction and under-reaction. Libor is a known problem, but there are questions over other market indices for oil, steel, gold and other commodities. Surely five years into financial crises why shouldn’t the EU set out guidelines for robust indices upon which most markets depend? Yet I worry about state control and auditing of benchmarks. Some bankers claim they connived with regulators on Libor to look stronger than they were. Instead I would suggest a more ‘British’ approach – a published ISO or BSI standard on index governance and management, independently audited on quality, accuracy, timeliness and distribution in a competitive market. And the under-reaction? These financial reform proposals should be coming from London. If we’re losing our intellectual leadership perhaps we do deserve to lose the ‘L’ in Libor.

In CityAM 7 June 2013 –

Why CO2 Will/Won’t Kill Us

I was intrigued with a thought about “when did CO2 atmospheric concentrations actually become directly harmful”, i.e. we’d really really have to do something about it as human beings.

From here –

“Carbon Dioxide is a powerful cerebral dilator. At concentrations between 2 and 10%, Carbon Dioxide can cause nausea, dizziness, headache, mental confusion, increased blood pressure and respiratory rate. Above 8% nausea and vomiting appear.  Above 10%, suffocation and death can occur within minutes.”

Let’s assume then that 2% is unacceptable.  Our current concentration on 1 April 2010 is 391 ppm. From the Mauna Loa record – – we can see that over 50 years the average growth rate is 1.43ppm/year.  One notices that recent rates are higher, i.e. the average of the past 10 years is 1.98ppm/year.  I’ll just take 2ppm/year.

Thus we need to estimate when we hit 20,000ppm.  That’s 10,000 years hence, i.e. 12,010 AD.

We could halve that probably, i.e. 6,005, as I’d reckon we’d definitely notice 1%. So CO2 is a long way off killing us, except it’s likely to destroy us in fifty years if we do nothing. That’s the long and the short of it.

[I can’t afford to pay, but you can afford to look at the black humour side of this here –]

The Eternal Coin: Physical Endurance or Digital Failure

On 15 June 2010, the Real Time Club evening’s proposition for discussion was that new technology will move beyond a facsimile of current exchange to new means of exchange that are better for society as a whole.  Future e-money synthetic currencies for speculative fiction writers shouldn’t be, “that will be ten galactic credits, thank you”, but rather, “you owe me a return trip to Uranus and a kilogram of platinum for delivery in 12 months”.  Well, that’s what our payments autodroid bots (i.e., mobile phones) will agree amongst themselves.  Dave sets out his stall: “When you digitise something, you have the opportunity to re-engineer it.  So it is with money.  As money has changed from barter to bullion, from paper to PayPal, it has changed the markets and societies that depend on it.  Where next?

The Eternal Coin

The Eternal Coin

Dave Birch opened in front of about 40 members with a reminder that Hayek always believed that money was too important to be left to governments.   Dave argued that we ideally needed many units of account for many things but that multiple currencies increased the cost of transactions markedly – how could the cash register be large enough.  He pointed out though that in border areas people seemed able to handle concepts of multiple currencies easily.  This led to a quick reminder of the many new currencies emerging online, e.g. QQ in China, but Dave emphasised the crucial role of the mobile phone, e.g. M-Pesa in Africa.  Finally, Dave touched on new currencies related more closely to real value, e.g. based on commodities, such as people in Norway using future kwHs of electricity as currency.

The core of the argument was that:

1 – we have reached a time of great change in the nature or money

2 – the mobile phone is the most important technological part of the change

3 – some of the nascent currencies will transform our view of money

Dave concluded by musing on what these changes might mean for definitions of communities and community values across space rather than being confined by geography.

Malcolm Cooper opened his reply by asserting that the mobile phone is a transient technology, witness the iPad.  He believed that Dave confused the communications device with the technology.  Malcolm, drawing from some of the themes in his book, “In Search of the Eternal Coin: A Long Finance View of History”, felt the aberration over history was currency.  The norm is trading and storing value in a multiplicity of ways.  As an example Malcolm pointed to the extent of the Carthaginian trading empire and its relatively low use of coinage.

The discussion was, as ever with the Real Time Club, quite vibrant and funny.  Some comments and ripostes included:

  • shouldn’t we conclude from Dave’s arguments that Nokia ought to be a bank? This led to a further reminder of the 1994 paper by Edward de Bono  published by the Centre for the Study of Financial Innovation, “The IBM Dollar”;
  • would Carthage have been better off or stronger with currency?
  • Michael King of WDX (commercial interest) spoke of his firm’s Wocu (World Currency Unit), a basket of top 20 nations by GDP, weighted by GDP;
  • Michael Mainelli raised a point about trading currencies versus stores of value (reserve currencies) and pointed out other initiatives directed at that, e.g. the UTU;
  • wasn’t the deeper problem removing swings in markets, or was it perhaps that swings in markets were exacerbated by our reliance on currency?
  • the use of the quote from Dostoevsky, “money is coined liberty” (House of the Dead, part 1, chapter 2) led to a ponder as to whether we are at our most vulnerable when everything is cash;
  • people were reminded that fiat currency is fiat because the government only accepts the currency for tax purposes, giving government other opportunities to tax through debasement and devaluation and inflation;
  • was the importance of the mobile phone the global connective power and little else, followed by a comment that these days a mobile phone was hardly that, rather a computer with a phone attached;
  • a discussion kicked off on the importance of anonymity to money, including the withdrawal of cheques in the UK, and of course the Real Time Club’s interest in many things cryptographic.

The evening closed with a poem, “Liquidity”, composed on the night and read by long-standing member Andy Low:

The lake of commerce gives life its pace,

For on its smooth and shiny face,

Ripples form, surge forth and race.

(What do I want, what can I get)

They cross, connect and intersect.

The lives of people who’ve never met.

About the speakers

Dave Birch is a Director of Consult Hyperion, the IT management consultancy that specialises in electronic transactions.  Here he provides specialist consultancy support to clients around the world, including all of the leading payment brands, major telecommunications providers, governments bodies and international organisations including the OECD.  Before helping to found Consult Hyperion in 1986, he spent several years working as a consultant in Europe, the Far East and North America.  He graduated from the University of Southampton with a BSc (Hons) in Physics.

Described by The Telegraph as “one of the world’s leading experts on digital money”, by The Independent as a “grade-A geek”, by the Centre for the Study of Financial Innovation as “one of the most user-friendly of the UK’s uber-techies” and by Financial World as “mad”, Dave is a member of the editorial board of the E-Finance & Payments Law and Policy Journal, a columnist for SPEED and well-known for his blogs on Digital Money and Digital Identity.  He has lectured to MBA level on the impact of new information and communications technologies, contributed to publications ranging from the Parliamentary IT Review to Prospect and wrote a Guardian column for many years.  He is a media commentator on electronic business issues and has appeared on BBC television and radio, Sky and other channels around the world.  For much more, see

Dr Malcolm Cooper holds a First Class Bachelor of Arts in History from Dalhousie University, a Master of Arts in History from the University of Western Ontario, and a Doctorate of Philosophy in Modern History from Oxford University.  His thesis on the formation of the Royal Air Force was subsequently developed into a book, The Birth of Independent Air Power, and published in 1986.  His career has included a Research Fellowship at Downing College, Cambridge, management of the research programme of the Institute of Chartered Accountants in England and Wales, equity research management with three different investment banks (none of which, alas, exist today under their original name), and a five year spell as Head of Research for the City of London Corporation.  His most recent post was as Head of research for the independent public policy think tank Centre for Cities.

Malcolm was the first foreigner to take up coverage of the Istanbul and Athens stock markets and spent most of his investment banking career in European emerging markets, his last post being as Head of EMEA Equity Research for ABN-AMRO (a job he gave up in 2000 – not because he could see the crash coming, but because he decided he really didn’t want to be on the Central Line at 6.30 in the morning any more).  Most of his recent work has been in the UK public policy field but be retains an active interest in the more challenging parts of the world, and is still inordinately proud of having a letter published in The Times pointing out some of the more obvious problems with the UK’s current military commitments in Afghanistan.  He has also published several pieces on Turkey, including an article in International Affairs, a written submission to the Commons Select Committee and a contribution to a Chatham House forecast of likely regional scenarios following the second Iraq war.

Gresham College – A Short, Personal, Alternative History

Gresham College – A Short, Personal, Alternative History

 Professor Michael Mainelli, Gresham Fellow & Trustee


[October 2009 – originally written for the Mercers’ Company]

Sir Thomas Gresham (1519-1579) traded cloth and linens between England and the Low Countries at a time when Cambridge and Oxford had a duopolistic hold on higher education in England.  A Cambridge man himself (Caius College), if Gresham’s skippers had visited an Oxbridge College they would have, at best, had the door of a college opened to them and then been laughed at in Latin for their ignorance before being closed in their face.

If you’re going to backstab some one properly, do it from the front. Gresham did so with money. Sir Thomas died of apoplexy in 1579 bequeathing one moiety to the Corporation of London and the other moiety to the Mercers’ Company, charging them with the nomination of seven Professors to lecture in Astronomy, Divinity, Geometry, Law, Music, Physic and Rhetoric.  He required the lectures to be in Latin and, horror horribilis, English.  In effect, Sir Thomas, who pursued monopolies himself, used his will of 1575 anti-monopolistically to crack the Oxbridge oligopoly by bribing seven professors to give lectures to the public, in English.

Gresham College is about ‘new learning’.  Sir Thomas felt strongly that the ‘new learning’ should be available to those who worked – merchants, tradesmen and ships’ navigators – rather than solely gentlemen scholars.  In the 17th century, the Royal Society was founded to explore “natural philosophy”, new learning through experimentation.  So, it is no surprise that the Royal Society was founded and housed at Gresham College for half a century (1660 to 1710) and numbered among its associates Gresham Professors Petty, Boyle, and Evelyn.

For over 400 years the Gresham Professors have given free public lectures in the City of London.  I had the privilege of four years (2005-2009) in the modern, eighth chair as Mercers’ School Memorial Professor of Commerce from 2005 to 2009.  There are some deep footsteps in which we tread.  Early professors at Gresham College included Christopher Wren and Robert Hooke, also integral to the Royal Society.  Recent professors include the mathematical physicist Sir Roger Penrose of Penrose/Hawkings fame and the theoretical physicist John Barrow, who won the Templeton Prize and the Royal Society’s Michael Faraday Prize.

Professorships are awarded for three years with a stipend for six lectures a year, though professors often give more.  Each professor develops his or her own programme.  Academic professors complain that what seems like a sinecure is actually a very demanding post requiring novel, innovative, researched lectures of six to eight thousand words suitable for a global audience.  Business professors, such as I, definitely find it is work.  My estimate is that each lecture takes approximately 100 hours of preparation, thus 600 hours at about £10/hour – you’re not doing it for the money.  In fact, at that rate you should question whether you’re competent to be a professor of commerce.

As my tenure was extended for a year and I had ‘been volunteered’ each year for an additional lecture in the Docklands, I gave 28 lectures.  As a glutton for work, I gave a final synthesis lecture as part of the City of London Festival’s celebration of the 2,000 anniversary of the publication of Ovid’s Metamorphoses with saxophonist John Harle and friend Bill Joseph, “Metamorphoses: The Terrible Beauty of Change“, for 29 formal lectures in four years. The core 28 lectures, around 8,000 words per lecture, 56,000 words per year, some 224,000 words, found their way into the obligatory book – The Price of Fish: A New Approach To Wicked Economics And Better Decisions.  Fortunately for readers, only 100,000 found their way out to the printer.

Given 48 professorial lectures a year, along with honorary professors, former professors, fellows and numerous guest lecturers, Gresham College provides around 140 intellectual events a year for business people, retired people, mature students, university students, schools and the general public.  Each year over 20,000 people physically attend Gresham College’s 140 lectures.  In an age concerned with making money from intellectual property, Gresham College encourages the free exchange of ideas and is one of the most potent intellectual houses on the net and podcasts.  To quote Jefferson, “He who receives an idea from me, receives instruction himself without lessening mine; as he who lights his taper at mine, receives light without darkening me”. The Gresham community worldwide downloads lectures over a million times each year from a library of now thousands of recorded lectures, many of which find their way into syllabi from the USA to China.  My strapline for Gresham College today is, “Gresham College: The Modern Tudor Open University”, a “Tudor TED” even.

At Gresham College, we seek to reinterpret the ‘new learning’ of Sir Thomas’s time in contemporary terms.  Our emphasis is on sharing knowledge, exchanging ideas, fusing old views and generating new insights.  Gresham College is increasingly important for those living and working in London as the traditional universities and colleges focus on qualifications and are less able to offer the extra-mural activities they once did.  We have no conscripts: we have a community of people who come because they want to, because they find the lectures and seminars topical, informative and enjoyable. Gresham College is about personal, higher education from dipping into one lecture to completing a series.  I often lord over my academic friends that our current Registrar continues a long tradition of Registrary excellence – in over 400 years no registrar has admitted a single student.

Yes, I am a Gresham Groupie. I found the four years at Gresham College extremely rewarding and remain a Trustee and Fellow, and my firm continues to work on Long Finance and the London Accord with Gresham College.  Sir Thomas Gresham is synonymous with Gresham’s Law, best expressed as “good money drives out bad”.  I often think that the best people in the world come to work in one of the best cities in the world because Gresham College has a part in helping good discussion drive out bad.  Our 16th century Open University is going strong in the 21st.

[I continued to give talks and run symposia to the point that I ultimately became involved in over 120 events.]

To view all Michael’s Gresham lectures.

The City Debate: In This Current Financial Environment, More Financial Regulation Is A Major Part Of The Solution

Securities & Investment Institute
Annual Debate
Mansion House, London
Wednesday, 14 January 2009

“In this current financial environment, more financial regulation is a major part of the solution”

For the motion:
Dr Vince Cable MP
Mr Alan Yarrow FSI

Against the motion:
Professor Michael Mainelli FSI
Mr David Bennett FSI
Chairman – My Lord Mayor, Ladies and Gentlemen.

Mr Christopher Jones-Warner FSI

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ABCB – New Alphabet For Standards – Association of British Certification Bodies

My Lord, Ladies and Gentlemen.  It is a real honour for me to have this opportunity to address a group of people who share my passion that standards markets can improve the world, this Association of British Certification Bodies.  This is a personal address, not speaking as a non-executive director of UKAS, though I realise that probably had a bearing on inviting me here.  My remarks to follow are not meant in any way as UKAS policy.

Yet non-executive directorships are not filled for money – the risks are high, the time commitments always exceed the estimates and the thanks are low – nor are directorships filled with love.  If seeking a non-executive directorship is the first sign of madness; the second sign is probably taking one.  In return, we non-executive directors can be your worst nightmare.  In my case it’s because I have a passion for world trade and sustainable economies that I would like share with you.

To start with, I’d like to explore standards themselves.  Standards are funny things.  Because of my accent, I’m going to start with pronunciation standards.  Because the name of the International Organization for Standardization (ISO) would have different abbreviations in different languages (IOS in English, OIN in French), back in the 1940’s it was decided to use a language-independent word derived from the Greek, isos, meaning “equal”.  Therefore, the short form of the Organization’s name is always ISO – “I-S-O” – and ISO follows the “z” spelling as in “organization” and “standardization”.  Is that clear?  ISO’s recommendation on their website is to pronounce their name whichever way comes most naturally.  “So, you can pronounce it “EZO”, “EYE-ZOH” or “EYE-ESS-OH”, we don’t have any problem with that.”  What a great credential for flexible standards!

And then we have date standards – oh no, I’m not talking about the US month first versus the UK day first, or even the Chinese year first.  For 38 years ISO has designated World Standards Day to recognize the thousands of experts worldwide who collaboratively develop voluntary international standards that facilitate trade, spread knowledge and share technological advances.  ISO officially began to function on 23 February 1947, but 14 October was chosen as World Standards Day because on 14 October 1946 delegates from 25 countries met in London and decided to found ISO.  Of course, in the spirit of standards, in 2006 India, Ghana and others celebrated World Standards Day on 13 October while Nigeria celebrated from 12 to 14 October.  In 2007 the European Commission held its World Standards Day conference on 17 October, while the United States celebrated World Standards Day on 18 October.  Need I say more?

The truth is that the world is a messy place.  Moreover, it’s human nature to resist standards, or at least male nature.  A friend of mine, Paul, is raising three boys on his own.  When I asked him how he kept the house clean he explained, “Michael, men don’t have standards, women do.  Men have thresholds.”

The objective of standards is to help the evolution from complete mess to complete order by putting things in boxes at the right time.  Managing evolution isn’t easy.  Sometimes we try to box things in too early.  Other times we’re so late we just add cost and unnecessary complexity to existing commodities.  But done right – ahh, there we add a lot of value to consumers, to business and to society.  I recently conducted a large study with PricewaterhouseCoopers and the World Economic Forum looking at solving global risks, “Collaborate or Collapse”.  We concluded that society solved global risks using four collaborative approaches – sharing knowledge, implementing policies, markets and, yes, standards.

Sometimes I wish we could have a better sense of humour about it all.  I’d like us to avoid going down the path of political correctness and keep our largely scientific and engineering outlook on life and its problems.  Sadly, certification and standard jokes are rarer than one might like.  Perhaps we should have a comedy kite-mark.  Fortunately, the only after-dinner/lunch joke on standards I know doesn’t concern an ABCB member.  It is about certification taken to extremes over wine.

Two oenologists are trying to outdo each other on their exacting standards.  They both grab a tasting glass of red wine from the examination table in front of them.  Inhaling deeply, the first wine expert remarks that “this wine is an outstanding Bordeaux”.  The second interjects, “particularly when you recognise the difficulties inherent in raising vines of character in Côtes de Bordeaux-Saint-Macaire”.  “Indeed”, says the first, “and as this wine is from Saint-Macaire, the terroir in that area most suited to this interpretation of the Malbec grape is, I’d suspect, Château Malromé”.  “Ahhh”, counters the second, “self-evidently Château Malromé, but clearly the south-facing side, near the old well.”  “Elementary really”, replies the first oenologist, “and probably the fifth row, slightly higher up the hill”.  “Mais bien-sur”, adds the second oenologist gaining the upper hand by saying, “though I’d say a late summer picking from the eighth vine in the row and, dare I add, probably by picked by Pierre.”  “Well”, says the first, now delivering what he believes to be the fatal blow, “of course I detected Pierre’s hand on the grapes, after a cool morning and a late dejeuner.  Though his post-prandial micturation infuses this wine with a somewhat disagreeable undertone.”  “Naturally it does” says the second oenologist rather coolly, “as one must certainly ask why-oh-why did Pierre drink such an inferior claret for lunch?!”.

But standards are not just about quality and one-up-manship.  Adam Smith advanced the metaphor of “the invisible hand”, that an individual pursuing trade tends to promote the good of his community.  Yet the Doha round is stymied.  Valid social and ethical concerns transmogrify into trade restrictions.  Property rights are a battleground, from carbon emissions to intellectual capital.  Already, emerging carbon standards are being sharpened as weapons in future carbon dumping wars.  Our state sectors swell out of recognition, crowding out the private sector that delivers value.  Standards and certification markets exist to improve the functioning of global markets and trade, and even to inject market approaches into monopolistic service delivery.

Adam Smith knew that markets alone are not enough.  Smith’s argument is too rich to take after an excellent meal, but what I admire about certification bodies is that you exemplify Smith’s Moral Sentiments of Propriety, Prudence, and Benevolence, combined with Reason.  As ABCB members you do set high standards, think to the long-term, explore new ways to help society advance and make business and government think about risk.  You realize that there is more to economic life than money – as  comedian Steve Wright says – “You can’t have everything, where would you put it?”

Things change fast with trade.  Looking back to post-war Japan and thinking of Japan today reminds me of the apocryphal quality control tale about relevant standards.  A western company had some components manufactured in Japan in a trial project.  In the specification to the Japanese, the company said that it would accept three defective parts per 10,000.  When the shipment arrived from Japan, the accompanying letter stated something like: “as you requested, the three defective parts per 10,000 have been separately manufactured and have been included in the consignment.  We hope this pleases you.”

Today China is the sobering reminder of the importance of trade.  I heard a great sound-bite at the IOD China Interest Group two years ago, “we’ve had a commercial break these past 200 years, but now we’re back, on air”.  In the 18th century China was the world’s biggest economy, with a GDP seven times that of Britain’s.  But China closed its doors to trade missing the industrial revolution, the capital revolution and the information revolution.  There is a children’s joke that “you should never meddle in the affairs of dragons, because you are crunchy and taste good with brown sauce.”  But we must mix-it-up with the Dragon.  Money is odourless and poverty stinks.  We must reach out to all the returnees to world trade.  And we must ensure that our own standards markets are open and competitive, in turn helping world trade be open and competitive.

So, is today’s luncheon talk supposed to be slick & humorous, a call to arms or an academic lecture?  Actually I want to end by emphasising the importance of conflict.  Regulatory capture is a phenomenon in which a regulatory agency which is supposed to be acting in the public interest becomes dominated by the vested interests of the existing incumbents in the industry that it oversees.  In public choice theory, regulatory capture arises from the fact that vested interests have a concentrated stake in the outcomes of political decisions, thus ensuring that they will find means – direct or indirect – to capture decision makers.  Conflict and competition, not calm quiescence or silence, are key signs that things are working well in standards markets.

Accreditation and certification only work when the entire system is a market system, not a bureaucratic one.  We are good, but we can do better.  For example,

  • development of a standard should be an open process involving interested stakeholders, but many ISO affiliates typically charge three figures for short documents that could be supplied electronically at no charge;
  • despite our claims for openness, transparency and public benefit, certification agencies often fail to be open oto the general public about whom they’ve audited for what. Outputs such as certifications and grades awarded could be better published so that they can be validated – yet the industry complains about the ‘grey’ certification market;
  • accreditors must be vigilant regulators and ensure the separation of standards development from the commercial elements of implementation and review. Yet accreditors must be realistic and engage in meaningful dialogue with the industry while avoiding regulatory capture.

I could go further and talk about the widest view of standards from financial audit through to social, ethical and environmental standards with which I also work.  I’d even mention that to me, ideally, certifiers should bear some indemnity that can, with the price paid by the buyer, be made publicly available.  Developing countries rightfully worry that “the things that come to those that wait may be the things left by those who got there first”.  Sustainable commerce means doing things differently.  We must clasp the hands of the developing countries, support the invisible hand of commerce, restrain the visible hand of government and slap the grabbing hands of special interests.  We must prove that a global Commerce Manifesto deserves to replace a soiled Communist Manifesto.  We must keep our standard and certification markets open, transparent and competitive.

Standards markets are the great alternative to over-regulation or naked greed.  We professionals committed to standards prevent both the abuse of capitalism, red in tooth and claw, and the abuse of government regulation, 1984 but without Orwell’s sense of humour.  We open up trade.  Let’s sell standards markets as the new third way to the sustainable economics everyone wants.

On behalf of all the guests I salute the ABCB’s hospitality and its great work on behalf of standards markets.  Thank you!

London Accord – Sharing Research To Save The Planet

After two years of hard work led by Jan-Peter Onstwedder and me, we finally launch the London Accord at Mansion House on the evening of 19 December.

Grainy but true – l to r: Rt Honourable Lord Mayor David Lewis, Rt Honourable John Sutton MP, Sir Michael Snyder, Professor Michael Mainelli

My Lord Mayor, Your Excellencies, My Lords, Secretary of State, Alderman, Sheriffs, [Councillors, Distinguished Guests,] Ladies and Gentlemen… – it is my great pleasure to have this opportunity to tell you tonight about the London Accord.

The London Accord’s theme is “cash in, carbon out”. The London Accord provides informed views about climate change investment and sets out a methodology for evaluating those investments. The London Accord began in 2005 at almost the same time as the Stern Review. Sir Nicholas said last year that “climate change is the greatest market failure the world has seen”. While I admire many aspects of the Stern Report, I beg to differ with this specific point.

Markets haven’t failed. Markets have done what markets do, set prices and transfer resources and risks. In the case of climate change, what we have is an absence of a market. Markets and investors have acted accordingly. Events in Bali last week change all that. Henceforth, society will turn greenhouse gas emissions into a property that can be capped, traded, and reduced – and we must factor these emission costs into all investment decisions.

Why does the London Accord matter? Well, for a start, the publication of the London Accord matters to us because we have been working on it for over two years, but the London Accord should matter to everyone. The comedian Jay Leno once quipped, “According to a new UN report, the global warming outlook is much worse than originally predicted. Which is pretty bad when they originally predicted it would destroy the planet.” The London Accord matters because the financial services community says, if society is prepared to pay, commerce can stop global warming.

Our future scenarios for greenhouse gas emission prices are double today’s €20 per tonne of CO2, more like €40 per tonne of CO2. In rough terms, we need to reduce the CO2 emissions per Briton from 10 tonnes to one or two tonnes. At around €40/tonne that’s about €300 per person or about €1,200 per family per year. It’s going to be quite a different world.

Private sector investment is crucial to climate change investment (86% of capital investment in energy supply must be from the private sector – UNFCCC). Much of that investment will be funded through large pension funds and asset managers who rely on analysis by the financial services sector for investment decisions. So what did the London Accord team conclude?
• Energy investment is going to become much, much riskier;
• Investors should invest now. At prices per tonne of CO2 over €30, investment portfolios can constructed that produce both attractive financial and ‘carbon returns’.
• Forestry is a big unknown – there is a need to narrow the range of credible estimates for abatement and costs of forestry projects, as well as solidify carbon offset markets for forestry.
• Efficiency gains continue to show great potential for financial and carbon returns but may need behavioural incentives such as regulation.
• Carbon capture and sequestration/storage (CCS) seems an unrealistic investment today.

Moreover, financial services leaders understand the need to collaborate or collapse. The London Accord is a great ‘open source’ research project – the largest-ever private-sector investment collaboration into climate change, representing work valued at £7million ($15million). Buy-side firms such as Universities Superannuation Scheme, Insight, and Legal & General helped sell-side firms and analysts shape the project to ensure its outcomes would be useful to investors. Observers from the EU, the International Energy Agency, the United Nations Framework Convention on Climate Change and others have been involved.

In the time available, I must turn to thanks, and there are far too many. The London Accord has truly been a cooperative effort. Jan-Peter Onstwedder and I recorded nearly 500 thanks in the CD-ROM you will receive tonight, and still we missed people. However, on such a special evening there are a few I must single out. First, I would thank my team at Z/Yen, including Ian Harris, Linda Cook, Mark Yeandle, Kevin Parker, Liz Bailey and Alexander Knapp, who put up with two years of stress. BP staff worked throughout on the London Accord, and here I would single out Tessa Marwick, Andrew Vivian, James Palmer and Sanet Phillips. Gresham College’s Lord Sutherland and Barbara Anderson helped to kick things off and generously provided facilities, including a technical seminar at Gresham College we’re having on 30 January 2008 to which all of you are welcome. Henry Thoresby and Sir Howard Davies gave us excellent support from the LSE community pulling the threads together.

The best way to thank the contributors, the important people who did all the work, is to enumerate their reports:

First we had two papers setting the context:
• Alexander Evans, Center on International Cooperation at New York University & David Steven, River Path Associates, wrote “Climate Change: the State of the Debate”, examining how climate change rose above other global issues;
• Nick Butler, Cambridge Centre for Energy Studies set out “The Forces of Change in the Energy Market”.

Then, the heavyweights analysed the investment opportunities:
• Solar Energy – Eckhard Plinke and Matthias Fawer, Bank Sarasin
• Investing in Biofuels – Conor O’Prey, ABN AMRO
• Investing in Renewable Energy – Mark Thompson, Canaccord Adams
• The Global Case for Efficiency Gains – Miroslav Durana, Tanya Monga and Hervé Prettre, Credit Suisse
• Energy Efficiency – Asari Efiong, Merrill Lynch
• Carbon Capture and Sequestration – Marc Levinson, JPMorgan Chase
• Emissions Trading – Andrew Humphrey and Luciano Diana, Morgan Stanley
• Forest Assets – Stephane Voisin and Mikael Jafs, Cheuvreux

A number of us examined the wider impacts:
• Credit Risk – Christopher Bray and Dr Richenda Connell, Barclays and Acclimatise
• Carbon Intensity – Valéry Lucas-Leclin, Société Générale
• Sustainable Investment Solutions – Alice Chapple, Vedant Walia and Will Dawson, Forum for the Future
• The Legal Issues – Lewis McDonald, Herbert Smith
• Climate Change Investment and Policy Portfolios – James Palmer

Finally, some of us considered the policy implications
• Technological Development – J Doyne Farmer & Dr Jessika Trancik, The Santa Fe Institute
• Emission Standards – Steven Davis, The Climate Conservancy
• Product-Level Standards – Hendrik Garz: WestLB
• Philanthropy – Davida Herzl, NextEarth Foundation
• Carbon Markets and Forests – Eric Bettelheim, Gregory Janetos and Jennifer Henman, Sustainable Forestry Management
• Cap-and-Trade Versus Carbon Tax – Alexander Knapp, Z/Yen, Jan-Peter Onstwedder

The full publication, The London Accord: Making Investment Work For The Climate, contains 25 reports in 780 pages.

Very early on we formed a governance team consisting of the early supporters, each of whom gave freely of their time and whom I would like to thank personally:
• Alice Chapple from Forum for the Future
• Simon Mills from the City of London Corporation
• Chris Mottershead from BP plc
• Alexander Evans from New York University’s Center on International Cooperation

Before closing, I would like to move on to three special thanks. The first is a personal and corporate thank you to the City of London Corporation. Without the Corporation’s resources this project would be a pale shadow of what it is tonight. The personal part is to thank Michael Snyder, Chairman of the Policy & Resources Committee, for putting his drive, intellect and charisma behind the London Accord so early on. People remark that it seems harder and harder for government and commerce to work together. That may be true, but when you see the City of London accomplishing so much globally, it’s hard to remember it’s just our local council.

Second, my heartfelt thanks must go to Jan-Peter Onstwedder and all the support we had from BP and, in particular, Vivienne Cox. Jan-Peter was the Project Director from last year, well before formally joining the project. Jan-Peter has diplomatic and organisational skills of which I can only dream. Jan-Peter should be giving this talk, but is, as ever, too modest. Jan-Peter applied his intellectual, social and organisational skills with the determination to show that financial services can make difference to climate change. It was a privilege to work with Jan-Peter this year.

Finally, I would like to especially thank you, my Lord Mayor. Two years ago you had the foresight and courage to lend this crazy idea your valuable support. Two years later you have the generosity and kindness to lend us your home for this magnificent event. You have been stalwart throughout and I hope that the London Accord publication is a fitting tribute to your concern, your passion and your vision of London’s financial services industry at the front of the fight against climate change. In your year in office, which has started so brilliantly, I wish you the highest success in all of your endeavours in office, from the ceremonial to the commercial to the charitable.

The London Accord demonstrates that the financial services sector understands well the future implications of climate change. A man once reproached William Shatner, who played Captain Kirk in Star Trek: “On your show, you had Russians, Chinese, Africans, and many others – why did you never have a character of my nationality?” Shatner supposedly replied, “You must understand that Star Trek is set in the future.” The London Accord is about our future and we would like to make sure that all nationalities are there, tropical, temperate or arctic; mountain top or sea-side.

Financial services is stereotyped as a selfish, self-centred industry. Over the past two years the collaboration and sharing of the London Accord has proved that stereotype wrong. The London Accord makes me proud to work in financial services. You should all be proud too.

Thank you.