Funding the Energy Transition

Michael Torrance:

Welcome to Sustainability Leaders. I'm Michael Torrance, chief sustainability officer with BMO Financial Group. On this show, we will talk with leading sustainability practitioners from the corporate, investor, academic and NGO communities, to explore how this rapidly evolving field of sustainability is impacting global investment, business practices and our world.

Speaker 2:

The views expressed here are those of the participants and not those of Bank of Montreal, it's affiliates or subsidiaries.

Speaker 3:

Today's episode is from a panel at the International Economic Forum of the Americas Conference in Montreal, 2023, titled Green and Clean, Redefining Finance for a Sustainable Future. It features President of BMO Financial Group, Grégoire Baillargeon, let's take a listen.

Mathieu Dion:

Welcome to this panel on Green and Clean, Redefining Finance for Sustainable Future. I'm Mathieu Dion, the Montreal bureau chief with Bloomberg News. So we are in Montreal, as we are all around the world. Now with me today I have beside me, Grégoire Baillargeon is president with BMO Financial Group in Quebec. Matthew Chamberlain coming from London from the London Metal Exchange. He's a CEO with the LME, and finally Kerr, she's CEO with FinDev.

In the next three decades, up to $194 trillion will be required in investments as the global energy system decarbonizes. That's a number we came out with at Bloomberg, close to $200 trillion. Think about that. Conditions are chilly right now in the public markets, but that may shift. So, my first question would be, and it's an easy one, on a scale of one to 10, can we globally achieve this carbon neutral target by 2050 to contain the global temperature increase to 1.5 degrees Celsius? On a scale of one to 10, what are your expectations? Let's start with Matthew.

Matthew Chamberlain:

So I'm naturally optimistic, so I'm going to go for a seven or an eight. And the reason for that, as I hope we'll get onto on this panel, is that I think there is now a critical mass of belief around what needs to be done. So clearly there are a huge number of challenge, which I know you're going to come onto, but I believe that we have jumped that first hurdle of believing this is something that we must do, and something that we will be able to do.

Mathieu Dion:

Grégoire?

Grégoire Baillargeon:

I'm going to have to say 10, because I don't think it's a choice. It's an imperative, and if you sit in a leadership chair anywhere in the world, you have to focus on this.

Mathieu Dion:

And Lori, you had a lot of time to think about it.

Lori Kerr:

Indeed, indeed, and certainly I'm an optimist, but maybe I'm not as bullish as an optimist. I put it between six and a half and seven, not seven to eight, or 10, for a few reasons. I feel like I'm on an emotional rollercoaster as data comes out, as I'm sure most colleagues feel as well. On one hand, we know from the recent IPCC report that there's less than a 50% chance of reaching 1.5, so it's urgent. So, that makes me depressed.

But then we have to celebrate all the progress we've made. I mean, 25 years ago, we were barely talking about environmental, barely talking about social. Fast-forward to Paris, a lot on mitigation. Now, adaptation and resilience, and we're talking about nature. So, a lot of great progress. I look at fossil fuel subsidies, $723 billion in fossil fuel subsidies in 2022, greater than a trillion in 2020... Sorry, in 2021, more than a trillion in fossil fuel subsidies in 2022. Renewable energy subsidies, $200 billion. So, I get depressed. But then Bloomberg New Energy Finance, I get optimistic. Last year we spent more than a trillion dollars in clean energy transition. So, we've invested as much in clean energy as we did in oil and gas and coal. So, I get optimistic. So again, up and down.

Mathieu Dion:

Just to quickly frame who you are in this conversation, how your organization can play a role in reaching this net-zero target by 2050, and what about the Bank of Montreal?

Grégoire Baillargeon:

When I think of our journey at the bank, and the consciousness that we've developed around the issue, the more you realize how difficult it's going to be, the more the optimism actually raises, because when you activate everyone, when you activate your entire employee base, when you activate all your leaders, you realize that there is a lot of ingenuity, lots of creativity to do things.

So, what we've done at BMO to grow that conscience, we built a climate institute within the organization, and those are people that are focused 100% on the climate. They're not bankers. They're there to help us grow conscience, distribute knowledge, make sure that when new data comes out, that it's circulated, that we see and understand through it, both in corporate areas, as well as each of the lines. We push the climate ambition into what we call our purpose at BMO, and that's really the driving force of our entire organization, to make a difference.

And then we pushed it into corporate strategy in each of the lines. So there are KPIs in each of the lines as to what are you doing on climate? And a bank is a very vast organization that does a lot of things across the financial ecosystem. And we all know we need to transform everything. Therefore, each job that is part of the wheel of the economy in a bank is part of those solutions.

So we need everyone to activate fine ideas. And when those ideas surface, the executives are receptive because everyone's aligned on consciousness. And what we've seen is it brought a lot of innovation. We bought Radicle last year, so that's a carbon credit trading platform. Why? Because banks create markets for commodities. So, we now have the tools to create a market around carbon, to try and get it properly factored in.

So, there's a lot of products that banks can push, and when you have that kind of conscious, not only you can bring new solutions to market, activate the competition to compete with you on those products and activate things, but you are a relevant player at the policy table, working with governments, working with the United Nations, and we have that privilege at BMO, to be around that table.

We do finance the oil and gas industry, and we don't have any intention to stop that. The role of a bank is multifaceted. It's multifaceted. And one of the most important role of a bank is to be a trusted, loyal partner for the economy to function properly. We are in a transition, and as long as for energy security purposes, for fairness in the world, I mean this is the mother of all injustices, but we will need to transition out of fossil fuels, into cleaner energy. And during that transition, yes, our bank will be part of that conversation. We're not going to hide, we're not going to run away, and leave that problem to others. We're going to be at the table. We're going to bring the solutions we see throughout the world to our clients that have carbon heavy footprints. We're going to work together.

So it's important that we listen to each other. So, environmentalist groups, I've spent a lot of time just doing listening sessions, understanding their perspective, and making sure we really sink in what they mean. We're pragmatic, we're solutions finders, and we will work toward transitions.

Mathieu Dion:

Grégoire, what is there to say about carbon credits? Is it working very well right now?

Grégoire Baillargeon:

Certainly at BMO, we think it's a part of the solution. We need everything everywhere, all at once. This is certainly one piece. I mean, we all know that we have a carbon budget, whether you're thinking we're going to end within 1.52 degrees, or even if you go above, you always have a carbon budget to whatever your objective is going to be. So, there's a finite resource there, and it needs to be priced, and we forgot to price it for decades.

So, how do we price it? So it's going to be carbon taxes in a bunch of jurisdiction. That's one way. But another way is as everyone wakes up to that pressure, that the voluntary markets are going to create themselves, our world has functioned in extraordinary ways around financial markets. We think the carbon markets will develop themselves.

And when we think about it, there's all sorts of bad reputation that was developed around certain amount of carbon credit concepts. But simply said, this is one of the ways to bring fund flows toward decarbonization. What we're talking about is companies taking funds out of their profitability to actually route them to companies that have a project to decarbonize the world, whether we're talking about nature-based projects, or about carbon removal, with carbon capture and sequestration.

So, those are interesting tools we can develop to actually flow more funds toward those decarbonization solution. And we all know we'll need them. So, that's why we bought Radicle. Radicle is that firm that helps both the firms that have a carbon reduction, or carbon sequestration project to actually develop the credits properly, get them properly documented, properly verified in a rigorous fashion, such that they can withstand any kind of scrutiny over time.

That's fundamental. Any new market will need that. And then they're there to help them trade, and find the market with the buyers on the other side, corporations of the world that decide to offset part of their emissions. We are not saying that people should offset instead of reduce. That is not our thesis. Our thesis is quite the opposite. This is all corporations, all individuals, everyone should try to reduce their carbon footprint to the maximum extent, but there will remain something. In the current world, there will remain a lot, because we don't have the technologies to decarbonize everything, and there still will remain a piece in 2050. So, that piece needs to be removed, and we think the carbon markets are going to help accelerate that transition. So for us, it's an important piece of the solution.

Mathieu Dion:

Do you think the new accountability guidelines by the International Sustainability Standard Boards, that's going to make a big difference? And I think it's going to be announced. I think it's this month, right? So is that going to be huge in the market?

Grégoire Baillargeon:

If there was one big risk ahead of us, is the lack of regulation. So we talk about all sorts of nomenclature, being able to compare, whether it's comparing carbon footprints, all the way to comparing the actions of different corporations at different points in time on different elements of ESG, and all that. So, having parameters, clear parameters, comparable parameters, and the first set of rules.

It's quite amazing that we're moving that fast. I mean too slow, but that fast. And are there going to be holes? Are there going to be problems? Are people going to stumble? Yes, yes, yes. And we're going to make it better, and we're going to advance. But is it big? It's enormous. It's a big, big step in the right direction. And when we look back five years from today, it's going to look like a small step maybe, but it's beginning of an important momentum around regulations and standards that is quite fundamental.

Mathieu Dion:

Europe puts money in decarbonization programs mostly, while in North America we're focused... We talk a lot, I talk a lot about solar panels, carbon capture, electric vehicles, and batteries. So I want to ask, where is the capital most useful, you think, when these are two different kinds of investments? And if we think about governments, with the Inflation Reduction Act, which provides huge incentives for the energy transition, for more capital in the energy transition, do we need governments to increase those?

Grégoire Baillargeon:

Well, definitely The role of governments is important on two sides. One is the regulation aspect. So, one of the issue of our system as it is, is of course when you're in a competitive environment, in a growth environment, we play within a set of parameters and rules. And you can, as an industry, whichever industry you're in, sort of nudge things and go to where you think the industry needs to go over time.

But within the rules of the game, it changes sometimes stuff to do, and regulation can actually reset the parameters. And suddenly, with the new rules, and we saw, all saw during COVID, when there are new rules, we figure it out. So new rules are extremely important. The role of government is extremely important to accelerate change. And the other piece is incentives. Yeah. We saw what happened to solar over a long period of time, and it became an energy that is very, very cheap to deploy.

Could it have been faster? Probably, probably. More incentive faster would've actually resulted in more deployment, more scale into the systems, and therefore cost reductions and a faster deployment of the solution. So, incentives are absolutely fundamental. And when we think where are places that are going to decarbonize the world faster, well incentives can actually help there. We cannot put all the capital on low carbon solutions. The world needs to transition, so we need to put a lot of capital to decarbonize the sectors that need it.

Mathieu Dion:

Is there a way to go even faster than we're going right now, because we need to shift quickly? Is there any outstanding solution we didn't mention here?

Grégoire Baillargeon:

Well, the most important part of all of this to me is a thriving economy. And there's all sorts of debate about growth, around the debate, but fundamentally, in the situation we're in, we're going to need a lot of innovation. We need a lot of risk taking. We need new solutions. We need each industry to reinvest profits into solutions of the future. We need investors to have profitable investments to redistribute their capital into the system. This needs to roll.

One of my largest worries is the economic cycle we're in, and the risks ahead, about the stability and the solidity of the economic landscape, which will slow down all of these things. And if you have initiatives in each of the corporations for which you work, suddenly, yeah, budgets gets constrained, and new initiatives don't get their budget, and suddenly solutions that could have been brought forward are not brought forward. We don't have time for this. So, it'll take a lot of courage also from investors to take risks despite an environment that's a little tougher out there. So, what we need mostly is a strong economy to actually be able to go through that phase of the next couple of decades here.

Mathieu Dion:

So higher interest rates, higher inflation is somewhat bad news, that's what you're saying?

Grégoire Baillargeon:

Well, high inflation's not the solution, certainly, and high interest rates is not great either. So yeah, we're navigating through that altogether. Hopefully we'll land the plane very quickly, and start investing rapidly in each of the solutions after that.

Mathieu Dion:

Right now, today, where is the boundary between sustainable finance, and traditional finance?

Grégoire Baillargeon:

Well, if sustainable finance means innovation into financial solutions that are going to tackle the crisis ahead, yeah, it's going to continue to innovate, and there's probably a distinction to it. And given the size of the opportunity and how much capital needs to roll, there is probably an alpha concept to it. There's a moment, we've all seen these markets at some point when momentum really gets carried away, there should be extraordinary value in those kinds of investments. But the destination necessarily is just one and the same. Finance needs to be sustainable like everything else, the world needs to be sustainable. So that's the destination, and financial products will need to find their place in it.

Mathieu Dion:

Europe and Asia are leading the way right now. Why is North America lagging, you think?

Grégoire Baillargeon:

My answer to this is always conscience. So, that means our leadership teams, that means our markets. That means our people have not developed the same level of conscience that maybe other markets have about the crisis that's in front of us. And that's always my sort of closing remarks on any of these conversations is this is our responsibility, to grow our conscience on these things. And when we think we know the facts, we need to dive deeper, and understand them a little bit deeper.

No leaders should just rely on teams briefing them on what the IPCC synthesis report of this, of the last few months was. You should take and read it. I follow a lot of stuff out of Europe, because to me it's pretty clear that any kind of regulation that's coming here are essentially the ones that are in place or getting in place in Europe, and they're a couple of years ahead of us. So North America needs to catch up. It's important. It's essential, as a matter of fact. So all I can say is conscience. That's the only thing that is drawing us back.

Mathieu Dion:

Anything else you want to add on the top of what we've talked about, and people should know about?

Matthew Chamberlain:

I would just go back to where we started, which is that I think there is real cause for optimism, because the conversations are happening and not just conversations happening. A huge amount of work has happened. Again, going back to this question of the proliferation of standards, and the difficulty of comparability, yeah, that's a problem, but as we said, it's because there are a lot of organizations who care, and a lot of organizations who see it as a commercial opportunity, which we also shouldn't have a problem with, right? This should be something that people commercially want to be [inaudible]. Again, just look how many startup companies there are in the ESG data space. That might make it more complex to compare. It may make it harder to navigate the data, but it certainly means that there's an ocean data out there that is accessible. So, I would just reiterate that optimism, we can't lose focus on it, but as I say, it's an element of every conversation that we have right now, and that's got to be a good thing.

Lori Kerr:

You talked about North America a moment ago, or we talked about North America a moment ago. Again, bringing sort of in the emerging markets view. So indeed, renewable energy, energy efficiency, energy transition solutions. We can't forget about the 675 million people that actually don't have access to electricity that are in emerging markets. And the opportunity for them to leapfrog, and use renewable energy in distributed managers, I think is really, really important. So as they get access, that's a huge opportunity there, as well. Stop burning kerosene, dung, et cetera, et cetera. Clean cooking, this is a huge part that often doesn't get talked about a lot in the energy transition conversation, but it's a huge part, and that's part of the just, as well, in the just energy transition.

Grégoire Baillargeon:

Well, the last piece I would say, we didn't talk much about it, but it's all about that. It's collaboration. In the end, we need industries to get together. I mean, there's all sorts of alliances, there's all sorts of net-zero pathway alliances and so on. These are fundamental. We need to compete where competition is actually going to drive innovation faster, and we need to collaborate when sharing knowledge is actually going to... We don't have time to wait. So, collaboration, I think is a great piece of the solution.

And we often say that at BMO, that we've had the privilege of being rated the most sustainable Bank in North America, and the number one by the World Benchmarking Alliance of COP 27 out of 400 financial institutions. I often say I'll celebrate the day we're last. We're going to push the machine as fast as possible. When everyone's better than us, maybe we'll be at destination. And my CEO, and me have been saying it. We'll give the blueprint to anyone who wants it, as to what we've done, and I've essentially set it on stage, but, "Let's collaborate. Let's find solutions, and if someone else has a better idea, well, we'll probably copy it two months after, and the world will be better for that. So, let's collaborate as much as we can.

Mathieu Dion:

So, thank you. Grégoire Baillargeon is President with BMO Financial Group, Matthew Chamberlain, CEO of the London Metal Exchange. Thank you for making the trip. Laura Kerr, CEO of FinDev Canada, thank you so much for this panel. It was very instructive. Thank you so much everyone.

Michael Torrance:

Thanks for listening to Sustainability Leaders. This podcast is presented by BMO Financial Group. To access all the resources we discussed in today's episode, and to see our other podcasts, visit us at bmo.com/sustainabilityleaders. You can listen, and subscribe free to our show on Apple Podcasts, or your favorite podcast provider, and we'll greatly appreciate a rating, and review, and any feedback that you might have. Our show and resources are produced with support from BMO's Marketing team and Puddle Creative. Until next time, I'm Michael Torrance. Have a great week.

Speaker 2:

The views expressed here are those of the participants, and not those of Bank of Montreal, its affiliates or subsidiaries. This is not intended to serve as a complete analysis of every material fact regarding any company, industry, strategy or security. This presentation may contain forward-looking statements. Investors are cautioned not to place undue reliance on such statements as actual results could vary. This presentation is for general information purposes only, and does not constitute investment, legal, or tax advice, and is not intended as an endorsement of any specific investment product or service. Individual investors should consult with an investment, tax, and or legal professional about their personal situation. Past performance is not indicative of future results.