Doug Morrow:
I think it goes without saying that with COP26 coming up in Glasgow in early November, climate change remains front and center in the minds of not just ESG investors, but I would say, increasingly, all investors across the capital markets, full stop. I think that the market will be looking for announcements at the COP26 from countries about potential new emission reduction targets and plans.
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 3:
The views expressed here are those of the participants and not those of Bank of Montreal, its affiliates or subsidiaries.
Michael Torrance:
Today we have a special episode from BMO’s IN Tune Podcast. IN Tune features Equity Research analysts from BMO Capital Markets and explores key emerging themes, trends, and issues which are important to our institutional clients globally. Today, BMO’s Camilla Sutton, MD in Equity Research, is joined by Doug Morrow, Director, ESG at BMO Capital Markets. The two experts take a deep dive into the ESG landscape and equities.
Camilla Sutton:
Today we are joined by Doug Morrow, Director ESG at BMO Capital Markets for a deep dive into the ESG landscape and equities. I'm Camilla Sutton, MD in Equity Research. Doug, I'm really looking forward to hearing the journey you take us on today, and obviously, I'm pleased to welcome you back to our IN Tune podcast.
Doug Morrow:
Thanks a lot, Camilla, it's great to be back.
Camilla Sutton:
Terrific! Well, let's get started. Can you walk us through the current ESG landscape, and in particular, the key topics that you're discussing with clients?
Doug Morrow:
Sure, I mean, there's obviously, you know, so much going on in the market these days with ESG. I think it goes without saying that with COP26 coming up in Glasgow in early November, climate change remains front and centre in the minds of not just ESG investors, but I would say, increasingly, all investors across the capital markets, full stop. I think that the market will be looking for announcements at the COP26 from countries about potential new emission reduction targets and plans. And as we've seen in the news and heard from others, I think a particularly divisive issue is coal, with some countries, including the U.K., France, and Germany, pushing for an agreement to halt construction of new coal-fired power plants, while other countries including China, India, and Russia are opposing it. So this is definitely going to be an issue that we think investors are going to be monitoring at the Climate Change Conference. I think another issue again, climate change related is just the flurry of net zero pledges that we've seen from both countries and companies. This is something that we've written about, and I think what's important to note here is that, despite the flurry of pledges that we've seen, global emissions are trending well above the Paris agreements 1.5 degrees Celsius target. So, you know, there are lots of different ways to interpret this, but for sure, I think it presents a real significant opportunity for investors in terms of energy transition. So these are, you know, front and centre themes. I guess one other one that I would flag is greenwashing. So this is one that's been around for a long time, it's a long standing issue, but I think what you can say is it's really come to a head in the last month as a result of what happened at DWS Group; this is the German asset manager with about a trillion dollars in assets under management, and they got caught up in what we believe is the first-ever dedicated greenwashing investigation by a financial regulator. So this happened in late August, and the company's share price dropped approximately 14% when these investigations were announced and has yet to recover. So it really shows the potential for market impact around greenwashing, and I think this is a big issue, because ESG has been a massive trend in the financial markets, and there's risk that some investors are simply, you know, hopping on the bandwagon a bit and relabeling their products as ESG without really making any substantive change to their investment process. So I think, you know, I think this is another headline issue, and I think on balance, it's actually a good thing for the ESG world over the longer run because it kind of reflects the growing up and maturing that the ESG space has to do, but I think in the short run, it's also clear that some asset managers, you know, could get dragged into the spotlight for the wrong reasons. So we think that investors are going to be more sensitive to, you know, to making sure that they back up their claims around ESG integration. So I'd say those are the two big issues right now.
Camilla Sutton:
You’ve really summed it up. It's interesting, you move from coal to net zero, all the way to greenwashing. It's an interesting time. Doug, at this point, you've really released on quite a few sectors. I'm curious if you could share with us a few of your biggest surprises.
Doug Morrow:
Sure. I mean, there's been, as you said, six releases and lots of interesting little tidbits that we've come across. I would say for instance, with Canadian Real Estate, which we launched way back in February of this year, we screened companies for their exposure to green buildings, and we found some really, really substantial differences. Now green buildings are important because they tend to be much more energy efficient than conventional builds, and they are going to play a really critical role in helping not just companies, but also countries, meet their greenhouse gas targets. So we found an enormous range here; so First Capital was the top performer, with 76% of its portfolio certified to a green building standard; this includes LEED as well as ENERGY STAR, and this compares, at the other end of the spectrum, to just 3% for SmartCentres – so I think that spread was larger than I was expecting. I guess another little tidbit that we came across was in the food report, this was working with Ken Zaslow's team in the U.S. focusing on the U.S. packaged food group. And here we looked in particular at Scope 3 emissions; so this is really where the investor action is these days and where investors are actually are asking the hardest questions. Scope 1 and Scope 2 are kind of, you know, established, and now increasingly, investors are moving to consider Scope 3 emissions, these are emissions that are upstream and downstream from an employee, or sorry, from a company's own operations. And I was surprised that first of all, only three companies within the peer group disclosed their Scope 3 missions. And General Mills was really, you know, taking the most aggressive steps to rein these in through a really interesting initiative that we talked about in the report called regenerative agriculture; and this partly includes work they're doing with their farmers and their supply chain to adopt low-emission practices, such as low tail and no tail, and things like that. So people may not realize, but depending upon the way that you cultivate your crops, it can actually have a big impact in the amount of emissions that are released from the soil into the atmosphere, and which ultimately get picked up in a company's greenhouse gas footprinting metrics, in this case, General Mills. So I thought that was also really, really interesting and indicative of the leadership that General Mills is showing on ESG.
Camilla Sutton:
So you've been running our Equity Research ESG initiative now for well over a year; how is it progressing and what are the latest developments?
Doug Morrow:
Yeah, it's been absolutely fantastic to tell you the truth. I've been here as you said, for just over a year, we've made significant progress rolling out this initiative and plan, and the feedback that we've received from both issuers and investor clients has been positive. So just to describe for the audience, there's basically three prongs to our ESG initiative, the first prong is publishing our ESG tear sheets for the companies in our coverage. And as listeners may know, we've taken a bit of a unique approach for assessing issuers on ESG relative to other equity research departments in Canada. For a start, we refrain from assigning a single composite ESG score. We think that this is somewhat reductionist, and in addition, these rolled up scores really necessitate difficult decisions about what should be measured, and how they should be weighted in a final score. So what we do, is instead, shine a light on some of the relevant performance indicators, such as, you know, the percentage of recycled packaging and the food industry; the percentage of a portfolio certified to a green building standard like LEED in the real estate industry; methane intensity in the oil and gas industry, so on and so forth. And I think another point to flag for listeners is that we also work closely with our fundamental analysts in the course of doing these tear sheets to unearth, what we think are valuable qualitative insights about how management teams are addressing the key ESG risks and opportunities in their sector. So that's really the first prong in the in the initiative; we have launched tear sheets now for six industries and counting, covering almost 100 companies with the most recent being the Canadian packaging industry. And we've got lots more in the pipeline. And the response from the analyst teams has been positive and in general I think, they are excited to build out an ESG framework to assess their companies. The second prong is publishing ESG content. And as your listeners may know, we have established a bi-weekly ESG periodical called ESG Matters. This is basically a platform for us to give our view on important developments taking place in the ESG world and what they mean for investors. We’ve published nine reports in the series so far, the most recent one being published on September 24, where we looked at greenhouse gas emissions intensity across the S&P TSX 60. So the feedback once again has been positive from clients for the series, and we certainly look forward to ramping up more publications in the future. And I guess the final component I would just flag is that we are, the team is acting as a source of ESG expertise within the Equity Research team but also across Capital Markets and the full BMO organization more broadly. So there's lots of information sharing going on across the bank on ESG. And, you know, I've had the privilege to engage with multiple teams across the bank on ESG, ranging from, you know BMO GAM and our ETF team, to debt financing and sustainable finance. So there's lots of engagement and collaboration going on behind the scenes. So yeah, overall, I think it's going to the ESG initiative within Equity Research is going really well, and definitely looking forward to keeping that momentum going into 2022.
Camilla Sutton:
So I'll confess, your reports are probably amongst my favorite, and in one of the your recent ESG Matters publications you looked at greenhouse gas, or GHG, intensity of the S&P TSX 60. And you drew some really interesting conclusions. I know you mentioned that briefly, but maybe you could walk us through those, highlighting particularly where they're most important for investors.
Doug Morrow:
Sure, sure. So yeah, I mean, for us, this is just a new way of thinking about and analyzing companies. And what we did is we decomposed the constituents on the S&P TSX 60, as you said, by looking at greenhouse gas emissions intensity. So this is Scope 1 and 2 greenhouse gas emissions over million dollars of revenue. It's a really important metric for investors, because portfolio managers around Canada and indeed the world, and not simply those managing, you know, specific climate funds, they're increasingly thinking about the amount of carbon in their portfolios, how it compares to the benchmark, and also differences between industries and companies within industries, in terms of how much carbon they need to burn in order to generate revenue and ultimately profits, and returns to shareholders. So, you know, I don't want to overplay its significance. I mean, we kind of make clear in the note that greenhouse gas intensity is one of a basket of metrics that investors can use, but the advantages is that it's widely used and highly accessible. So when we, what we found is, as we expected to see the utility sector in Canada has the highest average greenhouse gas intensity on the TSX 60, with an average of just under 1,500 tonnes of carbon dioxide equivalent for every million dollars of revenue. But I think, I don't think that's particularly surprising, I think what some investors might find surprising is the range. So the range was quite remarkable with Emera at the high end, emitting approximately 2,600 tonnes of carbon per million dollars of revenue, and Brookfield Infrastructure all the way at the other end of the spectrum, emitting only 471. So that's an enormous differential. And most of it comes from the fact that Emera has coal exposure; but they have also announced that they have implemented or are planning a low carbon transition, and they've also set reduction targets. So we do expect that number to decline over time. We also found significant spreads, perhaps not as significant, but definitely important spreads within energy. This, we found here that the range is from 149 tonnes this is Cameco, all the way to TC Energy’s 1,240 tonnes at the high end. And within Materials, the best performer was CCL Industries, with 74 tonnes of carbon, and it ranged all the way to First Quantum Minerals that with 679 tonnes per million dollars of revenue. So the main message here is that when investors you know, think about their investment process and allocations to different industries, we think that over time, this metric will become increasingly important because we think that other factors held constant, companies with low greenhouse gas emissions intensity are better prepared as the world moves towards that 1.5 degree target we talked about with the Paris Agreement.
Camilla Sutton:
So Doug, one of the other differentiators of your approach to ESG has been your introduction of tear sheets, so very simple two pages on each published company. And recently you partnered with BMO analyst Steve MacLeod to look at the Canadian packaging industry. I'm curious if you can walk us through kind of some of your findings there and a little bit more about what the tear sheets are.
Doug Morrow:
Yeah, absolutely. So yeah, as, as I mentioned, we've launched for six industries and counting, and the most recent one, we partnered with Steve MacLeod and put out a note on ESG. Within the Canadian packaging industry. We look specifically at three companies: CCL Industries, Intertape Polymer Group, and Winpak, and essentially we assessed these companies on their strategies around climate change; steps they're taking to minimize waste in their operations; packaging, of course, which is probably the most important issue for the industry; and as well, how they think about and govern ESG within their organizations in terms of, you know, does the board provide oversight, etc. I think the main message here is really that CCL tended to come out on top on most measures, including, for example, the amount of energy and water that the company uses per unit of revenue, as well as the percentage of waste that's recycled. They also scored favourably on diversity metrics. So we do tend to look at diversity within each industry that we assess because we think it is a cross-cutting importance. There's lots and lots of literature suggesting that more diverse management teams and boards make better business decisions, and are also less prone to groupthink. So we do think it's important to look at diversity across industries. And here again, CCL came out on top, with women comprising 42% of their board, and directors that self identify as BIPOC, representing 8%. And I guess, you know, in addition to these metrics, I think the most important thematic I would flag for investors is just how the packaging industry is increasingly contending with this idea of the circular economy. So this is something that listeners may be familiar with, but it's essentially this, this paradigm where waste from one process ends up being an input into another process, or as we put it in the note that continuous flow of technical and biological materials in a feedback-rich value cycle. So again, the basic idea here is that over time, we think the economy is incrementally moving away from a linear approach to this circular economy idea. And, you know, we certainly acknowledge that it's extremely complex, and I think truly achieving a circular economy would require many types of behavioural changes, probably at all stages of the supply chain. But again, we definitely see this occurring in increments over time, and I think, you know, some of the initiatives that caught our eye in this regard were CCL's involvement with the new plastics economy, a global commitment. Intertape has engaged William McDonough, he's a well-known circular economy author and specialist. They've, they're working with him as a strategic advisor, and four of Intertape products now have received the Cradle-to-Cradle certification. And Winpak is also targeting 100% sustainable products by 2025. So, I guess again, just to highlight the main message here, I think when investors think about the packaging industry over time, it's really, in our minds, incrementally moving towards this new exciting paradigm of the circular economy.
Camilla Sutton:
That's really interesting. So Doug, we’re already at final thoughts, what are some of the major ESG events on the horizon, and is there anything else that you'd like to leave us with in closing remarks?
Doug Morrow:
Well, again, I think when I scan ahead, COP26 taking place in Glasgow in early November figures prominently. It's what everyone's talking about, everyone's waiting for. I think, listeners might also be interested to know that at this conference, the IFRS Foundation is expected to announce the headquarters for the new and super-exciting International Sustainability Standards Board. and Canada has made a well-publicized bid to host this body. It's been supported by the Chartered Professional Accountants of Canada, as well as several pension funds and companies including BMO, so lots of support for this, and it would be absolutely fantastic if Canada could get this and be the headquarters for this new organization. We've written about this previously in ESG Matters, so this is a group that is looking to build out a set of standardized and comparable ESG metrics to facilitate comparisons across or within industries by investors. So really, really important, and I'm certainly hopeful that Canada gets it. So this is certainly top of mind. There's also lots going on with biodiversity; there's a new initiative taking place with that. I think biodiversity is kind of lived in the shadows a little bit of climate change, but is now kind of moving into its into its own as an independent issue, which I think is hugely important. So yeah, lots of interesting and exciting stuff on the horizon.
Camilla Sutton:
As always, Doug, it's such a pleasure to hear your thoughts on ESG. Thank you for joining us.
Doug Morrow:
My pleasure.
Camilla Sutton: That was Doug Morrow, Director, ESG at BMO Capital Markets. BMO Capital Markets is proud to deliver a thoughtful analysis of upcoming Equity Research trends that will prove important to clients’ investment decisions for both this IN Tune podcast, as well as our commodities-specific Metals Matters hosted by Colin Hamilton. If you enjoyed today's IN Tune podcast, please do subscribe and rate it.
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 3:
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.
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