The Global Energy Transition: Darryl White & John Graham Discuss

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.

Michael Torrance:

On this episode of sustainability leaders, BMO Financial Group CEO, Darryl White joins John Graham, CEO of CPP Investments. The two leaders were on the ground together at this year's international economic forum of the America's Toronto Global Forum and they discussed sustainable investing and capital allocation context of the global energy transition.

Darryl White:

Hello everyone, I'm here having the privilege to lead an amazing team at BMO financial group and an even greater privilege to host John Graham, who is the President and CEO at CPP Investments. A little bit about CPP and a little bit about John, CPP Investment plan is among the 20 largest investment funds in the world. They manage more than $500 billion of assets at arm's length from provincial and federal governments. They provide the foundation for 20 million Canadians to contribute and be beneficiaries to their futures and their financial security in retirement. John, a little bit about John, John was appointed President and CEO in February, I think, of this year. John's got an amazing background prior to that. He spent a decade helping shape and execute CPPs strategy and holds an MBA from the University of Toronto and a PhD in chemistry from the University of Western Ontario. Before CPP, John spent a lot of time, I think a decade plus as a research analyst, in fact. And so the science meets the investing audience real time right here with John.

Darryl White:

Now this conference is seemed redefining prosperity, and this particular panel is around sustainable investments and capital allocation. So I can't think of actually a better person in this country and maybe not on the planet that, that we could have this conversation with around sustainable investing and capital allocation, so why don't we start there. John, you have been quoted as saying that client climate change is the defining issue of our time. You've also said that fossil fuel divestment is short on human ingenuity. Talk to us a little bit about how you make the connection between sustainability on your agenda, the accountability and the responsibilities that you have to the members of your plan and also, this is a really hard question, also the implications for Canada's economy, as we think about how we put all this together over the next 20 or 30 years.

John Graham:

Well, thanks Darryl, thanks for the kind words. A lot in that question and maybe I'll start with a comment on divestment or blanket divestment is a short on human ingenuity and I'm sure we'll talk more about this later in the session. But one of our principles at CPP Investments is that blanket divestment is not part of a responsible transition. And we do believe in continuing to invest across the entire economy, across the entire energy spectrum and a belief that all players in the economy are going to contribute towards the solution as we transition to net zero, which we do believe we will, we do believe we will transition to net zero. But maybe I'll start with who we are as an organization and CPP Investments, as you mentioned, we have a single mandate and that's to maximize return without undue risk of loss and we're here to contribute to the financial security of 20 million Canadians and that's really what we come in everyday to think about.

John Graham:

Climate change is one of the biggest challenges that we face and the planet faces over the next few decades. We've thought a lot about it, and we've thought a lot about how it fits with our mandate and how it fits with CPP Investments and we spend a lot of time thinking about the risks. We spend a lot of time thinking about how do we manage our portfolio, how do we manage the transition risk, how do we manage the physical risk in the portfolio, but we've also started to very much come to the view that this is a huge investment opportunity. We've seen the numbers, it may take 50, 60, $70 trillion for the global economy to transition, something more, maybe a $100 trillion and whatever it is, it's a big number to transition the global economy. And it's not, every company's got to transition, the consumer has to transition and therein lies is a huge investment opportunity for patient capital, for partnership driven capital, for long capital, that's the capital CPP Investments has.

John Graham:

So we're seeing this as the next 10 years a tremendous opportunity and really fitting with our investment mandate. We can be an investor in the entire economy, from conventional energy to renewable energy, to industrial companies and be a partner as these companies transition. And getting back to maybe my quote on a short on human ingenuity and sometimes necessity is the mother of all invention. You mentioned I had a background in science, I know a lot of people from my technical days who work in the energy sector, some brilliant people who work in the energy sector and we're seeing some amazing examples of innovation, some amazing examples of technology coming out of Canadian companies to help with this energy transition.

Darryl White:

Legacy energy companies and new ingenuity and startups, all together.

John Graham:

Exactly. We have a company in our portfolio called Wolf Midstream. It's a company that we seeded and we found it and they were a conventional midstream company and they are the owner operator of the Access Pipeline, Alberta. They're also one of the developers and operators of Canada's largest carbon capture and sequestration pipelines, the Alberta Carbon Trunk Line. So they've taken that engineering know-how and applied it to carbon capture. And so we see this as an opportunity and talk about Canada as an opportunity to actually be a leader and take some of this engineering know-how, engineering know-how in the conventional energy space and apply of the energy transition.

Darryl White:

You know, as I listen to you, Canada's legacy and energy, to date, is that we've had amazing engineering know-how. We've actually got one of the best ESG track records on the planet from the perspective of comparability. And it sounds to me like your perspective is, we have to take a advantage of all that, not turn our backs on that and use that as an asset to win in the transition. Do you think we can actually be a leader in the world if we're able to do that?

John Graham:

Certainly, I think Canada can be a leader and on the sustainability side, and one of the quotes we say now is that sustainability is the new digital. It's a quote that's out there and this is where there's going to be real investment opportunities. But one of the differences between digital and sustainability, sustainability requires scale, requires capital. It's not going to be solved in somebody's garage. It's going to be solved at a large scale with engineering know-how. Canada has a long track record of that.

Darryl White:

I think you're right. I think you're right. Let's go to the social issues. There was a recent investor conference where Steve Schwarzman at Blackstone said that the world is facing such energy shortages that the outcome of that could be social unrest, particularly with some commodities in the commodity complex at, or near all time highs. How do you think this crisis will impact the ability for folks like you to invest in the transition and address issues like these that are pretty profound if he's right?

John Graham:

Yeah. It's a great question and is a little bit about my opening remark around a responsible transition. We think about sustainability, E, S and G, and we do need to make sure that we don't hammer so hard on the E that the S pops up and becomes an equally big problem. We can't drive hundreds of millions of people into poverty. And within the developed market, have some, a really different experience for people where you have some, who don't have the same means, paying a disproportionate amount for this transition, so we need to be thoughtful. It's a complex issue, requires a complex solution. As an investor, we take into consideration E, S and G. It's not just E, it's thinking what are the knock on effects? What are the unintended consequences into S? Which goes back to why we think we need to invest in the economy transition and invest in the economy transition in a thoughtful way.

Darryl White:

It's a pretty cool flywheel when you think about it that way. So if we bring it back to Canada for a second, because this is a global challenge, it's hugely complicated, it's complicated here in Canada as well for some of the reasons we've discussed. Let's talk about the ecosystem a little bit. As you and I sit here as participants in the financial system, how should we think about the need for connectivity, leverage, cooperation as between governments, the financial intermediaries or principles, corporates, and other parts of that ecosystem here in this country in particular?

John Graham:

Yeah, it's a good question and a couple comments, getting back to scale. This is a scale problem. This is a scale issue and the solution will be one of scale. So that, by definition will require cooperation, by definition will require some coordination. We, as an investor, [inaudible 00:10:37], we have an investment only mandate and we're here to drive investment returns for our contributors and beneficiaries. But we are going to, and we have been taking a very engaged approach, engaging with also sharing our perspective. This is what will make this a good investment. This is what has to be done to you attract capital, not just from Canada, but from around the world. So, it will require coordination and it will require cooperation.

Darryl White:

Yeah. And by the way, I'm with you a hundred percent. I know you're supposed to be answering the questions here but I have a point of view, which is shared. I think that we, frankly, I think we have a long way to go on the amount of cooperation we could have in that triangle as between the government bodies, the corporate entities, the financial system, and you might even put academia and science in the middle of that. All of that. I think that there's a huge opportunity and I think that there's a lot more, frankly, that we can all do. I pull the lens a little bit further back. We've talked a lot about sustainability so far, but we're also talking about capital deployment, broadly speaking. So, as you look at the planet and you guys are investors all over the world, are there particular countries or regions or themes that you're thinking about geographically right now? And is there anything that Canadians could learn from your experiences around the world? How do you see the opportunities globally sustainability or otherwise at this point?

John Graham:

Yeah. One of the things that I do firmly believe that for CPP Investments, our asset base is growing and continuing to grow and to prudently invest the assets, we need to be a global investor. We need to have the capabilities, the relationships, the infrastructure, to be a global investor. And this is for a few reasons.

Darryl White:

And you, I'm sorry to interrupt you, you very much are right for portions of the audience who may not know, a pretty significant share of your asset portfolio is outside of Canada.

John Graham:

Yeah. As of today, 85% of our assets are outside of Canada and we do have really a quite diverse portfolio in Asia, US, Latin America, Europe. So we are very global. We have nine offices around the globe. So we have regional representation in Asia, Europe, Latin America, and we feel this is important as an investor, one, it provides diversification and we really saw the benefit of that over the past two years. We saw a real divergence in how economies perform, especially during some of the early days of COVID and that diversification was a real benefit to us asset.

Darryl White:

asset class and Geography?

John Graham:

Starting with geography.

Darryl White:

Yeah.

John Graham:

Yeah. And then with asset class too, somewhat. It also broadens the opportunity set and it which provides greater opportunities for value added. So we will continue to build out our global capabilities and with respect to where we're seeing the real opportunities, it's actually very asset class specific.

Darryl White:

Okay.

John Graham:

And it really is asset class specific. As I look through our groups and look at where they're active, we continue to see a huge amount of activity in the US. The private equity market right now in the US is incredibly active and probably the most active we've seen it in years. Our credit team is actually being quite active over in Asia and Europe right now and seeing some good opportunities over there, but maybe I'll spend a couple minutes on emerging markets. And we have been, I would say, a leader in investing in emerging markets and building out our capabilities and emerging markets.

John Graham:

And part of that is for the same reason around diversification and emerging markets is a term that sometimes times it maybe seems almost a little antiquated at times, because I think of it is from a GDP perspective. We want to be able to invest in the biggest countries in the world. China, which is an emerging market is the second biggest economy of the world, may very well be the biggest economy in the world. And so we are continuing to look at China, look at India, look at Latin America, again, with the belief that we want to tap into global growth. And we want to tap into these markets that are going to continue to grow.

Darryl White:

Yeah, I heard someone say once there are no small countries, there are only small markets and there are growth rates in small markets that can be pretty attractive for all of us if you do it right. John, this has been fantastic. Thank you for taking the time to do this today. I think that the audience members will recognize that John isn't only a great Canadian, but the conversation around sustainability and capital allocation, we have embodied in John, the scientist meets the financier and thinks about these things really, really deeply as does all of your team at CPP Investments, starting with how you get a return, as you pointed out, you have a single mandate, but the implications of your mandate are far broader than that and I think that the template is actually one for a lot of people to think about.

Darryl White:

You may have half a trillion dollars that people entrust you with today, but when that's another half a trillion dollars, it sure isn't all going to be invested in Canada and is it sure isn't all going to be invested in one space. So the diversification is really exciting and I think that's a great lesson for all of us, as we think about how we put together that cooperation as between the various sectors, because it's just so important. So thank you. Thank you for doing this today.

John Graham:

Thank you. It's a pleasure.

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 view 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 a Bank of Montreal, it's 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 the 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.