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Investment Opportunities for a Net-Zero Economy: A Conversation at the Milken Institute Global Conference

 

Conversations around investing for an environmentally sustainable future have significantly changed over the last decade, shifting from avoiding potential risks to seizing a once-in-a-lifetime opportunity, according to panelists at the recent Milken Institute Global Conference.

The panel, titled Investment Opportunities for a Net Zero Economy, featured Dan Barclay, CEO of BMO Capital Markets, Giulia Chierchia, Executive Vice-President, Strategy, Sustainability and Ventures at oil company BP, Edwin Conway, Global Head of Alternative Investors at Blackrock, John Graham, President and CEO at CPP Investments, Raymond Sagayam, Chief Investment Officer, Fixed Income at Pictet Asset Management and moderator Hiromichi Mizuno, Special Envoy of U.N. Secretary-General on Innovative Finance and Sustainable Investments.

In this Episode:

  • The seemingly sudden change in institutional investors’ thinking around sustainability illustrates just how much the reward system for the green transition has evolved

  • How rising inflation, climbing oil prices and Russia’s invasion of Ukraine have caused some governments to backtrack on their climate commitments

  • The fact that climate and sustainability could end up being a generational investment opportunity, in that sustainability is the “new digital”

  • Why there’s a lack of common reporting standards around environmental, social and governance (ESG) criteria

  • Why emerging energy sources, such as hydrogen, could be a great near-term opportunity


Sustainability Leaders podcast is live on all major channels including AppleGoogle and Spotify

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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:

The recent Milken Institute Global Conference posted a panel with top global experts, including BMO CEO and group head of capital markets. Dan Barclay. They discussed how conversations about investing in a net zero economy have shifted from avoiding potential risks to seizing a once in a lifetime opportunity. Let's listen to what these experts had to say.

Hiro Mizuno:

Good morning, everyone. Welcome to this panel to discuss investment opportunity for net zero economy. I'm Hiro Mizuno, I'm a special envoy of United Nations for innovative finance and assessment investment. Today, we have distinguished speakers representing asset owners and asset managers. And also, I'm sorry, but there's one representing industrial sectors has been under huge pressure from the investors and overall, the ESG movement, but I'm sure we are going to have the very inspiring discussion here. I'm hoping at the end of this meeting, just you guys feel like leaving a room convinced that this is the opportunity for everybody, not something you just feel obligated to do it for the investors or something.

Hiro Mizuno:

So let me, ask the panelists, first of all, to describe your corporate strategy because I'm sure ... I mean, when I started 10 years ago, the promoting sustainability, I must say probably, each asset manager or asset owner I talk, I had maybe less than 20% which they agreed with me that the ESG or climate is going to be our investment or a financially material information, but I'll be surprised these days, if any of a financial professionals talks negatively about the importance of the ESG or the sustainability in their businesses. So, I'm sure everybody has the corporate level or in institutional level strategy for sustainability and I'm sure most of you. I heard one intentionally or consciously decided not to join the what's called the G Funds, but at the COP 26, we had the 450 institutions made collective statements saying that we are going to make our portfolio net zero by 2050.

Hiro Mizuno:

So, we have a lot of momentum and everybody should have the ... institutional, the strategy for that. So I'm going to go, ask each partners to share that first of all, and each of you representing maybe a different practices, so we get into a bit deeper, into the different practice of asset classes, and we must give the fair amount of air time for Julia because you are handicapped in terms of the number of the speakers. So, let me start with the ... from Raymond, if you could share your corporate ... the institute's strategy on that?

Raymond:

Happy to, Hiro. Thanks a lot for choosing our panel. I know you had a lot to choose from at 10:00 AM, so appreciate that. I represent Pictet Asset Management. I'm also responsible for the fixed income business. I'm the chief investment officer, but I'm going to talk a little bit more broadly in answer to your question. Pictet, this is not a new arena for us. It's been nearly three decades that Pictet has engaged in investing in thematic equities, and particularly with an environmental footprint. In the year 2000, we launched our first water fund, and that was followed soon after that, by timber funds, clean energy funds, environmental opportunity funds.

Raymond:

Why I say that, is that DNA is very much in our heritage and it spans many decades. That said, and to your point Hiro, on which alliance we ... that's so many alliances out there and at the end of the day, we had to make a call. And in October last year, we decided that the net zero asset management initiative was the one which we wanted to align ourselves with. So, we committed to that, but we committed to that mindful that the path to transition in terms of our investments is also very important. So, we did that in conjunction with science-based targets initiatives. If you call up slide number one, I'm not sure who's controlling the slide, that gives you a little bit of a visual.

Raymond:

So for us, the net zero path, combined with a science driven, a very tangible way of measuring our investee company progress, it's not the only way of doing that, is an important way forward. I guess I'll probably conclude by saying it's unsurprising therefore, that 75% of our strategies and funds are now article eight or nine under SFDR. So for us, net zero asset management initiative, coupled with a science-based roadmap, if you like, and many years of thematic heritage, is the way we are pressing forward on this.

Hiro Mizuno:

Thank you, great. So, John?

John:

Great. Thank you, Hiro. I don't have slides. So thank you, certainly appreciate the invitation and the opportunity to participate in the panel. So, I'm with CPP Investments, for those who aren't familiar with CPP Investments, we're a Canadian based institutional investor. I think it's fair to say as an organization, we've been engaged on sustainability, engaged in climate for quite a while. We were one of two pension plans that was involved early on with TCFD and we spent a lot of time building out that capability to incorporate climate risk into how we manage the portfolio, thinking about transition risk, thinking about physical risk and how we manage the portfolio and how we look at new investment opportunities.

John:

But our mindset started to evolve and our mindset started to evolve a year ago, 18 months ago, to really looking at climate and sustainability as an incredible investment opportunity and what could end up being a generational investment opportunity, in that sustainability is the new digital. And as we look the whole economy, the whole global economy needs to transition. This is not about just more renewables. This is about transitioning the entire economy. It's about transitioning every sector within the economy, including hard to abate sectors, steel, cement, agriculture. And for an organization such as CPP Investments that has long duration, patient, partnership-driven capital, this is the type of capital be needed.

John:

Yesterday we heard estimates that it might be two trillion, three trillion, four trillion, whatever it is, needed per annum to transition the global economy. It's a lot of capital. So, at CPP Investments, one of the things we did recently is we did make a net zero commitment. So, we made a net zero commitment in February of this year to have our portfolio net zero by 2050, and our operations net zero by the end of next fiscal year.

John:

But two things I'd highlight that are very fit for purpose for CPP Investments. One is, we will not pursue a path of blanket investment. We will continue to invest across all sectors, including oil and gas. And as Richard Manley, our head of sustainable investing will say, that blanket divestment is a short on human ingenuity, and you don't want to exclude some of the best scientific and engineering expertise in this global transition. And it is a transition, it's going to take years and decades.

John:

The second is, as we think about building our portfolio, what we've really focused on is increasing our exposure to green and transition assets. We have about 67 billion of green and transition assets and our goal is by 2030, to increase that to 130 billion. So, I'll pause there.

Hiro Mizuno:

That's good. I think that we definitely want to go back to your opinion on how the collaboration could help us to transform our portfolio. But before that I just want to ask, excuse me, [inaudible 00:08:55], yeah please.

Edwin:

Thank you, everyone.

Hiro Mizuno:

Excuse me.

Edwin:

Oh, thank you for the invitation as well. Really nice to be here again, with people. So some BlackRock, I lead the alternatives franchise of BlackRock. As you probably know, we're a $10 trillion franchise. Alternatives for us represents about 340 billion in assets. When you think about what was done back in December, 2015 in Paris, to me, that was an extraordinary catalyst for what we're all going to agree upon today. Is that sustainable investing is a critical part of all of our futures, I think to John's point across every single industry, and there's no borders which constrain it. So, we too agree that this is probably likely one of the greatest investment opportunities of our lifetime.

Edwin:

So as a firm, we have in excess of 500 billion in sustainable strategies today. If you take a look at the active equity, active fixed income, the passive exposures and the alternative capabilities, we've wrapped dedicated products to the tune about 500 billion today with a sustainable lens. Actually the funds, the assets and the activities that we're undertaking, is far greater than that. And I think the reality is we looked at what the capital need, and yes, we've all read many surveys and researched reports, but I think what seems to be a common number that's shared around what's going to necessitate and drive the change is something that equates to about 125 trillion by the time we get to 2050. If that's the case, four trillion expenditure a year to really transform these industries and economies, massive opportunity.

Edwin:

But when you think about that transition of capital to support the physical risk, the transition risk, actually we've implemented a framework to try and guide our principles, our approach, but also help our clients. It's an awful lot to try and digest and understand as you think about that quantum of capital migrating away from strategies that we've so embraced over the years.

Edwin:

So, we think about it really in three ways. We think about navigate, drive and invent. Really the three philosophies and the framework of where we think about the deployment of our capital on behalf of our clients. So, what do we mean by navigate? It's hard. So, understanding what you want today, what's already involved in the transition, the risks that are currently inherent in your portfolio, independent of where they're going to go in the future as managers, and you as individuals that preside over these pools of capital, make really tough decisions around where they go.

Edwin:

So, understanding the roadmap from today to the future state, difficult. Our mind navigate is really important. So the Aladdin systems we created all be 35 years ago in what we were calling Aladdin Climate is a technology of data insights model to try and help our clients understand how to navigate this world we're living in, where data is scarce technology isn't quite that rich but I actually can span both public and private markets. Really important in our mindset to understand, to build for the future.

Edwin:

The second thing is drive. Once you comprehend what you have, what are you purposely doing with that capital? And in our mind, is looking for value. This isn't a philanthropic activity. This is an activity whereby our clients are looking for return. And so, as we think about how you do that, most recently you've probably seen in the press, our partnership with the French and German governments with regard to climate finance partnership. This is a public private activity, whereby we're bringing much needed capital now to emerging economies.

Edwin:

This is not just a developed world issue, it's actually an emerging world issue too. But bringing in public and private capital together to create that catalytic capital and even first loss, to encourage the emerging economies and investors in emerging economies to embrace the opportunity, we think is really important.

Edwin:

And last but not least, invent. There's a tremendous amount of innovation that's happening right now. How do you take that capital and allow for its expansion and for it to now transform industry a going forward state. More recently, we did decarbonization partners with Temasek, which was really designed to invest in late stage venture, early stage growth. Companies with proven technologies but quite frankly, there was a massive capital shortfall. So, when we think about the opportunities, that as we apply the lens of navigate, drive and invent, actually allows us to develop not just product and capabilities and solutions, but hopefully create guideposts too for our clients as they're transition into capital.

Edwin:

But I would agree, and we'll probably have a lot of agreement here today, this is an extraordinary opportunity. We just need to be patient and thoughtful about how that approach happens.

Hiro Mizuno:

I see. Thank you. Thank you. Thank you, everyone. So maybe, Dan first and then we'll wait for you to make-

Dan Barclay:

I was working at out that I'm the last one to speak, not much for me to say. But that doesn't work if you're not the last one. So Dan Barclay, I run the capital marks division for Bank of Montreal, the eighth largest bank in North America. For us, we declared net zero last year and we joined GFANZ and fundamentally it was driven by our purpose, to boldly grow the good in business in life.

Dan Barclay:

I think when we have focused on this, very similar to what John said, we have a very similar philosophy. The goal is how do we arrive at a just transition? And that just transition is transitioning from the old, building infrastructure, to get to the new. A couple of things that we focus on that maybe would be additive to some of the conversation, our alignment's with what you've heard. The first is a conversation around incentive models, as opposed to penalty systems. Penalty systems have slow flywheels for change and incentive systems create rapid change. And to the conversation around opportunity, opportunity really is a flywheel for change. And so, if you have the opportunity to do new and better things that happens to work for the environment and you can create a return, that flywheel is incredibly powerful. What we've been watching in the last couple of years is that flywheel in action. We've seen more change around climate in the last 12 months than we probably saw in the last 20 years before that. And that flywheel's going to continue.

Dan Barclay:

The second thing we're very focused today is on demand versus supply. Much of the conversation is on the supply side to climate. Demand is actually where we have our biggest problem. We've watched a bunch of events in the last three months that showed us political expediency comes at the expense of climate. And so, things like a high carbon price, that's probably the fastest catalyst in the world to climate change. And yet, we're pushing our carbon price down as hard as we can today. It's actually backwards to the transition.

Dan Barclay:

You've heard from everyone up here, the opportunity is in the amount of changes coming. Whether we use 120, 200 trillion, it doesn't really matter what number you use, it's the biggest movement of capital in our lifetimes. And that big movement of capital will come with some risks. It will come with some change. It will come with some loss, quite frankly, whenever we innovate. But that dynamic of moving money is really what the BMO philosophy in, which is our job is to give our clients the best advice we can. And so, the dynamic that we work today on is how do we help our clients transition? Because it's the clients that actually transition banks or a facilitator of action. We're not the principle, we're not the regulator. Our job is to facilitate change. Those are really the approaches that we've been looking at BMO.

Dan Barclay:

Like others, I often talk to my teams about this is the biggest opportunity I've ever seen in my career. And it's really that movement of money, that creation of opportunity, the ability to think different act on change, is a catalyst. I think I would add one thing which will come up I think through this, some of the stakeholders that we have is our own employees and the communities we live in and the dynamic today is that is actually a big driver of change, for us as a bank and there's lots of ... I get to say, we're attacked as a big bad guy for now, but that dynamic today is we have a role and an obligation to our stakeholders to facilitate the change. But it's also part of the positive flywheel. The more we embrace that change, the more our stakeholders are engaged. The more employees are engaged, the more change we can actually make happen.

Hiro Mizuno:

Thank you. I think there's a agreement that near zero transition is going to provide probably the best investment opportunity in our lifetime to most investors. And then, when the ESG movement started about 10 years ago, is all about risk, how to mitigate externality. I think our discussion has been sifting or shifting over time to more as an opportunity-driven discussion. But in the meantime, we also need to address the risk inherent in some industries, like oil and gas. And then I think we passed the phase of talking all about the divestment, because if reflect the five years ago, when we talk about ESG, first question is about divestment. You should divest from the oil and gas industry or not? But we hear very much less about the divestment as the appropriate strategy. So, I hope you feel better now, but I just wanted to hear from the industrial sector that you have been under significant amount of pressure from the investor to transform your business model. I'm really respect that the BP came up, the very aggressive and [inaudible 00:18:54], the strategies, but share with us, what's your frustration about the way the investors treat your industry.

Julia:

Okay. Thanks Hiro for that. Pretty direct question. So, as the only industry representative, I'm going to try to do a good job at defending the category. Before I actually go to your question, maybe I can spend also two minutes trying to say what we as BP are aiming to do.

Hiro Mizuno:

Spend as much time as you want.

Julia:

And then I can actually talk to how we're actually engaging with the financial sector as we go through it.

Hiro Mizuno:

Sure, absolutely.

Julia:

So, I think you mentioned risk for the and gas industry, similar to what everybody else said. I think we see it as a tremendous opportunity. We can talk to 3.5 trillion a year, to 2050. If you look at energy outlooks, and we spent a lot of time modeling energy outlooks, it's a monumental transition. We are seeing demand in the energy system shifting. So if you put yourself in aligned scenarios, you could see oil indeed reducing from 100 million barrels a day today, to something like 25 to 50 million barrels a day in 2050, depending on which scenario you take and renewable penetration, actually having to go to something like 600 to 700 gigawatts deployed every year to actually get to a net zero scenario.

Julia:

The same time, we see a pretty significant technology challenge. When we look at the world, we say, basically you have two thirds of energy demand that you can electrify. The rest can't be electrified and we mention hard to rate sectors. And so we will need all technologies to come into play. We need CCUS, we need bio energy, be it biofuels, biogas. We need hydrogen to come into play. So, when you look at that amount of complexity and change that needs to happen, and the integration of all these technologies, we take a step back and we say, "Wow, with the capabilities and the global scope that we have, we are in a privileged position to actually do the right thing in terms of energy transition, but also capture the opportunity that comes with."

Julia:

So, two years back, basically when our new CEO started, Bernard Looney, in 2020, we announced a new ambition, which is to be net zero by 2050, or sooner. We announced a new strategy, which basically has three core parts to it. Resilient hydrocarbons, because we will continue to lead hydrocarbons in the system, even in 2050. Convenience and mobility and the transformation of mobility towards the future, and low carbon energy. With integration and in particular, our trading activity that allows us to bind that roofing together, to bring cleaner, reliable, affordable energy solutions to our customers.

Julia:

And two years down the road, few months back, we actually accelerated that strategy. We accelerated in terms of investment. We announced that we're actually going to be allocating 40% of our CapEx in 2025 to what we call transition growth engines. And that number goes up to 50% by 2030. We accelerated aims, so we're now going to be ... I think we're the only oil and gas company who aims to be net zero on operations, upstream production and traded energy products. And we accelerated in terms of execution and progress. So, we're very much in action and very much aiming to capture the opportunity.

Julia:

Now, I'm not sure whether I would call it a frustration. I think we've been throughout this process, engaging very significantly with the financial sector, because I think if there's one thing that we understand, it is that if we want to be successful through this journey and have a chance to get to net zero, it basically takes every single stakeholder in the system, be it energy system or broad economic system, to actually participate. And we acknowledge that our journey is not an easy journey. So, we've been engaging with investors on an ongoing basis.

Julia:

We've just published our net zero ambition report, which we're putting out a vote at our next AGM. And we continue to engage to gather feedback, learn from our investors. And also to a certain extent, educate our investors on the complexity of the energy transition, the pathways associated to it, which if you are familiar to oil and gas, there is no SBTI type pathway, as an example. So, I wouldn't talk about frustration. I would talk about a dialogue and a need to work together as we go through the journey.

Hiro Mizuno:

Thank you. I mean, well, I think that the investor has been demanding a lot from the other, their portfolio companies, and we have been asking them to disclose more and more information. And my question to the other panelists representing the financial institution or the asset owner, is when you hear from the company like BP, they're trying to transform their business portfolio and they are announcing a lot of new investment. And then now they are doing more disclosure, using TCFD and now we are talking about the IFRS, they are trying to establish a new disclosure standard. And then there has been some of ... it's a bit of a cynicism, but the skeptics within the industrial ... the leaders, the more they disclose, the less capital they ended up getting, because they actually seemed like they are not attracting the capital into their new project.

Hiro Mizuno:

So, from everybody's perspective, from the investor perspective, or the financier's perspective, what you are looking for? And when the BP or the other the carbon heavy industry shows new strategies, what the real opportunities and what kind of tools do you have to support their transition and make your investment opportunity too. So John, you want to start?

John:

Sure, sure. Happy to start. And it's important that this is a transition. And the first thing we look for is the plan. And we often say that with a net zero commitment, a 2050 net zero commitment, really all these companies, us included, we're signing up to run a two hour marathon. And the first step we got to do is actually now figure out how we're going to do that. It's a great ambition and we want to get there, but we got a lot of training to be able to run that two hour marathon.

John:

And so what we look for as an investor is the plan and putting in place a credible plan. Now we also as an investor, respect that it is the role of the board of directors and management to put in that plan and us as investors will be transparent and we'll share our expectations, but the strategy is owned by the board and the management team. If it's a private company, then we could have more influence. If it's a public company, if we're not satisfied that the plan is credible, then we will potentially sell our position. But as a engaged investor, a long-term investor, we look for the plan and willing to engage with companies.

John:

Other point, and I think you were touching on this, is around disclosure. And one of the challenges we have in our portfolio, is even trying to measure the carbon intensity of our portfolio. And today, we only get information on about 35% of the issuers in our portfolio. The rest of them, we proxy, we estimate to get a total portfolio estimate of the carbon intensity.

John:

And it's more volatile than I would've expected because every year and more companies are coming out and providing actual information, and we're seeing restatement and revisions to estimates. So, we are on this journey. It is a transition. And I think for us right now, as investors, we're just really trying to engage with the board and the management team of the companies we invest in.

Hiro Mizuno:

I am going to ask the same question to everybody, but John, the person, as you said, there's a journey and you have to learn, I mean, your team have to learn how to properly announce the opportunities in terms of the climate and also the risk of the climate change. How are you building your team? I mean how many professional you hired? Or I'm very interested in like how everybody's building up their capability to do that job properly?

John:

Yeah. Maybe make a couple comments there. And we have a couple teams. One of the things that we did about a year ago from an investing side is we actually combined our conventional energy team with our renewable energy team. And we call it our sustainable energies team with the mandate to invest across the entire waterfront of energy. We also have a team called sustainable investing and this team is actually there to support all the investors across the organization. Because as I said, this is actually an economy-wide transition. It's not just about energy. And so they support all the investors across the organization.

John:

And part of the goal of that team is not only to provide the support for new investment opportunities and on the portfolio, but we also have to improve the literacy and the fluency within the organization. We actually have to bring up the understanding of everybody in the organization, because this is something that touches not only how we work internally, but every investment.

Hiro Mizuno:

I see. So Raymond, what about [inaudible 00:28:29] then?

Raymond:

I've got to take the baton from John on engagement, a subject I'm passionate about, and our group is passionate about. With transition engagement is critical, but I'm going to go out on a limb here and suggest that I think one of the biggest fallacies in the broader marketplace right now is to associate engagement with the equity business, because we think of shareholder voting, proxy voting.

Raymond:

Now of course, that has a relevance and that has an ability to impact a great influence, but we forget a huge part of the financing equation and that's the bond market. And of course I'm biased, as the CIO of fixed income. But it's so true. If you think about the regularity of bond issuance, these bonds are rolling off all the time. These issuers keep coming back to the market and in size. The potential to influence via cost of capital and the regularity of that interaction is absolutely massive, Hiro.

Raymond:

So for me, the big point I'd really like to impress upon you is that engagement has to have a duality. It needs to have an equity and a fixed income dimension. And that's how we approach it. Every year, we typically engage between two and 300 companies at Pictet Asset Management. I don't know if that sounds like a large or small number, but it's not meant to be any kind of number. It's a number which we feel we can exert influence on. The engagement has to be targeted in order for it to have impact, so you've got to pick your spots.

Raymond:

Incidentally, we've picked our spots around axes axis of climate, water, nutrition, and long termism. So we engage on those axes and we engage with an equity and a debt lens because that's the most powerful way to do it. And of course, that also opens up other considerations like sustainability, link bonds, green bonds, and so on. But perhaps we cover that later on. I pass it back to you.

Hiro Mizuno:

Well actually, we can cover it now because as you are leading the fixed income effort of the Pictet, the green bond has been one of the instruments we believe that can promote, the Euro transition into the sustainable and the green, ... the project. Do you think the green bond ... I mean, in terms of the size, it's growing, but do you think the green bond will continue to be the effective product for corporate, raise the money, direct into those green project? And also, do you think it will remain attractive for the investors? I mean, yield hasn't been differentiated themself, but what's your view on that?

Raymond:

It can be and I know that sounds like a cautious response, and it goes beyond green bonds. Let's talk about ESG label bonds to encompass green social and sustainability link bonds. So ESG bonds, what's the role of ESG bonds? For me, it's not an either/or. It actually goes hand-in-hand with engagement. If you think about it, when an issuer is issuing an ESG bond, that bond very often comes at a premium, what we call a greenium, that means it comes at a lower yield than the conventional bond curve. Is that lower yield justified?

Raymond:

Hiro, to your point, what's the use of those proceeds? That for me, is absolutely critical to investigate more deeply. What percentage of those funds are going to be deployed to the project? Are those funds going to be used for a CapEx role or actually for a brand new project to decarbonize? Those are critical questions, which my credit analyst team and our equity teams have to dig a lot deeper on. So, the reason for my tentative answer is it can be, but it has to be done in unison, with engagement. It's not an either/or, and of course, there's almost a paradox. If you have a dodgy issuer, for want of a better word, but who happens to get an ESG bond off, how do you reconcile that?

Raymond:

You need to be able to reconcile the use of proceeds at the sustainability link bond with good behavior and a transition path which is credible at the issuer level. The two have to go hand in hand.

Hiro Mizuno:

Yeah. Dan, you want to make a comment on the green bond?

Dan Barclay:

I was going to go back a little bit to your information sets around climate. I think the dynamic today is, while it creates, I think the example used with a bit of uncertainty, what we really need is transparency and comparability. And today we don't have that. And so, the investments that are out there today, like when we put out our high [inaudible 00:33:21] climate standards that we put out and the reduction targets we had, we actually say right in there that it's going to change because the data today, isn't very good. John talked about 35%. I don't think we think we're that high across our portfolio.

Dan Barclay:

And so that dynamic is it's going to change over time, but if you don't actually lead with what you can see, it's very hard for them to change to something better. And so that process of innovation is there. Unfortunately, you convert that back into the risk spectrum, i.e. the investing spectrum. Your challenge is with some clarity, but not full clarity, you get the perception of more risk. And so the irony is some people leading on the data side are actually going to create more risk, because they're actually showing people what that uncertainty looks like.

Dan Barclay:

The last thing on comparability, over time, what we need to see is pace of performance as opposed to a disclosure. So today, all we are is disclosing. What we're not doing now is a relative performance discussion, or absolute or relative. And to me, that's where these tracking standards are going to be very helpful, three years out, five years out, 10 years out, where you can actually track the performance of an entity as it went through it.

Dan Barclay:

To your point on green bond, green bonds are a very effective tool. Some people call it greenwashing, doesn't really matter to me. really what it is it's a company's commitment to make change happen, and it's this tool to give them that commitment. The same thing on sustainable and the rest. The challenge that I think I see most today is there is no real risk transfer and there's no real risk opportunity. The greenium is infinitesimally small. And so therefore, what's the real incentive to change out of the instrument? And you can argue on the bond side, there shouldn't be, it's a credit instrument, as opposed to that on the equity side, you can argue at some, but that dynamic of what investors really want and how much risk will they take to get a better outcome, that's I think a really interesting question for the next couple of years.

Hiro Mizuno:

I think that's a very important point. I think, green premium, I always think it's meant to be there because for the investor who really wanted to precisely direct their capital into those green strategies, a green project, they should pay for the premium for that. But the problem is like John, I used to run GPIF where we are operating in a very tight, fiduciary duty requirement. And as soon as we observed the green premium kicking in, we need to withdraw from that market. So, that's the kind of the dilemma we are facing. But I really want to ask Edwin a question, but before that, John, how do you deal with the green premium or that kind of sustainability premium if we kick into the pricing as a fiduciary?

John:

Yeah. Well, I think you touched on it that we at CBP Investments, we have a sole fiduciary duty to maximize return without undue risk of loss. That's our mandate. And we're here to invest the funds in the best interest of our contributors and beneficiaries. And every investment we make in the portfolio is through that lens. So, if there's a green premium, we won't subsidize an investment for a green premium, but we do believe, as I said earlier, that there is a tremendous investment opportunity. It's also why we're actually looking across the entire economy. It's why we're focusing quite a bit too on some of the harder to abate sectors, which do require a little bit more of rolling up your sleeves and trying to understand. So, to answer your question, I think we really look at everything through our mandate and that is to maximize return without undue risk of loss.

Hiro Mizuno:

That's good. So Edwin, I want to ask you two questions. One is, I remember my dialogue with Larry Fink about 70 years ago and how many people should be involved in this sustainability or like the ESG activity of the BlackRock. I think at that time you had probably 20, and then we had an argument about 20s enough for the portfolio of the BlackRock? And I wonder how it grow and how that's organized to supervise your private or public ... the activities. That's first question. And the second question is about, coming back to my earlier question to the other people, other panelists, as you are leading your alternative strategy of BlackRock, what do you think is the best tool or best mandate to support BP's transition, to the sustainable business portfolio.

Edwin:

So of the 18,000 employees we have today, 18,000 of them are touching sustainability.

Hiro Mizuno:

That's very good way to answer.

Edwin:

It's so true, so if you look at it-

Hiro Mizuno:

BlackRock is so good at marketing.

Edwin:

I learned from Larry. So, we interview our clients every single year and I think this is an important point. As of the beginning of this year, 88% of our institutional client community around the world said as they review investments, E when it comes to ES and G is the most prominent thing they're trying to understand, really comprehend how to take advantage of the opportunities, but also mitigate some of the risks. And with that in mind, as an organization where none of our assets are BlackRock's assets, it's our clients, knowing that that amount of capital is really thinking about that is, it's so incumbent upon us to be able to react to that need.

Edwin:

And then I think this goes back to here, the point earlier, with regard to technology, data. It's better in public markets. It's still not perfect. It's awful in private markets, there isn't a data source. There isn't a place they go to. We happen to know BP very well, and Bernard and team, and understand the strategy they're implementing. The whole notion of going brown to green is very real. And when you have strong leadership and a commitment to spend capital around that transition, you can see how that can happen. I think with regard to how we try to support that, very recently, you probably saw that with Aramco, which is one of the largest publicly traded equity company in the world at a market value, I guess around two trillion. We structured a 15 and a half dollar billion investment to take some of their natural gas business, 49% of it private, but we did it for a couple of reasons, to inject new capital into an area where gas is really required to help with this transition. But as we think about how we work with these enterprises to make this satisfying to our clients, you have a guaranteed output at a floor on price for a very long period of time.

Edwin:

And so, being able to introduce gas as a potential solution at a very cost effective way for a very strong return for our clients, to us this is how we're working with public enterprises who are actually looking for private capital. When we think about the opportunity set though, quite frankly, the biggest one across the globe for all of us really sits in infrastructure. The need there is tremendous. Now, albeit 12 years ago, we built very organically renewable power capability, which at the time people thought you were crazy. Renewable power, wind, and solar was such a very small, nascent part of the industry. It's now become one of the greatest catalysts as we go through this change and this transition. In fact, between now and 2050, there's about 26 trillion of additional investments required to allow for this to happen.

Edwin:

So, this is an industry that's going to get great support, but it's really not all about power. It's fascinating, like an infrastructure, as we think about climate change, you think about it in a lens of decarbonization, you think about digitization and decentralization or 3Ds, these things are easy to remember, but I say that because it's not all about power and because the opportunity set to invest is so great, the decarbonization part we get. We mentioned mobility, EVs, batteries, charging stations, et cetera, that's really in play. And it's making a huge impact on the world we're living.

Edwin:

When you think about the decentralization, if you think about solar, it's about now bringing close to the end user an ability to harness power, as opposed to have to centralize it somewhere. So we've invested the largest solar capability in the world to basically enable homes through a much more resilient technology that have much greater longevity and much lower cost, to harness energy that they haven't been able to in the past. So, decentralization is making a very significant play.

Edwin:

And then digitization, understand, this goes back to the data element. So, in the UK recently, we made an investment with the UK government. We took a ... in support of the UK government's mandate to have within the next five to seven years every home having a smart meter, every commercial enterprise having a smart meter. The reason they wanted that is to better understand is the grid sufficient to support the enterprise that exists today in the United Kingdom? And if it is, how do they continue to modernize it, but importantly, as they think to the future, how do you build for the future to support industry in a very different way? And a private enterprise, funding its ability to put smart meters in every single home in the United Kingdom to build a new energy grid, is a really interesting opportunity that's measured over decades and then not in single years.

Edwin:

So for us, we're thinking about multi-year investments within private markets, data is very sparse. So, similar to CPIB, similar to the rest, we have sustainable experts that sit with the investment teams that ask the questions ESG, understand the plan, look for complete transparency, but then using our technologies, try to bring that to life, even in the context of a private investment for our clients. And this is where the Aladdin climate technology for us hopefully will be game-changer for our clients. You can now bring your public market exposure together with your private market exposure and understand the risks, but also the opportunities. So, it's a really big part for us.

Hiro Mizuno:

I think that is fantastic. I mean, I think the other private investment going to hold the key to really transform our energy system, because on one hand we have a big public company like oil and gas, who have to transform their portfolio. But at the same time, we need to invest in the new technologies, which most of them can be private. And also, I have been wondering why the people like BP, split into the green and the brown and those ... to attract the more capital. But just, before going to you to share with us what you are planning to just attract more capital, or what kind of project are under finance, but I wanted to ask Dan because I know you have a lot to talk about the infrastructure investment. So, as Edwin touched on infrastructure, how do you see the infrastructure investment opportunities.

Dan Barclay:

Similar to others that we think that's the biggest piece of the pie, and it's the hardest. And in most places, we're going from traditional to new and the new often doesn't have an economic model. So, to use the example that Edwin used a minute ago, they had a public service entity that could actually underwrite the model and give the incentives to the investor to actually invest. How do you make a return? The challenge we're having almost all of the new infrastructure, the new technology, the new whatever, there isn't actually a revenue model. And so it's an idea. It makes a lot of sense typically, but can you actually get it to work?

Dan Barclay:

Think about carbon sequestration, is probably the best one. We've got some big, huge projects that would make a material difference in the world and the math doesn't work. There's no math to work. And so, going through that process of how do we define who underwrites that opportunity set and who gets that return and how safe is it, or not safe, we can go to pure venture capital for a bunch of the stuff. That dynamic, I think is going to be one of the biggest impediments and we don't have a conversation today about that in the right way.

Dan Barclay:

On the small side, yes. Big scale side, very hard, unless something's willing to underwrite the change. And I think that to me is the piece that we're working on and watching today, and then how do we facilitate it? One of the things that BMO built is something called the BMO Climate Institute. And it was designed to put smart people in a room to have these kinds of conversations. I think that's the real challenge. It was also designed for us to create an advisory capability for our clients as they look at new ways to do things, as well as to advise us on how we should do things different. So, very similar to others in that we're ready.

Hiro Mizuno:

Thanks. So Julia, which area you think is under-financed or that you need more investment? I know you are responsible the venture investment for the BP as well. So if you could share with us, which is opportunity and which area is under-financed.

Julia:

Yeah. Well, I think if you look at the overall numbers, I think in 2021, the investment into low carbon was around one trillion and we just spoke to numbers that are 3.5 to four. So, I think if we are to actually meet the Paris goals, there's an opportunity to accelerate across the board in terms of technologies. We are not short of financing opportunities. If I react to your comment, if I look at what we are very much investing on in terms of transitioning technologies, a lot of the investments that we're actually doing, and the businesses that we're aiming to build as transition growth engines, are not really dependent on long-term subsidies. So if I think about it as an example, bio energy. We've announced an aim to actually grow our bio energy portfolio to 100 KBB. We've announced that we're actually launching three, fit for purpose bio jet staff plants, and converting up to two refineries to bio refineries. We have a biogas business in the US which we're looking at expanding in Europe.

Julia:

That business is actually extremely attractive today. And if anything, the aviation business would actually love to get more staff volume what's missing is actually supply today. And the limitation to that business in the long term is actually going to be sustainable feed stock availability.

Julia:

If I look at the second vector, EV mobility. We were planning on a acceleration of EV mobility in Europe, with a trajectory which was in line with a Paris consistent trajectory. It's going three times faster. We've doubled the amount of EV chargers that we have globally with a significant share of those in Europe and with a 30% utilization, those chargers are already positive in terms of a [inaudible 00:49:02].

Julia:

If I think about renewables, similarly. I spoke to 600 to 750 gigawatts a year required to actually drive the energy transition. We've already in the last two years, grown our pipeline from six gigawatt to 24.5 gigawatts. So, my point is for the transition to actually come into play, yes, there are technologies such as hydrogen green hydrogen, which will require ... and blue by the way, which will require subsidies to accelerate pickup of the transition. But it's exactly what we saw happening with renewables and other technologies as they actually mature and gain scale. But there are a bunch of technologies today, which have existing latent demand. And what we need to do is actually work on driving that demand while delivering supplies.

Julia:

So, we are not short of availability of projects to invest. We're not short of capital being offered to us to actually invest in those opportunities. And I think the biggest challenge is just aligning stakeholders and driving execution at pace.

Hiro Mizuno:

I see, I think that interesting you said you have enough capital to finance those projects. I think the other, financiers can finance the project in a developing countries, particularly like in Africa, through the other corporate credit. But in a Glasgow we announced the GFANZ, which has the 450 institutions committing to net zero and aggregated asset under a management is the reaching $130 trillion. Sounds enough but the reality is less than 10% of that capital is currently allocated to the developing countries. But OECD estimate that all the money necessary for us to make the world net zero, two third of that capital should flow into developing countries. And obviously, it's very far away from their current status.

Hiro Mizuno:

So except for the investing into, or supporting BP to do the project in developing countries, do you have any idea that we can shift more capital into those developing countries? Because that's the one question coming from the audience, is also asking why we don't have enough investment into South Africa? So, if we want to pick up on this?

Edwin:

Sure I mean, so we did build this climate finance partnership with Macron and Merkel, when she was in seat. I think this was a really interesting structure for government policymakers, no different than enterprises, saw an opportunity to bring new technologies, to transition old technologies to this new world. The reality of those is in emerging economies, you're taking on a different level of risk. And so, as people try to comprehend, what is that risk? For us, this climate finance partnership, I think is the second largest fund created of public and private partnerships to infuse this capital, predominantly actually it's all emerging economies, but very significant amount of it actually in Africa.

Edwin:

Now, they're moving from burning bunker fields to potentially moving to wind and solar. What the French and German government saw in BlackRock was well over a decade of experience in building and developing these projects, now taking that experience and bringing it to these emerging economies. I think the hesitancy is around risk, the hesitancy around the transparency, closeness and proximity to these assets and these projects. And this is where actually in this case, these policy makers and these governments created a catalytic capital and allowed for, should there be a loss, they would be those who would be taking the loss on set investments. So trying to incentivize others to come with and bring forth their assets to invest in [inaudible 00:53:07]-

Hiro Mizuno:

Derisking the investment, yeah.

Edwin:

Derisking the investments. Exactly right. I think you're going to see a lot more of that in the future.

Hiro Mizuno:

I see.

Edwin:

The reality is, we don't think you'll need that catalytic capital. We don't think you need to de-risk it. It's just going to take time to introduce this to these new geographies, that will require a whole set of different regulation, permitting, et cetera, as you build into it. So for infrastructure, it's very real. It is an emerging need, not just an OECD, developed economy's need. But that's an example of one where, albeit 700 million of capital was raised, which if you think about it as small, relatively tens of billions that are being raised for developed economies, there is a catch up that's required.

Hiro Mizuno:

I see. John, maybe?

John:

Yeah, I totally agree. And we have investments in the renewable space in Brazil, in India. They're big economies. There's scale. There's a history there and so we have investments. We don't have a lot of investments in outside of those two big geographies and I completely agree. I think the path is, there's going to have to be public private partnerships, but it's going to have to be risk sharing. And even to attract private capital, entities taking that first, last piece. Providing cheap financing, cheap debt is not the path forward. I think people really need to see that de-risking.

Hiro Mizuno:

I see. Dan, want to say something or we can move on to the next [inaudible 00:54:31]?

Dan Barclay:

Nope, that's fine.

Hiro Mizuno:

Okay, great. So we have two minutes left, so I promise with the panelists, I'm going to ask one question to wrap up this panel discussion, which is which industry or which region, whatever the way to put it, you see the opportunity, because this is the panel is about opportunities. So, maybe starting from Raymond?

Raymond:

Fine, I'll be quick because we have a minute and a half. Chris, I don't know if you could put the second slide on, just to add some visual impetus to this, but for me, it's picking up on your point in emerging markets. When we look at emerging markets, sovereigns and corporates, their degree of preparedness right now, relative to developed markets is completely different. We're looking at a fraction of the index in terms of corporates, which are ready and have a credible plant to net zero.

Raymond:

For me, that's not a reason to choke financing off regions and corporates which need it the most. It's actually the complete opposite. It's where we should be channeling that financing, knowing that we can influence that transition with very, very tangible engagement. So emerging markets, fixed income, which is also lagging equities. That's where I'd be going but of course, I'd say that.

Hiro Mizuno:

I'll give you first opportunity.

Julia:

Yes. Thank you. Well, listen, I joined BP two years ago to help the company get to net zero. So I mean, you know what my answer's going to be. I wake up in the morning thinking about energy transition. I go back to bed thinking about energy transition, which admittedly might be a bit depressing. But yeah, I think to me, what I want to say is when you think about energy transition, it is not just a technical energy piece. It is a whole ecosystem that needs to change. It's the implication for transport. It's the implication for industry. It's the implication for the financial services system. It's the implication for us in our use of energy and it's the implication for the way we think about policy making. So, I think it's a reductive term, but it's that whole transition for me.

Hiro Mizuno:

Thank you, Dan?

Raymond:

I think you're at time.

Hiro Mizuno:

No, he can talk.

Dan Barclay:

I would've said emerging energy sources, so hydrogen's a great example. I think we're going to see it's got a natural placement, especially if we can get a transferal carbon price in the marketplace. If we can get that in place, that opportunity is going to be spectacular.

Hiro Mizuno:

Right, Raymond, quick?

Edwin:

Edwin.

Hiro Mizuno:

Sorry, Edwin.

Edwin:

So, maybe really quickly, people have mentioned energy. Digitization is a huge part of this transition. And usually the more capital intensive the industries are, the less capital is actually flowing into them. And I think that's where you actually do see some of the greatest amount of opportunity. Don't be shy of the capital intensity but as you transform these economies, there's an extraordinary investment opportunity there that is somewhat still to be tapped.

Hiro Mizuno:

So, green and digital as John mentioned earlier. So John, all right, very quick.

John:

I think interest in mining. Copper nickel, cobalt, lithium, magnesium. We don't have enough.

Hiro Mizuno:

Yeah, we need those to make a battery.

John:

Make a battery.

Hiro Mizuno:

Right, so we ran out of time, so thank you very much. And they give your hands to these distinguish speakers.

John:

Thank you very much.

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.

 

Dan Barclay Chief Executive Officer & Group Head, BMO Capital Markets

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