Promising Views Coming out of COP26

Fiona:

As investors, we need to understand that every investment that we make has an impact in the world, they're either positive or negative, and we've got to make more choices about moving them from the negative to the positive. Because we can't keep using the world's finite resources and we can't keep exploiting people either. We need to work within planetary boundaries and we need to work within societal boundaries.

Michael:

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, it's affiliates or subsidiaries.

Nalini:

Hello, I'm Nalini Feuilloley, head of responsible investment at BMO Global Asset Management. In early November, I was on the ground in Glasgow with other BMO leaders for Climate Action's Sustainable Innovation Forum, which took place alongside COP26. While I was there, I had the pleasure of sitting down with Fiona Reynolds, CEO of the United Nations supported Principles for Responsible Investment, also known as the PRI, to talk about how COP has changed, how this year in particular was so unique, and what the road looks like going forward to next year's meeting in Egypt.

Nalini:

Fiona Reynolds has led the growth of responsible investment broadly through her tenure as CEO at the PRI, where under her leadership the organization grew its institutional investor membership from just over 1,000 signatories to over 4,000 today. Let's dive into the conversation.

Speaker 3:

Thank you, Fiona, for joining us here in Glasgow. I'm really excited to be here as part of COP, and I know you're no stranger to COPs. You've been going to them for years as your role as the head of the U.N. Supported, Principles for Responsible Investment. And so now, as we're winding down the conference, it would be really great to hear if some of the outcomes of COP26 have met your expectations, coming into the conference.

Fiona:

Well, thanks for having me. It's great to be here and it's great to be in Glasgow and at another COP. I think that one of the things in terms of this particular COP that's been quite different and so has exceeded my expectation has really been the role of the finance sector. The private sector more generally, but particularly the finance sector.

Fiona:

So when I first started coming to COP, many, many, many, many years ago, I've been to more than I care to remember, we were lucky if we were involved in any events in the main venue. Generally we were in some side event that was way, way down on the list of anyone's agenda. But now, this COP, and this is really the first time that I've seen it in a significant way, the finance sector, the investment sector, is on the main stage with the world leaders.

Fiona:

There's finally an understanding that we not going to solve climate change unless we bring the private sector and private finance together with the public sector. And I think that's been a significant change. I've also never seen so many people from the private sector, really senior people, here at COP. And a lot of people that I've spoken to are here for their first time. So it's a first year they've ever been. And I think that's been very significant.

Fiona:

And then I do think that there has been also significant announcements made. So we have seen 40 countries, or more than 40 countries, who've committed to phase out coal. Now, some of the biggest countries in the world, including the U.S., including China and including really large fossil fuel exporters like Australia, were not there. But that doesn't mean that it wasn't a significant commitment. We've seen big commitments on deforestation, on methane. So I think that there's been really significant progress made.

Fiona:

I think that we've gone from, when we were in Paris for example, of the Paris agreement, we were talking about high level aspirations about, we wanted to keep the world to one to two degrees. And I think this COP has more been about sectors and about what are we actually going to do. What do we do around deforestation? What are we doing about biodiversity? What are we doing about methane? So I think great progress has been made at this COP. And you hear lots of discussion about, is it successful, is it not successful? Well, I think progress has been made.

Nalini:

Absolutely. I couldn't agree more. The coverage has been actually quite positive, specifically within the finance community and just hearing observations from different stakeholders from saying, it's not just the NGOs and the governments around the table and not just the ministers of environment, but it's actually ministers of finance. And it's the private capital representatives and not just the ones who care about sustainable investment or who have been touting, have been leaders in that field, but really, really big mainstream names who recognize that this is table stakes and that they have to be part of the solution.

Nalini:

So if we can take a step back and provide some context for our listeners, it'd be great to have you talk a little bit more about the Principles for Responsible Investment, the initiative, and why it's so important to be here representing the world's biggest institutional investors.

Fiona:

So the PRI was formed in 2006 out of the U.N. System. And it was really formed around how did you bring sustainability to capital markets. And since that stage, we started with 86 asset owners who were there at the beginning, and we were launched by then Secretary-General, Kofi Annan. Now we have 4,300 signatories, they represent over 140 trillion US in assets under management. So the past 16 years has been all about trying to convince the private sector, mainstream investors that they need to consider environmental, social and governance factors.

Nalini:

Absolutely.

Fiona:

Today it seems like it has finally entered the mainstream, but as you know, it's taken a long time for us to get here. And sometimes I think people think that ESG is a new thing, and I say, it's taken a long time to become an overnight sensation. Really. And I think, now the world has woken up to the fact that finance needs to operate differently.

Fiona:

That business, as usual cannot be the way that we continue, investing as usual cannot be the way that we go, that the world has got finite resources and that we have to live within planetary boundaries. I also think that if COVID 19 has shown us anything, it should really be about the interconnectedness of issues and that we can't have a healthy economy and therefore healthy markets and healthy businesses if we don't have healthy people in a healthy planet, that they're all related to each other. And I really think in that way, that COVID 19 has moved the ESG debate on even further. I definitely think that climate change has as well.

Fiona:

So our signatories will say that climate is the number one issue. There's so many issues within the ESG field, of course, but climate is the number one issue that they're focused on. They're focused on it from a risk, they understand the risks and they're focused on it from the perspective of the opportunities. What does it mean for the future? And so I think that that's why we see so many people from the finance sector here today, and that's why it's important that we are here. Cause we are part a huge part of the solution. Cause if there's one thing that I know for sure, the finance sector alone will not solve climate change, but we will not solve climate change without the finance sector.

Nalini:

Absolutely. And there's actually one thing I'd like to pick up on, you mentioned the interconnectedness. I couldn't agree more. And I actually think that if COVID 19 showed us anything else, it's that you need to collaborate to find solutions. We can't work on this separately, we need to be partnering with each other. We need to be leveraging expertise from cross sectors, right? Because when we're thinking about resources and how we can make them go further, whether it's like waste and water intensity and all these types of things, I think so many of them transcend sectors and regions. And I think one thing I'm seeing from a lot of the talks and the sessions that I've been going to is that there's this energy around collaborating. And I think that's why COP has been so successful this year, because I think people are no longer just looking at their own agendas. I think they're seeing that they're part of this bigger problem and also part of contributing to a meaningful solution.

Fiona:

Absolutely. If we don't bring the private sector, business and finance together with government.

Nalini:

Exactly.

Fiona:

Then with regulators, with all the NGOs as well, who have got all lot of knowledge and skill about different areas and with other parts of civil society. And if we're not all moving in the same direction, then we are not going to get there. And that's why I think that G fans, the Glasgow finance initiative, let's just call it that cause we need, we need more,

Nalini:

All the initiatives that support Net Zero.

Fiona:

That's right. So G fans is bringing together all the different parts of the finance sector. So it's got the banking sector, it's got the insurance sector, it's got investors and within the investors, asset owners and investment managers. And I think that's a good thing to have everyone come around the table together, rather, than just operating in silos.

Nalini:

Exactly.

Fiona:

Now you're going to operate within your groups because you've got different issues for different groups, but then coming back together under one umbrella can only be a, to me really useful a useful thing. And we've certainly participated as part of G fans.

Nalini:

Absolutely. So one thing just to kind of shift gears for maybe our optimistic tone, I've picked up on a little bit of skepticism around kind of pledges and commitments versus real action, like real world impact. And so how do stakeholders, key stakeholders actually move the needle in this fight beyond just making lofty commitments? Because there's been, not to quote anybody in particular, but saying, "Oh, this is a watershed moment." And very bold statements like that. And I think we need to be realistic because if we get too caught up and these banner commitments that we've made when people go home from Glasgow, what does that mean in terms of driving meaningful change?

Fiona:

Yeah. Well, I think that the finance sector has to be really careful about the greenwashing issue because the world is watching. And as we've seen at Glasgow, there's been a lot of protestors. And there was a lot of protestors outside the G fans events. Protestors, these days are smart and they understand the role of business and they understand the role of investment. So when we make, when the investment community is making pledges, they need to be ones that are realistic. They must be transparent in terms of these are the targets that we're making. This is the plan that we have to get there. And then you must report against them manually.

Fiona:

So when we at the PRI, we are involved in a number of initiatives. But one that really involved we're intimately involved in is the Net Zero Asset Owners Alliance. And one of the things that we wanted to be really clear of, if we were going to be involved, was those things. That we had, not just long term targets, because you, or I could say something about 2050, but were hardly going to be sitting in our roles in 2050.

Nalini:

Exactly.

Fiona:

So, as a lot of CEOs of organizations won't be, so you have to have short term targets and you have to report and be transparent. And as long as we do those things, then I think that's fine. But it's you can't just go, oh yeah, we're signing some pledge. We didn't want to be part of just signing a piece of paper. It had to have real weight behind it. But at the same time, I think that we shouldn't pretend this is easy. We've never decarbonized the economy before it hasn't happened.

Nalini:

Exactly.

Fiona:

So, and this comes back to your point earlier about collaboration. There is no one investment organization, no one business, no one government that is going to be able to do this. Everyone's going to come together in the investment community, in these initiatives and work together, share knowledge because otherwise we're just not going to get there in the time that we should have.

Fiona:

And I have really been encouraged particularly through the asset owner Alliance about how much asset owners are working together. We're also involved in the investment management commitment that's been made, not as involved on a day to day basis. But if that's really great as well to see investment managers coming together, because in some cases they're competitors as well. Right?

Nalini:

Absolutely. Absolutely.

Fiona:

But I think again that there's still an understanding that it doesn't matter how big they are. They're still not going to be able to get there on their own. And so that sharing of knowledge and information, is really important,

Nalini:

You know, I can definitely speak from personal experience being a part of the Net Zero Asset Manager Initiative that there's some actually so systemic challenges with the commitments that we've made, right? And things that we actually have to work really hard on solving. Things like this market cap indices, that a lot of institutional investors still invest in today, right? So these are just mainstream indexes where we fully replicate the benchmark and invest in all the constituents as designed. So I think all of that have exposure to those types of products and solutions and we equally have to decarbonize them. And so I think working together will enable us to jump some of these hurdles and we're all moving towards the same goal, which is great in that kind of trumps the commercialism of our individual organizations.

Fiona:

Yeah. And we need to work together to develop the tools that we need. Because you can't keep, it comes back to what I was saying before business and as usual and investing as usual is not going to get us there.

Nalini:

Exactly.

Fiona:

And using the tools that we've always used before or indexes or

Nalini:

Exactly

Fiona:

That happened before isn't necessarily the answer either. So we have to develop the tools, the standards, the data that we need for investing for the future and investing in a Net Zero world.

Nalini:

Absolutely.

Fiona:

And we need those things to really catch up. I think some of them are a bit slow. Some of them are developing. Some of them I think are a bit slow. We've got to really accelerate. I think all of these issue.

Nalini:

And one other thing I've heard, just to wrap this up in terms of investors' perspective on decarbonizing, is looking at the difference and the debate of divestment versus engagement. And I know we've been talking about this for a really long time. I think in different regions of the world people approach this very differently, but I think where everybody agrees is that to sell out of a position for somebody else to buy is actually not making any real world impact. So I don't have a personal perspective on this and I'm not trying to imply one, but I do think that shareholders coalescing have actually made a big difference in how the businesses that we invest in are actually changing their models and actually making real world impact by diversifying in terms of investment in clean technologies or whatever it might be or closing down their coal fired plants. So yeah, that was just kind of one thing.

Fiona:

Yeah. Well I think that investors have a number of levers and they need to use all of them.

Nalini:

Absolutely.

Fiona:

Now the engagement is part of that. And I think what's pleasing though, is to see that engagement is stepping up. It has to be more than box ticking and now we're seeing that engagement is getting smarter, things like climate action 100 class,

Nalini:

Exactly.

Fiona:

Where a big collaboration coming together, all pushing in one direction, being very clear with companies, the largest emitting companies in the world about our expectations collectively as shareholders. And then that's one key lever. But obviously we are also seeing a lot more happening on the voting side. Because I don't think it can just continue to engage, engage, engage, and then nothing changes. And you don't do anything about it. So things that we've seen through engine number one with the voting at Exxon, I should say

Nalini:

Yes,

Fiona:

Whereby the board was then basically three board positions gone. Well, this is what this is escalation. So I think that's what we need to see. We need to see this continued escalation in practices. If we are not seeing the change that we want to see. I think divestment does have a role, as well. Not everybody does, but I think it's got a role for some, there'll be some companies that you just decide, you know what, they're just not listening, nothing's happening, I don't want to, or I don't feel like I want to invest in this sector anymore. I'm going to put capital or elsewhere. And then of course there's what you do invest in and what you don't invest in and the investments that you make in the new technologies. As you were saying, and we need to use all of those levers effectively.

Nalini:

Yeah, no, absolutely. I couldn't agree with you more, especially on the escalation part. I think we all need to develop frameworks that we can actually abide by. So it's one thing to be invested in a company. But if you use the tool of engagement, you don't get anywhere, you escalate to proxy voting. If you can bring forward a shareholder resolution to actually drive impact and coalesce support around, that's even better. But then like you said, there's not an infinite amount of time where we can sit back and wait as investors. So I think that's when you have to make hard decisions and calls maybe around investment splicing, that exposure with a company that is looking to move with the times and support sustainability.

Fiona:

Yeah. And I think the industry, the investment industry is getting a lot more sophisticated in this area and is really stepping up as well.

Nalini:

Absolutely. Okay. So we'll switch gears really quickly to an area that I've been thinking a lot about. So there's a lot of clean technologies. There's so many innovators out here at COP who I've been meeting with who are actually producing meaningful solutions to sustainability challenges. And that's what we want to see. But as you know, a lot of this happens kind of at the micro level. So really small startups wanting to be a part of this solution, but not knowing how to scale their innovations in a way that we need for the timeline that we're working with. So knowing how investors today, especially institutional investors are kind of structured and the asset classes that we invest in, how can we be a part of contributing to the scaling of these technologies that can potentially be for what we need to get to a 1.5 degree scenario? How do we make that accessible to our community?

Fiona:

Well, I'd like to see some investors coming together and pulling some capital so that they're spreading the risk for themselves and saying, "Let's get together whether it's a group of asset owners or a group of asset that managers will all put in some money, we'll try some things and we'll see what work." Some things will fail, no doubt, but some companies won't. I think that that is a sensible way to go. I don't think that we can get everything just to fit into the nice little buckets that we have before coming back to the point about we, it's not just businesses usual.

Fiona:

And so maybe the way we think about asset classes, et cetera, needs to change and the tools that we need. And I think we need to be a bit more innovative. I do think that there can be a bit of, this is the way that we've always done it thinking going on, that's starting to change, I'm pleased to say. But I think five years ago it was very much, "Well, this is the way we've always done it and this is the way we're going to continue to do it, we've made money this way." And we just can't do that anymore.

Nalini:

Yeah. I think you're absolutely right. Our counterparts on the business side are definitely innovating. We can see that from all of the amazing exhibitions and the presentations of these clean technologies. But I think it's art turn as a finance community to really step up and innovate to meet that demand.

Fiona:

Yeah. And I know that a lot of investors are talking about blended finance solutions.

Nalini:

Exactly.

Fiona:

And that might play a role as well. Working with governments, working with the world bank, with the IMF, et cetera, coming up with ways to fund things. Thank God that the world is full of smart people who are inventing great technology. I mean, thank God the world is full of smart people. Look where we would, but who knows where we'd be with, with COVID. If we didn't have so many smart scientists in the world who can create solutions and I think that's what we need on the climate side. But like you said, I've banged into so many people over the last couple of days who have been talking about the amazing things that they're involved in creating and their frustration as well. Okay. I've been here. I hear all of these people talking about, they need the solutions and they need to invest in solutions and then I've got the solutions and all these people here, no one will help me scale up.

Nalini:

Exactly.

Fiona:

There needs to be a marrying of the two somewhere along the line.

Nalini:

Absolutely. And that changes kind of how us as investors look at that spectrum of risk and return and start to put in this kind of third axis that I know the PRI has been talking about for a long time, which is kind of real world impact. And so changing that two dimensional view to that new way of thinking, I think will help us get there.

Fiona:

Yeah. Well I think as I often talk about is as investors, we need to understand that every investment that we make has an impact in the world. They're either positive or negative. And we've got to make more choices about moving them from the negative to the positive. Because as I said, we can't keep using the world's finite resources and we can't keep exploiting people either. We need to work with implant entry boundaries, and we need to work within societal boundaries as well. And I think this is where the investment community and finance in general has lost a lot of trust in the world. And we've got a chance I think, to really gain a lot of that trust back if we are part of the solution. And, I do genuinely feel or that the private sector is trying to be part of the solution and sometimes gets a pretty bad rap when it's actually the ones who are trying to do things, because they're out there talking about them will often be attacked from people from the opposite side rather than the people who were doing nothing.

Nalini:

Exactly.

Fiona:

And it's frustrating.

Nalini:

Absolutely. I can't tell you how many philanthropists we've heard from during this week who've been talking about launching new growth equity funds or venture capital funds because that's kind of what we need to support at this transition. And they're putting their money where their mouth is. They're taking it out of their personal bank accounts, but that's not traditionally where the bulk of the capital that we are responsible for comes from. And so I think we just need to open our eyes to kind of new models and ways of financing, what we need.

Fiona:

Yeah. It's interesting too. I just wanted to come back to a point you made before about people feeling positive about COP from the finance sector. Because just before I came here, I was reading, someone attacked me on a LinkedIn post, that was a survey of people in the sector. I don't think they're necessarily people who hear it COP though. And they were saying that they don't weren't feeling as that positive about the, or what had happened. So I suppose there are very different views and maybe it is different if you're on the ground or you're watching from afar and you've got a certain coverage or

Nalini:

Right. Yeah. Yeah, no, I definitely had my share of that too. As you know, I'm representing BMO here today and I went to a lovely event yesterday, where are a lot of other Canadian organizations got together to have a pint over a panel, that was the name of the event. And somebody I bumped into said, "Well, why are you here?" And I was like, "Because, I work in Responsible Investment, I care deeply with sustainability and I think finance has a big role to play." And they were like, "Well, I'm just really surprised that banks would show their face here. That oil and gas companies are here" And it was interesting to see how different perspectives manifest, but at least we're here.

Fiona:

Exactly. As we said in the beginning, we all have to begin it together.

Nalini:

Exactly. That kind of attitude. We're not going to get a lot done. So yeah, maybe we can wind down. One last related to COP26 very specifically is I think investors were really hoping, and I know this is a big aspiration, that out of one of these COPs that we would start to move towards a global price on carbon. And I know this is an expectation with every COP that we go to, just wondered what your perspective was on that expectaion. Is it unrealistic? Are we ever going to see that come together?

Fiona:

Well, we investors for a long time through the PRI signatories through a number of initiatives, I think consistently have called for both a price on carbon and an end fossil fuel subs subsidies. And have been for years and years and years. So I, there hasn't seemed to be a lot of discussions so far that I have been involved in at COP that it seems to be advancing this. But a few weeks ago I did a session with the OECD person who looks, has been looking after global tax arrangements. And you will know that now there's just been this agreement that's been made around tax about the 15% minimum tax rate and the G 20 signed on a number of a number of countries has signed onto this. And he said to me that now that this is done, that they are going to move their focus onto the global carbon price.

Fiona:

So I felt that maybe through the OECD there could be that mechanism and it was probably the right mechanism working with the G 20. So I feel more hopeful now that there will be some mechanism to do this. To get to that global 15% tax took a long, long time. So I hope that it could be sped up that that's all and that we do have get some consistency there and across the world. I mean, that's not to say that there aren't countries who aren't doing their own work on carbon price and

Nalini:

Absolutely,

Fiona:

And border adjustments and all of, all of these kinds of things, but it would be better if we could have some harmonization and some consistency around the world.

Nalini:

Exactly. And I think for investors, consistency is the key and that kind of is a road block in a lot of ways. All right. So as we wrap up this week here at COP26, I'd love to get your thoughts and reflections for what we should be looking towards for COP next year.

Fiona:

Well, the next COP in Egypt. And so it'll be, I think there, we need a really strong focus on Africa and on the developing world. And we really need the developed world to step up with their commitments. And I hope that it can be that turning point that we really need. So, I'm really glad we're having the COP in Africa. And we of course also need to keep a focus on the pledges that have been made and are they being, I think we need to have, annual accountability about those things. But the key thing needs to be on how do we help the developing world who are really at the sharp end of climate change in all kinds of ways that are just exacerbated by heat issues, by poverty, lack of water, lack of sanitation and.

Nalini:

Really on the front line.

Fiona:

Yeah. And then we are not providing the funding that we said we would as the developed world. And I think this is where citizens need to get involved because I certainly expect my government to be, I pay my taxes, I expect them to be putting them to use. And this is one of the uses that I expect them to be,

Nalini:

Absolutely.

Fiona:

That they've committed to. And that, that I expect them to be following through on.

Nalini:

That makes a lot of sense. Well, with that Fiona I just wanted to say, thank you so much for joining us here in Glasgow to give us your reflections on COP26. It's been a pleasure. And to all of our listeners, we look forward to coming back for the next COP in Egypt and, and doing the same again.

Fiona:

Thanks for having me.

Michael:

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/sustainability-leaders. 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 at 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 undo 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.