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Changing Behaviours is Key To a Low-Carbon Future - Milken Panel

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Sustainable Finance October 25, 2021
Sustainable Finance October 25, 2021
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Over the last 18 months, increasingly more companies and governments have come to realize that the global economy must become more sustainable or risk an environmental-related collapse.

That was just one of the key takeaways from an Oct. 18  Milken Global Institute Conference panel on Investing in a Sustainable Business Transition that featured Dan Barclay, CEO and Group Head at BMO Capital Markets, Jorge Mesquita, CEO, Blue Triton Brands, Hiromichi Mizuno, Special Envoy of U.N. Secretary-General on Innovative Finance and Sustainable Investments – Special Advisor, Milken Institute, Anthony Pratt, Executive Chairman, Visy Industries and Executive Chairman, Pratt Industries, and Shally Shanker, founder and managing partner, AiiM Partners.

The hour-long panel, moderated by Milken Institute Senior Director, Innovative Finance, Caitlin MacLean, saw global experts drill down on how stakeholders ranging from investors to consumers, employees and suppliers must play a fundamental role in a successful transition to a low carbon economy.

Hiromichi Mizuno thinks the move to a more sustainable economy is less of a transition and more of a revolution. He equates what he calls the “sustainability revolution” to the industrial revolution in that for change to occur everyone will need to think and act differently. Similarly, during the industrial revolution, the financial industry didn’t sit on the sidelines – they helped accelerate change. That’s what must happen today, too.

“Now everyone says we do ESG or we take sustainability into account in our business or our financial decision making, but when will we see enough action? That’s the question,” said Mizuno.

Companies and governments must do more now, he added. The world is at a critical juncture, and there’s no time like the present to begin that transition. “In years from now, we will reflect on 2021 and on whether we succeeded in changing the course of our society or economy, or we failed,” he told the Milken panel.

Dan Barclay, CEO of BMO Capital Markets, agreed, calling 2021 an inflection point around behaviour specifically. The business world, he noted, is shifting away from penalty and rules-based philosophies, where words like divestment and challenge were common, and more into a conscious conversation about transition. Rather than a company getting punished for not being sustainable, they’re now being incentivized – through higher profits, cash flows, consumer attention – to embrace new environmental and carbon-cutting standards.

“When you think about doing the right thing for the environment, you’re now creating an opportunity set where the company makes more money and that’s driving a behaviour change,” Barclay said. “It’s a virtuous circle of good – good for the environment, good for the company, good for their investors. When I see the right behaviours, I know the right outcomes will follow.”

Embrace sustainable finance

Sustainable finance is one tool that’s incentivizing companies to transition, said Barclay. For instance, in 2019, a Canadian meat plant became the first company in Canada to secure a sustainability linked loan. The interest rate on that loan would drop as certain sustainability targets – such as lower methane emissions or improved operations – were met. Canada was also home to the first North American energy company to secure a sustainable loan, which tied its rates into emissions reductions, improved gender diversity in the workforce and more gender diversity on the board.

“When you think about these companies, they were willing to make public pronouncements about the change of behaviours,” he said. “Then the banks came in and said if you deliver on your targets you’ll have cheaper financing. It’s not materially cheaper, but it is a set of intents to actually change behavior. And to me (those are) great examples of people who said, ‘I’m going to be different, I’m going to change.’”

Adopt new technologies

Anthony Pratt, executive chairman of Pratt Industries, which creates sustainable paper packaging, said that tech is also key to combatting climate change. Years ago, his firm developed a technology that turned waste into cardboard boxes. At the time, companies were cutting down trees to create boxes. “If we hadn’t kept relentlessly reducing our cost position, we never would have revolutionized sustainability in our industry,” he explained. Pratt also stressed the importance of transitioning coal communities in the Midwest to green industry jobs. His own paper mills, he said, serve as an example of how that can be done.

A number of innovative companies are finding solutions to sustainability challenges, but can they manage to stay afloat long enough to become profitable? That’s the question panel host Caitlin MacLean posed to Shally Shanker, founder and managing partner at AiiM Partners, who posited, “the missing middle continues to be a place where capital and resources are missing, and there's an opportunity for returns. I wish [investors] would come in sooner and help these companies scale a little bit faster. But the capital is there at the sidelines, so we do hope that more capital moves from sidelines to the mainstream.”

Focus on specific ESG areas

Jorge Mesquita, CEO of BlueTriton Brands, a company that produces and sells bottled water, among other beverages, said it’s important to focus on a few key ESG areas rather than try and tackle every aspect of sustainability.

For instance, BlueTriton Brands wants all of its water bottles to come from recycled plastic by the end of the decade, which he says will require new technologies and “transformational innovation.” It’s also focused on improving the standard of water sourcing and it’s working with geologists and hydrogeologists to ensure they’re sourcing water responsibly. It also wants to have 80% of its transportation fleet using alternative fuels by 2030.

“Those are the areas that matter most to our consumers,” he said. “I believe by focusing we can really make a lot more progress.”

Mizuno wants business leaders to take that even further and commit their organizations to reaching net-zero emissions by 2050. That’s not only the right thing to do, but it will help capital markets improve the way they price assets. “Capital markets have really struggled to price all these things into today's market because we haven't agreed that the base case scenario is going to be net zero,” he said. “Without the consensus on the base case trajectory to net zero, we won't be able to price investments properly.”

Make use of data

Companies will really start to transition once they get better data from their business, added Barclay. While ESG standardization will help, companies must invest in data collection; for example, when companies know how their equipment is operating, the kinds of emissions they’re producing and how their supply chain is contributing to their carbon footprint, then they can change.

“Once you have data and information you can actually plan to change, and I’ve seen it time and time again when you have information you didn’t have before,” he explained. “That is what gives me optimism, that the cycle of generating reliable, consistent and comparable data across systems is really starting to accelerate. And the more we have, the faster we can change.”

Soon enough, the gap between what investors want versus what environmental activists are calling for is narrowing because more people care about a company’s value to society. “Everything is more integrated and it’s actually merging into the one core value, which is: value to the society and value to the system,” said Mizuno.

Barclay agreed. “Once upon a time the corporate purpose was to drive the most value for the shareholders. I don’t know many corporations where that’s how they define themselves today. BMO’s purpose is to boldly grow the good in business and in life – that doesn’t sound like a bank, but we have to deliver as an institution in our communities.”

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