What COP28 Means for the Future of the Energy Transition

Johnathan Hackett:

We often talk about the innovation around renewable power is not just on solar panels or wind turbines, it's actually about the power purchase agreements and high leverage finance that goes into accelerating the deployment of those technologies. The more we can bring those kinds of solutions to catalyze more capital faster into the places that it needs to be in order to drive the decarbonization of the economy, I think the more impactful we will be in driving the transition to a low carbon economy with our clients.

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.

Disclaimer:

The views expressed here are those of the participants and not those of Bank of Montreal, its affiliates or subsidiaries.

George Sutherland:

Hi there. I'm George Sutherland, senior advisor in the BMO Climate Institute. In today's episode of Sustainability Leaders, we'll be sharing key developments coming out of COP 28 and looking ahead to what this means for climate finance and the energy transition. To unpack this, I'm joined by Grégoire Baillargeon, president of BMO Financial Group Quebec and Vice Chair BMO Capital Markets, and Jonathan Hackett, co-head of BMO's Energy Transition Group and head of Sustainable Finance. Thank you both for joining me today.

Grégoire Baillargeon:

Thanks for having us.

George Sutherland:

Grégoire, you were on the ground in Dubai for COP 28 where there were more than 100,000 people in attendance. That's twice as many as COP 27 making this the largest climate summit to date. There were also a lot of conversations on the dichotomy of holding this cop in the UAE, a major oil exporting country, and in a city like Dubai. Can you provide our audience with a sense of what it was like to be there?

Grégoire Baillargeon:

First, it was a great privilege to be at COP 28 representing BMO and helping advance the matter on common efforts on the fight against climate change and addressing our emissions. The site in Dubai, the site itself was quite unique. The expo site in Dubai allowed all of these people to actually congregate on those grounds in a very effective and efficient manner. Having 100,000 participants in the blue zone. That's the main negotiation zone with every single country and many NGOs having their own pavilions to hold panels and conferences throughout the entire two weeks of COP is actually a very, very ambitious endeavor. It happened flawlessly. The amount of content that it allowed participants to exchange, there were panels in more than a hundred buildings at all moments of the day, every single day. It was quite unique. The site itself was something that allowed this cop to be special.

The other elements is, of course, holding this in Dubai, which may feel like a big dichotomy. Dubai is a symbol of excess, of luxury. It's an oil and gas city and oil and gas country. That does feel like an enormous dichotomy and it is. But at the same time, Dubai is this symbol of ambition, that nothing is impossible. That's what we need. We need ambition to actually achieve the transition that's ahead of us, the most ambitious global rapid shift in world economies we've ever done. That feeling of ambition, I think fueled the participant with a sense of optimism that has started to lack in the transition. We see this inertia and we lack optimism, but it gave a feeling of ambition.

The last element I would mention about the site itself, as you mentioned, this is an oil country and there will always be debate as to whether it made sense to hold this in an oil country, to have a presidency under Sultan Al Jaber that's also an oil executive. But there's two sides to that [inaudible 00:04:16]. One side is of course, for many environmental groups, this doesn't make sense. But on the other flip of the coin is the fact that for fossil fuel companies, for all countries, it actually made the presidency a credible party to put topics on the table.

George Sutherland:

And was the sheer size of COP 28 and the extent of private sector participation helpful or a hindrance?

Grégoire Baillargeon:

Well, sometimes we look at COP and we say, "Well, what progress really comes out of this?" And we have to realize that governments can only go so far in the transition. It is actually amazing that all the world governments would actually come to a consensual agreement on text that will guide the transition, but the keyword is guiding. They agree amongst themselves and where the world needs to go. They come back, they may set a series of policies that would actually meet the texts and meet the ambitions of those texts. But ultimately, the private sector is really where the transition needs to happen. All participants in the private sector need to come along. This is about transforming the entire economy. The participation of the private sector in those conversations is, in my view, the catalyst that can actually get the transition to really accelerate.

The fact that it was so inclusive this year, yes, inclusive of the private sector, but the sheer size allow inclusiveness of more indigenous nations, of more gender equality, of more justice conversations. Therefore there was a catalytic moment happening on site for conversations and collisions of, yes, many different points of views, but that's how human progress gets made. You get people in a room, you converse, you hear, you discuss, you listen to each other, and at some point solutions start to pop up.

To me, the participation of the private sector is in that sense, very, very positive. It is a legitimate concern as to whether the private sector should invade the same grounds as the primary negotiations. The thing about those negotiations is they have to be inclusive. We have to hear the voice of everyone. For many years, the voice of environmentalists are getting more and more present. Arguably they may be being a little less present because it was in Dubai this year, but the voice of everyone and the private sector needs to be part of the transition. It won't happen without it. To me, that was a positive all in all.

George Sutherland:

You've touched on this and given where COP 28 ended with a historic reference to transitioning away from fossil fuels, how relevant do you think the location was for COP 28?

Grégoire Baillargeon:

My personal view on this is I think it did allow a certain conversation to start at more ambitious places. If it wasn't in a country like this under the kind of presidency we had, it's actually difficult for a president of COP to put text on the table that actually could be seen as being too ambitious on transitioning away from current energy systems. Now, when the presidency is actually part of those energy systems, putting an ambitious text does not start at "You don't understand our point of view." Obviously he does. Therefore that I found was catalytic to put things on the table that facilitate conversation and the insertion of words we had never seen in text in the past.

I think overall positive. Early in the COP, methane was back on the table. Many countries agreed very quickly to tackle methane this decade, and then we'll talk about the text itself, but the unequivocal focus on the 1.5 degree, the Paris text does start to 2 degrees and 1.5 degrees creating confusion. But since the science has proved that we should really, really target the 1.5 path, and therefore that is unequivocal in the text, the focus on 1.5 and of course the words fossil fuels, transitioning away from them, those are first in the history of COP text. Therefore I find we have to say that may have been a positive. Now was there negatives to it probably as well, but we got to a good outcome.

George Sutherland:

Jonathan, there were several important developments coming out of COP 28. As mentioned, this includes new language regarding transitioning away from fossil fuels as well as eliminating methane emissions by 2030 and tripling renewable energy capacity by 2030. In your view, what developments from COP 28 will have the biggest impact on the energy transition?

Johnathan Hackett:

Yeah, I think it's important to distinguish between the different things that each of these types of goals or announcements they're trying to accomplish. Because we are really in a world where we need everything in large amounts. And if you think about those three that you highlighted, tripling renewable energy capacity really is about solving for the part where today as we grow energy demand globally, we've not turned the corner where that is being met on a zero carbon basis. We're still essentially adding to the carbon deficit as we grow the economy. Getting to the point where we're not doing that really is setting a foundation on growth that allows us to grow forward in a cleaner way. Eliminating methane emissions is actually mitigation. Right? You're talking about taking something that is a near term harm where methane has a disproportionate impact on warming on a shorter term basis.

On a longer term basis, it's actually one-to-one with carbon, but we now need to solve near term mitigation as well as our longer term deficit. That type of change really is important. That type of commitment to make a near term impact is important to now reduce the harms that will come from climate change in the near term. Transitioning away from fossil fuels, to me, is an aspirational statement that really does set the foundation for where we need to go. I think it will help to have it out there, but I don't see that yet having an impact on the energy transition. Part of that really is, is that goal of transitioning away from fossil fuels doesn't give a solution. All of the other things that we're talking about, tripling renewable energy, making multiples over that on nuclear capacity, all of that will really be a way of reducing the demand for fossil fuels.

But as long as we need energy to grow the economy, that the goal of reducing our reliance and reducing the use of fossil fuels is great, and having that explicit is great, but all these other pieces that create solutions and to Grégoire's point of the need to have corporates really driving the investment in the development of these solutions, those are what's going to be required to actually achieve that transition. Otherwise, it really is nice that it's there, but it won't be impactful unless we have somewhere to go to, not just a place to go away from.

George Sutherland:

As someone who helps customers transition to a net zero world, were you surprised by any developments at COP 28 and what will those developments mean for energy transition solutions post COP?

Johnathan Hackett:

I'll draw a distinction. I think there's always this question of what were you surprised by? Everything is surprising on a long-term basis and unsurprising on a short-term basis because the world has changed so quickly over the last 5, 10 years as the world has recognized the need to drive this transition to a low carbon economy. I think the goal around tripling nuclear capacity by 2050, that is one that if you said five years ago it was going to be there, I would've called that very surprising. We were still having the debate is nuclear green five years ago, and I think we've now gotten to a world where people recognize and understand the integrality of that in driving the energy transition and that we can't solve our problems solely with solar, wind and other renewable power like hydro, that we do need large scale investments and things that we can grow, and nuclear satisfies that. It's not just about maintenance, it's about growth in that space. That didn't feel surprising in November, but if you rewind several years, it absolutely was surprising.

The other surprise for me, and one that I think is still not a positive is that we've not made enough progress around the development of a global approach to the voluntary carbon market. We see this is a massive need when we talk about engaging the private sector, the ability to catalyze large amounts of capital into solutions that are removing carbon from the atmosphere, that are avoiding emissions and incentivizing change on a faster basis. That's something that we fundamentally need. It's disappointing that the frameworks and guidelines that would allow us to accelerate private sector engagement aren't being established as fast as I think we need them to be. When we think about the intensity of the journey we're on and the risks that these types of frameworks not being in place create for people engaging in those markets.

Grégoire Baillargeon:

I would add a couple of thoughts on the carbon markets and some of the observations coming out of the grounds. One of them is certainly the lack of progress on what is referred to as Article Six. The formal texts that actually allows for countries to figure out how carbon markets in one country would actually offset in others as things move around. That didn't advance as much as possible, so that's too bad. At the same time, the participants in the carbon markets, which were very present at COP, actually saw some positive developments, one of which is many of the organizations that actually look to the integrity of those markets. I think IC, VCM, VCMI, SBTI actually agreed to produce a set of guidelines that will actually be coordinated instead of different guidelines, which will facilitate the work both for credit producers and buyers of credits to actually understand how to meet some standards and actually have a good case to use credits in the right way.

That is a major development, which of course will unfold over the next few months, but could allow the markets to found their wings to a great extent, at least locally in various jurisdictions worldwide. That is, to me, an important development. In parallel to this, certainly a sense in many of the panels I attended on carbon removal and on carbon markets first, that the need for carbon removal, which was seldom discussed five years ago, is now well understood and not in a way to continue business as usual, but just in something additional that we actually needed in the toolkit, and second that the carbon markets are essential to get there, and therefore buyers are really shaping up their view.

They're educating themselves, they're understanding how to think of an offset and use it in the proper way, in a way that actually protects their organization and actually does exactly what the offset is supposed to do, which is fuel capital into the right places that actually provide solutions. It's about taking profitability from corporates and channeling it to solutions for the future. A couple of encouraging signs coming out of private conversations around the carbon markets throughout COP.

George Sutherland:

Related to that, this is a question for you both. I wonder what did COP 28 mean to you when it comes to the role of finance in addressing climate change?

Johnathan Hackett:

Yeah, I think I would echo what Grégoire said earlier that really we see now an evolution of COP from being a nation to nation discussion to a bringing together of all of the stakeholders and all of the participants that are necessary in order to drive this transition forward. Having corporate attendance, not just those that are uniquely interested, but all those entities that are affected and have an opportunity in this space is absolutely a great sign and a great indication of where things are going. One of the challenges is still that this is an area where we need to manage and reduce risk to increase the volume and the pace at which capital is coming in. The more of those pieces that are happening in terms of frameworks will be beneficial.

The other thing that happens though when you get all these people together is that understanding increases. That lack of understanding is often been a barrier to investment in this space. The fear of, "Am I investing against solutions that only makes sense in a one and a half degree target in a world that is going to be a three degree target or a two and a half degree target?" Those types of concerns and risks get mitigated the more time people spend there interacting with people and seeing that it's not just a few people that care on an island away from the rest of the economy, but that we have full economy participation.

Grégoire Baillargeon:

And I think another element is catalyzing finance for climate solution falls in the category of finance innovation. We all have very nuanced roles to play when you work in finance. Whether you manage a pension fund, whether you manage an investment fund, whether you're a bank having all sorts of facets to the financial equations. None of these players can take undue risk that's not rewarded, that is not part of the mandate. We need to find ways for risk and reward to actually make sense at a moment where we need to flood capital into relatively risky places to advance innovation and accelerate things. How do we do this? Well, part of this comes with we need to match concessionary capital maybe from governance. We need to match subsidies, we need to match philanthropy in the mix. We need to find different layers of capital, pull all of that together or provide government guarantees behind a number of things to innovate.

A little bit like we've done with BMO, with a number of our products in decarbonization, from retrofits to agriculture. We need to find packages that actually make it make sense for us to deploy capital and therefore for our clients to ask for our capital for the solutions. That innovation is one of the drivers that finance can really push, and it's our responsibility to continue to develop those solutions, which we'll do. When we say being a lead partner to our clients in the transition, it's that it's finding those products that allow them to make the right decisions.

George Sutherland:

What do you think should be the biggest focus after COP 28?

Grégoire Baillargeon:

Well, from my point of view, it's taking the momentum coming out of it and using it. This is not a conversation that should happen for two weeks once a year. It's actually a conversation that should take that moment and actually channel the momentum, channel the new ideas and gather momentum. The conversation's not done. It's starting. That's the most important thing. I call it building momentum, continuing to innovate. The other elements is there needs to be a common consciousness level about what carbon represents in our atmosphere. We've been focused on finding new technologies and ways to reduce emissions. Hopefully those technologies and those solutions, including renewables, are getting to a certain maturity level that's going to allow the curve to start bending on our emissions and starting to trend toward net zero. That's happening, and hopefully that curve is exponential and accelerates.

But at the same time, carbon is in our atmosphere. It's accumulated there, it's at levels that is unprecedented in millions of years, and we need to bring it down. Being at net-zero would actually allow the planet to do that naturally. But maybe before that, we need to start bending the global warming curve. Of course it's about nature. That is the natural process, and we need to restore ecosystem, restore forest, and make sure we suck as much carbon out of the atmosphere with nature solutions. But it will also require novel solutions. There needs to be a realization by all parties in the economy that the cost of carbon will get priced in some way. It is in our carbon tax in some jurisdictions, it is in compliance markets in other places. But all in all, this is just going to become higher and higher reality. The more carbon budgets deplete, the more that resource becomes a high value resource and therefore it will be priced. It will be priced at the proper price that allow those funds to channel to those who will remove the carbon from the atmosphere.

Johnathan Hackett:

I'll add I think there a particular opportunity and responsibility for banks in this space to bring the set of solutions and tools that we've used everywhere else in the economy to make things efficient, effective, seamless in how the economy moves and how capital gets to where it needs to be to innovate in how those tools are brought in to solving these problems. We often talk about the innovation around renewable power is not just on solar panels or wind turbines. It's actually about the power purchase agreements and high leverage finance that goes into accelerating the deployment of those technologies. The more we can bring those kinds of solutions to catalyze more capital faster into the places that it needs to be in order to drive the decarbonization of the economy, I think the more impactful we will be in driving the transition to a low carbon economy with our clients.

George Sutherland:

And is there anything else that you would like to add to this conversation?

Grégoire Baillargeon:

Well, when we think of all of this, I think we need to remain grounded in four things for progress. One is decarbonizing a business or anyone's personal life actually happens at clutch moment. You can actually decarbonize your transport at the moment you actually change your car or change your fleet. You can decarbonize your heating at the moment you change your heating system. Those clutch moments are the moments where decisions need to be made and where we, the banks, need to provide the right solutions to allow the right decisions to be made. But realizing that it happens at those moments I think is important. The second is cooperation. A business can not take difficult economic decision to decarbonize if the rest of its space and its competitors are not doing the same. Talk with your industry, make sure your industry associations are actually cooperating to ensure there's a certain level of progress that's getting made for the entire sector.

Otherwise, you'll get passed by some other player out there in the economy out there in some other country that actually decarbonizes over time. The third is it's a nuanced problem. And sometimes when we think black or white, we fail to understand the realities of each of the leaders sitting in all the seats across businesses or in households. We need to understand that making decisions is incremental and we need to listen to each other to understand each other's realities such that we can be partners together in advancing in this. The last one is educate. Make sure that people understand where a given sector, where the possibilities are, and of course, the root of the problem and the science, making sure that everyone is on board, understanding the state of things such that the right decisions actually get made.

Johnathan Hackett:

The only thing I would add there is just being in the room matters and the expectation that somebody else is going to find a solution that is going to not just solve climate change, but also will not negatively impact you as a stakeholder is hard to believe. It is a really hard problem. Finding solutions that work for everyone is going to be really important. That also means that we need everyone around the table. Grégoire touched on something there that I think is fundamental, which is those moments where solving this problem is easier. The total turnover of capital investment over the next 30 years is massive. That means that nearly anything that could be decarbonized by making a different choice will be up for grabs.

The hard part is when you make a choice, not being informed, not being connected, and then two years later look back and say, "If I had only known, I could have solved this problem cheaper, faster, better, easier, more aligned to my long-term goals." But if you don't have the right information when you're making those decisions, you can lock in really tough things to solve in the future that are going to require more investment and more change. That's exactly what we're trying to do by being so deeply involved in this is to be the representative of our clients in the room to think about their needs, what we are able to bring into those conversations to make sure we're getting to the right outcomes, and then to translate that back to our clients so that they have access to the solutions and to the right information to make the right decisions as they manage their business and their lives.

George Sutherland:

Thank you, Grégoire, Jonathan, for sharing your views on key developments coming out of COP 28 and what this means for the energy transition and climate solutions.

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/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.

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