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Investment Opportunities for a Net-Zero Economy

Sustainable Finance May 03, 2022
Sustainable Finance May 03, 2022
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Over the last decade, conversations around investing for an environmentally sustainable future have significantly changed, 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.

Companies are now realizing that achieving above-market returns is a more powerful and fast-acting catalyst for change than the stick of regulatory censure. “This is the greatest opportunity I’ve ever seen in my career,” said Dan Barclay, echoing the remarks of fellow panelists. “We’ve seen more change on climate in the last 12 months than we probably saw in the last 20 years before that.”

The seemingly sudden change in institutional investors’ thinking around sustainability illustrates just how much the reward system for the green transition has evolved. “Penalty systems have a slow flywheel for change. Incentive systems create rapid change,” Barclay said. “The conversation around opportunity is a flywheel for change and what we’ve been watching the last couple of years is that flywheel in action. It’s incredibly powerful.”

In the coming years, opportunities from the transition will require trillions of dollars in investments, which “is the biggest movement of capital in our lifetime,” Barclay noted. The movement will come with risks – and investment losses – but it’s BMO’s job, and the responsibility of other institutions, to help facilitate the transition to a lower carbon economy. “Our job is to give clients the best advice we can,” he said. “It’s the client that actually transitions, banks are the facilitators of action.”

Of course, creating the kind of just transition that drives BMO’s purpose today is easier said than done. While more companies and investors are putting sustainability front and centre, there’s been increasing resistance to change over the last few months. Rising inflation, climbing oil prices and Russia’s invasion of Ukraine, for instance, have caused some governments to backtrack on their climate commitments and repress carbon pricing. “A high carbon price is probably the fastest catalyst in the world to climate change,” said Barclay. “And yet we're pushing our carbon price down as hard as we can. That's backwards to the transition. Political expediency comes at the expense of climate.”

Better Reporting

Another challenge asset managers face when it comes to identifying green investments that also satisfy their fiduciary duty to maximize returns and minimize risk, is the lack of common reporting standards around environmental, social and governance (ESG) criteria. “What we need is transparency and comparability,” Barclay said.

CPP Investment’s John Graham noted just 35 percent of the companies in the public pension manager’s enormous portfolio provide carbon disclosure, with Barclay adding that that figure may be even lower across companies in BMO’s portfolio. Even still, it’s important for the bank to publicly pursue net-zero goals. “If you don’t actually lead with what you can see, it’s very hard for them [issuers] to change to something better,” Barclay said.

As a fixed-income manager, Pictet’s Raymond Sagayam emphasized the importance of bonds to the transition. Although they too lack reporting standards, so-called green bonds and ESG bonds represent the issuer’s commitment to change. It’s not as if investors are underwriting risky investments just for the sake of altruism. The green premium or “greenium”—the difference between yields of green and regular bonds—is currently “infinitesimally small,” Barclay said.

“We won’t subsidize an investment for a green premium,” added CPP’s Graham, noting that his organization frames every decision in terms of its mandate to maximize returns without undue risk of loss. That said, CPP has made a pledge to reach net-zero carbon emissions across its portfolio by 2050 and in its own operations by the end of next year.

There will be industries whose carbon intensity is harder to abate and developing countries—where two-thirds of the transition-related investments are needed, according to the OECD—have risk profiles that make them unappealing for many investors, but that doesn’t mean there won’t be opportunities there, said Graham. The commitment to net zero, he says, is like “signing up to run a two-hour marathon”—a feat that has not yet been accomplished. “It's a great ambition and we want to get there, but we have got a lot of training to do,” he said. “So, what we look for as an investor is putting in place a credible plan.”

Time to Unlock Opportunities 

Green infrastructure, and carbon sequestration in particular, is one potential investment area that has yet to be unlocked, in part because the economic model is still unproven. “We’ve got some huge projects that would make a material difference in the world and the math doesn’t work,” said Barclay. “How do we define who underwrites that opportunity and who gets the return and how safe or not safe is it? That dynamic is going to be one of the biggest impediments. We’re not having conversations about that in the right way, but that is the piece we’re watching today.”

To that end, BMO has created the BMO Climate Institute to think about these big issues and advise internal and external clients in an unbiased way.

In wrapping up the discussion, moderator Hiromichi Mizuno asked each panelist what they think is the greatest area for opportunity in the near term. Conway proposed digital green investments, while CPP’s John Graham pointed to the new minerals needed for electrification of the energy system. Barclay suggested emerging energy sources such as hydrogen. “We're going to see it’s got a natural placement, especially if it can get a transferable carbon price in the marketplace. If we can get that in place, that opportunity is going to be spectacular.”

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Dan Barclay Chief Executive Officer, BMO Capital Markets

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