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Sustainable Finance Has Become a Journey

Sustainable Finance March 31, 2022
Sustainable Finance March 31, 2022

 

The conversation around sustainable finance is changing, moving in just a few years from being a tagline used by a small subset of investors, to a phenomenon that is firmly entrenched and growing in the corporate and investor lexicon. Sustainable Finance has gone mainstream, being viewed as an opportunity – rather than just a risk – as companies seek to define their future as the world transitions toward net zero. Sustainable finance is now viewed as part of an ongoing journey to a cleaner, more sustainable world.

“Part of this is getting more clients, more companies, access to a tool that incents the investments they need to make and giving investors a way to see through to the impact that their investment is going to have,” Jonathan Hackett, Head of Sustainable Finance at BMO Capital Markets, said in an interview to mark the one-year anniversary of BMO’s Net-Zero Ambition. “As long as we’re providing that in a way that gives people confidence of the impact they are having, that is going to continue to proliferate and continue to find new places to go.”

Read on for the full interview with Jonathan, edited for length.

It’s been a year of change and evolution for sustainable finance and the climate change agenda. What would you say have been the main drivers of this evolution?

I think, as I look back across the past year, we all knew that COP26 was going to be driving the narrative, but what really amazed me was the effort that went ahead of it and the companies that were looking at their strategies and the opportunities that they saw and asking how sustainability and climate change fit into those. Certainly, the backdrop of TCFD - the Task For Carbon Related Financial Disclosures – and heightened expectations from investors, drove some of that as well, but I think people were really looking at it more broadly, not just from the investor relations perspective, not just from a “this is a risk that we have to manage” perspective, but from the opportunity side as well. That’s where, really, I think we’ve seen some of the change in our conversations with clients.

What have been some of the key developments in the sustainability conversation, and where do you anticipate change over the next year?

I think one has been the shift in focus from a broad conversation on sustainability to one that is more focused on net zero. There has been an evolution in people’s understanding, moving from a vague tagline to really trying to get to the meat around the bones of, “What does it take? What does it mean?” It is one of those concepts that is challenging for people, because net implies something broader than a unit element. When people talk about, “Are we a net zero company?”, the answer has to come from the economy level and the question has to be about their alignment to the pathways that are necessary to get there. I think that understanding, spurred by things like the Glasgow Financial Alliance for Net Zero (GFANZ), the Net Zero Banking Alliance and the Net Zero Asset Owner Alliance, really put that focus on this concept of net zero, and I think it’s really driven an interesting change in the way that we talk about, not just are you climate aligned, but where are you on that pathway? People are now getting to that next layer down of understanding.

Will this greater understanding impact how sustainable finance evolves, as companies work toward meeting interim targets?

Yes, that is where the discussion around Sustainability-Linked Bonds and Sustainability-Linked Loans has been really interesting over the past year. I think people used to talk about a Sustainability Linked Bond as an alternative to a Green Bond, where, if you were not spending enough on green use of proceeds, you could think about sustainability linkage as an alternative to create an alignment, and Sustainability Linked Bonds have done exactly that. They have created interim milestones and checkpoints and put teeth around them, but I think what’s also happened is a convergence of those instruments. The first questions we get asked when working with a client on sustainability linkage is, what are they actually spending? What are they doing to achieve these goals? In the case of Green bonds, or transition bonds, one of the key questions that needs to be addressed is your trajectory to net zero. What are your targets and how are you progressing?

And do you think that is going to advance or delimit the evolution of sustainable finance?

It’s going to advance it. Part of this is getting more clients, more companies, access to a tool that incents the investments they need to make and giving investors a way to see through to the impact that their investment is going to have. As long as we’re providing that in a way that gives people confidence of the impact they are having, that is going to continue to proliferate and continue to find new places to go. People and companies want more of that, and so I think that is going to help continue the growth rate.

What about for BMO? How would you characterize the past year for Sustainable Finance and how it, and your job, have evolved?

Over the last year, it’s been amazing to see exactly what we have done as an enterprise in order to, I think, look at the commitments we wanted to make and that we were making, and say, well, how do we support that. So, obviously the establishment of the Climate Institute has been fantastic. We now have a team of experts that we are able to draw upon that are able to support the work that we are doing and that is a highly differentiated capacity that we have as an organization. I think the other one is the establishment of an Energy Transition Group with the capacity and team members and the allocation of resources that comes with it across the entire shop. It underscores the extra focus that we are putting on building the capabilities we need to serve our clients. There is momentum across all parts of the organization; the scale that you get when every part of the organization is asking, “Well, what does this mean for me and how do I think about what I can do in this avenue,” is really amazing because it just opens up doors with clients across the firm. That is what you can get when you have people thinking about and hearing the messaging of our commitment around net zero and our desire to serve our clients by being differentiated in the space.

You mention the Climate Institute. How has it helped BMO’s net zero ambition and our work to help clients in their own transitions

I’ll give one great example. We were approached by a few different clients around understanding the future of the Canadian electricity grid and electrification. These were companies involved in power generation, in the natural resources sector, in different elements, all of them looking to understand the scale and the scope of the transition pathway. When some people think about electrification, they think it’s about replacing a bunch of things we have and plugging them in to the wall. That’s an over-simplification. We are going to have to build, not just generating capacity, but distribution and transmission capacity, and to understand the scale of investment, we need to have a top-down view. All of that to say that when they approached us, what we were able to do and which is highly differentiated, was to introduce them to the BMO Climate Institute; fast-forward a few months and Susan McGeachie, the head of the Institute, is now co-chairing the industry-led Electrifying Canada initiative. That’s a working role that reflects the expertise that the Climate Institute has and can bring, and that effort connects into multiple clients that are wanting to have insight into how they can invest and how they can deploy their businesses in the future in order to have an impact.

What have been some of the key developments in BMO’s sustainable finance offering and why?

There are three things that I would call out in the evolution of our sustainable finance offering. The first is Sustainability Bonds versus just Sustainability Loans. We have over the past year shifted the conversation from Sustainability-Linked Loans as an option, to being a part of a journey that can include sustainability linked bonds in the future. We are showing clients that Sustainable Finance is something that you build on, something where you are not just checking boxes, but saying, “You want to do a sustainability-linked-loan that is highly credible because you might want to access the Sustainability Linked Bond market or the Green Bond market, and that is something you can point to as a track record.”

The second, is around transition-labelled finance in Canada where there is not yet any framework, and we have really pushed with our clients to help them navigate that. We have great global examples, and multiple clients who have taken us up on, “How do we build that framework and, when the time is right, how are we going to issue into that space, knowing that there is some uncertainty around what the market expects and not having the guidance of a Canadian framework.” And that really leads me to the third piece, and what is really a meta point, which is that our offering has really shifted focus from simply helping our clients do a Sustainability Linked Loan, to focusing on how we can help them ensure it serves not just their sustainable financing but their broader needs: their stakeholder management needs, their equity needs and how they are talking to their investors broadly about the “greenness” or the impact of their business from a sustainability point of view. It means a shift to asking our clients, what can we do for you that is ground-breaking or first-of-kind? One of the most important examples of that is the Green Bond with Bruce Power that was the first nuclear green bond globally. So, it’s about not just looking to precedent, but saying, where do we, based on first principles, know that there is an opportunity to work with a client to have an impact and support them in their journey?

No conversation about sustainable finance would be complete without noting BMO’s leadership in the area of SLLs, what do you attribute that to?

I do think that that really does reflect where we have worked with our clients to give them support through the entire process. So, when we work with our clients on Sustainability Linked Loans, we don’t show up and say, “Let us know when you have targets and we’ll socialize them.” We work and facilitate dialogue internally within their organizations to make sure that they are choosing them in a way that supports their overall goals and, where they don’t necessarily have those goals, how to finalize them in a way that supports their sustainable financing needs. I think our willingness to roll up our sleeves and work with our clients where they are, to help get them ready, to bring them to market, is what I have most often been told that they value. We’ve been told we have a differentiated approach and it’s part of why we win mandates and part of why, particularly, we win mandates where we are not the incumbent within a relationship on a particular loan.

Why was it so important to form the Energy Transition Group?

The Energy Transition Group is our answer to serving clients who have a complex need. I think we always talk about having the right approach, but there is particularly a piece that is resonating, which has been saying that this is a complex problem that we cannot solve in silos. Energy storage and mobility and decarbonization of our power grid, these are interrelated concepts that need perspectives that sit in different parts of the bank and which this group brings to help our clients navigate them and deploy capital with confidence into the solutions that we need for the economy. So, when we bring together the best of BMO across those different pieces, it gives us a real way to win and way of supporting our clients that resonates well with them. I think the Energy Transition Group has given us the ability to build dedicated capabilities, but I think one of the key differentiators for it has been the interconnectedness and the federated model that really brings together people that are making a difference with all of our clients.

Read more
Jonathan Hackett Co-Head, BMO Energy Transition and Head, Sustainable Finance

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