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Why Changing Behaviour is Key to a Low Carbon Future – Dan Barclay


Disponible en anglais seulement

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 one of the key takeaways from the 2021 Milken Global Institute Conference panel on Investing in a Sustainable Business Transition. The panel 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, and was moderated by Milken Institute Senior Director, Innovative Finance, Caitlin MacLean.

In this episode:

  • Why the move to a more sustainable economy is more a revolution than a transition

  • How sustainable finance is one tool that’s incentivizing companies to transition

  • How technology is key to combatting climate change

  • Why it’s important to focus on a few key ESG areas rather than try and tackle every aspect of sustainability


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Disponible en anglais seulement

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.

Speaker 2:

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

Michael Torrance:

Ahead of the next Milken Institute Global Conference in May, we look back at some of the issues that were top of mind at its last global gathering in October. BMO Capital Markets CEO Dan Barclay joined a 2021 Milken Institute Global Conference panel to discuss how changing behaviours will be key to a low carbon future. The panelists discussed how stakeholders-- ranging from investors to consumers, employees and suppliers must play a fundamental role in the success of a sustainable future.

Speaker 3:

Please welcome the panel on investing in a sustainable business transition. Moderated by Milken Institute senior, Caitlyn McLean.

Caitlyn McLean:

Excellent, good morning, everyone. Excited to see you all in person. Thank you for coming to this first main session of the day. It's part of our sustainability track here at the Milken Institute. An increasingly bigger percentage of the program here at Global Conference. So we're excited for this session in particular when we're talking about how do we get to invest in a company's transition towards sustainability? Obviously sustainability as a topic has become increasingly of interest to our communities, to our companies. We've just gone through a pandemic, still going through a pandemic, and have seen a whole host of climate related weather events over the past few years. So increasingly feeling the effects of not being sustainable as communities and as businesses. So we're really going to focus today thinking about what are the actions and the investments that we need to be making now? Probably needed to be making 10 years ago, but really need to be making now to make that transition and hit the Paris goals and the net zero goals that many companies have.

Caitlyn McLean:

You've probably seen nearly daily that another company comes out and pledges to be net zero by 2040, 2050, which is very exciting. We're seeing investors increasingly interested in using ESG, environmental, social and governance factors to the tune of probably in the next few years $50 trillion in assets under management globally. So obviously it's a very important time right now and an inflection point for us. So the panelists that you have here are truly experts in this space and represent a word that has certainly become a buzzword recently, which are really the stakeholders of sustainability. So you all have their bios in your program. So we're not going to go through a long introduction, but as I go to each of the panelists, I'll just give a quick overview of who they are and where they're coming from. But to give the high level overview, Hiro, if I can go to you first, Hiro Mizuno, for those of you who don't know, but I'm sure that you do is the special envoy to the United Nations secretary general for innovative finance and sustainable investing.

Caitlyn McLean:

He was formerly the CIO of the government pension fund of Japan. 1.7 trillion. He said, "No, that's an important six point versus $7," trillion that he managed. He also sits on a few corporate boards. So Hiro, talk to us as you've seen, you're such a champion of this space and of having people not only be educated, but really they start to move towards action. So would love to hear about what you're seeing in terms of progress. We've talked and heard about some of the challenges and data disclosures, global frameworks and how companies are really thinking about this. So give us a high level overview of what you've seen over the past couple of years and what you're excited moving forward.

Hiro Mizuno:

Sure. Thank you very much. It's my honor to join this panel with the other distinguished panelists. And you forgot to mention I'm a special alibi to Milken Institute.

Caitlyn McLean:

Yes. That's your most important role clearly.

Hiro Mizuno:

Well here we are gathering to discuss how to save the world, but at least we are saving the Thai industry today. I've never seen this many Thais over the last 18 months. Some people call me a Mr. ESG or a ESG whatever, but my ESG journey started seven years ago at the Milken Global Conference. And at that time ESG attracted the selected group of people. And on the other hand the vice president Al Gore is talking about the climate change and the sustainability revolution. I find it very hard to believe sustainability transition is worse called as a revolution. But ever since, I think it's really worth that we call it. We should call it sustainability revolution is happening because it is probably as significant or comes with the same magnitude as the industrial revolution.

Hiro Mizuno:

And everybody has to think and act differently. And particularly the financial industry, I always, they ask you guys and ask myself to think what kind role the financial industry played during the last industrial revolution. It was not only like sitting on the fence and pick and choose and good ones and dump the bad ones. They are more proactive, accelerating the change to the new industrialized world. So I think today talking against the ESG almost became politically incorrect. So six, seven years ago I actually find it much more difficult to somebody who really agree that the ESG should be main or a core of a investment decision or financial decision, also the business decision or strategy decisions. But now it's became totally opposite. So now everybody says we do ESG or we take sustainability into our business strategy or financial decision making.

Hiro Mizuno:

But when we see enough actions, that's a question. So as far as all the different ESG issues are concerned, we have been pursuing, mobilizing the finance to accelerate to achieve sustainable development goals set by UN members. But also this year climate agenda, particularly the center of discussion due to COP26 taking place at the beginning of next month. And also this COP26 and also G7, G20 this year is the first time that the all the G7 leaders agreed to the same goal. That started this year with the president Biden's climate summit. And they led us to the G20, G7. And throughout those they are the series of global discussion. Sustainable finance became the main topic. Because everybody became aware that they're really shifting the world into sustainable society or sustainable economy. We need a huge amount of investment, and that money cannot be financed by tax.

Hiro Mizuno:

So we just need to promote the private investment to promote the shift, the transition. And that to do that ESG became the very critical tool or indispensable tool to promote the action within the financial or business institutions. But now we are reaching the point like, "Hey, okay, okay. We agreed with the ESG, which is important." We agreed we need to achieve net zero, but I don't know what to do today. And our industry, finance industry in particular, we need to be informed to do a good job. So this year one of the hottest topic is how to standardize ESD disclosure matrix or climate risk and opportunity disclosure matrix. And you may have heard that the tool, the COP26, the one big which I hope a lot out of that new initiative by [IFIS 00:09:08], International Financial Disclosure Standard to set up the sustainability disclosure, the framework.

Hiro Mizuno:

So this year we are going to talk a lot about disclosure and we are going to push the financial industry to use that. To be honest I really don't think the financial industry need the standardized information for them to start investing into these opportunities. But as you demand, we are trying to create a standard. For the businesses, I don't think you can spend a day now without talking or discussing sustainability in your boardroom or in your executive meeting room. And if you can spend a day without it, something wrong with you as an organization, you probably have to at least speak sustainability once a day in your leadership meetings.

Hiro Mizuno:

So we are trying to create at the UN level and G20 COP26 trying to help the private businesses, private investor with more data and a more standardized rule book. And I think should lead the whole economy and whole society move into the direction of sustainability very quick. So 2021 will be very critical year and when we look back in 20, 30 years, this is probably the year we will reflect whether we succeeded in changing the course of our society or our economy or we failed.

Caitlyn McLean:

Exactly. So no pressure to everyone here in the audience, but we have to start doing this now. No, that's great. That I think gives us a good scene setting. And I think one of the points you were making in terms of not letting the perfect get in the way of the good, we don't have the standards yet, but that doesn't mean you can't start acting now. Why don't I go to Dan Barkley who's the CEO of BMO capital markets. Dan, you've been advising clients. As a bank generally, you yourselves have been leading on sustainability, both for your own business practice but also for your clients. And I would love to hear your thoughts, especially because you have companies who are more carbon intensive, how are you thinking about making that transition and not waiting necessarily for those perfect standards, but really starting to prepare them for that type of disclosure, that type of data measurement that they're going to have to do.

Dan Barkley:

Yeah. Thanks for that. Actually Hiro's word on revolution is a great word. And we'll look back and I agree with a thesis that '21 will be the inflection point. The inflection point is really about behavior. I can tell you in corporate boardrooms across North America and around the world. We've moved from a philosophy of penalty and rules and I think of the word divestment and challenge into a conscious conversation about transition. And we're moving to a world where people are incented to transition. I sit in rooms today and we give advice on what transition looks like. And a CEO will say to me, "We've just put in place this program to adjust our operations, which is lowering our cost and driving up our cash flow." So when he thinks about doing the right thing for the environment, he's now creating an opportunity set where in the crafts way the company makes more money.

Dan Barkley:

So if you think of about that driving of behavior change, that's a virtuous circle of good. Good for the environment, good for the company, good for their investors. And as you watch that cycle change and whether that's a carbon intensive industry, whether it's a new business, as you start to see that incentive model start to work, innovation is faster, change of behavior is faster. The amount of capital they'll put to work changes rapidly. So to me this is the big year because when I think about investor conferences we would have held two years ago, I had lots of people stand up and say, "Investors don't get it." Now when they stand up they're competing to say, "We will be the best at transition." That dynamic is going to change behavior quickly.

Dan Barkley:

I think we're all on the same page when we think about the transition. It's not a bunch of really big, chunky things. It's billions and billions of little things that make a difference. And if every company does it a little bit better. Never mind the innovation of new business models, never mind the innovation of new technology, carbon sequestration. Got lots of new that we need as well. But if every existing business does it a little bit better, we'll be in a great spot by 2050. Now that may not sound like the crisis we want to create, but as a born natural optimist, when I see the right behaviors I know right outcomes will follow.

Caitlyn McLean:

And I appreciate that because Dan's coming from Canada. So we always appreciate good optimism. I'm a New Yorker. So let me add some pessimism to that for you Dan. No, I'm just curious if you could talk a little bit about what incentives you see that have really been working. We mentioned carbon sequestration and 45Q tax credits and things like that. What are you seeing as opposed to the penalties? Where are you seeing some of those incentives specifically really working?

Dan Barkley:

Well, let's use sustainable finance innovation as a good example. So believe it or not, it was only in 2019 the first sustainability loan got done in Canada. And it was tied to transition on behavior in a meat plant. So it was either lower methane emissions or better operations. We had the first energy company do a sustainable loan and some people could say that's not possible, but I would say it is. And they had three planks to their delivery that they're focused on. The first was on emissions. The second was gender diversity in the workforce, and third was gender diversity on the board.

Dan Barkley:

So when you think about ESG and not just climate, they were willing to make very public pronouncements about the change of behaviors. They were willing to commit that most publicly in turn of their employees to all their stakeholders. Then the banks came in and said if you deliver on your targets, you'll have cheaper financing. Is it materially cheaper? It's not. But what it really is is a set of intents to actually change your behavior. To me that's a great example of someone who said, "I'm going to be different. I'm going to change."

Caitlyn McLean:

That's great. So I think going back to something that Hiro is mentioning in terms of companies pledging to move forward and you were saying do a little bit better each day. I want to go to Anthony Pratt who has been growing businesses now for decades that have already been doing better. Have already had sustainability baked in for those of you who don't know, Anthony Pratt is the executive chairman of Visy Industries and Pratt Industries, the largest paper mill recycler in the world, the private recycler in the world. Anthony, would love to hear a little bit about, we're seeing all these companies want to transition and you guys really have been leading the pack for decades. So what are some of the lessons learned that you have from growing that business over the past few decades?

Anthony Pratt:

Well, I came to America in 1991 and I brought with me the recycling technology model that we'd perfected in Australia. You might say why didn't our other competitors in America do the same? And the answer is that in America trees are cheap and our forested competitors had legacy assets in the forest that their banks wouldn't let them write off. And you can't retrofit an old technology machine with recycling technology that is really a state of the art. Then came our initiation fee, for the next 15 years from 1991 to 2006 we endure the humiliation of our competitors saying, "Why would you buy schlock recycle boxes, when you can have pristine paper boxes made from trees." Then in 2004, Al Gore came out with an inconvenient truth that asserted that recycling is an important weapon against climate change. Because as things decay in the landfill, they make methane gas, which is 84 times worse for the environment than CO2. Landfills emit more carbon dioxide than all of global aviation.

Anthony Pratt:

And a recent McKinsey study showed that methane gas is responsible for a third of all CO2 emissions. Then Walmart developed a sustainability scorecard where Walmart's vendors had to have a certain recycled content and we were the only packaging company that were 100% percent recycled. Then on queue the whole packaging industry went into cyclical downturn. So we catapulted from number 46 biggest company in the industry to number five. So in the next 15 years, from 2007 to 2021, our sales grew from $300 million to $3 billion and that remaining private. And that required a big commitment to reinvest our profits into new plants rather than taking dividends. And in all we've invested to the value of $10 billion in these manufacturing assets. And I'm proud to have made a pledge initially in 2007 to invest $1 billion in recycling infrastructure and clean energy infrastructure at the Clinton Global Initiative in sustainable American manufacturing.

Anthony Pratt:

And then four years ago I made another pledge to invest $2 billion further into sustainable American manufacturing and we look forward to continuing to invest. This highlights the importance of technology in combating climate change. The Australian technology model that we exported to America was called a milligator, a paper milligator. Which was effectively a box factory, cardboard box factory like Amazon uses inside a paper mill. And unlike our competitors who had their mills in the forests and their box plants in the cities. So having the box factory inside the paper mill enabled a better nursing of the pre-loved fibers into the shape of a box that was just as strong as any box made from trees. This was great for economics for our customers. It was a low cost product and it was one that we built a sustainability narrative around, and that narrative was that recycling is an important weapon against climate change.

Anthony Pratt:

And after all it's wasteful to chop down a tree to make a box when you can make one out of recycled paper. And I can't overemphasize the importance of technology in being able to accomplish this. In fact now we've built five out of America's last seven paper mills, all 100% recycled. And we are now the only major 100% recycled paper company in the United States. And in doing so, we've created 10,000 well paying American green jobs doing it. Many of them are in the Midwest, so-called rust belt states, where we are part of the jobs and investment Renaissance. And we've just announced our 600% recycled paper mill in Kentucky with Governor Beshear which will be a billion dollar paper mill built in Kentucky. So we are hoping to be one of the people leading the push for ensuring of quality American manufacturing jobs and building new mills has been the key.

Anthony Pratt:

Because while the average age of a paper mill in America is 50 years old, this technology has enabled us to turn the most adulterated waste that was previously going to landfills into corrugated cardboard boxes. And it's also enabled us to make lighter weight boxes, not just recycle boxes, which means further savings for our customers. So we never enjoyed what Bill Gates refers to as the green premium. In fact it was the green discount. If we hadn't kept relentlessly reducing our cost position, we never would have revolutionized sustainability in our industry.

Caitlyn McLean:

Excellent. I think one of the things that you mentioned there in terms of the job creation component of it just emphasizes the connection between the environmental impact as well as social impact. So thinking about how you transition communities who were traditionally coal or steel and transitioning them to a green economy. So I think a very important point and thinking about the recycling component of it. Jorge, if I can go to you next. Obviously Jorge Mesquita who is the CEO of BlueTriton Group which is formally Nestle Water North America. So Jorge you're in the business of sustainability as well, obviously in terms of being a water company, you guys are a part of the Alliance for Water Stewardship, but you also obviously have challenges in terms of your need for innovation in better plastics and thinking about the recycling component of it. So would love to hear your experience. And I know that you're new to the position, but would love to hear your experience and how you guys are trying to think about sustainability, not just as a broad framework, but really with some specific targets in mind.

Jorge Mesquita:

Sure. I think the company I serve has done a lot of good work over the years to be sustainable and purposeful, and we're very proud of the progress made. But as Dan said, we have to take our game to the next level in order to meet our goals for the future. And what I've learned over the years, not only this job, but in other companies is it's really important to focus and to choose. ESG is such a broad agenda and if you try to do too many things you're going to move incrementally and really not move the needle in any significant way. So that's what we have decided to do. In our company right now we have three big areas focus. The first one is plastic and how do we move entirely to recyclable plastic?

Jorge Mesquita:

Our goal is 100% by the end of the decade, 50% by the middle of the decade, it's not going to be easy. As you know, the resin market is very tight and it's going to require as Anthony said very well, transformational innovation, but that's a big, big priority for us. Not only get 100% recyclable, we have a goal by the end of the decade we will collect as much plastic as we sell. So that's one big area. The other one is to continue to be very responsible and set the highest standards for water sourcing. We are heavily embedded in the communities that we serve. We have a really strong team of geologists, hydrogeologists, engineers, that work with the communities to really source water responsibly and make sure that we do so within our permits, and again with the highest standards. And then transportation. We want to have 80% of our transportation fleet on alternative fuels by the end of the decade as well.

Jorge Mesquita:

So it's in our way these are the areas that are most relevant for our model, the areas that matter the most for our consumers. And that's why we're going to be focusing. And I believe by focusing we can really make a lot more progress. I'll give you another example. The company that I serve on the board of [Mandalis 00:24:18] that are known as the makers of Oreos and Cadbury Chocolate. Huge company with a massive global footprint. A lot going on there in ESG but they focus on two things, responsible cocoa sourcing and reforestation. So that is my only point is here in order to make progress, you got to focus, have specific ambitious goals and then plans to get you there.

Caitlyn McLean:

Fantastic. I want to come back in a minute to talk a little bit about the challenge on the investment side, the financing side, in terms of the new technologies. Sherly, I want to go to you next. [Sherly Schenker 00:24:51] who's the co-founder and managing partner of Aim Partners. Obviously you are investing in the new technologies that we need. That companies need to transition. We've heard about the innovation that's needed. We've heard about the focus that it's needed. And at the same time it's a challenge to grow and scale these technologies to get to commercialization where everyone needs them to be to really integrate them into their businesses. So would love to hear from you what you're seeing in terms of some examples of those new technologies. It's not just solar and wind anymore. We really need to step up what we're investing in. I'd love to hear a little bit about that and maybe some of the challenges you see in getting investment in this missing middle group of technologies.

Sherly Schenker:

Sure. So we have a very high bar. We look to invest in companies that are not only reducing greenhouse gases, but are also providing access and equity as well as creating jobs in local communities. So from that perspective there are a couple of themes in the portfolio we are excited about right now. Low carbon footprint of food. To meet the growing demand for food is one of the priority areas for us. Using current agriculture and especially animal agricultural practices to meet the growing food demand is likely going to lead to severe greenhouse gases, biodiversity, water pollution issues. So we have been looking at enabling technologies like fermentation. Even in fermentation, we are looking at like solid state fermentation, which does not need the big infrastructure, steel bio reactors that other types of fermentations need. And there are companies like Atlast foods that are taking mycelium or mushrooms and growing alternatives to bacon, alternatives to seafood. Not only at cost parity, but also as a scale that's needed.

Sherly Schenker:

These products are meeting taste, texture, nutrition, and other criteria that the consumers care about. But the products are using a fraction of land, fraction of water, fraction of resources. And addition to that they're using some of the waste feed stock from farms as their feed stock. So from that perspective they're also not just creating jobs but also creating a product that's needed in the market. But what we are really excited about from a scalability perspective, that they're able to produce a product at cost parity with the existing products, and sometimes at better unit economics. Another company that we were looking at primarily for some of the topics that were brought up earlier on, in terms of transparency, measuring your own carbon footprint, and we have an investment called supply shift and what they're doing is collecting data and reporting on scope three emissions. 80% to 90% of the emissions in the supply chain are coming from supply chains.

Sherly Schenker:

But most companies are either able to monitor or have an idea of how to calculate them. This company is able to provide them scope three emissions data at the supplier level. From suppliers' perspective the suppliers are able to do a few tweaks and be able to see their own carbon footprint. The companies can see not just the carbon footprint of the products, but they can also see things like DNI metrics. They can see labor practices. They can see deforestation, water use, and some of the other related areas. In terms of talking about positive incentives, the suppliers are able to present their benchmark data versus their competitors to clients and have been able to create more business for themselves.

Sherly Schenker:

So that's a positive incentive for them to not just report, but to continuously measure and update their data. Because they're also finding that it's easier for them to access sustainable financing or get renewable energy access if they're able to monetize and monitor that data. Another company we are really excited about is not just sequestering carbon, but it has also come up with alternatives to some of the more carbon intensive traditional materials like steel and cement. So it's gratifying to see these products on the ground that are not just innovative, but they're actually in the market already.

Caitlyn McLean:

That's great. I think the seafood example in particular is really interesting because you're talking about the sustainability of our ecosystems, right? Thinking about the health of the people consuming it, but it's also traditionally the seafood industry has had had quite a bit of challenge in terms of labor, right? So of course labor and their supply chain. So you're looking at a whole host of environmental and social issues that you can solve. But that's important to then also make sure you have the right metrics to show, to tell that story. I'm curious on the financing side though, just to stick with you Sherly for a minute. As we've talked about there, the new technologies oftentimes do have that valley of death, where it's not yet commercial scale. It's not yet at the solar and winds level where investors are comfortable with a technology risk. You guys are targeting top quartile market rate returns. You have impact in your fund, but you are not at all meant to be concessionary in any way, yet there is a need for concessionary capital in this space. So talk a little bit about what you're seeing or what you wish you would see investors be willing to do or take on in terms of the risk return profile to help these companies really get to scale.

Sherly Schenker:

Sure. So we've been doing climate tech investing for almost 10 years. So we always joke we were doing it before it was hip to do it. One thing we've seen is that companies that are trying to solve complex climate change problems or serious climate change problems that are not in well funded sectors like transportation or energy or biotech, they really find it hard to raise capital. If they're not doing software, they find it hard to raise capital. The capital scarcity is even worse for companies that are headed by women or people of color. In this life cycle of a company, initially they do have access to grants, they do have access to angel networks initially, and then at the extreme end of the life cycle. Once they are profitable, when they have closer visibility to exits, there are a lot of funds waiting on the sidelines to invest in them.

Sherly Schenker:

In fact our team concluded that about over 1000 funds with under a billion dollars under management have made at least one climate change investment deal. So they're waiting on the sidelines, but the criteria is very strict in terms of the revenues they need, the amount of cheques they can raise. So from that perspective the missing middle continues to be a place where capital and resources are missing. I would say there is fiscal rigor that investment brings. So we like being in this space and we like being investors. There are times for policy, for metrics that grant funding is needed, but we always find best that if it's a for profit company to be able to progress moving forward using the fiscal discipline of investment is typically really best.

Sherly Schenker:

But I would say, I think this missing middle, I think there's an opportunity for returns. We started investing in 2018 in some of the sectors like alternative proteins, sequestration of carbon, data and security, which today those companies have raised $125 for every dollar we invested in. So the dollars have come in, but they come in a little too late. I wish they 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 main street.

Caitlyn McLean:

So Hiro, if I can put you on the spot since you're no longer the CIO. But to that point, obviously you guys have a certain level of comfort with risk, but a limited amount. So I'm curious what you think would have been appropriate for GPIF to look at in terms of an investment. Let's say the cement company that Shirly was mentioning. Do you see a time when investors like large pension funds are going to become more comfortable with looking at these types of investments? Because we're talking about everybody giving up a little bit of something, right? Companies are having to give up a little bit of something. So where the communities are, we're all paying more for this. Do you see a time when investors are going to be a little bit more flexible with their capital?

Hiro Mizuno:

Well, I think it depends on their constituency or the environment they're operating in. Some of the investor can go more extreme on. So like a social environment impact when they choose their investment opportunities. On the other hand, the pension fund like a public pension fund GPIF [Culpers 00:33:50], they are more strictly limited to make an investment decision based on just a financial return. That's what they used to call it fiduciary duty. What I see the hope in the way our industry is now transforming or capital market is transforming is we used to discuss that this kind of impact or something good for environment as a cost to the business or the cost to the investors. But now it's becoming more opportunities.

Hiro Mizuno:

And at the same time, I think the gap between the way the market price, the opportunity or the investment and the long term, the externality, positive and the negative of that investment opportunities is actually they're narrowing their gap. So the more ESG integration investor uses, regardless of what type of investor on that spectrum I just described, the gap between the social or the externality of that investment and internal financial return at a risk will continue to merge. We already saw ESG related default cases. So if some company is not very good at the ESG, they actually push their business into default situation. So you don't need to wait until their negative externality of that business materialize in 20, 30 years time.

Hiro Mizuno:

So not only because of the actual natural disaster they're hitting us, but investors' mindset is if they see negative impact of that weakness in some business in ESG, they can translate that into today is valuation. And with more and more ESG related or the disclosure matrix or information, that gap will continue to shrink. So at this point of time, we have to be careful because I used to try to keep me distant from the impact investment, because I knew I would only attract a lot of criticism saying like, "Oh, GPIF CFO become more social activist." Or an environmental activist. But now if you see the gap, it's narrowing. I was very encouraged by Dan's statement. Now it's really changing. Everybody see that an opportunity. And look, particularly climate, this is a guaranteed growth area.

Hiro Mizuno:

If you just add up how much fiscal spending already committed by G7 leaders, it's going to be a trillion. And when you talk about the other necessary investment, you are not throwing that money into the water or into the sea. If you invest, or if you cost, somebody will receive that money for their own business opportunities too. So we really need to change the mindset. It's just trying to just segregate impact, financial return or risk and return. Everything is more integrating and it's actually merging into the one core value, which is value to the society and value to the system. So what I like about ESG and SDGs is you cannot solve one problem by itself. Now when we talk about the energy transition, we talk about the other fair transition of their labor force. When we talk about auto- we talk about the impact on the community where they have a big factory. So everything should be discussed together and that's happening.

Caitlyn McLean:

That's great. I think Dan if I just quickly go to you before maybe grilling Anthony a little bit on his financing. Because we were talking about earlier this concept of stranded assets. And Hiro was just mentioning if we're thinking about this and assessing valuations based off of what potentially might be 30 years down the road a default because less sustainable business practice. I'm curious your thoughts about this concept of stranded assets and would we get there or do you have optimism, again, that the companies are going to shift enough where maybe these assets won't be "stranded."

Dan Barkley:

Yeah. Just permit me. I want to connect the dot in earlier, which is we think about the word corporate purpose. I think there's a couple sessions today on that. Once upon a time the corporate purpose was drive the most value for the shareholder. I don't think I know too many corporations where that's how they define themselves today. BMO's purpose is to build and grow the good in business and life. That doesn't sound like a bank. And when we take a look at that stakeholder analysis today or what we look into, what we have to deliver as an institution in our communities, we've changed a lot. I think about the investment business. What investor today doesn't have a social lens or a climate lens to what they're doing. It doesn't mean they're solely there, it doesn't mean they're a social activist, but they're no longer looking at it. And you could look at it with the risk or the opportunity lens as you look at that.

Dan Barkley:

To your point on stranded assets, the dynamic that I look at today is around how does it get priced and how does it get financed? So if you knew today a business was going to fall off a cliff in three years, I'm making that up. You're not going to get financed. So when we think about this concept of stranded assets, it's the idea that I put a large investment into the ground that cannot be returned. Energy transition is a good example. Energy is going to transition over the next 30 to 100 years away from fossil fuels. We can think that it will be accelerated, but until we have the replacement energy and I think we're going to have a really challenging next 24 months. We're seeing it in Europe today, where the investment in new hasn't made up for the loss of investment in old. So in commodity worlds prices just go up, that's where they go.

Dan Barkley:

So when you think about a stranded asset, in that context if you've got highly volatile commodity prices there'll be periods of time where they're worth a lot of money, and there'll be periods of time where they're worth less money. I think those are the things we'll watch. So I don't like to think of it in terms of stranded assets. I think it's capital is going to move, and to Hiro's point made earlier, you think about the valuation of energy companies, it's the lowest it's been in history, and that's actually the movement of capital out of the industry into other places. So it's pricing itself through risk or opportunity into the market.

Caitlyn McLean:

So in sticking with this theme of looking 30 years down the road and looking at longer term flexible capital, Anthony would love to hear from you a little bit more about some of the background in terms of the financing you were able to get and the green financing that you were able to get to expand as we've talked about with Sherly the challenge in trying to get new industries and new technologies to scale. And you guys were able to access, go to the markets and access financing that was a bit more creative and useful for you guys. So talk a little bit about that.

Anthony Pratt:

Yes. We financed ourselves in America largely through what are known as green bonds. That means that we borrowed 30 year debt, not from banks, but from pension funds. What fueled it was thanks to Mike Milken, our discovery of 30 year debt with fixed low interest rate and mortgage style amortization, which enabled us to remain privately owned in a very capital intensive industry, the paper industry. We were uniquely able to access them, because they were called green bonds which required that the waste paper otherwise would have gone to landfill. The waste paper was our raw material would have otherwise gone to landfill and we had to prove that. And in fact as a result of that, we built five out of America's last seven paper mills, all 100% recycled. We're now the only paper company in America that's 100% recycled. And as I said I was proud to announce last month we've got Kentucky governor Beshear, that our sixth 100% recycled paper mill will be built in Henderson, Kentucky.

Anthony Pratt:

The green bonds are 30 year debt with mortgage stole amortization at a flat interest rate to 5% with no refinancing risk, which is a big thing. The interest on the bonds are tax free in the hands of the bond holder. And without the access to these green bonds, we would not have had the courage or the appetite to make the billions of dollars of investment to enable us to grow in this very capital intensive industry. And because we've delivered five paper mills on time and on budget in our last bond offering, which was to embrace 250 million, we were oversubscribed by $4.7 billion. America is the only country with the tenure and secondary bond market to borrow this way. And accessing pension funds are vital to the transition to sustainability.

Caitlyn McLean:

That's great. I think obviously there's a huge demand as you mentioned in terms of how oversubscribed the issuance is, but I think there's also an inherent nature as you talked about of the greenness of your business. There is a challenge sometimes with greenwashing in the green bond market and in sustainable investing largely speaking. So it's great to hear how that has helped in the interest from the investors has helped you guys. Jorge, I'd love to hear from you and your perspective. As you said earlier, thinking about the financing that's needed. Anthony just mentioned some of the flexibility that they were able to get, but you mentioned margins and how tight things are. So how as a company are you thinking about using your balance sheet to invest in new technologies or try to drive some of that innovation given the market complexities that you have?

Jorge Mesquita:

Sure. So I've been around the consumer products industry for 30 some years and one constant that has been true throughout is increasingly consumers are choosing which brands they select, which brands they prefer based on their sustainability profile. And I would say that that trend is only accelerating with every successive generation, and especially the younger consumers. And ultimately the consumer is boss, the consumer who will decide. So historically, my first available dollar that I had to invest to grow our brands would go reflexively to marketing and promotion and demand generation activities. But if you have some vulnerabilities in terms of your sustainability profile and you don't address it first, all of these investments, they're going to go over people's heads. They're just not going to choose you. So we just need to think about investments in sustainability, strengthening our profile as a necessary part of strengthening our competitiveness in the eyes of the consumer and our preference in the eyes of the consumer.

Jorge Mesquita:

We need to accept that there'll be investments in packaging technology, in other areas that improve our sustainability profile, because that is the most important criteria for them to select which brand they choose. That applies to capital as well. We have a lot of needs to build capacity, to grow our business, to meet the growing demand that we see in the large economy. We have a lot of needs in analytics and digital technology. But sustainability has risen to that same level of focus and priority, again, because the consumer is really making very clear choices on that basis. So it's part driven by our purpose and our desire to do good while we compete. But it's also because we have no choice. The consumer is dictating, they're calling the shots, and we need to meet their needs.

Caitlyn McLean:

Do you think you have the ability Hiro was mentioning, pricing in these externalities. So pricing in what you are willing to invest because you see the market potential. Certainly we've heard when companies come out and make net zero pledges, their stock prices increase. There's a halo effect. I'm curious as a company how you guys are thinking about actually modeling what that consumer value and demand is on the sustainability front in terms of your market share.

Jorge Mesquita:

Sure. Well, I think the most important thing here is the reality is as we strengthen our overall sustainability profile, we're going to have to accept on occasion low returns on investment that are going to be not as attractive as alternative choice. This is why for us it's so important that we don't put all of our eggs in one basket, but that we have several irons in the fire of new technologies, new approaches, that we can validate quickly and determine which ones are the ones we can skill in a way that is economically effective. This is why Anthony and I were talking just before this, we live in Manhattan [inaudible 00:47:06], I'm dying to meet with them and with our teams to try to sort out some of the things that they're working on, what else can we do. So I think it's not just about investment. It's about investment in transformational technologies that can allow us to get a return that is sufficiently attractive.

Caitlyn McLean:

That's great. And you were mentioning potential collaboration here, which we love to facilitate at the Milken Institute Global Conference. But in the last few minutes that we have, would love for each of you to talk a little bit about maybe one thing you are most excited about or one thing that you really see that is critical that we need. If it's a policy, if it's better carbon accounting, if it's more flexible financing, what do we need? Because many of the folks in this audience could be potential partners. You all should be talking about this as you go to lunch later, what can we do to be collaborating? So we'd love to hear from each of you some of your thoughts of what's the most important thing we do next? Next at 11 o'clock, next week, next year. Shirly why don't I start with you?

Sherly Schenker:

Sure. So one of the areas we've been focusing on is the oceans. 70% of our planet is oceans, and only 20% has been studied or analyzed. So really excited about an upcoming investment which is using data analytics, AI, ML, and robotics to be able to provide real time information to industries in the area. But also actually really excited about the amount of attention ocean as a tool for decarbonization is getting at COP26. And this is the first time so much attention has been paid to it, so really excited about that.

Caitlyn McLean:

Great. Anthony, I know there's quite a few areas where you guys see the real importance in tackling next. So would love to hear from you as well.

Anthony Pratt:

Well, I think the continuing increasing in the focus on methane gas, I think methane gas is one third, a McKinsey study recently said that methane gas accounts for a third of all carbon emissions, whether it's through the waste management industry, landfills emit more methane than global aviation, whether it's the agricultural industry or whether it's the oil and gas industry, methane is huge. I think that our goal is to have landfills and double the recycled content in all manufactured products. And we're very excited about that.

Caitlyn McLean:

Amazing. Hiro, why don't I go to you next, in terms of, again, maybe on your corporate board position or through the work you're doing with the UN, are there one or two things that you're most excited about seeing. As we said, this is a landmark year. So what are you most excited about seeing next?

Hiro Mizuno:

Well, the board I'm serving [inaudible 00:49:54] and all the financial institution I work with and also UN, the other political leadership, everybody talking about sustainability, which is good. At this year more and more people started talking about 2050 net zero carbon neutral. If you go back to your organization, whichever it is, and if your organization hasn't committed to net zero 2050 scenario, that's the first thing I would like to hear. Because the reason why the capital market really struggled to price all these kind of things into the today's market is we haven't really agreed the best case scenario is going to be net zero. So I think that if this year more people join race to zero, that's UN combing the initiative, and also at the Glasgow COP26, we are gathering all the financial leaders from all the different sector to make a joint statement.

Hiro Mizuno:

We commit to net zero scenario, and we align our business to 2050 net zero. That will really change the way they price each investment. So without the consensus on the best case trajectory to net zero, we won't be able to price it properly. So please go back to your organization to see if they haven't committed to the net zero 2050, that's the first thing you have to do. And once it's done, market will shift directly to align themselves with the past agreement.

Caitlyn McLean:

Fantastic. Jorge.

Jorge Mesquita:

Yeah. I'd like to just address social sustainability as an area that is critically important too. I'm honored to be on the board of Humana that I joined earlier this year. There was a really interesting study they did about what are the greatest root causes for health problems for consumers and for people in the United States. They identified three areas. One is isolation. Being isolated, being alone. Second is food security and proper nutrition. The third one is lack of mobility. Inability to transport yourself around which relates to isolation. So they decided they're going to focus on those three things with great intent, with great purpose, and really investing to address these three root cause reasons for why the outcomes aren't as well as it should be.

Jorge Mesquita:

Obviously this has been exacerbated by the pandemic, but even prior to it, the economic divide in America is creating a lot of issues for people to have, again, minimum social interaction, transportation, and food security, which is hard to accept given the robustness of the economy and now it's grown. So I just think that all of us as companies need to ask ourselves what are the areas where we can focus on to really not only address the environment and climate change, but address the social sustainability challenges that we face.

Caitlyn McLean:

Definitely. And as we've seen, as you mentioned going through this pandemic the past year and a half, I think we've seen much more sense of urgency, in terms of acting in putting solutions forward. Dan, you're the optimist. So in the few minutes we have left, what are one or two things that you're most excited about or wish everyone would walk out of here and do?

Dan Barkley:

Well now I want to be the pessimist. I'm going to circle back something here said earlier which is around data. If you think about the challenge for a big bank it's scope three emissions, which really means what are the emissions of your clients, which then becomes the emissions of their supply chain. What you'll find the minute you start to crack that open and say, "I'm going to get in and figure that out." What you realize is you have no reliable information. And it's not none, that's an overstatement, but it becomes challenging. We can talk about standardization, we can talk about clarity, we can talk about different information sources.

Dan Barkley:

And the optimism that comes out of that is that once you have data and information, you can actually plan a change. And I've seen it time and time again, when you have information you didn't have before, and let's say it's showing you something in plastics, you will make a change to something different. That to me is the thing that gives me optimism, that cycle today of generating reliable, consistent, and comparable data across systems is really, really starting to accelerate. And the more we have the faster we can change.

Caitlyn McLean:

As many of you know, if you've participated in the global conference before, we'd love to share data with you as much as possible. So please join me in thanking the panelists here today and for their fantastic information and data that they've provided. Thank you so much. Please enjoy the rest of the conference. There are a whole host other panels on sustainability so that we can throw even more data at you. So please enjoy.

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, we're 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 2:

The views expressed here are those of the participants and not those at Bank of Montreal, its 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 statement. Investors are cautioned not to place undue 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.

Dan Barclay Chef de la direction, BMO Marchés des capitaux

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