Part 1: Talking Energy Transition, Climate Risk & More with Bloomberg’s Patricia Torres

Patricia Torres:

Why is the past so important? And the reason is because even if we stop all emissions today, the earth average surface temperature will climb another 0.6 degrees, or so over the next several decades before temperatures stopped rising. So it's not only about which countries are emitting today, but also who actually has polluted the most in the past. So we need money for mitigation and adaptation, and it has to be a problem that has to be solved by everybody. This is not a local problem, this is a global issue that we have to address.

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 3:

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

John Uhren:

I'm John Uhren, head of products and strategy in the Sustainable Finance Group at Bank of Montreal, on today's Sustainability Leaders podcast. I'm joined by Patricia Torres, head of Sustainable Finance Solutions of Bloomberg. Bloomberg recently hosted its fourth annual sustainable finance week with BMO as a presenting sponsor for the third year, sustainable finance week brings together corporations, clients, thought leaders, all for discussion on sustainable finance, focusing on ideas innovations that really drive environmental and social improvement on a global scale. And on the heels of COP26, which brought sustainability under the global microscope, this year's sustainable finance week was well timed.

John Uhren:

2021 has been an unprecedented year with sustainable finance hitting all time high in fixed income equities and other types of investments. We've now seen over a trillion dollars in green, social sustainability and sustainability linked bonds in 2021. And that's on top of close to half a trillion in sustainability linked loans. Money continues to flow into ESG labeled funds and we're seeing our performance vis a vis benchmark indices.

John Uhren:

There's also been a heightened focus on disclosure and performance metrics, which is a direct call from investors who demand transparency from the companies they hold. They want to know more about the impact they're having on the environment and society. And with movements such as the Net-Zero Asset Owner Alliance and Climate Action 100 Plus, we know investors will continue to be keenly focused on ESG performance. And when investors face the data, they have the power and financial capital to change the world.

John Uhren:

Patricia, thank you for joining the Sustainability Leaders podcast. Let's dive right into COP26, and some of the key themes and ideas that we saw that were discussed at that conference. First, energy transition. A number of countries made commitments to end reliance on coal, South Africa, India, others. What do you make of these announcements, and what do you think about shifting away from coal and whether or not it's actually attainable for developing nations in particular?

Patricia Torres:

Hello, and thank you, John, for having me. It's a pleasure to be here with you today. So going to back to your question. So it's the first time a COP deal referred to coal. At COP26, countries agreed to accelerate the facedown of unabated coal power and speed up the phase out of inefficient subsidies for fossil fuels. Today coal fire power generation still accounts for 30% of global CO2 emissions and fossil fuel support by G20 reach nearly $600 billion in 2020, and IA made it super clear to us that 1.5 degrees is out of sight if we don't phase out at least 40% of coal by 2030.

Patricia Torres:

So now let's look at India. So at COP26, India said that they would be net zero by 2070, and this was huge. And the reason is because they promised get 50% of its energy from renewable resources by 2030, and by the same year to reduce total projected carbon emissions by one billion tones.

Patricia Torres:

So now the question is, why was this huge and how big of a lift is that for India? So if you look where they are today, so today 73% of their power generation comes from coal and renewables only represent 20% today. And as I said, they want to reach 50% by 2030. They have one of the highest power demand per capita, and then one of the lowest CO2 per capita in G20. And as you also know, India is the world's fourth biggest emitter of carbon dioxide after China, the US and the EU.

Patricia Torres:

We put together climate sovereign scores and we ranked countries on how prepared they are to reach the 1.5 degrees, and India scored 2.15 out of 10 points, ranking on the 124th out of 135 countries. So there is a huge lift that India has to go through. And unfortunately we still don't have a lot of clarity on how they're going to get there without India economy and people paying a hefty price.

Patricia Torres:

They shared that they need $1 trillion for climate finance. And in this transition, we need to think about jobs, economic growth and inflation. So this is why India could not phase out on coal, but instead they proposed on phase down. But the problem that India has is they has... Okay. So on one side, I need to think about transitioning and investing in renewables. But on the other side, I also have the problem of climate risk. I have the problem that I have to transition, and I have the problem of actually facing physical risk.

Patricia Torres:

So we know that emerging markets are the most exposed to floods and typhoons and other things and devastated hazards. And this is why, for example, central banks in emerging markets like the Hong Kong Monetary Authority have asked banks to run physical risk scenarios.

Patricia Torres:

So the physical risk scenario focused on, for example, on Hong Kong's project its climate situation such as increasing temperatures, rises in sea levels and more intense cyclones. So I think to answer your question, it's attainable, but we need to ensure that emerging markets get help and get the support from developed nations to help them with the transition.

John Uhren:

I think that makes a lot of sense Patricia, I think it was almost at the 11th hour that the climate change deal was essentially amended to say, not phase out of coal, but the phase down of coal that you've alluded to in India and China and others positioned it and advocated for that change. You talk about a trillion dollars of investment needed for India, this is a massive undertaking.

John Uhren:

So to commit to phasing out entirely is almost impossible. And then you raise that, some of the social ideas as well around just transition and ensuring that they just don't have millions of people suddenly out of work and unskilled. And the final point around climate risk. I agree with you, emerging markets are so susceptible to climate risk.

John Uhren:

So it's not enough just to look at a specific sector or a specific form of energy, like coal, as an example, in a vacuum, you really have to look across the economy and across society. What are the major risks that these countries are facing and what are the ways that they need to look at all the different factors to make sure that they're making the best decision, not only for their country, but globally as we fight against global warming?

John Uhren:

So a lot of hairy issues, but we're going to circle back on a few of these themes. I want to come back to COP26 for a moment around a couple of themes that we heard a lot about around mitigation versus adaptation. And so for listeners, mitigation is around, how can we make the impacts of climate change less severe by preventing or reducing GHG emissions into the atmosphere? Whereas adaptation is really around the process of adjusting to the current and future effects of climate change. So with that, Patricia, what's the role of developed nations in mitigating climate risk faced by developing nations, such as India. And if mitigation fails, how can we help these nations adapt?

Patricia Torres:

I think it's such a great question. So I think what, let's go back to India, right? So India has, they have to think about how much money can I allocate to mitigation? So developing and transition away from coal, so reducing those CO2. Or they also have the other option is, even if I do it myself, but if nobody else does it, I still have to deal with adaptation, I still need to deal with physical risks impacting my country and impacting the jobs and the business and the GDP of the people that live in India. So this adaptation question is extremely important. So now the question is, but who should pay the price? So ultimately who is the country that is responsible for climate change and who needs to fix it? So the US has emitted more than 400 billion of CO2 since pre-industrial levels, twice as China.

Patricia Torres:

But now China is by far the biggest global emissions emitter, twice as much as US. So who should pay? The people that have polluted the most in the past or the ones that are polluting the most today? Why is the past so important? And the reason is because even if we stop all the emissions today, the earth average surface temperature will climb another 0.6 degrees or so over the next several decades before temperatures stop rising. So even if I stop today, the earth will continue warming up by 0.6 degrees. This is really important. So it's not only about which countries are emitting today, but also who actually has polluted the most in the past. So the question is, unfortunately, there's no right or wrong answer, so who should pay? I think everyone needs to join forces there. We cannot solve a problem locally.

Patricia Torres:

This is a problem that that has to be solved globally. And we need multilateral and coordinated action. We need to provide financial support to developing countries to fund the carbonization effort. So the reality is developing countries are the most vulnerable to the effects of global warming. And these countries face a huge economic impact because of this physical risk impact on their own countries. And they require a lot of capital to not only manage the transition through the mitigation, but also funds adaptation measure that will allow them to cope with more severe physical risks.

Patricia Torres:

So in the case of India, they said that they would like to have $1 trillion just for mitigation. Indonesia said that they will need 160 billion for mitigation, but we know that 1.5 degrees is no longer at reach. So with the current pledges that everybody has done in COP26 IA said that we can probably reach 1.8. Other organizations are telling us that given the pledges by 2030, we probably are on track to reach 2.4 degrees. So mitigation is there. So we need money for both, for mitigation and adaptation. And it has to be a problem that has to be solved by everybody. This is not a local problem. This is a global issue that we have to address.

John Uhren:

It really is. And it's one where there is no country, no government, no body of people, that's immune from climate change, right? And we truly are all in this together. And I started out by saying, when investors face data, they have the power and financial capital to change the world. And it's not just investors, it's also lenders, it's governments, it's all the financial actors across the market that really need to mobilize the capital. That's necessary to both developing nations as well as developed nations. And the technological solutions needed to address both mitigation and adaptation. But there's no single answer to say, we should focus entirely on mitigating this form of climate risk or climate change. It really is something that is going to change over time, but something we all need to be focused on improving.

John Uhren:

Now, coming back on climate risk, I have a question for you specifically on companies, governments, how they're measuring risk and climate risk specifically, and maybe I'll start with BMO's example before handing it off to you. We've signed on to the Net-Zero Banking Alliance earlier this year. And we made a commitment to align our lending portfolio with net zero emissions by 2050. Now I can tell you that our bank has rolled up our sleeves and we're working extensively on measuring and aligning our investment in lending portfolios with that net zero scenario. But it's a pretty involved process, right? We have stakeholders internally from credits, from risk, from sustainability, from treasury, from disclosure, from a number of different groups within the organization that are so focused on this, and really want to ensure that our portfolios are well positioned for the future. And so I'm curious, how our other companies Patricia that you've observed, or even governments, what are they doing to measure climate risk that they're facing?

Patricia Torres:

This is an extremely important is how do we measure climate risk, and how we're doing it across the board, across the buy side and the sell side? I'm not sure if you are aware, but Mike Bloomberg announced at COP26, that he will co-chair the Glasgow Financial Alliance for Net-Zero. These Alliance actually oversees the Net-Zero Alliance for Asset Owners and Net-Zero Alliance for Asset Managers, the Net-Zero Alliance for Banking, for insurance, et cetera.

Patricia Torres:

And in total, they have $130 trillion of assets and representing 450 institutions. So this problem is serious. And we really have to ensure that every single company and institution in the market knows how to evaluate the impact of climates in their books. So when we looked for example at the ECB, so the ECB published its first ever assessment of how European banks are adjusting their practices to manage climate risks in November last month.

Patricia Torres:

And the ECB concluded that the banks have taken initial steps towards incorporating climate related risks, but none of the banks is close to meeting all supervisory expectations. So before talking about climate risk model, the majority of the banks that don't have the basic data and ingredients to perform exposure based segmentation or sensitivity type scenario analysis that is required for the ECB climate stress test. And this is why we at Bloomberg, we care so much about getting the data, right? So as you rightly said, John, if you face the data, you can change the world. So what we at Bloomberg, we're trying to ensure they're providing the data that our clients needs to ensure that they are able to run the models.

Patricia Torres:

So let's break it down. How much data do you actually need? For example, you need asset level data for the companies. You also need to have their carbon data, their scope one, their scope two, their scope three. You need to ensure that you also are aware about their CapEX investment in sustainable products. You have to understand their assets. Then you have to understand climate data, hazards, floods, temperature spikes, and the location of those hazards and economic impact that these hazards had in the economy. You have to then integrate several physical and transition models like the IPCC, the NGFS scenarios, the Bank of England, the IA scenarios. Then you also need to agree on specific transmission channels in the economy and the financial system. So for example, how a carbon pricing will change a company's valuation in 2030, 40, and 50, and also how these carbon pricing will then impact the competitive landscape in that particular sector. So I think now the question is, who is right? So which model is right? So there are several people out there trying to solve this issue.

Patricia Torres:

There are several people trying to offer climate risk models, but it's important also to be aware that there's a lot of assumptions in these models. So maybe one model is not the right model. Maybe it's the combination of several models that get us there. But I think what is important to say is that it's important to start. So even though today, we only have an estimation of what the exposure is, of what the impact of the share price of the companies. And even though those outputs potentially are not 100% accurate, it's important that we across the board, we run those models and we became better and better and better. So that we're better and more sophisticated at understanding the climate risk that every single company that a specific set or their specific country has in terms of exposure and their economic impacts into their GDP.

John Uhren:

So who do you think it be leading the push to measure and report on things like climate risk? Is it something that should be government or regulatory led or is it private industry or is it Mike Bloomberg's new Glasgow Financial Alliance? Is it any one body or is it all of us together need to move towards the measurement of climate risk?

Patricia Torres:

I think it has to be all of us. So it's really important that all of us trying to tackle the problem, but it's also important that we have a standard. For example, that we have one model that people can run and everybody can run their books around those models. Of course, you probably have to tweak the models because not everyone has the same exposures globally, but in a way we have to ensure that the models are standardized, but you also have the freedom to potentially combine different models and apply a probability for a particular set of models and actually check how your book gets impacted, how your trading book gets impacted, how your lending book gets impacted, how your portfolio gets impacted by all these different scenarios. Because if you don't measure your risk, you cannot manage it. And I think at the moment, people need to realize that 1.5 degrees is still not at reach. And if you don't understand impact that 1.8 degrees has in your business, you are not going to change.

John Uhren:

And to the point you made earlier, it all comes back to data, right? It's having access to that data around asset levels and carbon and expected CapEx investments and physical and transition models. And just to plug Bloomberg for a minute, I mean, this is what you do. You're the top financial data provider in the world.

Patricia Torres:

Yes.

John Uhren:

So coming full circle, call Patricia, if you have questions related to climate risk, because you guys just house and store so much of that data about so many companies in the economy. So really interesting position that you hold as we look into the future as well from a climate risk perspective. Thanks so much, Patricia. Be sure to join again for our next episode in this two part series where Patricia and I dive even deeper into trending climate change and sustainability themes.

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/sustainabilityleaders. 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.

Speaker 3:

The views expressed here are those of the participants and not those of Bank of Montreal, it's 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 statements. Investors are cautioned not the 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.