Part 2: Talking Energy Transition, Climate Risk & More with Bloomberg’s Patricia Torres

Patricia Torres:

Face the data, because when you face the data, you understand how much work is there and left to do, and you have the opportunity to help, to jump, and to change the world. So don't shy away. Join us. Join us in the battle of climate. Join us in the battle of gender equality. Everybody has a role to play in the transition, and we need you.

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, its affiliates, or subsidiaries.

John Uhren:

I'm John Uhren, head of sustainable finance products and strategy at Bank of Montreal. Welcome to part two of our two part series with Patricia Torres, head of sustainable finance solutions at Bloomberg. In part one, we talked a lot about the outcomes and previews coming out of COP26. Today, we're going to dive even deeper into the role of sustainability and climate change. Patricia, thanks for joining me.

Patricia Torres:

Hello, and thank you John for having me, for the second time. It's a pleasure to be here with you today.

John Uhren:

I want to move towards opportunities or investments or new technologies because I think this area is super interesting. Specifically, let's talk about a few different types of greenish or green investments, technologies, fuels, and maybe the importance that you see for purposes of decarbonization. I'm thinking kind of three, principally. One, carbon capture utilization and storage or CCUS. Secondly, hydrogen, and I want to differentiate sort of green hydrogen, which is hydrogen produced by splitting water, using electricity from renewable sources versus blue hydrogen, which is splitting natural gas into hydrogen and CO2 and then storing that CO2. Finally, nuclear power. I'm going to plug BMO just for a second. We just worked with a company called Bruce Power here in Canada to do the first labeled green bond from a nuclear power producer in the world. We are very supportive of the nuclear industry and investors were very supportive of Bruce Power in this most recent bond offering. But just coming back to the three technologies, what do you think in terms of how relevant each of those will be for purposes of decarbonization in the future?

Patricia Torres:

I think they're going to be extremely important. One of our research arms, BNEF, is trying to understand which technology and which regulations, which policies are being placed to help us to navigate to net zero. This team has around 300 analysts solely focus on the letter E, environment, and focus especially on the transition to a low carbon economy on a sector, but also on a country basis. They try to answer questions like, "How can we get to 1.5 degrees?" They published the new energy outlook, which called the NEO, which is BloombergsNEF annual long term scenario analysis on the future of the energy economy and we try to answer questions, how do we get to 1.5 degrees? Would it be through wind and solar? Can we reach with LNG and carbon capture? Can we use it through a modular nuclear to complement wind and solar and battery technology like in the power sector?

Patricia Torres:

The BloombergNEF team has developed three climate scenarios. They call it the green, the gray, and the reds, that reflect dominant to the carbonization technology, through hydrogen carbon capturing storage or nuclear power. The green scenario is when we believe that we are going to be reaching 2050 with a clean electricity and green hydrogen net zero pathway. Gray scenario is a clean electricity and carbon capture and storage net zero pathway, which includes a little bit of the blue hydrogen that you mentioned. And the red scenario is a clean electricity and nuclear net zero pathway. It deploys small and modular nuclear to complement wind and solar and battery technology in the power sector and add so called red hydrogen, which is the manufacturer using electrolysis as green scenario, but this time powered by dedicated nuclear power plants. We don't think hydrogen or the carbon capture and storage and the new nuclear technologies will play a meaningful abatement role in the 2020s, but getting them to scale, it's going to be critical for these decades. Not just to scale, but also to establish strong standards for its own production.

Patricia Torres:

Let me zoom into hydrogen. Hydrogen is the most abundant chemical element estimated to contribute around 75% of the mass of the universe. However, even in the green hydrogen produced from renewables can have a global warming effect when it leaks through infrastructure and interacts with methane in the atmosphere. Even if you invest in hydrogen, if we see leakage, we can actually still contribute to a global warming potential that could be estimated to be around three times larger than the CO2 over 100 year time frame. This means that we cannot just invest in hydrogen. We have to ensure that we establish strong standards for hydrogen infrastructure so that we can ensure lower leakage rates overall, to ensure that we get on track to the 1.5 degrees. It's important to invest in these technologies. It's going to be critical for our success to scale them by 2030, but we cannot forget that. We also have to remember that we have to protect ourselves from any leakage that could potentially get us even worse to where we started.

John Uhren:

That makes a lot of sense. I think using this decade to scale these forms of technologies or fuels, and importantly, the last point you made there around investing in infrastructure, it's not enough to say, on their own, these technologies or these new fuels are the ways that we are going to abate carbon and minimize the emissions into the atmosphere. If we don't have effective infrastructure around them, they're insufficient anyway. They don't actually do any good if they can't make it to the end use, which is necessary for purposes of decarbonizing. I think that's taking the long view as it relates to the types of investments we'll be needed to make into these three areas. Question for you around the main ways you're seeing companies moving away from energy intensive operations and what's the impact on their businesses. Do you have any specific examples on how companies are incorporating sort of their own new processes to move away from energy intensive to less energy intensive operations?

Patricia Torres:

Yes. I have a very interesting example that I'd like to share with you. Let's go back and just revisit what transition risk is. The transition risk is a degree to which low carbon trends could disrupt business profitability and viability. If you think about coal or oil production, they face existential threats as demand will shrink under net zero targets. They won't be able to sell their fossil fuels. They're one of the most impacting industries by this transition. They know they need to migrate their businesses away from fossil fuels or invest heavily in carbon capture and storage. Our BloombergNEF research arm, they looked at 39 oil and gas companies and how they're shifting or not shifting their business to a low carbon worlds. And for oil and gas companies shifting means investing for example, in things like renewable power or the EV charging.

Patricia Torres:

When we look at the 39, the best company out of the pack was Royal Dutch Shell. Why? Well, not only Shell has made huge divestments in the last five years around 50 billion, but they also invested eight billion investment in clean energy. They are the leaders in battery storage capacity. They are the leaders in EV charging points. They are the leaders in carbon capturing storage projects and also in digitalization. We also look at them in a different projects. The BNEF also runs a net zero target project. We look at all the companies in the oil and gas, and we look at Shell, how do we score Shell from a net zero perspective? When we look at Shell, actually, they had the second best score of all the other companies in the oil and gas. We score companies based on their base dates, their target based dates, if they have a hard or a soft target.

Patricia Torres:

If they are absolute cuts or intensity targets, we look at the horizons if they have targets in the short term, medium term, long term, if they cover all the scope or not, if they're global targets, et cetera. The reason why Shell had one of the highest scores is because they actually have issued hard targets. They have targets in the interim, not just at 2050 targets and their targets were global and they addressed the three scopes. But even doing after all of these, when we run Shell's data through our temperature alignment score, Shell is still aligned with a 2.51 degrees for scope one and two in the next five to 15 years. But if you look at the long term and including scope one, two, and three, their score becomes much better. They'll have a score of 1.28 degrees Celsius, much better aligned with the 1.5 degree world.

Patricia Torres:

But now the question that our investors have to make is, "But what should I do?" Let's say that the investment cares only about scope one and two and they look at Shell in this context of five to 15 years, they still see the company is aligned with a 2.51 degrees. They also a part of the Net Zero Alliance for asset managers or for asset owners. And they say, "Should I have Shell in my portfolio? Or should I divest from Shell? Or should I ask Shell to sell their portfolio to private companies?"

Patricia Torres:

Do we help them finance with the transition or not? It's a very difficult question to solve because if you divest from Shell, you are not helping to solve the problem. And if you are asking them to also divest from their portfolio and sell it to private companies, you are actually moving those projects from a very huge scrutiny where they operate at a very high standards and you are relying these assets to be managed by private sector, a sector that potentially does not face the same investor scrutiny and does not have the same ESG reporting obligations. There is an argument that keeping the assets with these companies could be the best outcome while they transition to clean technologies.

John Uhren:

I was thinking, as you were talking around this theme of transition and whether or not it makes sense to, you're right, completely divest from certain companies in certain sectors, or if working with them through their transition. You mentioned a lot of the eight billion that Royal Dutch Shell is investing in clean energy and their leaders in battery storage and EV and CCUS projects and digitalization. These are material improvements that the company will make over time, they've invested and put money behind it. When I think about transition, it's a bit topical right now around this concept of transition labeled bonds, for example, and you may be familiar, ICMA came out earlier this year with its climate transition finance handbook. It was actually in December of 2020, really with the idea being, how can you finance companies as they attempt to decarbonize their operations in line with a long term transition strategy that ideally aligns with Paris as an example.

John Uhren:

I think the right approach, and certainly what we've seen, from Bank of Montreal's position, is really to work with companies that are truly committed to decarbonizing their operations, and if necessary provide financing, but provide financing in a way that allows them to achieve those medium and longer term goals. We're natural resource-intensive economy here in Canada, and to say that BMO and the other major banks don't have a decent amount of its lending book associated with oil and gas companies or agriculture companies or certain mining and metals companies. It would be silly to say that. We're a 200 year old bank and we've been supporting Canadian borrowers for a long time. But I do think this idea around transition and specifically transition bonds, I do think this is an area where, we as lenders and certainly investors, as they're thinking about buying a label transition bond, or buying a sustainability linked bond, they do need to, and we do need to, look hard at whether the borrower is meaningfully committed to transitioning its operations.

John Uhren:

To your point, whether they're setting really hard milestones along the way. It's not enough just to say, "By 2050, we're going to align with a one and a half degree scenario." That's not enough. We need to know the checkpoints along the way, and you describe that with a Shell example where they have taken the time to do that. And if you're looking in over the short term and they're still in that two and a half degree scenario, then that's one thing. But over the longer term to get to that 1.28, I think you said, degree scenario, that is something that they will need to be checking in and being very transparent in disclosing their progress towards that goal over time. To me, the transition bond labeled market, but just generally transition finances should be really focused on supporting companies as they try and improve over time.

Patricia Torres:

I couldn't agree more with you. At transition bond, it's there to allow the carbon intensive companies and industries, such as cement, steel, oil, and gas to finance the gradual shift away from fossil fuels. They are intended to signal the transformation of having emitting industries or activities, enable to be fully classified as green. I think this is the critical piece is that we know that these sectors need to transition away. We know that they have assets. We know that they have to invest heavily in that transition and we have to support them. I think the question is there, but we need to ensure that the money and the funding is going to the right place. In terms of transition, you see the transitions bond that can be issued-based or activity-based depending on what it characterizes them. The first transition bond, just to give you an example, was issue in 2017, it was a Hong Kong's main electricity generation company called Castle Peak Power Company Limited.

Patricia Torres:

The reason why they came to market and asked for money was to finance a need to build a gas fired unit, to replace coal at the time. It's still a gas fired unit though, back in 2017, but the reason is they wanted to move away from coal. It took two years for the second transition bond to be issued, which reflects that hesitation of, should we fund that transition and what classifies as a sustainable transition? This year we saw quite of a lot of issuance. We reach around 6.2 billions issuance this year. We saw a lot of issuance from Italy, China, and Hong Kong, like in Japan. But the problem that we still have in this market is the clear definition of what transition finance actually means and to what extends such instruments are environmentally sustainable. I think that we have to think about market standards.

Patricia Torres:

If you think, for example, you talked about ICMA, we also saw the Monetary Authority of Singapore also have tried to develop standards for transition finance. We also saw other classification like private classification, like the ones developed by Natixis and Cicero, and if I'm not mistaken, also CBI also came out with a definition for transition bonds. I think that I probably see a market that will develop over time. But again, it goes back to the same problem, which is we have to ensure that we have a standardized version of what the transition finance means or a transition bond means to ensure that it's credible, and we have a wider adoption, because let's be clear, we need to fund these industries to move away from fossil fuel. And this could be one of the solutions, but we need to have a standard that we can use across the globe so that people feel that the money is going to be funding credible transitions.

John Uhren:

Well-put, and I know the EU is looking at its own definition of what constitutes transition and certainly here in Canada, there's been a lot of work done on establishing a transition taxonomy that identifies exactly what you've described, the types of activities that would qualify for a transition use of proceeds type instrument. The work's been ongoing at the Canadian level. I think now there's some alignment with the sustainable finance action council or SFAC here in Canada, that sort of bringing the transition taxonomy, the current draft of its under its wing and is going to figure out what the next steps are as it relates to getting this document to market.

John Uhren:

But I agree with you, there's the need to have the consistent market standards and guidelines out there so that both issuers and importantly investor are on the same page as to what constitutes transition. Patricia, we focused a lot on energy and I just want to hit one more theme that I saw coming out of COP26 and that was really related to biodiversity and specifically, themes around agriculture and food production. Agriculture, forestry, and other land use account for almost a quarter of greenhouse gas emissions globally. But nevertheless, we need agriculture to feed people and we need forestry to build things. How do we mitigate climate change while still providing the level of food and nutrition that that people need?

Patricia Torres:

I think it's a great question. I don't have the magic answer, unfortunately, and there are so many different components to actually get it right. You have to think about govern policies. You have to think about the carbon markets, ESG policies embedded in supply chains, communities and so many other factors. As you may know, like we saw the first ever day focus on nature at COP26. One message was extremely clear from that COP26 day, is that we need critical alignment of climate and nature and international coordination if we want to protect, conserve, and restore the planet. Trees and forests are one of our major defenses in the warming worlds. They suck carbon dioxide out of the atmosphere acting as the so-called carbon sinks. They absorb around one third of global CO2 emit each year. As you shared, agriculture emits 14% of greenhouse gas and another 6%, if you include what agriculture does to forest.

Patricia Torres:

That percentage increases to 25% when you consider the entire food system, including processing, packaging, transport, and retail. Unfortunately, at every minute, we are losing an area of the forest of the size of 27 fruitful peaches. One of the biggest causes of forest lost, for example, in Brazil, is to grow soybeans, much of which it goes to China and Europe for animal feed for pigs and chickens. I think is it goes back to, is the solution that we all turn vegan? Look, I don't think that's the answer. When we look at Indonesia, for example. Indonesia is the world largest exporter of palm oil. A product found in everything, from shampoo to biscuits and for a long time, palm oil was the key reason for deforestation in Indonesia, but in 2020 deforestation within palm oil concessions was the lowest in Southeast Asia during the past years.

Patricia Torres:

The reason, it's because there were government policies were put in place, and we also saw that the buyers had no deforestation policies forcing their supply chain to adhere to that policy. Now if you think about why we're losing so many forests, we're losing it because of our agriculture, being it palm oil, coffee, or cocoa. The reason is because they actually provide a better source of living to small holders that leaving forest standing. Let's not forget that 36% of the area and their oil palm concessions in Indonesia, they were managed by small holders. For many small farmers, deforestation is a strategy to survive. For them, they're not thinking about CO2. They're not thinking about forests being the carbon sinkers. They are thinking about having food at the table for their kids, being able to provide education for their families.

Patricia Torres:

I think is we need to take into consideration that also biodiversity, for example, is another like important topic. Biodiversity, 5% of our population protects 80% of our biodiversity. We need to look after those communities and for us to be successful, I think we need to think about three things. The first one is, how can we increase crop yields? How can we produce more goods with the land that we have? How can we educate the small farmers to be better at what they do? How can we actually protect them, as well, to ensure that they actually have the means to survive, not just by cutting forests and also how can we reward their words and actually turn forests in terms of carbon sequestration. I think the answer is, as I said before, we need to think about government policies, we need to think about the communities. We need to think about the farmers. We have to educate them. We have to reward them with better crop yields and we also have to reward them for keeping the forest there and ensuring that the forest continue doing their work of carbon sequestration.

John Uhren:

To me, this is another example, just circling back on some comments you made earlier around how the developed nations can be supporting developing nations. Because a few of the examples you gave were palm oil from Indonesia as an example. When we think about things like improving crop yields or carbon sequestration technologies, like these are areas where the developed nations can create these technologies, scale them and then bring them to developing nations so that they be used in a meaningful way to support the communities in which the producers are operating. Because it's not enough just to say, "Do less deforestation."

John Uhren:

Even if it means you are going to not put food on the table for your family. That's not a good outcome in any scenario, but if we can be bringing them solutions to say, "Here are ways that you can enhance your crop yields in a way that uses less water, has less deforestation associated with it, improves the overall performance of what you're producing." It's really win-win at that point. Like a lot of these themes that you've referred to are just how can we all lean into support each other to produce a good outcome, it's a good economic outcome as well for both developing and developed nations. But more importantly from a climate perspective, these are things that can really move the needle environmentally and from a societal perspective.

Patricia Torres:

Exactly. I was just going to add that I was recently at a panel with Shell and Rocket as well, and we talked about palm oil. The question is what do we do with the small farmers? They depend on palm oil. They depend on that income to support their families. The answer is not, let's just ignore them. The solution has to be, let's help them. Let's educate them. Let's ensure that they have a means to survive, but in a way that is sustainable. The answer is not just to ignore people or pass the problem to somebody else.

Patricia Torres:

We have to be engaged and it's not just a problem that needs to be solved by governments. It's a problem that has to solve by every single corporation that is out there. I just feel that this is extremely the point. This is a global problem that everybody has a role to play and you cannot be indifferent to climate risk because it's going to impact you. An impact if we don't tackle it soon, it's going to be huge, to us and to the future generations. I think you need to think about that in your business.

John Uhren:

I want to touch on the intersection between gender and climate. The UN sustainable development goals really focus on people, planet, and prosperity. Do you have any ideas or thoughts around how the SDG related gender goals can be furthered alongside the planet specific goals?

Patricia Torres:

I don't know if you were aware, but at Bloomberg we run the gender equality index. We do a lot of work on gender equality. The reality is that it'll take another 100 years to achieve gender equality based on the current rate of progress. These numbers were based on a survey run by the Global Gender Gap Report that was published this year. It's just frightening that, especially with COVID 19, this really has exacerbated the issues that we see like on gender equality. We lost a lot of women in the work because these women had to look after their kids and their families. Let me just take you through some of the conclusions and the insights that we got from the gender equality survey. The gender equality is a survey that we send, is open, is based on voluntary disclosure, and it measures companies to assess their progress towards parity.

Patricia Torres:

It allows them to benchmark against peers and also highlights their public commitment to gender equality. Why do we do this? It's because Bloomberg, we really believe in transparency. We believe in data because we know that when you measure data, you can actually manage the problem. We also know that investors care about this data, as they want to know which companies are serious about equality given the strong correlation between employee productivity, talent retention, and stronger financial performance. Last year we had 464 companies participated in the survey and we rent them. We scored them and 380 scored high enough to join the gender equality index. Three highlights came out of the data. The first one is when companies have at least 30% of women on the board, they have more women in executive roles. The second one is that it's the percentage of women in management position that drives more women in revenue producing roles and also in the 10% most well-paid roles.

Patricia Torres:

If you think about you as a company, having 30% of women on your board is great, but the thing that is really going to change and move the needle, is how many women do you have in management position roles? It's not only helpful because it's drives the amount of room that we have in the higher pay buckets, but it helps you with retention of talent because when the woman that are at the bottom, they look at the top, they look up, what they see is that they see that they have a future in that company. The last insights that we took away from the data is that if we really want to drive KPIs at your company, you need to get those KPIs linked to the compensation of the management team. What we have seen is that whenever the compensation is linked to the diversity and inclusion, and it has specific KPIs, for example percentage of women in executive positions or percentage of women in management positions, we see a much higher increase of women in executive roles.

Patricia Torres:

We need everybody's help to push the equality agenda. This equality has to be part of the board's agenda because we know that if we tackle this collectively, we can change it. I think always our recommendation is the first thing you need to do is that you need to, first of all, measure where you are, what's your starting points so that you can create what your targets, where your goals are going to be. You can define your strategy, and then you can start measuring it as you go along in your journey. But it's really important that you start measuring those issues. Otherwise, we'll never get there.

John Uhren:

And kudos to Bloomberg for taking the time to measure, and putting in the work to say, "Look, if you really are focused on gender equality and diversity in the workplace, you need to have 30% women on boards. Here are the outcomes that you can expect to see if you hit that." But I think more importantly, our last two points around women in management position roles and compensation links specifically to gender related KPIs. Those will have direct, tangible outcomes. Those will move the needle. What we can't do is nothing because of a hundred years to achieve gender equality, which is, I think what you mentioned at the beginning, that's unacceptable, and you're right. We've seen this in North America as well with the she-cession, it's called, through COVID, in the last 20 months where just more women have found themselves unemployed.

John Uhren:

It may have been a hundred years when you did that data. Maybe it's even longer now and it's like, that's not acceptable. This really has to be a call to action for all companies in the sectors. Listen, Patricia, these are big issues and I've really appreciated your time today. Obviously some of these issues, both environmentally and socially, will take some time before we start to see material progress, but it's safe to say that we, as data providers, as companies, as investors, as lenders, as market participants, we have the ability to make meaningful progress and change the world, but there's no time to waste. I thank you very much, Patricia, for joining the podcast and keep up the great work.

Patricia Torres:

Great, John. I just want to leave with a sentence. Face the data because when you face the data, you understand how much work is there and left to do, and you have the opportunity to help, to jump, and to change the world. So don't shy away. Join us. Join us in the battle of climate. Join us in the battle of gender equality. Join us in the battle of making sure that you leave this world being a fair world and also equal and also clean because we need your support to make this world a better place to live. Everybody has a role to play in the transition, and we need you.

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 podcast, visit us at bmo.com/sustainabilityleaders. You can listen and subscribe free to our show on apple podcasts or your favorite podcast provider. 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 a 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 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.