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Dan Barclay at the 2020 Global Milken Conference

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Beyond Financials: The Importance of ESG

How are investors and corporate leaders addressing environmental, social, and governance (ESG) factors amidst a global pandemic that has made every day a fight for survival for so many companies? How do banks and investment managers help clients navigate ESG and remain profitable, and how is the investment industry evolving to accommodate appetite for products that go beyond climate change and also address social and governance goals?

These were some of the questions put to experts on the Beyond Financials: The Importance of ESG panel at the Milken Global Institute Conference this month, sparking healthy discussion about the depth of the sustainable finance market and whether it should be incentive- or penalty driven, and how ESG will drive economic development in a transition story that is not linear.

Video credit: Milken Institute

The panel was hosted by Financial Times reporter Billy Nauman and featured an hour-long discussion with Dan Barclay, CEO and Group Head at BMO Capital Markets, Pierre Breber, Vice President and Chief Financial Officer, Chevron, Lori Heinel, Deputy Global Chief Investment Officer, State Street Global Advisors, and Lydie Hudson, CEO, Sustainability, Research and Investment Solutions, Credit Suisse.

It was provocative from the start, with Chevron’s Pierre Breber challenging whether it’s even possible to go “beyond financials” in a discussion about ESG.

The title of this panel is beyond financials. I’m not sure we can go beyond financials,” he said in his opening remarks. “We need to do both, we need to earn good financial returns and we need to meet high ESG standards, and it’s not one or the other.”

His comments were echoed by panelists who agreed the conversation around ESG should focus on how to achieve a just transition AND support the sustainability of companies as we move to a lower-carbon world.

“In a world where you can create a good economic outcome from transition - it meets a social objective but also creates a return objective – there’s lots and lots of capital available. Where you have a shortage of capital is for ideas that don’t generate value,” said Barclay. “The best thing, for example, that we are doing as a bank, is to make sure we are aligned, that our investment policies are focused on the AND question, which we call transition, and creating that opportunity where we are having the right discourse with our clients about what they are trying to achieve, and it’s usually a benefit. “

Lori Heinel of State Street Global Advisors added to the AND question as well, underscoring her company’s basic investment premise to operate from the place of value creation, rather than values, while at the same time understanding how companies are thinking about their ESG footprints and how they are minimizing environmental impacts across operations.

“So we have this very active stewardship and engagement model where we are talking to companies around the globe about these issues and the lens that we always start with is, are these issues that are going to drive long-term value creation for shareholders,” she said.

Credit Suisse’s Lydie Hudson remarked on how her firm is in ongoing conversation with clients that are thinking about how to incorporate ESG into both their corporate and personal lives, and how COVID has reinforced rather than sidelined the trend.

“It’s an opportunity for us to be a great partner to our clients and, to add another word to the discussion, there’s the AND, but there’s also this idea of transition and we really feel that one of our obligations as a financial services firm is really to help our clients transition.”

These were just a few of the highlights from the Milken panel on how investors and corporate leaders are contributing to sustainable development and a smooth transition to a lower carbon economy in a way that addresses climate goals and socio-economic impacts.

Even amid the market volatility brought on by COVID-19, and fears the pandemic would put ESG on the backburner whilst companies focused on survival, panelists agreed the focus on environmental, social and governance concerns has only intensified over the past seven months.


Female Speaker: The Milken Institute Global Conference is the culmination of the important work our centres do throughout the year, and helps inform our agenda, going forward. Each of you participating represents extraordinary expertise and ability to mobilize significant resources and a sincere desire to be a force for good. And for that, we could not be more grateful. It is my honour to formerly acknowledge and thank the group of people who make this event and all the great work we do possible -- our supporters. 

Billy Nauman: Hi, I'm Billy Nauman, a reporter with the Financial Times and editor of the Moral Money Newsletter. Thank you all very much for attending. We have a great panel coming up here on ESG, Environmental Social and Governance, which is a huge trend that has been sweeping the investment world for years and really growing fast. Joining me today we have Daniel Barclay, the CEO of BMO Capital Markets; we have Pierre Breber, the Vice President and CFO of Chevron; Lori Heinel, the Deputy Global Chief Investment Officer of State Street; and Lydie Hudson, The CEO of Sustainability Research and Investment Solutions at Credit Suisse. Thank you all very much for joining today. 

So, ESG, as I mentioned briefly, has been a huge, huge topic for us at the FT, especially within the Moral Money Newsletter. And I think what we've really started to see is how this has kind of grown into the mainstream. A lot of people, I think, still think of ESG, social responsibility environmental governance issues, as sort of tangential to the core of "real business," but that really has been changing a lot, and I think we can get into that from many, many different angles on this panel. 

Just for a little bit of background, I work with Jillian Tett, our Editor-at-Large and U.S. editorial board at the FT, and I had to step in for her at the last minute to do this panel. And the first thing that jumped out at me when I looked at the list of participants, there are three financial companies and one oil major. So, Pierre, I'd like to start this conversation with you. What are you doing here? To put it bluntly, Chevron is an oil major. I think when a lot of people think of ESG, oil majors are not the first thing that comes to mind, you know, when we talk about climate change. Especially Chevron, I mean, we've seen announcements from companies like BP, Shell, about cutting back on fossil fuel production, cutting back on drilling. Chevron has not. So, what's your take on ESG and what has the feedback meant from investors? And what sort of ESG issues are you looking at at Chevron? 

Pierre Breber: Yeah, well, thanks, Daniel. Thanks, everybody. It's great to be back at the Milken Conference. I mean you said it well, ESG is a growing trend. We expect it to go in one direction and, you know, the title of this panel is beyond financials. I'm not sure we can go beyond financials, we need to do both, right? We need to earn good financial returns and we need to meet high ESG standards, and it's not one or the other. Being a great ESG company, but not making money and not fulfilling your fiduciary responsibility for shareholders, that's not good for anyone or society. And then just maximizing returns and not addressing very worthwhile society objectives also isn't good enough. So, we've been committed to both. We hold ourselves to the highest standards and we know society expects more and more and will continue to strive for that. 

The second point I'll make is that often it becomes just E for oil and gas, but I think at least in the United States, we're in the middle of a health crisis, an economic crisis and a social crisis, various serious concerns around racial justice and racial equity, there's gender pay equity issues, there's governance issues, there's diversity of boards, there are lots and lots of worthwhile causes. There's water issues, there's local air quality, so it goes beyond climate. I'll address climate change and energy transition, but we really look at ESG in totality and we, again, have high standards and expectations in all three dimensions. And again, I'll point to our board of directors, who are very engaged in all of this and the governance we have over decisions like strategy and the dividend. And so when we think about, you referred to BP announcements, and I won't talk specifically about any of our competitors, but there have been some changes and strategies; they've also been accompanied by very significant dividend cuts. And so, again, I think the importance of having strong financial performance and strong ESG performance is something that a company, all companies, should strive for. 

The last thing I'll say is I'm here in California, it's dark outside, and I apologize for that at 6:00 a.m. But California has as much climate regulations as anybody on the planet and has and we've been a good partner with the previous governors here in California and the current governor, and our products coexist with that. This is a state that pre-COVID certainly was thriving, jet fuel demand was growing, the freeways were, you know, filled with drivers, you know, agriculture sector. So, the demand for our projects is linked to underlying economic activity. This is a tough economic time, therefore it's a tough time for our company and our industry, but we'll get our arms around the pandemic. 

You know, the last thing I'll say… go ahead, Billy. 

Billy Nauman: No, I was going to say I wanted it… you brought up the dividend, and I think that's an interesting point, and I think that is a good way to kind of pivot into the rest of this discussion. Because, you know, your CEO said, you know – and this is to the Texas Oil and Gas Administration earlier this year – he said, "All our actions are consistent with our long-standing financial priorities, and number one is to protect the dividend." And one of the things we've seen is that sort of commitment come into question. When you look at a company's responsibility beyond shareholders, looking at stakeholders, this is a big part of the ESG discussion today. You know, you guys are a member of the Business Roundtable, which put out a statement last year claiming that stakeholders needed to come before shareholders. Your number one priority is the dividend. In service of that dividend, you're expanding fossil fuel drilling, you are not making a plan to cut back on these activities, which the science tells us are responsible for and worsening global warming. How is that, you know, how does that line up with a commitment to stakeholders? 

Pierre Breber: Yeah, sure. So what Mike said is our number one financial priority is the dividend. I just talked about how we have, it's an and world, we need to also meet ESG standards. And again, that's environmental, social and governance, all of them. I didn't get to what we're doing. We're doing a lot. We just started up renewable natural gas projects here in California, working with dairy farmers, it captures methane that otherwise would be vented to the atmosphere. We process it and we sell it to trucking companies and it's a low-carbon fuel. We have renewable power that supports our operations, and we just signed a deal with Algonquin to grow that in our business. We're going to be the first bio-feed refinery in LA. We'll co-process bio-feed with conventional feed at our refineries. 

So, we're doing a lot. I can go on. And more, we've got the world's largest carbon capture project in Australia, so we're going to learn about actually reinjecting CO2 and sequestering it in the ground. But what I will say is yes, we are not divesting away from our business and diversifying into a business that we don't know anything about. We'll hear from all the institutional investors. They have choices; there are lots of wind and solar companies. If you want to invest in the best wind and solar company, investors will do that. I'm not sure I can claim that we are the best at that. What we are doing is making our business lower carbon and we're making our business more sustainable for the future, and that's what ESG is about. So earning high returns, doing it in a lower carbon way over time. We have carbon reduction targets that lead in the industry in some ways in terms of we do it on equity basis, not just ownership. There's a lot of detail as we get into this. We can talk about our climate disclosures, which we were the first to do a TCFD-compliant climate report. So, I know we want to hear from the other panelists, but we're doing a lot, but it's an and world. We need to get higher financial return and we need lower carbon. 

Billy Nauman: It is, you're right. > I have a ton of questions on a lot of the things you just said, but we need to broaden this conversation out there. And I'd like to talk to Lori next as the institutional investor. I think, you know, looking at Chevron at the AGM this year, there are multiple shareholder resolutions on ESG issues, you know, from one-on lobbying, quite a bit of lobbying disclosures, one on Ecuador and the liability you're facing there and the ongoing legal battle on that. But going down the list, this is such a priority for institutional investors. And at State Street, with one of the world's largest passive management investment orgs, you guys have a lot of power to influence how companies are acting. Lori what is sort of the priority at State Street and for State Street clients in terms of engaging with, you know, whether it's oil majors or any other company on ESG? 

Lori Heinel: Well, first of all, our basic premises is we want to operate from the place of value creation, not values, right? So we have this very active, as you know, stewardship and engagement model where we're talking to companies around the globe about these issues. And the lens that we always start with is: are these issues that are going to drive long-term value creation for shareholders? Now, clearly, there are lots of things in the ESG domain that have impact on that. So, you know, you just heard Pierre talk about some of the things that they're doing. One of the things that we start with is we're not necessarily questioning the company's business strategy, but we want to make sure that business strategy is aligned with how they're thinking about ESG, you know, footprint. So, it's not necessarily divests from those companies that are engaged in fossil fuels, but rather are they good actors? Are they doing the things that are minimizing the environmental impacts? Are they aligning the way that they're dealing with their supply chain in support of that strategy and support of both the ESG, as well as financial strategy? 

I think that what's really important for us is that we want to see companies that are aware of the ESG impact that they have, not just today, but longer-term because things like stranded assets are clearly something that we're all going to have to deal with and certain energy companies and other kinds of companies are going to be more in the wheelhouse on that. And then how are they communicating to all their key stakeholders, including suppliers, shareholders, employees, others, and are they consistent in kind of driving that value creation through time? That's sort of the basis for how we shape our engagement model. 

Billy Nauman: Great. So, through that engagement, I think one of the aims, you know, certainly is to help companies move in the right direction if you identify that they are not properly assessing and accounting for ESG risks, whether that's stranded assets, whether that's human rights in the supply chain. There are a lot of different ways, I think, that the finance industry is being called on to push companies to "do better". 

Daniel, I'd like to come to you next. BMO, I know has a large presence in the green bond market, but what we've seen in recent months is sort of an explosion in other types of financing, green financing, transition financing, sustainability-linked financing, social bonds. What, from your experience, has been the most successful instrument from both getting exposure to companies in your portfolio that are moving in the right direction on this, and also helping companies to make a transition from being less sustainable to more sustainable? 

Daniel Barclay: I think I'd start off with two perspectives that we would share. First off is we act as a principle of the bank, you know, we lend money. And the second is that we're an agent and we facilitate investors wanting to put investments into their choice. And the dynamic around ESG, from a bank perspective, I like to word that Pierre used, we use it often, is the word and. We are huge believers in supporting our communities, huge believers in a strong economy, and we believe the world – let's use energy, I can use other industries as well – has a need for energy, but also has to have a transition. And a transition to a low carbon world. And so our job is a principle is to help facilitate that. And so you have things like sustainable loans, which are growing today. And in those loans what you've created is an incentive structure so that if one of our clients has some targets that they'd like to meet on the ESG, and it's E, S and G,  – and you start to touch on the breath of the change in the investment market away from just environmental – we're starting to see that they're using those incentives to assist them to transition faster. Transition and make their commitments is a way that we can help create an incentive structure around that. 

On the investor side, you'll hear from the other investors here today, there's lots of opportunity with investors looking for different styles of investment products today. And that's a demand-driven concept where they would like exposure to and would like to invest both with a return thesis and probably a social thesis. And that's the proliferation that we're seeing today where investors, both institutional and retail, are looking for new opportunities to invest in a different way. That's the proliferation product, so I think we're going to continue to see that market innovate dramatically over the next decade, because I think this is one of the macrotrends moving to the market place. And you're right, we started on environmental, we've moved into social, governance is a little more challenging in terms of unique investment products. But on the social side, we've seen a large number of very interesting opportunities this year. Either new businesses or new companies, that's a form of it, or new instruments to support the development of that. 

Billy Nauman: I think that's a really important point, and I'd like to go little bit deeper on that. We've gone 15 minutes or so without mentioning the elephant in the room, which is the pandemic and why Pierre, Lori and myself are not in offices right now. One of the concerns that we heard early on when the pandemic hit the West earlier this year, was that all of this ESG stuff was going to go out the window, that this was a bull market luxury that with companies being forced to worry about keeping their heads above water, they weren't going to be able to invest what they needed to improve on environmental and social metrics. In practice, that has not happened. I'd like to hear a little bit more about sort of what might have changed over, because from my understanding, everything was really, really focused on client in the E, and the effects of COVID have gotten worse and are now taking back up, that investors have shifted to more social aims. How are those deals taking place? What sort of structures are they happening in, and what are they setting out to achieve? 

Daniel Barclay: I think a good example would be some social bonds, and so people focusing on specific issues in society they would like to see change in. It's not related to the bank, but one of the charities I run has made an investment into social bond, which is to improve – or teenage pregnancies. So money was raised and it would be invested into a program, and if the program is successful, the investors earn a higher return. And that dynamic around trying to achieve a social aim through investment is growing. That's an example I'm intimate with, and there's lots and lots of examples of that. And it's really this piece that we talked about earlier, which is how do you create where the demand is there and investors are looking for this social opportunity and they're looking for a return? It's not separate; they're together. And those types of corporations have grown this year. The pandemic, as you said earlier, I thought early on there was a pullback, really, as people dealt with the crisis as it unfolded. We have seen lots of discussion and lots of great intentions, which we would love to make this a greener and more socially-inclusive recovery, and you're seeing that action play out in many, many places with some of our best corporations, with our best investors, our capital, innovation instruments, I think is a real story there, which is encouraging on all of the dimensions of an ESG. 

Billy Nauman: Great. Lydie, I'd like to come to you next; we haven't gotten to hear from you yet. You're doing something really interesting at Credit Suisse with this new sustainability research and Investment Solutions unit, which I the name is a little ironic. You know, being SRI, and SRI kind of being the old vision of what we now call ESG, where you are you investing on your values. But I think it's a really interesting case study in sort of how ESG, SRI, has been modernized and how maybe where it used to be a sort of ringfenced tertiary concern for a lot of financial institution, this is something that Credit Suisse is being implemented across a large, you know, the totality of the bank pretty much. Can you walk me through sort of the evolution of this or the creation of this unit and sort of the evolution of thinking around ESG at Credit Suisse? 

Lydie Hudson: Sure. And thank you for having me, it's great to be here from Switzerland. So, as some of the other panelists have mentioned, this is really a topic that's on the forefront of many different stakeholders' minds, including our clients, our alright investors in Credit Suisse, the communities that we operate in, and, increasingly, the regulators in the markets that we operated in. And we decided to go on offence on this topic and really bring together the entire force of the. So within SRI, we have our Chief Sustainability Officer, our Chief Investment Officer and our entire Research Organization, you know, they cover stocks and economics. And this is really our opportunity to engage on ESG very structurally for our corporate wealth and institutional clients, and as part of that we've named leaders for each division who are experts in the product services that matter to that division and to their clients. It's an incredibly important part of our journey as a company. 

You know, I think as a bit of background, you know, we are a Swiss firm, but we operate through many different countries throughout the world, and we have had tremendous success talking to our clients who have been very successful entrepreneurs and have established a certain amount of private wealth as well, and they are very much thinking through the implications of how they should incorporate ESG, both in their corporate life, but also their personal life. And I would just echo that COVID has really cemented this trend, or it's reinforced it, and it's an opportunity for us to be a great partner to our clients. To add another word to the discussion, you know, There's the and, but there is also this idea of transition, and we really feel one of our obligations as a financial services firm is really to help our clients transition. 

Billy Nauman: Great, thank you. You mentioned regulation, which is something we haven't talked about yet, but it is important. We're seeing carbon pricing growing, well, we're seeing more and more countries making carbon-neutral pledges. China most recently said they're going to be carbon-neutral by 2060. That's a long way away, but typically when China says something like that, they do it. There is a lot of regulatory burden coming down on companies in terms of ESG disclosures, carbon pricing, stuff like that. Pierre, I'd like to come back to you and get your perspective as an oil major. In the U.S., I think there's a lot less, certainly regulatory burden, then, if you want to put it that way, than there are in other regions. But do you expect that to change? You know, there's an election coming up and who knows what's going to happen there, but do you expect that we will start to see more widespread carbon pricing in the U.S.? And I'd also like to get your thoughts on some of the other regulations here, particularly around methane emissions, where Chevron was the only oil major, if I remember correctly, that did not speak out against the rollbacks on methane emissions, and kind of how that plays into this narrative around regulatory certainty and what you are faced with? 

Pierre Breber: Sure. So, well, look, we support the Paris Accords. We, the future of energy, will be lower carbon. I mentioned earlier we operate in California, it has as much greenhouse gas regulations arguably than any place in the world. Jerry Brown was one of the most committed climate change politicians. I wouldn't agree that there isn't a lot of policy in the United States, there's a lot, except it tends to be more at the state level, but it's also at the federal level. So, there's renewable power mandates, there's feed-in tariffs, obviously there's a renewable fuel standard that we've been operating under a long time. And so, as you know, policy gets done at multiple levels. 

So, look, society, the Paris Accords have a very clear ambition, and we support that to be carbon-neutral. That's not the same as saying every company needs to be carbon neutral. There are many companies, for example, I'm looking at Daniel, who sold their interest in assets in Canada in the oil sands. Those facilities are still operating, they're there just being done by some other operators. So diversifying away from your business, selling your businesses to someone else who is going to operate it, doesn't actually change the world's greenhouse gas emissions. We need to make tangible actions and make progress on this. And the examples I talked about with renewable natural gas, or carbon capture sequestration, or working on hydrogen and other technologies, renewable diesel, these are all meaningful actions that we think are both good for the environment and good for shareholders. We have to do this in a capital-efficient way. The energy sector in particular is earning too low overturns, and so we need the capital discipline, you've seen from Mike Wirth, strong capital discipline when it's in our conventional business, when it's in acquisitions and we bought a company – just closed on one last week – and whether it's with energy transition. 

Billy Nauman: Lori, coming back to you. When you were analyzing risk in the companies that go into your portfolios, how do you analyze the sort of regulatory risk, the transition risk, if it were, you know, whether it's on stranded assets or any other topic? 

Lori Heinel: Yeah, it's definitely a challenge. There are some 600 different mandatory or optional provisions enacted by about 84 countries around the world, and often times those provisions are not the same. So, they actually, if you look in the U.S., for example, there certainly are states that have enacted a number of green-friendly provisions. But at the DOL level, there's been actually a movement to try to take ESG in a different direction, right, and we were among many people who wrote letters against that potential role. So, it becomes very dicey, and I think that's why us focusing on the value creation sort of helps us stay above some of that fray. I mean, clearly, our clients want to have disclosure, they want to have reporting, they want to see that their investments are being enacted and having the kind of impact that they desire. So, we're actively working with our clients both to identify investment strategies that align with their own intentionality on ESG and then making sure that they can see that those strategies are delivering both on the investment outcomes that they need but also on the ESG outcomes that they need. 

We also take stances on important things. So, you know, you talked about how climate is really at the forefront, but I would argue that social issues have also been very much in the forefront for a long time and maybe accelerated most recently. But our efforts around gender diversity, for example, and the Fearless Girl go back many years now, and that's a place where we were able to find a thesis that was an investment thesis, sort of deliver that through a stewardship activity, deliver that through investment products, and ultimately drive change that we think was sorely needed. So, I think that the key thing is to be very centred on what it is that you ultimately believe in – and, again, that's why this whole value creation is so important to us – and then try to figure out, as Lydie and others mentioned, how do you transition, who are the winners and losers, how do you think in terms of longer-term impacts, not just this quarter or next quarter, and then ultimately serve all your stakeholders, whether that be the corporations you're investing in or the clients that you're serving. 

Billy Nauman: Great. Lydie, I'll come back to you. You know, taking up on this issue of transition, we saw over the past two weeks some very large banks making commitments to align their portfolios with the Paris Accord or with some version of net zero by 2050, you know, thinking about JP Morgan, HSEC, two of the most recent ones. At Credit Suisse, what is your perception of the power of financial institutions to fix the problems facing the world? You know, what is the responsibility of investors, you know, if fiduciary duty tells you you're only responsibility is to make as much money as you physically can, why are banks stepping in on this? Is that a reflection of this new vision of stakeholders, or is it more of a shift in thinking that there are no profits on a dead planet and, you know, taking a more long-term mindset on how you allocate your assets? 

Lydie Hudson: Yeah, well, I think it's – I won't answer for the whole financial services sector, but I do think that at Credit Suisse we believe very firmly that we have the opportunity to help our clients transition. And in many cases, there is fairly strong appetite, and so, really, the question is what does that pathway look like? And so what you're seeing coming out of many of these announcements by the financial services sector, and they all use different numbers and statistics based on the underlying business, but it's really an attempt to be a part of that transition story, which is not linear, and it's long-term. Some sectors obviously can go faster than others, but I think we all recognize that capital is needed to fund the transition. And so there is a very important opportunity for the financial services sector to play a play a part in that. 

So, really, when I'm talking in that regard, I'm talking about with our corporate clients, like a Chevron or others, but on the wealth management side and really thinking through how we service the investable appetite around this topic, this is where you really begin to see how our wealth management clients' needs are shifting and their risk appetite is shifting. And coming back to a point, I'm forgetting who said it earlier, but really looking for sustainable returns. And so the thesis here is that by being part of that transition and really investing into more sustainable assets, that we're going to be able to deliver on our fiduciary responsibilities more effectively. 

Billy Nauman: Great. Daniel, would you like to add that? 

Daniel Barclay: I thought I would add just a slight perspective around this. When you think about a financial institution, the community we live in is the clients that we deal with. And when I think about our approach to sustainability, it's really been around this discussion you started earlier around stakeholders, stakeholder engagement. We, for a long time, just based on the way were built and the nature of our institution, is a community-based organization. And so in discussion, let's say, the motive, which was kind of implied in some of your questions, and the motive is really around how do we help the communities that we work in? And by helping our clients, helping our communities, we're helping our business. And so the second comment I wanted to add was this dynamic today around the discourse, where we need to be thinking about the word incentive as opposed to the word penalty. And anything that is for the good of growth that is permanent, sustainable, typically comes with incentives. Those that come with a penalty or rules-based over a hammer, if you like, typically end up in bad outcomes where we have misalignment of resources, unintended consequences, and changes that we get aren't necessarily there. 

You know, a great example is the energy business, where today there's an incentive to behave and to do great transition, and most energy companies are great corporate citizens and are moving on a path to transition.  The real driver around the energy business is both supply and demand, and it's the demand side of the question that we actually need to spend a lot more time on, which is consumer consumption. How do we move, what do we care about? And those dynamics where we set up market pricing, we set up incentives, you'll get to great outcomes. 

Great. Lori, I'd like to come back to you. You mentioned the DOL and some proposed rule changes there. Before I do that, though, I want to remind our guests using the app to please keep your questions coming in. We'd like to reserve some time at the end for audience questions, so please send those our way so we can we can make sure that we have enough time to get those answers. 

But on the topic of rulemaking in the U.S., you mentioned the DOL and a proposal that would curb the ability for retirement plan sponsors to include ESG funds in their line-ups, and that's a huge market. There also have been some changes coming from the SEC that are negatively affecting ESG. I'm thinking about 14a-8 changes that that make it harder for shareholders to submit proposals. Engagement is obviously a large part of what investors – or at least one of the levers that investors can cull in the ESG world to help push companies in the right direction, or at least get answers on ESG risks that they may want to know more about. What is your take on this change? Is it going to be substantial? Is it going to hurt the ability of investors to have their voices heard? And is that detrimental to the ESG investment market as a whole? 

Lydie Hudson: So, those are great questions. And again, as you can appreciate, our views on this is that investors do need to have a voice. Investors do need to engage on these issues, and investors need to understand what companies' ESG footprints are. So that's the starting point. I think one of the concerns that we saw in some of those legislative efforts, or those rulemaking efforts, was concern that somehow investors would not understand that they would actually just be putting these sort of non-pecuniary ESG interests first, and that that would actually be compromising to investors who ultimately are fiduciaries or stewards of assets and have a responsibility to folks on kind of traditional investment outcomes. But what we've tried to demonstrate is that it's not an either/or, that you can have strong investment outcomes. And, in fact, often as a symbiotic relationship in that some of the ESG parameters actually drive long-term value creation. So, whether it's the companies that leverage diversity better, or invest more in their human capital. We saw during COVID that a lot of companies that were better prepared to deal with the pandemic in terms of worker readiness, safety measures on behalf of their employees, etc., actually weathered the storm better. 

So, I think that a lot of the rule-making is really to try to protect investors from doing things that are going to be bad for them or that maybe they're over-focusing on the ESG outcome. But we actually think that that's misguided, because in fact, focusing on the ESG outcome gives you a lot of insight into the investment outcome. 

Billy Nauman: Great. Pierre, I'd like to come back to you on the topic of investor pressure. I mentioned earlier that at this year's AGM there were a lot of ESG proposals, all of which it was recommended that shareholders vote against. One of them saw some success in terms of asking for better disclosure on climate lobbying. The other lever that investors can pull, obviously, is divestment. And we've seen, you know, Norwegian Sovereign Wealth Fund divest from Chevron, we've seen the fossil fuel divestment movement sort of sweep across the university endowment space. I'd like to get your thoughts, hear about your experience with investor engagement and what actually moves the needle, what you have to respond to and how it can be effective in helping shape corporate strategy at a company like Chevron? Then I'd also like to ask about divestment and the efficacy of that sort of action. 

Pierre Breber: Well, I think we just heard, and I think there's a lot of agreement that it's an and world, and that engagement is the right approach, and Daniel made that point, Lori's made that point. And obviously we support that. Look, we engage heavily with our investors all the time at multiple levels. Our board members do also. And we welcome it, and it makes us better company. By the way, we've been doing this long before we even called this ESG. We're committed to transparency. Again, I encourage everyone to go read our sustainability report. We cross-reference all of our disclosures with SASB, and GRI, and APECA, and TCFD and all the other approaches that are out there; there's a lot of them. They're not easy for companies to respond to, but we're trying to be as responsive as possible. 

I mentioned we were the first company in our sector to do a TCFD-compliant climate report. We've done multiple of those. I encourage you to do that. We did a lot; we do a lot of disclosure on our fees <and safety industry associations down to $100,000 annually. It represents 96% of our total fees. But our shareholders want to know more and we'll respond and we'll engage and we'll do that. We regularly meet with everybody that's on the screen there to hear what the concerns are and how we can best address it. 

Look, our sector is challenged right now, right. Energy is 2.5% of the S&P 500. I think it's primarily because we haven't earned our cost of capital. I think primarily it starts with financials, because there is a fiduciary responsibility. People are investing for the future, for their retirements, for teachers, for public employees, for 401Ks, so we need higher returns and then we need lower carbon. Again, to show that those returns are sustainable, we need to show that we are reducing carbon intensity over time. Energy transitions take decades. The reality is how do you make concrete, how do you make steel? You know, there's lots and lots and lots of things and marine vessels and the rest of it. There's lots and lots of uses for our products. We're working on all that, but for us at Chevron, it's a very simple mantra: higher return, lower carbon. That's how we think we will get back investors, and engaging with them and listening to them and talking with them. 

Billy Nauman: Great, thank you. Daniel, he brings up an interesting point. I'd like to get your thoughts on this kind of what we talk about a little bit with transition financing. And for a company that is working in a high emitting sector, it may be the best thing for the planet if they were to just stop what they were doing and close the doors and shut off all the oil wells. But as Pierre mentioned earlier, there will always be people to reopen those oil wells as long as there is a market for it. But one of the things we've started seeing is, you know, when companies do want to improve, that finding the money to do so, you know, to move into something that may be not within their current core competency or maybe a pivot that they need to speed up, that accessing funding for that can be a challenge, especially through a traditional sort of green bond mechanism where the companies that are issuing those have to meet a certain level of environmental standards just to qualify to participate in that market. As a result, we've started to see a lot more sort of transition financing. I wanted to get your thoughts, Daniel, on how that is evolving and if there are any examples of ways that that can be structured to, you know, give money for a company to get more green where they might not already be doing that? 

Daniel Barclay: I think it's a great question, and we talked a little bit about it earlier, which is this is around investor demand and investor need. And the creation and the integration of new products comes with the demands that you would like to see as an investor. I'm trying to think of a great example for you outside of the energy business. Why don't we do sustainable agriculture? It's a great topic today, lots of time and lots of investment going into how do we improve the agriculture process to have less environmental impact? It's probably the second or third largest sector in the world for environmental impact. And there's been enormous innovation, either in logistics, I think it was mentioned earlier, about the story before about capturing methane out of agriculture today to turn that into a fuel, which is very beneficial for the environment. And in a world where you can create a good economic outcome from a transition, it meets a social objective, but also creates a return objective. There's lots and lots of capital available, right. There's no shortage of any kind. 

Where you have a shortage of capital is ideas that don't generate value. And I think we heard earlier from State Street around that, it was about long-term value creation and managing risk. And so the best thing that, for example, we're doing as a bank is to make sure we're aligned, our investment policies are focused on the and question, which we call transition, as you've talked about, and creating that opportunity where we're having the right discourse with our clients about what they're trying to achieve. And it's usually a benefit, so the transition, let's say, in agriculture from the old way to the new way has both an environmental benefit and it typically has an economic benefit. And so we're seeing that play out more and more as people get more and more innovative. As we create more and more market pricing incentives, we'll continue to see that level of innovation transition. 

Billy Nauman: Great. Lori, coming back you. We spent a lot of time talking about E and a little bit about S, but we've not really talk about G at all. G, I think, often, you know, the governance aspect of ESG is almost the forgotten part of the of universe here. From your perspective, what are some of the issues that are most pressing in terms of improving governance? Because I think the reason that the G is so important is because without good governance, the E and the S are much less likely to be improved. So, what do you look for in companies from a governance perspective, and how are you thinking about changing practices in that area? 

Lori Heinel: Look, there a couple things that I think are really critical. First and foremost is the role of the board as it relates to a lot of these ESG issues. So, again, you know, several years ago now we called on boards to play a much more active role in helping companies sort of describe what their ESG footprint was, putting in places to address on any kind of ESG risk that they might have, and then ultimately communicated that out the key stakeholders, including shareholders, as a complete package, if you will. So, there's a really important role that boards can play in holding companies accountable to the most pressing issues. 

I think the other thing, and then again, this was something that Pierre brought up, was this idea of reporting and complying. And again, there's sort of a whole alphabet soup now of various mechanisms to report. And one of the things that we've been advocating for is some framework that normalizes some of this. So, whether that's around the actual definition for how you even report the carbon footprint, is it the company's operations, is at the supply chain, is it something else? Or whether it's around the materiality and how do you make sure that you're looking at those ESG issues that are most material to your particular industry or your particular company? And we've been in partnership with organizations like SASB, the Sustainability Accounting Finance Board, to help drive that kind of a materiality map. And then ultimately, you know, trying to figure out those specific issues that align with corporate strategy. So, how are you deploying human capital in support of your workforce strategy? 

So, those are also oftentimes linked to the E or the S, but at their heart often times it is the boards who can help companies navigate these issues and that's very much a governance element. 

Billy Nauman: Great, thank you. We're getting close; we've got about 15 minutes left and we've got some questions coming in, so I'm going to turn to the questions now. And, Lydie, I'll come to you with the first one. In many sectors, there is a gap between stock price performance and ESG performance. E.g. after a company's egregious ESG violation and co-response that cost the CEO their job, stock is at a twelve-year high because of stellar financial performance. When will markets price in good or bad ESG performance? 

Lydie Hudson: That's a great question. I think this is something that we all are eager to understand better. An advisor of mine once said that at some point the values and value are going to merge, and I think that's the question you're asking. And I think what you're seeing from corporates, including Credit Suisse, is that we are investing into a space where we really believe that those two points are going to intersect. Clearly, there are disconnects and you continue to see them. There have been recent high-profile examples, but the thesis underlying much of this work that we're also focused on is that at some point in the future that will happen. 

I will step back and just say that in the COVID environment, as was referenced earlier, we have seen some of the best performing corporates have been those who have had very ESG-friendly or sustainable strategies, and whether or not that trend will persist over a period is what we're really looking to see. So, this is the million dollar question in some ways, and what we do when we advise our clients is to really make sure that we are understanding their risk-return profile and what their risk appetite is, and when we apply an ESG lens, how they would think about what an appropriate return profile would be for them. So, this has been discussed throughout the panel. This is a very fragmented space and I think the data is going to be something that we're watching for the time to come. 

Billy Nauman: What about tax? We've seen GRI, Global Reporting Initiative, which was mentioned earlier as one of these ESG standard setters, to put a focus on corporate taxes as an important thing, you know, for companies that are putting stakeholders first, that they need to pay their fair share in taxes. We've seen the UN Principles for Responsible Investing, the PRI, highlight this issue as well, but I have yet to see a company be rewarded by markets for voluntarily paying more in tax. Is that going to be part of this as ESG investing grows? And will we ever see the day where that happens? 

Lydie Hudson: Well, I think that this is probably for, again, this comes back to when certain investors are looking for certain outcomes and where they invest to see certain outcomes. I think that ESG has a broad, obviously, based on this discussion, a broad applicability, and tax is something that I think is quite murky in terms of how we actually can assess a little bit of what you're describing, which is kind of the outcome an investor might be looking to solve for. But I wouldn't say that it's not on the horizon, it's just at least in what we talk to our clients about, this hasn't been one of the principle discussions. 

Billy Nauman: Great. Next question, and I think this one probably works well for Lori, but I would encourage anyone else to chime in if you have thoughts. The question is around ESG ratings, and I'm pulling it up now and it says: "The title of the panel is Beyond Financials, but when considering the importance of credit rating metrics, do ESG ratings possess the same uniformity and comparability across companies and industries?" 

Lori Heinel: Well, the easy answer is today, no. And in fact, I can remember being on a panel not too long ago where there was an asset owner who mentioned that they could change the ESG rating in their portfolio tomorrow if they wanted to, all they had to do was change a different ESG rating company. And again, so, if you look at different taxonomies, the underlying methodologies are often different. You know, I mentioned earlier this idea of even what is the carbon footprint of a company? There's no common standard around that. So, one of the challenges for investors is what information do you use? How do you make sure you understand how it's being derived? Because, again, a lot of this is still derived data. There is a lot of reporting going on, but there are lots of dimensions that aren't necessarily reported in a comprehensive or complete or consistent way. So, again, our view on this is that there is benefit both for investors and for companies to get some clarity around this and to try to align around some sort of reporting methodology that would be maybe not exact same as FASB accounting standards, but some sustainability accounting standards that do provide consistency and comparability across industries, across companies, and provide the opportunity to at least have a marker that we all know how it's been derived and how to interpret it, and then ultimately how to use it in our investment or other processes. 

Billy Nauman: So, for you at State Street, I'd like to hear more about how you use those ratings. Obviously, with the very, very large passive investing arm, when you're setting up an index it's very important that I would think you have a strong understanding of the factors that are used to make that index. In many cases that would be PCSU ratings. What do you look for when you're selecting an index to run a fund against in terms of the rigour of these ratings? 

Lori Heinel: So, in some sense, the indexing is not the hard part because as an index manager the job is to replicate the index. Billy Nauman: Right. 

Lori Heinel: Right. Right. So that's a great point. So, you know, often times there are a couple of things. One is that we would look at what are the ESG care-abouts, if you will, that are embedded in that index? So, in some cases, the index is very broad-based, in other cases it might be focused on one particular ESG dimension, like carbon or social dimensions, or things of that nature. The other thing that's increasingly important is how you integrate some of this information into active or quasi-active strategies, like smart beta. And there again, we've done a variety of things. We've certainly leveraged third-party data sources, but we even went to the point of creating our own R factor, is what we call it, where we're taking best in class sources, combining those, mapping them against the materiality framework of SASB, and then coming up with what we think is the best in class marker, and then that's ultimately used in many of our proprietary and/or active strategies. So, it's not a one size fits all today, and in part that is because of the nature of clients want different things and the different indices offer up different answers. 

Billy Nauman: Great. Daniel, another question here. I don't know if this came in from one of the panellists' PR departments or not, but it's going to be a good opportunity for – and I might open this up to the group – but when it comes to ESG, it still feels heavily weighted toward the E. Can you discuss some of the initiatives within your own organization that support the S and the G parts of the acronym? And we'll open that up to everyone else if we have enough time. But, Daniel, please, you can start. 

Daniel Barclay: Sure, sure. I guess from BMO as a company, one of the things we've done, we relaunched our purpose last year to boldly grow the good in business and life. It's very consistent with this conversation we had around stakeholders earlier, and our definition that our stakeholders are not just the shareholders, but it's also our employees, it's our communities that we live and work in. As a part of that launch of our new purpose, we had a major thrust into sustainability and sustainable finance. 

The second one was a launching into Zero Barriers for Inclusion. And in that framework, we're looking at a number of places where we don't have the right socioeconomic advantage or disadvantage in society, and looking for ways that we can advance that. A great example, you know, we put up a $3 billion portfolio to help women entrepreneurs in starting businesses. We're very focused in our retail brands works on areas where you have racially diverse communities that don't have the same economic outcomes and how can we advance access to banking, access to bank products in those? And then, obviously, we're working very strong on our racial diversity as a company to make sure that the economic opportunities of working in a company such as ours is open to all with equal and equal access to that opportunity. So, that would be a good example of how we're behaving as a company. Then we've talked a lot about the transition dynamics earlier and some of these social bonds that we're trying to facilitate in social lending that we try to put forward. 

Billy Nauman: Great. Pierre, how about you? What is Chevron doing to support the S and the G? I'd be particularly interested to hear more about the G. 

Pierre Breber: Yeah, well, I think I started by saying we're working on all three of them and again, if you look to our sustainability report you'll see all three. I do want to just say, the E is not just climate change, right, local air quality, water management issues, there's other factors in the E. And when we go to the G, we really think around, well, our board, right, and Lori talked about this. Our board is very engaged, we have an incredibly – well, we have a diverse board, we have an incredibly talented board. They're dealing with all of these questions that we've been talking about. Again, board governance over strategy, over dividend policy, over the major decisions, over acquisitions like we just made recently, you know, safe and reliable operations. So, you know, how we conduct ourselves, we want to be the most responsible company. This is what we're talking about here, is doing both, right, being really good fiduciaries for our shareholders who we work for and then being really good members of society and meeting all the high expectations across E, S and G. 

So, we hold our governance and our board and how we conduct ourselves as leaders and managers at the highest level. We hold ourselves to the highest standard. And by the way, we did this before ESG started. We've been around 140 years and we intend to do it for a long time. I expect ESG will continue; it's not a fad. But we would be doing it whether there was a lot of attention on it or not. 

Billy Nauman: Well, before I let you go on that, I wanted to ask about Ecuador, and obviously there's a large, large multi-billion-dollar judgment that's been levied against Chevron for some of the pollution that can came through an acquisition, but that Chevron's been held responsible for pollution in Ecuador. You mentioned that E is not just about climate. Chevron's been fighting that. Obviously, it makes sense you don't want to pay $10 billion or whatever it is. I think it's been knocked down a little bit from that. To the point that we were discussing earlier, though, with Lydie, looking at corporate responsibility and separating out when will ESG issues be factored into the price, you know, if that that needs to be cleaned up and Chevron – I don't know, why fight so hard to fix the environment if the company doesn't care about the E? 

Pierre Breber: Yeah, well, I think that's a good example of governance, actually, because we're not fighting it. We've won it. We've won it in virtually every court. It's the biggest fraud that has been uncovered. The plaintiff's attorney has been disbarred. You can go Google it and learn all the information… 

Billy Nauman: No, I know. We don't have enough time to get into that and you're mischaracterizing that. 

Pierre Breber: It wasn't our environmental responsibility; it was another company's responsibility. We've proven that. To take our shareholders money and to pay off a plaintiff attorney with a fraudulent claim is not good governance. So we have good governance, we managed that the best we can. Look, it's a difficult world out there. We're protecting our shareholders' interests and we are absolutely good stewards of the environment. And, again, we meet society's highest expectations of companies. 

Billy Nauman: Thanks. Lydie, S and G. Well, what sort of initiatives do you have going on at Credit Suisse? 

Lydie Hudson: Yeah, thanks. So, as described before, it's a part of the launch of SRI. We brought together our Chief Sustainability Officer, Chief Investment Officer and all of our research, but also we brought together our whole diversity inclusion effort, and so this is really an opportunity for us to make good on a number of our commitments and look at our inclusion and diversity activities and efforts across the organization in a very structural way. And I'm just aware of the time limitations, but I will only also reinforce that we also, as the as part of the launch of SRI, dedicated a board seat to be our champion at the board level. I do believe it's not just one person's role at the board, but good governance at the board is incredibly important. And so as part of our efforts to enhance our standing on this topic, we also have a dedicated foreign seat as well. 

Billy Nauman: Great. And Lori, we have enough time for you to get in front of that question. What is the State Street doing on S and G? 

Lori Heinel: Yeah. So, again, I mentioned a lot about the G earlier with our board engagement and the role of the board and how we've engaged with them to make sure that they are playing that important role of understanding a corporate's ESG footprint and how they're dealing with it. Again, I think the social side has become even more important. I mentioned Fearless Girl a little while ago in our work around board diversity and how that manifested in several hundred companies adding females to their boards who had previously not had female board members. We also had a very big sort of a push on social capital or employee capital just recently where, there again, a couple of years ago we really pushed companies on what was their human capital strategy, how that aligned with their corporate strategy, and looking at metrics, whether it be turnover or engagement or other things, to see how that alignment was being manifested and the way they managed that human capital. 

So, I think that, again, these are all issues that have gotten renewed attention, certainly during COVID, and Black Lives Matter and other things that are happening here today, but they are things that in the long term do drive company value creation and that's always going to be our focus. 

Billy Nauman: Great. Well, thank you very much. I think with that we are running out of time. So, I want to thank all of our panelists for joining us today. This is a great discussion. I feel like we could probably go for another hour, but we will let everyone get on to next panel. Thank you to our audience for sending in questions. And I'd like to just get a quick plug in for the Moral Money Newsletter. If you're an FT subscriber, sign up at We cover this stuff all the time. If you're left wanting more of this discussion, you can read all about it every Wednesday and Friday. So, thank you all very much. Thank you very much to the Milken Institute for having me and letting me fill in for Jillian on this. And yeah, thank you all. 

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Dan Barclay Senior Advisor to the CEO

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