Episode 35: CN - Sustainability and the Future of Rail

Chantale Despres:

Being in the transportation sector, and thinking about carbon emissions on the planet, we have to decarbonize, and that's a big area of focus. Efficiency, technology, renewable fuels, but to get to a net zero 50 world, which is where we all need to head to, and to get that deep decarbonisation, we're going to need to figure out what the rail propulsion of the future will be.

Michael Torrance:

Welcome to Sustainability Leaders. I'm Michael Torrance, Chief Sustainability Officer, with BMO Financial Group. On the 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.

Disclosure:

The views expressed here, are those other participants, and not those of Bank of Montreal, its affiliates or subsidiaries.

John Uhren:

I'm John Uhren, Head of Product and Strategy, and the Sustainable Finance Group, at Bank of Montreal. I'm joined today by Chantale Despres, Assistant Vice President Sustainability, at Canadian National Railway. Chantale, welcome to the podcast.

Chantale Despres:

Thank you, John. It's great to be here today.

John Uhren:

CN Rail is one of the top transportation and logistics companies in the world. Annually transporting more than 250 billion in goods, including resources, manufactured products, consumer goods, and more. With ports on three coasts, it's 20,000 miles of rail networks span Canada, and in the US. And in 2019, CN celebrated its 100th anniversary. Now CN has focused on the next 100 years, with heightened awareness around sustainability, and the environmental, social, and governance, or ESG of its operations. It has made aggressive commitments to reduce its greenhouse gas, or GHG emissions, including setting science-based targets, and doing its part to hold the global temperature increase below two degrees, compared to pre-industrial levels. CN has also been an industry leader in locomotive fuel efficiency for the past two decades, increasingly using renewable fuels, and other alternatives, that allow it to maintain its position, as one of the most fuel efficient railroads in North America.

John Uhren:

And CN just backed up its commitment to a sustainable future this past week, by announcing the largest sustainability linked loan in Canadian history. The $2 billion sustainability linked loan, or SLL, tie CN's cost of capital to ambitious environmental improvement targets, including reductions in GHG emission intensity, and increasing its fuel efficiency. The SLL involves a potential pricing adjustment to the interest rate margin if CN achieves, or fails to achieve the environmental thresholds. As assistant vice-president sustainability, Chantale was one of the several people from CN, that helped arrange the SLL. And I'm pleased to have Chantale join today's podcast. Chantale can you please elaborate for the listeners, on what sustainability means to CN, and what's most critical to your company, from an ESG perspective?

Chantale Despres:

Sure. At CN, we call our sustainability strategy, delivering responsibly, and we are focused on five key pillars, environment, people, safety, community, and governance. And that really is our play. In terms of the critical aspects, if we talked to the E, S and the G a little bit more in depth, from an environmental perspective, as you've mentioned, we have a significant focus on greenhouse gas emissions, and in having set a science-based target. We're also focused on reducing our air emissions, so not just greenhouse gas emissions, but air particulates, NOx and Sox as well. We're focused on the circular economy, and reducing, reusing, recycling our waste. And we also have a significant focus on biodiversity. And over the last several years, we've done a lot of tree planting, and have planted over 2 million trees since 2012, for example. On the social front, the focus there, as I mentioned, one of the key pillars is safety.

Chantale Despres:

And that really means the safety of our people, the safety of the customers that we serve, and also the safety of the communities that we cut across, along our long North American rail network. From a people perspective, not surprisingly diversity inclusion is critical, and has become even increasingly more critical, and important over the last 12 months. And we'll talk about that maybe a little bit later, we also have a particular focus on first nations. We do a cut across many first nations community, across our network, along our network, and so we have a focus there as well. So, when we think about our sustainability strategy, it really is crystallized through materiality. And I think that's interesting in terms of where we are today, versus where we were at the beginning of my journey in sustainability, maybe 10 or 12 years ago, where it seemed that everything was important to everyone. And it's great to see today, the increasing focus on what is material to each sector, and each organization, and we leverage materiality to inform our sustainability strategy, and what's critical to our organization.

John Uhren:

Thanks Chantale, I think that's a really good point around materiality. Ideally, every company would be perfect from an ESG perspective at everything, but that's not realistically how it works, and you have to then prioritize certain areas within the E, S and G breakdown, and really focus on those areas where you can have the biggest impact. And I know for CN, let's come back to GHG emissions for a second. I know that has been something that you've been focused on in your career, and certainly the company is, very focused on, and around the science-based target specifically. I'd be curious to hear a little bit more about, how you came to set those science-based targets, and what the impact on CN's business has been.

Chantale Despres:

Well, when I started my sustainability journey, I had a marketing communications and railroading background, but really came at it from a sustainability perspective as a non practitioner with no educational background. And part of the strategy for me personally, and as with the company has been to rely on international frameworks. And in terms of greenhouse gas emissions and understanding our footprint, we collaborated early with the CDP. And for me, and for the company, the CDP journey has been quite fruitful. It has really helped us understand from the beginning, our carbon footprint, we started many other organizations, understanding what is our scope one, scope two emissions. Scope one for us is obviously our locomotives, and all of the equipment that we run, that combust fuel, and then scope two is our facilities. So that's where we moved to next in terms of our understanding. And scope three is really for us, and for every company really in our procurement stream and understanding that, and that's why we're doing more and more work every year, is just gaining a better understanding of these scope three emissions. And so through our journey with the CDP, we've been learning more. And in 2017, was when the CDP introduced, or made the introduction to science-based target.

Chantale Despres:

And so, we took a crack at submitting our science-based target approach. That first year, we leveraged the models that were being developed, and quite frankly, our attempt was rejected by the CDP, but what they came back with, was an opportunity to collaborate with the science-based target initiative, to develop a rail model, more specific to our sector. And we embarked on that journey, collaborating with SBTI, and got approval for our science based target in 2017. So, we were early on, which means our science-based target is aligned with the two degree scenario currently, which was the science at that time. In 2018, there was an important IPCC report, that indicated that we have to keep global warming well below two degrees. So we've embarked on the journey again, this year, to work with the science-based target. It is about five years later, which means we're due to review the target.

Chantale Despres:

And we also acquired TransX about a year ago, which is a tracking company, and that impacts our scope one. So, we're collaborating again with a science-based target, and resubmitting for a new target, and awaiting approval in the coming weeks. Kudos to the CDP, because they've been there for a long time, and have served an important framework, I think for CN and many other organizations. And then they opened the door for us to collaborate directly with the SBTI, and that's been a great journey for us as well.

John Uhren:

Thank you for the background. You're right, the CDP has played such a critical role in even introducing the concept of companies tracking, and reporting on their own carbon emissions, and then creating this gateway to the science-based target initiative, whereby companies make these really ambitious pledges. And it sounds like, CN was there at the early stages of the SBTI. And it sounds like we'll be looking at them again here shortly, for a well below two degrees scenario, but major credit to the CDP for getting everything started when it was still really a new scenario for a lot of different companies. So, that's cool.

Chantale Despres:

Absolutely.

John Uhren:

On fuel efficiency targets. So I mentioned at the outset that CN has been a leader for 20, 25 years from a fuel efficiency perspective. I'd love to hear about some of the ways that CN has improved fuel efficiency, and then forward looking, what does the future look like from a fuel efficiency perspective with developments in renewable fuels, things like biofuels, or hydrogen, or others, what impact will that have on fuel efficiency going forward?

Chantale Despres:

Sure. And I'll actually circle back, because part of your previous question was what's the impact on the business. And this really ties in to the impact on the business. And of course, when you set these ambitious science-based targets, they are not for the faint of heart, they are ambitious. And in working with the SBTI, our next target to come, and we await approval in end of March, or early April, we'll be even more aggressive than the current one. And what that does to the business, is to continue, for us, this intense focus on efficiency, that's been part of our DNA for a very long time. It just reinforced it. And I'd say that, no stone has been left unturned as a result. These targets include scope one and scope two emissions. And while the bulk of our emissions come from our locomotives, 85%, in order to achieve these very ambitious targets, we have to look at all of the fleets that we operate, and also our facilities, and the electricity consumption that I talked about, which is our scope two.

Chantale Despres:

So, setting these targets, impact on the business is a reinforcement of this intense focus on efficiency. And the impact then there, has actually been greatly positive, because we know when we save carbon, we're saving fuel, or electricity, and we're saving money, which is great for the bottom line. So, at the beginning of this journey, it was fairly a good sell to the organization, to focus on this since we're contributing directly to the bottom line, and continue to do so, as we improve our fuel efficiency, it's very meaningful to the business. And then, the other important aspect it is that, it also allows us to offer low carbon transportation solutions to our customers. And given where we are today, that's becoming more and more meaningful. And so, leading into this discussion about our performance, we've been able to achieve a 40% carbon intensity improvement since 1993.

Chantale Despres:

So that's based on scheduled precision railroading, which CN has pioneered. It allows us to move more freight with less assets, and a much more fuel efficient way, as you've mentioned. To this day, CN continues to be the leader in the sector. We're 15% on average, more fuel efficient than the industry as a whole. And it's pretty interesting, given that we're all running on the same steel rails, and the same locomotive. So, how you operate, and the people, impacts how you run those trains and locomotives, is certainly very meaningful and has been a big part of our success, over the last 20, 25 years. Technology has improved, the locomotives that we procure today are a lot more fuel efficient than the locomotives of the past. And then we're also buying and implementing other technologies onboard our locomotives, anti idling technologies for example, have really helped us reduce our carbon emissions.

Chantale Despres:

We do data telemetry, systems as well. And what that's doing is, it allows us to collect a lot of information about the journey of each train, that outlines where we can improve. And so through big data management, we're uncovering other opportunities to continue to improve our fuel efficiency and intensity. So, we're active on that. And in-house, our fuel efficiency team, which by the way, is pretty fantastic, because they're generating with the operations team, this 15% edge that we have on the competition. They're leveraging this big data, and also in-house developed an HPTA system. And what that is, is really, it's a horsepower to ton matching system. On a train, there can be more than one locomotive unit, and those locomotives are where the fuel resides. And HPTA allows us to match only the amount of locomotive power that we need, in the journey to move the freight, and then shut off a locomotive unit when we don't need it.

Chantale Despres:

And when those locomotive units are shut off, of course they're not burning fuel. So that's been also a big part of the opportunity, or how we've reduced our carbon emissions in the last few years. You've mentioned renewable fuels, and we're using them, and that's very exciting. I think medium term opportunity to decarbonize the rail sector. And that really is in line with the regulations mainly in Canada. We have a renewable fuel standard. So we've been buying fuel that's blended 2% with renewable fuel, in diesel for the last decade or so. We have a pending clean fuel standard that's coming at the national level. We have a clean fuel standard in British Columbia, and other jurisdictions where we operate, where they're already blending up to 4% in BC, 3.5% in Manitoba. So we're seeing these increasing blends of renewables in the diesel fuel that we buy. And that's also helping us reduce our carbon emissions. If further than that, we're exploring the greater use with our OEMs.

Chantale Despres:

So the locomotives that we operate have guarantees, for the diesel fuel that we buy today. And so we have work to do with OEMs, and at the industry level as well to make sure, that the increased use of renewable fuels that we understand the impacts, and that we can indeed use higher rates of renewable fuels in our locomotives, and we're really active on that. So, for our sector, because we use long-term capital intensive assets like locomotives, it is sustainable for us to foresee using them, to the end of their life cycle. And we use our locomotives for at least 20, 30 years, and we want to do that. Like I mentioned, it's very sustainable to use an asset to the end of life. So, we see the greater use of renewable fuels in the next decade, as really key to decarbonizing our sector, and helping us achieve our science-based target.

John Uhren:

You said a few things Chantale that I want to pull out that I think are really interesting. Early in your response, you were talking about the idea of using fuel efficiency improvements to save money. And of course, that's part of the triple bottom line, right? So you have environmental and social improvements within your business. But the economical advantages that come with a focus on ESG, every bit is important. And certainly as you're selling it through the individual business lines, that was something that you see and realized early on, could be something that really benefited the economic bottom line for you. And so, that was one way to get buy in, which is cool. Another point you made, which was interesting was, around providing value to customers. And it's one thing for CN to be trying to improve its own fuel efficiency, because yes, that helps helps profitability.

John Uhren:

But as you're thinking of the actual goods and products that you are shipping through your train, a lot of the companies that you're shipping for, have their own scope one, two, and three targets and goals. And by providing a more fuel efficient service across the value chain, that helps their scope three emissions, and contributes to the greater good as well. So you using that as an advantage vis-a-vis competitors to say, we are actually the provider that yes, we'll do it at the best possible rate, but also we'll do it with an IDR, environmental stewardship and responsibility, which then helps them tell the story to their stakeholders as well. So I thought that was cool. And then finally around using tech and big data, all really great as we look into the future, because we have so many companies that are coming up with these amazing solutions, not just in renewable fuels and whatnot, but really working with companies to meaningfully reduce their carbon emissions, and do it in a way that will create a sustainable outcome for the future.

John Uhren:

And so it sounds like you're already harnessing a lot of those technologies, but certainly something to kind of double down on in the medium to longterm. Switching gears a little bit, I want to not to bring it to a somber note, but obviously we're in the middle of a global pandemic right now, and the entire world has been facing disruptions in virtually every facet of life of the past year. As an essential services provider, what major changes has CN had to implement to maintain operations through the pandemic?

Chantale Despres:

I can't believe it's been a year already. In a way it seems like it's been forever, and in other ways it seems like it's gone by so fast. It's just this weird circumstance that we all find ourselves in, and of course CN is the backbone to the economy. And it was very important that we keep moving the goods that are so important to everybody, to be able to stay home, get our groceries, get our protective masks, and what we needed to be able to stay home safe. So, safety obviously, was the big focus. And a lot of it in the beginning, because our people, our operations people are essential workers, a lot of focus, and time, and effort, to make sure that we kept our people safe, and able to operate the railroad throughout the pandemic.

Chantale Despres:

So, for headquarters people like me, or office people like me, we were just sent home, and I've been set up in my home office now for about a year. And not returning at least until we have more vaccines and higher level of immunity in the general community. So, working from home, and then in terms of our operations people, making sure that they're safe, we actually have a medical doctor on staff. And so that's been extremely helpful, to making sure that we put in place all of the correct safety protocols, and equipment, and provisions to keep our people safe. And then of course, making sure that our customers are safe. And so that's been the big intense focus, and it's been all of the same thing that other companies have done, which is temperature checks, when people are checking in, and protocols, and masks, and hand sanitization, and a lot of cleaning. Kudos to our facilities people, who have been extremely busy, our medical staff who have been very busy, and our operations people who have kept the economy moving over the last 12 months. So a lot of people working very hard to keep everything safe and moving safely.

John Uhren:

Well, what's interesting is, one of your four pillars of delivering responsibly is safety, right? You'll see I said that at the beginning, and so the companies that have responded best to living through a pandemic, and including essential service providers, were ones that weren't caught off guard by this, were ones that, not that anyone plans for a pandemic, but if you have at the core of your operations, a focus on your employees, a focus on your customers, and principle their safety, then it really sets you up at the very least to pivot quickly, and to ensure that you have the right operations and mechanisms in place to protect that safety, and enhance it really. So, that's no surprise that you've been able to manage through this time, but also really good to hear.

Chantale Despres:

Yeah, of course nobody could prepare for this. And I remember in the early days, we all thought we would be back at work in a couple of weeks. But certainly having that safety culture, and safety in the DNA, it certainly been very helpful to keep operating over the last unprecedented 12 months.

John Uhren:

So on my last question for you Chantale, so you've mentioned a little bit about data, and technology, and not to preview the question, but what I'm trying to get at is like, what does the future look like for CN, and perhaps the rail transport industry more broadly? What does that look like in a post COVID world?

Chantale Despres:

Well, I'll just end by focusing on two kind of key things, and we talked about de-carbonization, and of course being in the transportation sector, and thinking about carbon emissions on the planet, we have to decarbonize, and that's a big kind of area of focus. To 2030, a lot of it will be the focus on what we've talked about, efficiency, technology, renewable fuels, but to get to a net zero 50 world, which is where we all kind of need to head to, and to get that deep de-carbonization, we're going to need to figure out what the rail propulsion of the future will be. And so we're actively working on that. We have a longstanding memorandum of understanding with Transport Canada, through the Railway Association Of Canada. So at the industry level, we're active on this. In the last negotiation or update to the MOU, that's been there for 20 years, we agreed with Transport Canada to collaborate together as an industry, with the government on the pathway to decarbonize the rail sector in Canada.

Chantale Despres:

And we've been active on that for the last couple of years. Part of that is looking at what are the technologies that are being developed around the world, what would the costs be to deploy some of these technologies in Canada, we've looked at LNG, for example, we've looked at rail electrification, in terms of studies. CN itself did pilot LNG locomotives a few years back. We're not active on that right now, quite frankly, and to achieve the deep de-carbonization that we're going to need. We're now turning our attention more to towards electrification and hydrogen, and working together with government, and also locomotive manufacturers. I like to say, oftentimes, in this challenge that we face with a science-based targets, or deep de-carbonization, as a railroad, we're kind of the in-between guys or girls. We don't make the locomotives, and we don't make the fuel, that are really required for us to achieve our deep decarbonisation.

Chantale Despres:

So this is really a team sport. It requires significant collaboration with government, with fuel suppliers, with locomotive manufacturers. If we think about electrification, we're going to need to collaborate with utilities. And so, there's a lot of people that need to be at the table, as we think through these future solutions. Quite frankly, it's pretty exciting. And in our experience, and in my experience of the last 12 months, people are very excited to come to the table to talk about the future of the transportation sector, and the future of railroading. So, it'll be very exciting to see the innovation to come, and that will certainly participate in, and pilot in the coming months and years ahead of us. When I started this journey in sustainability 10 or 15 years ago, I didn't think that in my lifetime, or my career, I would see alternative propulsion for the rail sector.

Chantale Despres:

And in the last couple of years. And in particularly in the last 12 months, we really see the momentum picking up on all fronts. And I am sure now that we'll see alternative propulsion rail, as a matter of fact, there's already alternative propulsion rail being piloted all over the world, including in North America. A lot of the innovation has been happening maybe with passenger rail first, it's a little easier, it's not as heavy to pull, so you don't need as much power. But we'll see the application of those technologies, that are already deployed in many instances for passenger rail, being developed for freight railroads as well. So, we live in very exciting times where change is happening a lot faster, than I ever would have imagined. So I think in terms of the second aspect of a post COVID world, this pandemic has been extremely interesting. And I think, even a learning opportunity for a lot of us.

Chantale Despres:

And I think from a sustainability perspective, it's really driven home the importance of the S and ESG, that was kind of maybe always a little bit secondary to the E, particularly over the last 10 years, and the discussion on climate change that we've had. And I think what we've all learned is that, in order to prosper as a society and as companies, we need our people to be healthy. And at CN we'd say healthy and safe. And I think that that's been a big lesson learned in the context of COVID-19, and we've had some major social movements like Black Lives Matter, that have also had a significant impact. It's been an impactful year in so many ways. And I think that it's tied all of these ESG elements together, and driven them home for a lot of people.

Chantale Despres:

And so that second aspect for us is the social aspect, and the continued focus definitely on keeping our people safe, communities and our customers safe. But also, we're deeply focused on diversity and inclusion. In the rail sector, if you look at the makeup of our employee base, there's a lot of men. So, we have work to do, in terms of recruiting a more diverse workforce. Definitely we need more women in the workforce, but we have a broad view of what that means. And ultimately our goal, is to really look like the communities where we operate. And that is our long-term goal in terms of diversity and inclusion. And I think in Canada, and as I mentioned briefly before, we have work to do in terms of our first nations, and we're very focused on building strong, respectful, mutual relationship with first nations across the country. And so those will remain and continue to be some key areas of focus. So, environment is important, so are the social aspects. And then of course you need strong governance to support all of these aspects of the business. And that's what we'll be focusing on, post COVID-19.

John Uhren:

Yeah, thanks Chantale. And I would just echo that, it's such a critically important time in history right now. There's major issues and implications of decisions made at the environmental, at the social, and at the governance level for every organization. And I really appreciate you taking time just to walk us through both, how you've pivoted during the pandemic, and even before it. But as we look forward, what that means and the implications are, for sustainability in a sustainable future for CN, and more broadly for Canada and North America. So thank you very much Chantale, for joining the podcast.

Chantale Despres:

Thank you John, it's been a pleasure.

Michael Torrance:

Thanks for listening to Sustainability Leaders. This podcast is presented by BMO Financial Group. To access all the resources we discussed in today's episode, and to see our other podcasts, visit us at bmo.com/sustainabilityleaders. You can listen and subscribe free to our show on Apple podcasts, we're your favorite podcast provider. And we'll greatly appreciate a rating and review, and any feedback that you might have. Our show and resources are produced with support from BMO's marketing team, and Puddle Creative. Until next time, I'm Michael Torrance, have a great week.

Disclosure:

The views expressed here, are those of the participants, and not those of Bank Montreal, it's affiliates or subsidiaries. This is not intended to serve as a complete analysis of every material fact regarding any company, industry, strategy or security. This presentation may contain forward looking statements. Investors are cautioned not to place undue reliance on such statements as actual results could vary. This presentation is for general information purposes only, and does not constitute investment legal, or tax advice, and is not intended as an endorsement of any specific investment product or service. Individual investors should consult with an investment tax and or legal professional about their personal situation. Past performance is not indicative of future results.