Talking Climate Change: Mark Carney in Conversation

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Dan Barclay:

Welcome, and thank you for joining us. This year's conference marks one of our biggest yet. We've heard experts talk about recovery and what to expect here in North America and around the world, once we put this pandemic behind us. A key thread of our conversations over these three days is sustainability in ESG, a core element of our strategy at BMO.

Dan Barclay:

We have the extreme privilege today to have Mark Carney join us in our lineup of distinguished speakers. Mark has the rare distinction as serving as a governor for not just one central bank, but two. And now as a UN Special Envoy on climate Action and Finance, he's taking a lead role in driving bold and urgent action on climate. The fight against climate change has entered a new stage. In both government and private sectors, the dialogue has shifted from viewing climate change as a risk, to seeing the opportunity and taking faster action. Over the next hour, we'll hear Mark's perspective insights on the opportunity, our role in moving our economies to net zero as quickly as possible. Welcome Mark, and let's get started.

Mark Carney:

Thanks for having me.

Dan Barclay:

Yeah, it's great to have you, Mark, and it's great to see your leadership on this topic, and I am very confident this audience is going to be enraptured listening to your insights. As a COP26 client champion and finance advisor, you've recently announced an industry led and UN convened Net Zero banking Alliance. As chair of the alliance, tell us about the commitments of the sector wide forum and what success looks like if we get it right.

Mark Carney:

Yeah. Well, and again thanks for having me, and thanks to BMO for all you're doing, and everyone for tuning in over lunch hour. I hope we can hold your attention, although as I guess, a global audience, so it's not lunch hour everywhere. We did two things for the Biden summit, the first is the Net Zero Banking Alliance which you referenced, and that is for over 40 banks from five continents, 28 trillion of balance sheet committed to net zero.

Mark Carney:

And BMO to their credit has a commitment to net zero. Let me be clear what being part of the Banking Alliance is, is it's not just the 2050 commitment, it's a 2030 commitment. That's important because that matches what countries are doing in terms of their targets, so we can get into that. We saw obviously, progress on countries in the last few weeks, including Canada and the US. But as well, sectoral strategies. So within 18 months, the signatories will have sector strategies, decarbonization strategies. They'll choose the sectors, how they define them and the decarbonization paths, but they'll roll those out in 18 months, and then another wave in another 18 months from that. So, you get full transparency on financed emissions, invested emissions that are there, and a pathway to having the fair share of reduction by 2030.

Mark Carney:

The second point I'd make, that's the Banking Alliance, but the second thing we did for the Biden summit was to bring together a Banking Alliance, the one I just described, one for asset owners, one for asset managers, and we've also created one for insurance underwriters, so the core of the system, the true core of the system, and brought them all together under one umbrella group, which is called the Glasgow Financial Alliance for Net Zero, Glasgow obviously being where COP is. And the point of that is a couple fold. One is to have a same level of ambition across these alliances. There's lots of well-meaning efforts that are out there and I credit them all, but we need a standard that brings them up to the same level. That's the first thing. The second is to make sure that they're self-reinforcing, so the asset owners, expectations of the asset managers, or the banks, or the insurers that in which they invest are consistent.

Mark Carney:

And then thirdly and very importantly, that the infrastructure of the market is supporting this transition, allowing investors, those on this webinar, those intermediaries such as BMO, to do their job properly, so there's the right kind of disclosure. The rating agency analysis is supportive, indices on stock markets are helpful, that if there, and we very much want this to be the case, we're working hard for this to be the case, a carbon offset market, a true market, true global market for carbon offsets measured in the tens of billions, not in the hundreds of millions, that that works, that that's self-reinforcing, and that's consistent with the net zero plans.

Mark Carney:

So this is quite an important development, not just in terms of scale of balance sheet being committed, not just in terms of the specificity of the targets and the near-term nature of the strategies, but also as a mechanism for the private sector to work together, to do exactly what you said at the outset, Dan, which is to shift from risk management into full realization of the opportunity, and to make sure that capital flows to those best opportunities as they develop.

Dan Barclay:

So, when you think back to the scope of that, in terms of global industry, success looks like the majority of banks, all banks, insurance companies? What does success look like?

Mark Carney:

Now to be clear, what we did in order to put this in place, is there were some existing groups of banks, and asset managers and asset owners. And so, we worked with those existing groups to get them up to this level that was consistent and could be announced for the Biden summit two weeks ago. And that included something called the Sustainable Markets initiative, there's banks that were part of something called UNEPFI, which is the United Nations financial institution group, and a few other organizations. But that's obviously not the whole of the industry, for example, it doesn't include the leading Canadian banks because they weren't part of those groups. The Canadian banks didn't refuse to be part of this. They weren't asked, because you're having a negotiation in order to put the thing together at the time.

Mark Carney:

So, I think one of the objectives between now and Glasgow, is to broaden this out and deepen it. So, broaden it geographically, greater representation for example, from Asia, deepen it in terms of the other leading institutions. And to be clear, some of the world's largest institutions, Morgan Stanley, HSBC, Bank of America et cetera, are part of this out of the gate, but we want to fill it in. And on top of that, very importantly, do that coordination by Glasgow, so that when we get to Glasgow, success looks like as follows: one, obviously we will have more assets represented within this alliance. Very importantly, some of the most important institutions will also have joined alongside their peers. And that the impact of having those institutions there is, we're about to launch a functioning global offset market. By the way, there's a lot of work going on on that, that's been going on for several months on that, but we're about to launch that market.

Mark Carney:

That we've addressed things like, and this is going to sound quite esoteric, but it's quite important, things like portfolio alignment calculations. So, one of the big issues as you can appreciate, is that we want to fund the transition. The collective we want to fund the transition. We want to go to where the emissions are, and for companies who have solutions investments to reduce their emission intensities, reduce their carbon footprint, that they can get the capital and reduce. And we need a way of expressing that on the balance sheet that captures, there could be cases where the balance sheet, actually the carbon emissions go up on the balance sheet per dollar, or it's level for a period of time. But that money is being put to work in order to get those emissions down over time.

Mark Carney:

And there are various technologies, financial technologies to represent that in a robust way. Those are being developed for Glasgow, but we need the industry buy-in and expertise on it, so have that gratification. So just to, I maybe should have started with the headline. The headline is we want it broader and deeper, in number of institutions, size of balance sheet, and the second thing is we want to complete a series of things on the plumbing side of financial markets, so that we have a true market in transition, and these opportunities are being seized.

Dan Barclay:

How do you think about some of the regional challenges? There's obviously some dynamics I think about Canada, we could have a conversation there. I could easily just say, let's talk about Chinese and the big Chinese banks. Obviously some of the biggest banks in the world, they've got a different dynamic. How do you think about that folding into this Banking Alliance and your thought process around maximum impact, versus truly consistent rules?

Mark Carney:

Yeah. So, I think the first thing is that the way that the overall approach to getting to net zero is supposed to be is, and I'll speak in UN speak for a moment. It must be [crosstalk 00:09:45], is common but differentiated responsibilities. So, that's the way it's talked about in terms of countries. So, we in Canada, the UK US, we have responsibilities. Which are principally, we have different industrial structures, but fairly rapid and accelerating decarbonization. A bigger challenge in Canada, candidly, than it is in the other two, but we all have that common responsibility. And the common responsibility we would share with China and India and other major emerging economies, is we need the world to get to net zero, basically by 2050 on a pathway, so we have that common responsibility.

Mark Carney:

But the responsibility for India and China, I'll use those two examples, is they first have to get to their peak emissions and then have an accelerated decline from that. And so, the profile of emissions in those economies is going to be different. The absolute level of per capita is still lower than it is obviously in the advanced economies. So, if your footprint as a financial institution is what is skewed to China or skewed to Canada, you have a different profile in terms of the type of mission reduction you'd be funded, and that should be reflected in your decarbonization plan.

Mark Carney:

I think the second thing to recognize is that, and you very much recognize this, is that we need transitions that work, we need transitions, again, I'll speak in UN talk which adjust transition is the language they use. But really what we need is a transition that maintains economic growth, helps build up not just the transition out of industries... Or companies, maybe in industries is better way to put it, that aren't going to be part of the future, at the same time by building up those who are going to be part of the future. As much as possible, and there will be frictions, but as much as possible we're growing jobs in the regions that will be most affected and the countries that will be most affected.

Mark Carney:

So, there are big differences here without question, those can be recognized. But it's all recognized within the context of a common goal, and in the end we have to get to net zero to stabilize the temperature at whatever level. And certainly, if we're going to do it at less than two degrees, we have a lot of work still cut out for us.

Dan Barclay:

Yeah. And one of the things that I think has been most exciting the last 12 months is this, you and I spoke at it the last time we met, the world is shifting from, "we need a penalty system," to moving to innovation and optimism. And that dynamic means there's new opportunities, and it is an accelerator of change rather than a drawback to change. Why don't we spend a little bit time on the carbon offset market, and some of the big planks you're putting together on that? Because I think that is in my mind, like you, it's a foundational piece to accelerating transition. And so, maybe take us through some of the things you're working on and thinking about, and helpful for the audience.

Mark Carney:

Yeah. This is critical, and just one of the things for those who, if you don't follow that closely, you might be misled into thinking that this is a big market that's sophisticated. This is a small market. It gets a lot of headlines, it's very uneven. 2020 figures are now, they'll be higher than this, but I'll quote the 2019 figures: about $325 million worth of offset trades.

Dan Barclay:

That's a global stat, Mark?

Mark Carney:

That's a global stat, so that tells you a lot. You probably did that before 9:00 AM this morning, Dan, so that gives you a sense. And the quality of those offsets quite variable, some of them quite robust and they're permanent, but others on the greenwashing end of the spectrum. Now, what's happened as we know in the last 18 months, 24 months to their credit, is more and more companies are setting net zero objectives, so something from outside of the financial sector. So, it's Microsoft, Unilever, it's a host of companies, 1500 now as part of the most rigorous version of this, which is called science-based targets, and there will be more by Glasgow. So, quite a substantial proportion of market cap of companies have net zero objectives.

Mark Carney:

Now, I'll pick on Microsoft. If I'm Microsoft, and I'm not just going to net zero, I'm going to net negative because I'm going to offset everything, every emission at Microsoft, not just at Microsoft itself, but those who have used the products of Microsoft since Bill Gates came up with it in the Albuquerque garage all those years ago. I need offsets in order to do that, certainly to go negative, but I'm Satya Nadella, I'm not going to sign off on my corporate accounts unless I know that the forest that has been planted, actually has been planted, and is still going to be there while I'm counting it as an offset. Or that the renewable project in a developing economy actually has happened, and on.

Mark Carney:

And so, I need a robust market. That's the second building block of this. The third, just to be clear what we're talking about is offsets as a compliment to absolute emission reduction. So, sometimes the charge is, "Oh, it's an indulgence, you won't do anything with offsets." No, the path is to reduce your emissions, but you can supplement it. And I use Microsoft as an extreme example, where if you want to make up for historic emissions, you absolutely have to use an offset.

Mark Carney:

Our view on this market, is that it's probably an 80 to a hundred billion dollar a year market by the middle of this decade. Because that is about 10% of the corporate emission reduction that's required between now and 2030, to keep on this path for one and a half degrees. And you well know in terms of, look, there's a lot of the emission reduction can be through efficiency, it could be through deploying capital with proven economic technologies on the renewable side of it. But there's some of it which can not be achieved economically at present, and certainly not economically relative to reforestation in Indonesia or Brazil, or renewables in some of these economies as well. And that's going to be a more economically efficient way of taking carbon, or reducing carbon that otherwise would have been there. So, we need this market 10% [inaudible 00:16:41]to those types of numbers, a hundred billion a year number.

Mark Carney:

And what is going on, and what's been going on for about a year now, is we formed a group led by a guy named Bill Winters, who's CEO of a bank called Standard Chartered, a long time history in the derivative markets, 180 institutions involved globally sponsored by the Institute for International Finance, so bringing in a wide range of financial institutions. And very importantly, a large number of NGOs are part of this process. Because we all know that you need the buy-in of that community. You'll never get the buy-in of everybody in that community, but the core of that community is part of that. The blueprint is published, published in January, the key elements of governance, and structure and plumbing. There's six working groups working on all of that. It's going to come out, I would say by mid July, which [crosstalk 00:17:39] the prospect of a pilot market up and running by Glasgow, and then chance to scale.

Mark Carney:

Now, this is a sophisticated audience on this call, so if you just give me another minute, let me describe what we're thinking for the market, or what the group is thinking for the market is, that there would be core exchange traded reference contracts for carbon reduction, liquid reference contracts for that. And then a quite substantial OTC market built off of those reference contracts, so referring to those reference contracts. Because as you can appreciate, look, there's lots of different ways to reduce carbon, avoid carbon, and quite often they will have, those reductions will have other benefits, co benefits to them. It could be biodiversity, it could be local economic development, it could be other things. And it's a market, and people will decide whether or not they want to pay for them, those co-benefits, but that's in the OTC realm as opposed to on exchange.

Dan Barclay:

And have you thought through that stuff on tokenization? Blockchain tokenization, ways that we can actually clarify, if you want to think the providence of the credit? One of the challenges when we think about the future, is how do you A, determine it hasn't been traded twice, do you actually own something, is it still there in place? And I think it's a really interesting angle for that, we've been thinking a little bit about that ourselves.

Mark Carney:

Yeah. Well, tip of the iceberg, you hit on a topic that's relevant for that market or potentially relevant for that market, but absolutely relevant in a bigger scheme of things, for let's call it green finance or de-carbonization. So, maybe just on the market for a second, which is that I don't think it will be tokenized, but we've got the experts who are going through it. It absolutely has to be the case that you can't have double counting of the credit, and the credit is distinct. And what is also important is that you have ongoing monitoring of the existing of the credit. So, I use the example of the forest. The forest has to still be there 10 years from now.

Mark Carney:

Now, the good news is, is that with satellite technology, low-earth orbit satellites, monitoring is actually becoming very cheap and very effective, and not just for things like reforestation, but tracking methane for example, that's quite feasible, so we do all of that. So, I don't think that the providence or the double counting thing needs to be dealt with through tokens, but that is as you can appreciate, there's a huge set of potential applications for smart contracts, and tokenization for tracking one, green molecules. So, if I'm looking for green power as my scope to emissions, am I actually getting green power or have I just catalyzed the production of, at least it's something to be honest, I could have [crosstalk 00:21:03] or you know what the issue is. But am I actually getting that molecule? That technology is developing very rapidly, so actually I can know that I get the green molecule, and I think that there is going to be value to that.

Mark Carney:

What is also relevant I think is, when we think about scope three emissions and we think about my suppliers, and tracking the carbon all the way through the chain and then out to the client, and having a robust system in order to do that, I can't see how we'll do that without... I mean, I'm not the expert, but I can't see how we'll do it without some form of blockchain technology, smart contract. But I can also see that that's a highly desirable thing to do, particularly given that ultimately, we're going to have quite significant double counting, triple counting in some cases of emissions. Which for the moment, tilts the playing field in the direction we need to go, but over time could be quite substantial, and would be better to align the incentives much more clearly, because I knew exactly where the molecules are coming from.

Mark Carney:

And when I think about this from a global perspective, one of the issues is we need 195 countries alongside for these objectives, and everyone pulling their weight. It's a lot easier to get developing and emerging economies alongside, if they're intermediaries for advanced economy products or services, there's alignment of incentives, "I'm willing to invest up the chain in order to reduce my emissions over there, because I own those emissions." If I'm apple, I own Foxconn's emissions. I just gave you an example which everybody knows, but there's lots of examples where it's much more opaque, and I would need that kind of technology to be able to track things.

Dan Barclay:

Well, I think you're into a great topic on level three emissions, because level three is when you think about your own, one, two, those are actually easy to get your head around. You can figure out your own impact. When you start to think about in the banking world, our clients, good and bad, you've got double counting on both sides potentially. But that whole dynamic, and then if they're actually doing one, two, three level emissions themselves, you get into a really complex problem today where we don't have standardization of disclosure. We don't have standardization of what it really means, and how do you measure progress and track it? And by the way, I think this is an exciting development, not a bad thing. I think we've got some real interesting innovation going to come in the next 24, 36 months around this topic, because you have to get there to have the kind of improvement and tracking that we're looking for. You actually have to be able to track it in a way that makes sense.

Mark Carney:

Yeah, I totally agree. I totally agree.

Dan Barclay:

For what it's worth, for those who are listening, on level three the rule of thumb at present is you should disclose your level three, if it's material. And material being defined as if you added up your levels one, two, and three, and your level three is 40% or more of that total, you should be disclosing it. Now, it's easy to say, and that's where the drift is going, but I think it has to get more sophisticated and will get more sophisticated over time.

Mark Carney:

Yeah. And I think trial and error is going to take us a long way there, hopefully not a lot of error and a lot of trial.

Dan Barclay:

One of the things that has been obvious in the discourse in the last 24 months, is the amount that commitment to climate change can be influenced by short-termism versus long-termism, that can be in the capital markets, could be in the political cycle. You're a huge fan of long-term value creation, and I think what's driving your thesis and a bunch of this, is how do we get to the long-term energy transition as soon as possible? But how do you think about the way we embed more balanced, short, long, get different behavior change? How do you think about that these days?

Mark Carney:

I'll tell you, Dan, I'm a lot more optimistic about that than I was when I was trying to point out that with climate particularly, we had this tragedy of the horizon, which is by the time it's very obvious to everybody in terms of the frequency and scale and impact of extreme weather events, it's too late to achieve certainly a sub two degree outcome. And so part of the question is, well, how do you pull the future forward, at least in terms of the decision-making of individuals and companies in a critical mass?

Mark Carney:

And part of the way was, you have to have disclosure not just about today, but some sense of the future or scenarios of the future, so that was part of what the TCFD was. That was supplemented or being supplemented by having climate stress tests, which is just, they're just starting to be rolled out. But really what's being asked of a bank, is to say in those circumstances, and the bank of England for example, is doing this, is freeze your balance sheet today. If you had those exposures to those industries 10 years, 20 years from now, what do you think that's going to look like under a scenario where we do get to one and a half degrees, because the carbon prices are 150 bucks a ton, and there's certain emission regulations and other technological... What does it look like in that scenario, what does it look like in a business as usual scenario?

Mark Carney:

How robust is your strategy, basically, is the question of senior management and boards, to success on climate, or failure and physical risk on climate? And do you want to think about beginning to adjust your strategy today, in order to be in a robust position tomorrow? And by the way, if your clients have no idea the answer to these questions, it tells you something as well? I think that was the second way. What I hadn't anticipated to the extent that has happened, has been the extent to which country commitments to net zero have spurred company commitments to net zero, and the speed with which that's happened.

Mark Carney:

And it happens for multinational companies as well. Again, I'll go to Microsoft, it's a global company, it has a commitment to net zero in advance of its home country having a commitment to net zero. Partly because of broader stakeholder issues, but partly because there were already 125 countries that had commitments to net zero globally, and you can see where things are headed. And I guess that's the last point, and this is when I still talk to my old colleagues, some of them who have turned over, but on the policymaker side, the finance ministers, the leaders, I make this point that you can go a long way by having a credible track record. You don't have to take the carbon price to a hundred bucks a ton overnight, but if you're layering in a gradual increase, if you have it legislated as where we're going to have in Canada, for example, to 170, if you're building a track record in terms of, let's say the auto sector like the Europeans and Germans and others saying, "Okay, no new internal combustion engine vehicles by 2030," and supported policies around that.

Mark Carney:

Hey, surprise, surprise. The market will pull forward the future. We'll start adjusting now, and then by the time you get to the future, the adjustment is quite straightforward. And so, those are all the mechanisms you use. Last point: I do find, and you find with your clients, that those businesses where senior management thinks about the big strategic drivers, thinks a little farther, thinks about how it could affect their business, they tend to be first movers, they tend to be more aligned, they tend to be more robust, and ultimately they tend to create more value over time. So, as an investor or lender, you're also looking for that.

Dan Barclay:

I think you highlighted a couple of great points there. One is effectively market pricing. If you think about the price of carbon, we don't havea... Your carbon offset market will help set that. Whether we do it by regulatory, or an actual structural cost of carbon, it actually allows you to price the risk you have that you didn't know you had. And if we can get a term structure to it, even better. And of course, obviously with a legislated price of carbon, you have a term structure, you put that in place and it will drive companies' behaviors.

Dan Barclay:

I think the other piece that we find really powerful, is this concept now that the change has economic benefit. And so, in the discourse of two or three years ago, it was in the divest mentality, it was in the shut down and harm. And now we've moved to transition as a thesis. And what I would say from my polling of big CEOs, both in those intensive industries and otherwise, is they've actually found ways now when they start to think about re-engineering the way they do their business, think about electric trucks or automated trucks versus manual in a mine site. There's an actual large safety benefit, and a large EBITDA benefit. And that's good for the environment, and it's good for the company. That's where you start to see this accelerated pace of change.

Mark Carney:

Yeah, I think that's absolutely right. And you get the benefit, in the end there's several layers of benefit. One is if you're on the, let's say carbon pricing side, again, having a term structure as you just said, critical for that. I can see my widening margin for my efficiency with the term structure on carbon price. If it's binary regulatory fiat, "You can not do X after 2030," for example, that also focuses the mind.

Dan Barclay:

Quickly.

Mark Carney:

Definitely. You look at the German automakers, the shift is-

Dan Barclay:

They are changing, they're changing rapidly.

Mark Carney:

They are changing. And actually what I found interesting about the European, the UK has done something similar, is it feeds back, it's spilling over into North America. We don't have those moratoria here, and there's work on fuel standards, and there's probably more to come from the Biden administration, we'll share it in Canada. But GM moves, because you know where this is headed now, you know where the market is headed and it's a question of getting out in front on that. So, you see the benefits of that also in terms of your margins as well. In the end, and this is a point that it can only happen when people decide they really want to deal with the issue, which then gives the politicians room to actually take the policies that are necessary in order to do it. And people change their consumption and behavior accordingly.

Mark Carney:

But surprise, surprise, it's what people value. In the end, they value greater sustainability, and you're going to get paid if you're a part of that solution. And if you're going to get paid in the quote, real economy for being part of the solution as a capital provider, as an investor, you're going to get that benefit capitalized up upfront. It's where things are going, not where things have been, obviously, which drives value.

Dan Barclay:

Well, and I think we've seen a real change in the last 24 months on the green side of investing. At one time, there was a green discount, and now a green premium. And it can be small, it can be large depending on the level of transition, but that's really an insight of demand versus supply, that you can achieve that premium.

Mark Carney:

Yeah. And I think what we see, I'm interested in your view, we see that initially at the extremes of the market, you see it in energy, for example coal versus renewables is an absolute extreme. But moving in on that differentiation, you see it in the hard to bait sectors, some differentiation who has strategies, who's got prospects, who has in some cases, balance sheet and access to capital, because of ESG but also other reasons why they could pull this off. My sense is it's gradually moving into the center of the market.

Mark Carney:

And one of the things, if I go back to where we started on what are we trying to do for COP in the private finance side, in the end what we're trying to do is have the structures and the information in the markets, so that you all, we all in the private side are just taking climate change into account, taking the transition into account as one of the factors, one of the drivers of value in a transaction. Alongside credit worthiness, to which it's obviously related, technology risk, other factors, and that's driving capital allocation. And when it's just mainstreamed in that way, then we'll truly get the scale of the flows that are needed to tackle the problem.

Dan Barclay:

That's right. I often call that full cycle economics, when you have the real costs weighed in, you actually get a different type of decision than if it didn't exist. Why don't we take a little bit of a drill down? In your new book, Values: Building a Better Place for All, you talked about the financial risks on climate change. Why don't we bring a few of those to life? And then one of the key points in there is how do we partner on, how do we address those risks, and then take action on the opportunities? And your book was well laid out on this topic, so maybe just bring that to life a bit.

Mark Carney:

Yeah. Well, I think the way we've historically thought about climate change risk, and certainly the way I was first introduced to it most directly, was when I became governor of the Bank of England, and discovered oh God, I oversee the insurance industry. I've forgotten about that. And the insurance industry in the UK, it's the fourth biggest in the world, and it includes a lot of re-insurance and property and casualty, it includes Lloyd's of London, and they have enormous physical climate risk, enormous physical climate risk. And surprise, surprise, they're pretty good at managing that, not least because a lot of the book turns over on an annual or short-term basis. They reprice it, they change the coverage, et cetera. But they were very sophisticated in terms of the scale of the physical risk, and the numbers, and the breadth and depth an impact were quite... They made a big impression, let's put it that way, just in terms of the parabolic nature of extreme weather events, insurance losses, and the so-called protection gap that continued to grow.

Mark Carney:

So that which was, there were losses, but losses that weren't insured around the world. And in an un-addressed world, a business's usual world, obviously those losses are just going to scale up. So, they're the most obvious, but they're probably not the biggest risks in terms of, and this was a bit of the revelation, thinking about, well, in some respects done wrong, success could be failure in addressing climate change. In other words, transition risks, the possibility of creating large stranded assets. Because policy isn't predictable, policy acts too late, we don't deal with this until the middle of next decade, and we slam on the brakes, or there's a series of measures. Or we end up in a protectionist world because people are putting up order adjustment mechanisms, because of differential effort, et cetera.

Mark Carney:

As opposed to, we've left it late, but it's not too late. And as opposed to broadly moving together, the more predictable policy is we keep markets open as much as possible. And the issue is, how long is this activity asset going to run and taper off, and how do I reallocate capital over here, where something's going to be competitive? Exactly the kind of conversations the transactions you guys are increasingly doing. And that's how we take down the transition rate. Now, there's a third category of risk, which in Canada, I don't think we want to go to because it won't be the solution, but for the lawyers, which is around litigation risk, which is the classic asbestos, tobacco type litigation, which says company X knew all along that climate change was an issue, or they got to a tipping point and they continued to pursue their activity in a way that caused it.

Mark Carney:

But, I really focus on the physical, the transition. And what we've been talking about, and more importantly, what you're doing, what I'm trying to do, is to convert that transition risk into opportunity. And the optimist in me is, and it's learned optimism on this issue, it's because people are moving, that I think that we can fully convert that risk into opportunity. Yes, there will be some stranded assets, but the extent to which those are played out over time, and there's a gradual understanding of that in the market, there's always stranded assets. New technologies strand old technologies, new models in cars strand old models, this is the nature of capitalism.

Mark Carney:

And so, that's the risk framework. And then last point, which is to go back to something we were talking about a few minutes ago, which is the extent to which a view of the future is pulled forward through scenario analysis, stress testing, thinking about where policy is going. That's where we start to convert those risks into the commercial opportunities they represent.

Dan Barclay:

I think it's an interesting way to think about pace of change, pace of transition and the consequences. And they'll be good and bad, I'm not naive, none of us are naive on that. When we think about the recent Biden summit, I think there were some great initiatives that came out. One was the US's commitment to cut greenhouse gas emissions by 50%. Canada was 45 below in 2005. When do you think about that as an economic consequence? How's that going to transform itself, or portray itself out in the economy? Obviously, there's going to be some that are... The innovation should accelerate, we should be into new. You think about your carbon offset market should develop quicker, but what about some of the other consequences?

Mark Carney:

Yeah. I think, first just to put the Biden summit in context, in my view that was a freebie to have the Biden summit. I mean, it was great to have, early in the year we got a US commitment which was at the upper end of what people would have hoped, so 50, 52. The Japanese moved to 46 with a stretch to 50, Canada moved to 40, 45. The UK put a farther commitment out, 68 by 2030, but then 78 by 2035. And there was some movement, I would say China, Brazil, South Africa, to a lesser extent India, but all of the first three all made additional important commitments, which is slightly dance of the seven veils, but slightly revealed things that could happen later in the year. So, it set up some momentum, South Korea an important commitment on coal financing. So, we've got to keep going, but that's all to the good.

Mark Carney:

But your question in the end, okay. You have these shifts, Canada, and let's take Canada specifically in terms of the... We had a 30% headline commitment, but a view that was revealed in the budget as it turns out, that we thought we were going to be on path for 36% reduction, given the policies that were in place. So, I would argue there's a gap somewhere around 10 percentage points at the high end of the range, in terms of, okay, we've got a carbon price going to 170, we have some clean fuel standards, we have some various things, but we need to do more on the policy front. Or there needs to be more innovation that comes that makes it happen.

Mark Carney:

I actually think that what we need, and I made this point to the government privately, but we need a much more rigorous accounting of, okay, here's our commitment, here's where we think the policies are going to get, and this is where we think we're going to get the emissions reductions from. Look, it won't be perfect, no prediction of the future is perfect, but it'll give people a greater sense of what's left to be done, and also help your clients, yourself, those watching, is it in the building side? Is it in ag? Is it in the energy side? Where's the low hanging fruit that's left, and where could we take advantage? I think where we are now is in a position where to get to the economic impact, and I'll take the US which is a little more straightforward, is that this is going to be an economic accelerator for the US. There's an infrastructure deficit, a chunk of this is infrastructure related from, I view as a slightly famous but stretch, clean grid by 2035 objective for the US. I'll come back to that.

Mark Carney:

The rollout, the reworking of the transportation system, which I think will be a big, important element of this in the US, and on. So, this is capital intensive, it's largely job heavy, which is net good, and so on a whole it's an accelerant. I think for Canada, that's broadly true, except that we need a more coherent strategy on the energy side, that is consistent with making the most of our immense resources in oil, gas, while bringing up some of the fuels of the future in a more concerted way. We have elements of this strategy in place, but candidly, I don't think we fully have the incentive structure for carbon capture for hydrogen that we could have. And I would rather that we err on the side of doing too much there, quite frankly, in order to accelerate, than doing too little.

Mark Carney:

I also think for what it's worth, and I think in the end this is what we'll end up doing, it just may take a year or two more, we're an 85% clean grid right now, so much higher than the Americans. Yes, it requires some investment, but for lots of reasons we should be at least matching their 2035 objective for a hundred percent clean grid, I'm not sure they're going to get there, if not trying to get ahead of them. A, because we have to get there anyways, first point. Second point, it's a big investment, it's job multiplying. And third point, it makes Canada a no brainer destination for tech, for manufacturing, and transportation as well, obviously, that would benefit from the clean grid.

Mark Carney:

And I do think with these types of big measures, you do need a few very simple objectives that helps concentrate the minds of... It concentrates the mind of industry, of finance, and also captures a bit of the public imagination as well, which is okay, we're going to decarbonize, but we're going to do it by building as opposed to shrinking. So, I'm not sure I gave you a precise answer to your question. I gave you elements. I think this is a growth strategy, I do believe it's a growth strategy for both of us. I feel a bit more with Canada, we've got elements that we need to layer in to get the full benefit of it, and hopefully that can come in the next couple of years.

Dan Barclay:

When you think of clean grid, do you think about it as net clean or absolute clean?

Mark Carney:

I think of it as, look, it will be net clean for a bit, but I think of it ultimately as absolute clean. We have the benefit of... There will be pockets where it's not perfect, but we have the benefit of hydro in many of our jurisdictions, which solves many of the... That's a little too strong a statement, but as you well know, if you've got a full renewable grid, it's virtually impossible on current storage to have a full renewable grid, to have grid stability. But if you've got base-load nuke, as we do if we've got renewables, and we've got hydro power, which we do in most cases, and we could have a lot more, it does create that ability.

Mark Carney:

Now, part of me is thinking, more than part of me is thinking that our hydrogen strategy, I did mean to say hydrogen this time, but our hydrogen strategy needs to, we need to move on hydrogen in a big way, and I think we'll have to move on blue hydrogen, given some regional characteristics and given the infrastructure we have in place, and the fact that we could well be very competitive. Look, you know well, you guys look at it a lot and do work in it. We need to be a leader in carbon capture and storage for a variety of reasons, for the oil sands, for blue hydrogen for other... And we've got geology that supports it, we've got infrastructure that supports it, we've got some expertise, and so we should just be charging very hard on that. But yes, to loop back to the core question, yeah. As much as possible, absolute clean grid.

Dan Barclay:

Yeah. I think that the hydro question is really fascinating, because it can actually be one of the biggest forms of storage.

Mark Carney:

Exactly, yeah. And we don't think of it quite that way, and again we had a recent dynamic in Texas where, it gets brushed with over-reliance on renewables, but in fact it was a lack of preparedness for cold weather, I think was the real driver. It's worth spending a second on, because lack of preparedness for cold weather, and the thinking that the capacity constraint was ultimately going to come in summer months, but it came in freak weather here. But also ERCOT as we all know, it's an island in grid terms, and that's a very, very risky strategy. If you run an island, then you got to have a lot of excess capacity, which they didn't. And it's got to be weather resilient. It raises an issue, of course for us, when you think about it in terms of-

Dan Barclay:

We have a different thesis than, let's build a big, huge central utility that controls it all. I think it's an and, I think it's an and and a middle. I don't think it's an or.

Mark Carney:

It is an and. And of course the battery in your garage is going to be in your car, right? I shouldn't say of course, but we see opportunities where that is going to be the case 10 years out, so that your electric vehicle is part of the distributed grid, and you're a part of the, you know, the load shifting capacity, and you get paid for that. And the consequence of that is... Sorry, never a good thing when, Bell Canada's calling me, I must be in trouble.

Dan Barclay:

They're about to turn your internet off.

Mark Carney:

Exactly, I'm going to say goodbye.

Dan Barclay:

We need 10 more minutes, 10 more minutes. Why don't we shift gears a bit, Mark? You've got another role in life. You are working at Brookfield in charge of, or developing now a seven and a half billion dollar impact fund, so that puts you now onto the investor category. How do you think of the way you're working toward net zero? How do you think that impacts the portfolio, the choices you make? What are some of the ideas you've seen recently, that get you really excited on the innovation side? Take us through the last little while offsetting there and building that business.

Mark Carney:

Yeah. Well the first thing, I thought I'd put my time where my mouth is on climate and climate opportunity, I fully believe this is an enormous commercial opportunity, probably the biggest commercial opportunity of our time, because we're rewiring the whole global economy. And in some of the ways which we know, and I'll come to that, because a lot of that goes directly to what we're doing at Brookfield, but some in innovation that's still to come. And we can predict some of it, the hydrogen discussion is an example of things that are on the cusp and probably have to be part of the solution. But there are that we don't fully appreciate, that will come.

Mark Carney:

So, the Brookfield Transition Fund, the work we're doing is to say the backbone of the global economy needs to shift towards... Let me reframe. We're basically going to where the emissions are today, and we're taking companies and assets and aligning them with the path to Paris, so a one and a half degree path. And so, for those who are investing in the fund, what they're getting, or what we're targeting is a commercial return, an infrastructure type return, so 13% plus return.

Mark Carney:

And very importantly, so it's got this dual objective, that the fund will be Paris aligned, it will be one and a half degree aligned, and that the assets in the fund will all be that. Now, we'll do everything we can in order for that to be the case. And what we see is that more and more companies around the world, and this is a global fund, but more and more companies around the world looking at their emissions, thinking about how they can get them down, and carving out areas in which they would decarbonize.

Mark Carney:

So, I'll give you some of the examples of things we look at and are working through, suffice to say in the tech world, there are very large power demands in the tech world. Think of cloud providers, think of just the usage of servers for a variety of tech applications. And the good question is, is that being serviced by renewable power? How do you optimize the power usage for that footprint, which is large and expanding? And well, given that Brookfield's got 20 gigs of renewable power in operation today, almost 25 in development in four continents, 3,000 operating professionals, and we can go and carve out and solve that issue for tech companies. So, that's one example of it.

Mark Carney:

Another example would be on the auto side, where you've got a couple of issues if you're a major automaker today. First, you have your own scope two power for just your production. And in many cases again, do you wait for the grid in your various regions, your various plants to get to zero emission, or do you bring in some bespoke renewable power and get your initials down accordingly from that? So that's one, and again, having a global footprint and being able to provide those solutions helps.

Mark Carney:

But then the second thing you worry about as an auto company is you say, well, what's my charging infrastructure? And it depends on the jurisdiction. I need a charging infrastructure, I may want to compete on that charging infrastructure. I may want to be high at fast charging type infrastructure, I certainly want to be branded on it. Do I want to own the capital, do I want to own the infrastructure? Not necessarily. Do I want to know that the molecule that's going into the charging infrastructure is green? Yes absolutely, because I don't want to undercut the case. Is there anybody who might have a lot of capital expertise, wants to own the asset and can provide green power? That's part of what Brookfield can do.

Mark Carney:

So, there's quite a wide range of things like that that we see. And I give those two examples, because it shows the element of the sustainable transition, which is that businesses look at their activities, and start to take them apart and say, how do I separate out the final energy demand? Do I really want to own this bit, how can someone else develop it, and how can I move ahead efficiently that way? Suffice to say that Greenfield Renewable development will also be part of this, and obviously that's straight there.

Mark Carney:

But the thing that I'll say as well, just to put this into the broader context, and Brookfield's putting two billion of its own money into this fund, and we're having a number of conversations, and going well, this is an area where I think a lot of people want to be involved. But if I put it into bigger context, which is there is a very large capital investment need globally, to decarbonize on proven technologies, quite often it has a business process re-engineering aspect to it, as I just described. And that's going to cover about 60% or so of emissions reductions today, on proven technology. That leaves let's call it a third, I'll round down, a third that is technology that is not yet economic. Hydrogen would be an example, carbon capture and storage would be another example, and then technology that is outright speculative, direct air capture, sustainable aviation fuel.

Mark Carney:

So, we're not in that end of the spectrum, but we do think that over time, over a life of a 10 plus or 12 plus year fund, that some of those technologies will roll down into that economic. So as you probably see, Brookfield's active in hydrogen, has got a partnership with Plug Power on some activities, we're active in some of these other technologies, in a way that's got downside floored, reasonable upside, but also is just getting us ready for the day when that shifts into the mainstream. So, as I say, I'm trying to put my time where my mouth is. It's largely other people's money, just to be clear, I'm not going to make the difference on the fund, but the time, and it's heartening to see just the scale and the quality of conversations.

Mark Carney:

And if I can say one last thing, Dan, which is that again it goes to the strategic nature of this, which is it's all CEO conversations initially, it's very top of mind, and you would see that in your interactions as well.

Dan Barclay:

Yep. Well, we put together our own impact fund last year, 250 million of BMO's capital. And we're a little more on the innovation side, more venture and growth side, as opposed to proven scale model, which is more you at Brookfield. And our dynamic was how do we get our intellectual capital up? That's the real driver, find smart people doing smart things that look promising. But for us as an institution, we need to bring our intellectual capital up to emerging and current state, wherever it is, and use it that way.

Dan Barclay:

We've also made our own commitments, I think we're a trillion dollars in mobilizing capital on behalf of the energy transition. And it fits as you know, complete parallel to how you think the role of a financial institution is, is we have to be an active participant in the transition. So, all those things. Maybe if we get one closing comment from you, as I see our time clock says we've got a minute: what gives you the most optimism these days? What's giving you hope and optimism?

Mark Carney:

I think it's, candidly, I'll hit on a couple of things. One is that it's a CEO conversation, so this is core strategy. And the breadth of it and the depth of it, in other words, I get optimistic anytime you've got a very large number of smart people, energetic people, entrepreneurs, investors, people trying it out, addressing this issues, I just feel that the best of the market is working at this, and people have taken an attitude that they're going to solve the problem. And what gives me optimism is I keep bumping into things that, and it's not hard to do, things I hadn't thought about in terms of solutions or speed of solutions. And that's always reinforcing, and that just demonstrates that people are on this issue. And candidly, in the last four seconds, they're going to make a lot of money doing that. And that also makes me optimistic, because I'm very happy for them. Things will be better as a consequence.

Dan Barclay:

Yeah. Well to me, I think I said it earlier in the conversation, my big observation with our clients in the last 12 months, is going from feeling like they're in the penalty box to feeling like they have incentive to change. And when you have incentive, you are creative, you're innovative. As you said, you're going to find a way to make a lot of money in what is a fundamental change coming through.

Dan Barclay:

Mark, thank you for your time, your insights, that was a very engaging conversation. We wish you Godspeed in everything you're doing, and you've got the support of this group, for sure, this audience in the efforts you're doing. And we look forward to COP26 and what we get achieved. So, thank you.

Mark Carney:

Look forward to it as well. Thank you, Dan. Thanks everyone. Take care.

Dan Barclay:

Thanks.

Mark Carney:

Bye.

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