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Why ESG Has a Bright Future

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For all the differing views on sustainability right now, there is still a broad consensus that the risks linked to climate change are real. Few are taking as proactive an approach to climate change as the investment industry, with financial companies becoming leading voices pushing to create a stronger and more supportive market for sustainability-focused investments. That was one of the main takeaways from the ESG Practice Amidst the Correction and the Politics panel at the BloombergNEF Summit in New York.

The panel, moderated by Danya Liu, Senior Associate for Climate Risk at BloombergNEF, featured some of the leading financial and global asset management firms, including Dan Barclay, Chief Executive Officer at BMO Capital Markets, Nikita Singhal, Co-Head of Sustainable Investment & ESG at Lazard Asset Management, Dave Stangis, Partner and Chief Sustainability Officer, Apollo Global Management and Riddhima Yadav, Vice President, Strategic Initiatives, Brookfield Asset Management.

Committed to ESG

The financial industry continues to show its commitment to the energy transition by investing in and developing financial solutions to meet the global 2050 net zero targets under the Paris Agreement. While the economic risks tied to climate change shouldn’t be dismissed, the more than $5 trillion expected to be invested in the energy transition by 2050 means it’s also an opportunity that investors can’t afford to ignore.

The massive scope of change that is already underway to find climate solutions is why BMO Capital Markets has dedicated so much of its intellectual capital to be its clients’ lead partner in the transition to a low-carbon economy. “It’s our tour de force,” said BMO’s Dan Barclay. That’s why the bank has reimagined to embed sustainability into its culture to help clients understand the business imperative.

While that approach applies to both public and private companies, Barclay said public companies are experiencing greater scrutiny, with pressure coming from regulators, investors and customers. To level the playing field, Barclay believes there needs to be a greater emphasis on incentivizing sustainability to encourage private companies to accelerate their sustainability efforts. The clean energy funding and incentives outlined in the Inflation Reduction Act (IRA), as well as the similar policy moves in Canada and parts of Europe, are the types of incentives Barclay would like to see more of.

Apollo’s Dave Stangis agreed, noting that the IRA is an important accelerant and drives innovation in the energy transition. “When you can incentivize market drivers, there’s a lot of positive action that comes from it,” he said.

BMO believes in a just energy transition, which means providing all clients with access to as much support as possible to help them succeed, said Barclay. To achieve that vision, BMO is helping clients gain a better understanding of the opportunity and manage their risk by focusing on three pillars: sharing insights, improving better data and human capital to help enable the change. BMO has been focused on developing those three pillars over the past five years, said Barclay. “We’ve put a lot of effort and time into this, and I think of those as our enablers to help our clients change faster,” he said.

Identifying the Catalysts

One of the more important takeaways for Lazard’s Nikita Singhal is that there are so many ways to invest in this market and the opportunities are often highly idiosyncratic. Investors must also understand the catalysts that will be priced into transition-related risks and opportunities. She outlined three main catalysts: a shifting regulatory environment, changes in consumer behavior and technological disruptions.

“There are tremendous opportunities as you start to think through these catalysts, and not just from a product standpoint, but from an operation standpoint and a margin improvement or an ability to maintain your competitive edge in the marketplace,” she said.

But for all of the opportunity available to investors around climate change, the lack of consistency in data and reporting continues to be a barrier limiting ESG’s potential, explained Barclay. “Data creates opportunity,” he said.

Better Data Will Accelerate the Transition

Brookfield’s Riddhima Yadav agreed. “Useful data is going to be one of the makers or breakers of understanding how a company is transitioning,” she said. Getting that piece in place will be critical to incentivize investors and put capital to work where it needs to go, she added.

Still, Singhal argued that lack of data shouldn’t be used as an excuse to slow the momentum around ESG. She added that important as data is, the contextualization of that data is equally important. “I think we’re quite a ways from getting to the point where the financial industry or all of Wall Street understands how to contextualize this on a daily basis in their work,” she said.

Despite the challenges, the panel presented an optimistic view of the future of investing in the energy transition. “The amount of capital that’s going to be deployed is just tremendous,” said Stangis. “This opportunity is happening, whether everybody is aligned on the right terminology, doesn’t matter.”

Resetting Regulation

The panel also weighed in on the rapidly changing regulatory environment, which is making people take a harder look at new commitments, said Stangis. “Let’s make sure we're precise about what we’re focused on, and not committing to things that we don’t know how to achieve yet,” he said.

To build on that point, Barclay said regulators face the delicate task of trying to balance how prescriptive they need to be versus giving the market room to find solutions. “I don’t like the idea of regulating everything or standardizing everything because I think it takes away from innovation,” he said.

While regulators play an important role, Barclay would like to see greater coordination between competitors to become more aligned in the way they approach the energy transition. “When you create a like-minded alliance, you have the power to establish benchmarks and accelerate change,” he said.

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Dan Barclay Senior Advisor to the CEO

PART 2

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Rachel Walsh, CFA April 28, 2023

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