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Episode 19: Just Transition

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The Paris Agreement target to limit temperature increases to 1.5 degrees Celsius above pre-industrial levels is widely discussed, but there is also a less cited part of the Agreement - the Preamble, which mentions that the transition to a net zero carbon economy should be a just one. Underpinning the concept of a just transition is the inclusive wealth model. On today’s episode, special guest host Rani Pooran will take the listener through conversations with two leading thinkers, William Irwin, Policy Analyst, The Grantham Research Institute at the time of recording Steven Stone, Chief of the UN Environment Programme’s Resources and Markets Branch on why investing in a just transition is critical to achieving the economic potential and managing the social impacts of the net zero carbon challenge, and how measuring dimensions such as human and natural capital can further countries’ progress.

In this episode:

  • The 5 areas for investor action in the initiative for a just transition

  • How all kinds of investors can play a part

  • The comprehensive wealth model of nations

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William Irwin: Investors need companies, need the government, who also need investors. Everyone has to act on this and take responsibility.

Michael Torrance: Welcome to "Sustainability Leaders." I am Michael Torrance, Chief Sustainability Officer with BMO Financial Group. On this show, we will talk with leading sustainability practitioners from the corporate, investor, academic and NGO communities to explore how this rapidly evolving field of sustainability is impacting global investment, business practices and our world.

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

Rani Pooran: I am Rani Pooran, Senior Advisor at BMO Financial Group, working on sustainability and inclusion topics. Today, I'm hosting the "Sustainability Leaders" podcast series on the importance of a Just Transition as countries move to a net-zero carbon economy. With today's guests, I will explore how a Just Transition can be financed, who is involved and why it is useful to move beyond the measurement of GDP and consider dimensions of inclusive wealth such as human, natural and produced capital. My first guest is William Irwin, a policy analyst covering sustainable finance at the Grantham Research Institute at the London School of Economics. William focuses on how the financial sector can support a Just Transition in the UK. Efforts to limit temperature increases through decarbonization is a transition underway in all countries and one that will unfold over the decades to come. The Paris Agreement target to limit temperature increases to 1.5 degrees Celsius above pre-industrial levels is widely discussed, but there is also a less-cited part of the agreement, the preamble, which mentions this transition should be a Just one. The International Labour Organization indicates that a well-managed transition could result in changes in the production system on a scale equivalent to an industrial revolution and a net increase of 80 million jobs globally and a 2-degree scenario. Industries, regions and people will be impacted differently by the transition, and proper planning is required to ensure access to decent work and economic growth. Will, at Davos this year, we heard activist leaders such as NGOs calling for this transition to be a Just one. In addition to NGOs, this concept has largely been associated with policy makers and trade unions, but at the Grantham Research Institute, you have established the business case for investors in this area and consider that the role that the broader financial services industry can play. Help us understand what the latest thinking is on this topic. What do we mean when we use the term Just Transition?

William Irwin: Hi, and thank you for having me on this. It's really great to be speaking to you about this exciting topic. So, yes, what is a Just Transition? As you say, this is a concept that comes out of the labor movement and, maybe for some people, more associated with policy makers, but really, it's actually a broad concept applicable to everyone, all actors. It's rooted in the idea that the net-zero transition is. It's economic and technological, but actually, it's more than that. It's a process of societal transformation, and that's got very profound connections to long-term returns, benefits in a business case for banks and investors but also in terms of the societal role that they have. So it touches the kind of investor space for many angles, I think.

Rani Pooran: Why is this a topic country like the United Kingdom, where you and the Grantham Research Institute are based, and Canada, where BMO Financial Group is located, should pay attention to?

William Irwin: There are two main angles, if you'd like. I mean, the first is that if it's not carefully managed, this process, it's either not going to happen, or making it happen is going to be much, much harder, and that's something that was recognized by the UK's Committee on Climate Change, so that's the independent body set up by the government to monitor progress on climate targets and hold the government to account on the targets that it's put into legislation. They said that if this is perceived to be fair transition, then it risks being stalled or slowed down, and as we know with climate change, the risks are enormous. The potential costs involved in that are enormous economically, not to mention the kind of justice and fairness angle and the human cost of that. The second thing, I think, is that, as I said, it's about the type of society and the type of world that we're going to live in, in the future. In the same sense, in the climate change debates, scientists often talk about different equilibria, so if we overheat too much, we're going to tip into an equilibrium in which it's very difficult to kind of cool down again or to control temperature. Temperature could just kind of run away. We also face similar kinds of pathways on a socioeconomic front, so we face lots of different challenges at the moment, and net zero and the climate transition is one of them. There're also digitization and technology. There's also growing inequality. In the UK, we've got a serious issue with kind of lacking productivity growth.

Rani Pooran: Will, you mentioned the lagging productivity growth that the UK has been facing, as has many different countries. This speaks to the socioeconomics, which is what a Just Transition is all about and brings to mind the sustainable-development goals, in particular SDG 8 on decent work and economic growth. Share with us why investors care about a Just Transition and this specific SDG.

William Irwin: Right, well, I'll just start briefly with the sustainable development goals. They provide a great kind of framework for connecting different areas of societal aspiration, but the Just Transition also does that, so it's why it's quite useful to talk about the Just Transition in terms of the SDGs, so connecting climate but also social decent work is what the Just Transition is all about and also what the SDGs are all about. In terms of the case for investors, well, I think twofold, really, I guess it comes into this idea of fiduciary duty. One is that this is about long-term returns. This is about good returns. Firstly, climate change itself is an enormous risk on the physical side, the damages both to portfolios and businesses but also more broadly to society and the potential disruption if climate change isn't got under control and kept to that 1.5-degree target, really worrying for business. Then secondly, there's a transition risk, so the later we leave this, the more disruptive the change is going to be, the more assets will be stranded, the more damaging it will be for business and investors.

Rani Pooran: The Grantham Research Institute has released several reports, including one last year called "The Investing in a Just Transition Initiative," in which five areas of invest-to-action are identified. They are investment strategy, corporate engagement, capital allocation, policy advocacy and partnership, in addition to learning and review. Today, where are you observing the most activity from the investor community?

William Irwin: Currently, we see exciting things happening in all areas, to be honest, in all of those areas. I think where we are is probably more focused on the strategy and the engagement side, but there's some really exciting work in the capital allocation area and in terms of the policy and partnerships, as well, and that's really, really an important part of it that I'll kind of come to last. On the strategy front, investors are recognizing that this is a really important issue. We have a statement of support with our partners, the Principles for Responsible Investment, and that's attracted over 150 signatories with over 10 trillion in assets under management, some of them investors, full-range, some of them on the smaller side, impact investors and foundations from some very, very big players in there, as well, so we're really seeing that this is something the investors are understanding that they need to get on top of, and they're going to have to build into their strategies, and that's something that they're starting to do. On the engagement side, there's a clear root into that because companies, they're already involved in engagements on climate change, and they already have dialogues with the companies that they're involved in, so they're already starting to put Just Transition into some of those, so for example, some investors who were involved with engaging with a power generator in the UK. The Drax Group runs a very, very big power plant in Yorkshire in the north of England, and they've been getting into an engagement with them about the Just Transition. It's also, for example, started appearing in some of the AGM resolutions with oil and gas companies, just asking how they're planning for this, also in the oil and gas sector in the UK. So engagements, the first one, really, because of that clear route, and we're seeing that starting to happen, but also in terms of capital allocation, there's growing activity within the kind of debt markets, so there are Just Transition bonds just being issued, so those are kind of green bonds that also link to investments that have social benefits, and there can be performance-linked loans where the interest rate of the loan is linked to results on kind of social as well as environmental dimensions, so if a company hits those targets, hits those KPIs, and has that slightly lower interest rate than the other ones might, then, I mean, within that capital allocation piece, obviously, some of these markets are developing. We're some way through the climate-change transition, but there's a way to go, and some of these areas are emerging. But there's a lot of opportunities for investors from impact funds or local investment funds, so in the UK, we have local government funds. They are where they manage all the money for the local government, the police, fire department, et cetera, and one of them, the Greater Manchester Pension Fund, who we work with, has allocated 5 percent of its portfolio to local projects. They have Just Transition in their responsible investment policy, so starting to see some innovations on the capital-allocation side as well. Then on partnerships and policy, I mean, this is really key because this is going to unlock a lot of the areas for investors, but obviously, it's slightly slower moving and involves kind of longer process of dialogue, so that's starting up. Those conversations are ongoing. I think investors, much more prepared now to kind of make asks to government on these kinds of things. Something I'll just add on the capital-allocation front is, we're seeing a kind of push to develop ways of understanding numerically the impacts that companies are having on the social side of things, which is a big challenge, but that will really help equity markets to allocate money in a way that's aligned with the Just Transition, so that's an exciting area that a lot of people are working on.

Rani Pooran: What types of questions are shareholders raising at annual general meetings?

William Irwin: So a shareholder can ask a company quite simply, "What are your plans on this issue?" in the same way that they might ask, "What are your plans to be a Paris-aligned company? What are your plans for the Just Transition?" So that can touch on all the different areas that are relevant to this, so you mentioned the ILO right at the beginning of our discussion, so, "How are you upholding principles of decent work in this transition, ensuring that companies in your supply chain are upholding those values? Are you paying the living wage? Are those companies in your supply chain paying the living wage?" Then there's issues of kind of how workers are going to transition at the same time that you're going to transition your capital, so, "What are your plans for retraining? What are your packages for kind of relocation?" With unions and dialogue absolutely at the heart of what companies can do and, therefore, what investors can ask of companies, so, "What are your processes for dialogue with unions? What are your processes for dialogue with communities, as well?" And all of these things are things which investors are used to asking from companies in the sense that same goes for climate change, but the Just Transition is about connecting those two issues, recognizing that the context of climate change is a really big touch point for a lot of these things, and so they kind of need to be dealt with together.

Rani Pooran: Will, you mentioned policy advocacy is important and slow-moving. How comfortable are companies talking to stakeholders such as government and labor unions on this topic?

William Irwin: Well, I think enormously, very much a comfortable area because I think it's an area of great opportunity if interests are aligned and if the right coalitions are there. It's obviously partly a matter of overweight in the downside, so there's a really strong incentive there for companies to get on top of this and work with governments.

Rani Pooran: There is a concept which you mentioned earlier in our conversation. It is play space financing. What would you share with our listeners about how the investor community and retail backs can help regions and communities not go into economic decline as a result of stranded assets and workers?

William Irwin: Firstly, on the strategy front, understanding what this topic is about and understanding the ways in which it may challenge the ways that banks and investors have been doing things, but also opening up some opportunities on engagements. They can talk to companies about what's happening in specific places. In terms of capital allocation, just as I was talking about kind of Just Transition bonds, you also have kind of municipal bonds, and those open up opportunities for investing in particular places. You may have companies who are kind of anchored in particular regions, who offer particular possibilities, particular options for development, so for example, we've done some research with a major kind of water utility in the UK, Yorkshire Water there, based in Yorkshire in the north of England, and they're the water provider for that whole region. They're an anchor institution. They are very, very much linked into the economy in multiple different ways. They're a major employer. They're a major infrastructure maintainer, but they also produce energy. They train their workers. They have apprenticeships. They're really linked into a lot of areas. They also have green bonds, and so they offer a root through debt markets for investors to invest in some of the things that they're doing in that particular region. I think there are other areas through infrastructure and venture capital that may offer possibilities for investors to look at some of these things through a capital-allocation lens. Lastly, on the policy, I think this is a really, really, really important area because for the transition to be successful, a lot of the things that are going to have to happen are going to have to happen at that kind of regional level or city level, both in terms of kind of the hard, physical infrastructure, but also, I think one of the absolutely biggest challenges of this is how to have the citizen engagement to bring people on board in this transition because this is unprecedented. We have 30 years to completely change the way that the economy works, and some of that is going to involve people altering their behavior. Some of that is going to involve changing people's houses and having to go into their houses and change the way that it's heated, for example. They may have to get used to new taxes, a carbon tax, for example, but some of that might be paid back to them in a dividend in the way that would be really, really, really progressive, but that's a change that people are going to have to get used to. So absolutely, I think, arguably, the biggest challenge, in fact, in the climate-change area generally is that engagement piece in how to bring people along, and that really, really connects this to local agendas and the way that this is done on a local scale and the way that it engages communities in the way that it's done. So local government, local actors, community actors are going to be really, really, really important, and it's really important that there's capital for that. That's not something that government and local government is going to be able to do on its own, so going to have the find the partnerships and the ways for investors to mobilize capital towards some of those locally government-led projects but also the kind of community-level ones and some of the smaller opportunities. That's probably going to involve some kind of government link, some kind of aggregation, to achieve the scale of interest to investors. And you also mentioned banks, and I think that's a really, really important part of the puzzle because banks, through their involvement with kind of mortgage markets and lending to small businesses, they're much more linked into, firstly, into particular places. They may have 30, 40-year mortgages for houses or apartments in an area which may be affected by the transition in a particular way. That's not something that they want to just walk away from and the major stakeholders in the whole economy.

Rani Pooran: I have the pleasure of speaking with Steven Stone on the topic of comprehensive wealth and the valuation of different types of capital. Ultimately, a Just Transition is about moving towards a more sustainable and inclusive model of economic model of development, a key component of which is human capital. Steven Stone is the chief of the United Nations Environment's Resources and Markets branch. He holds a PhD in resource economics from Cornell University and has more than 20 years of professional experience in natural resource management. As chief of branch, Steven has helped incubate the Green Economy Initiative, the Economics of Ecosystems and Biodiversity and the Partnership for Action on a Green Economy. Welcome, Steven.

Steven Stone: Hi. Good afternoon, Rani.

Rani Pooran: Steven, the concept of inclusive or comprehensive wealth is gaining recognition, and it can help us understand how to think about sustainable and inclusive economic development by putting a value not only on human capital but also on other types of capital such as produced and natural. Last year, when we had the opportunity to meet, and you gave a lecture at the Graduate Institute, I remember you stressing the importance that, as sustainability practitioners, we should have a pointed view on the valuation of natural capital. Governments and corporations are taking interest in the idea of going beyond measurements of GDP to fully understand the wealth of a country or a business. For example, the World Bank published "The Changing Wealth of Nations" in 2018, which tracks the wealth of 141 countries between 1995 and 2014. Today, we'd like to hear from you about the latest thinking on this topic and how you think this concept might change investor and consumer behavior in the decades to come. So, Steven, let's start with, what exactly is inclusive or comprehensive wealth, and how is it calculated?

Steven Stone: Okay, that's a great question, Rani. Essentially, when you're looking and talking about inclusive wealth or comprehensive wealth, what you want to do is track all the assets that a country might have, and a lot of those assets are fairly straightforward and visible, so roads, bridges, infrastructure, factories, everything that's produced capital you can see. You can touch. But there's other forms of capital that you can't see and touch. Some are natural, so stocks of forests or fisheries in the oceans, in the lakes, underground minerals, as well. Those all form part of natural wealth, and then the intangible parts of human capital, so education and health. These are three different distinct classes of assets which every country possess in different amounts, so inclusive or comprehensive wealth is essentially your total stock of capital assets produced, which is physical, human, capital, health and education, as well as your natural capital stocks, as well, and there's some variations in how it's actually calculated, whether you use market prices or shadow prices. Shadow prices are just a fancy way of saying, "What is the value if the markets actually could give a price to it?" but essentially, that's what it is, and it's a great complement to GDP because GDP is essentially only looking at the flows as opposed to your stocks.

Rani Pooran: So how long has this concept been around, Steven, and who has been talking about it most?

Steven Stone: Well, it has an interesting pedigree, Rani. It actually started quite some time ago. I think there's some wonderful history to economic thought. If you haven't read Mazzucato's recent book, "The Value of Everything," she looks at how value is defined, but for inclusive wealth or comprehensive wealth, we can trace this back to David Pearce, Ed Barbier and Anil Markandya in their "Blueprint for a Green Economy," 1989, and subsequently, Partha Dasgupta and others picked it up and really took it forward. The World Bank issued their first comprehensive-wealth report called "Where is the Wealth of Nations?" in 2006, and UNEP, United Nations Environment Program, produced their first Inclusive Wealth Report in 2012 on the margins of the Rio 20 conference in Rio de Janeiro in Brazil.

Rani Pooran: Okay, so this concept has been around for a while, a couple of decades. You mentioned 1989 and David Pearce. So what are some of the trends that we've seen since that time, particularly around produced, natural and human capital?

Steven Stone: It's kind of shocking, actually, Rani, when you look at it. If you compare growth in total wealth or comprehensive wealth, inclusive wealth, to GDP, it lags behind quite a lot, so in other words, the Inclusive Wealth Report, which UNEP produced in 2018, showed that the rate of growth for GDP over the period from 1990 to 2014 was about 3.4 percent on average, whereas for inclusive wealth, it was 1.8 percent per year, about half, and the interesting thing is, when you decompose that, you find that some countries are actually growing their economies, so the size of their economies is growing. GDP is growing, but they're actually depleting their wealth, which supports the growth in the economy. In fact, 44 countries out of 140 in that sample from 1990 to 2014 had a decline in inclusive wealth per capita even though GDP was growing, so it really is an eye-opener. You can look at things from a GDP lens and say, "Looks pretty good," but if you look at the actual stocks of a country over the same period, it might not seem so rosy.

Rani Pooran: So, Steven, this seems like it would shift our understanding of how we think about which countries are wealthy and which are not. What can we expect to see in the next 10 years with respect to wealth?

Steven Stone: That's a great question. I mean, the interesting thing is, for a lot of low-income countries, countries that depend on primary commodities or primary sector of their economy, they depend heavily on their natural wealth, so it might not be surprising that they draw it down to convert that natural wealth into produced wealth or into human wealth, human capital, education and health assets, and that's the trend that we see. There is quite a bit of drawdown of natural capital, but when it comes to countries that are sort of getting beyond that point, where they're actually producing a large share of their value through secondary or tertiary parts of the economy, you would expect to see that reversed. In some cases, you do, and some cases, you don't. There's an interesting story of two countries. I wanted to share some data with you. This is from the World Bank's 2018 "Wealth of Nations" report, and it has two very interesting cases. One is China, so China's per-capita wealth in 1995 was about $30,000 per person, 1995. By 2014, China, that figure had grown by over 200 percent to over $100,000 per person per capita, so China was clearly reinvesting the way they grew into their produced capital, which grew hugely over that period, their natural capital, which grew somewhat, almost by 200 percent, and their human capital. So really impressive reinvestment in their wealth, whereas another country. Not to pick on anyone in particular, but we know it's an oil-rich country in Africa, a large one. In Nigeria, their 1995 per-capita wealth was 48,000, so higher than China's, but by 2014, it had decreased to 37,000 per capita, a 22-percent decrease, and a lot of that had to do with the lack of reinvestment in produced capital and the drawdown, very significant, 60-percent drawdown, of their natural capital base. So it's just kind of "A Tale of Two Cities" in a way because you start with an underlying endowment. Nobody can change that, but how you extract rents, and then how you reinvest the rents has an incredible bearing on your overall wealth, so it's not just the amount that you're growing, but it's how you grow. That's part of the story.

Rani Pooran: "How you grow," so let's talk a bit about that, how you grow. Who do you think is doing it well right now, if any countries, other examples we can look to?

Steven Stone: Well, there are. I mean, I think the data on China says they're doing quite well. Now, some people would probably say, "Yeah, but the air quality in China is really tough," and it is, same with India. We know some cities in both India and China where the air quality is really tough, and that actually doesn't get priced into wealth because clean air, at the moment, is not a physical asset, right? But it has a huge bearing on health, yet China has done a very good job of reinvesting the wealth that they've created into their economy, into their people and into their nature. There are others, as well. Some of the classic ones, which you probably know about, Costa Rica, for example, has done a tremendous job of reforesting their entire country, reinvesting in their watersheds and just making a growth model, which is pretty much sustainable. They're growing their wealth while they're growing their GDP at the same time.

Rani Pooran: Can we talk a bit more, Steven, about the measurement of comprehensive wealth and how countries can use this to help them address the environmental and social issues that will arise as they attempt to decarbonize?

Steven Stone: Yeah, absolutely. Well, it's interesting because a lot of countries are still very dependent on their natural stocks of wealth, even fairly sophisticated countries, so I'm thinking of Canada. I'm thinking of Australia. Australia still exports a lot of primary commodities, coal, minerals. Canada also has a lot of minerals. It has oil and gas, and so these things are difficult to pivot away from overnight, and yet if you look at their overall portfolio of wealth, couple of things spring to mind. One is, what are the value of your subsoil assets? If, for example, firm carbon pricing came into play or whether there were actually carbon caps or carbon budgets, this could seriously dampen a country's estimate of its own wealth, and I think that's something that a lot of oil exporters would probably have to look at. Another issue when it comes to measuring the overall wealth is the investment in the human capital. Economists have talked for a long time about, "How do you increase productivity?" and a lot of it comes down to human ingenuity and creativity, and that's essentially an investment in education. When you look at the decomposition of inclusive wealth or comprehensive wealth, the lion's share is in human capital. That was an amazing finding for me. I mean, it's almost like two-thirds, so it's the most important investment, in some ways, that a country can make, is in its youth and educating its population to be productive and creative and productivity-enhancing agents of the economy.

Rani Pooran: So we touched on this topic of human capital in the interview with William at the Grantham Institute, particularly in the context of a Just Transition, and so I'd like to dig in a bit more into human capital, and what are some of differences we see between how developing countries may be approaching this in the context of addressing climate change and the developed countries?

Steven Stone: Well, first of all, Rani, I'm just going to challenge you on the use of developing and developed because, from my point of view, all countries are developing. They're all at different levels of income, but they're all developing in one way or another. Some have very high levels of income, and I think they have less of a challenge because they have a surplus that can be reinvested and maintain what are sometimes seen as expensive educational systems. For a country like India, which has a huge and growing youth demographic, 1.3 billion people, educating that workforce is a huge, huge challenge. Another country that I'm very familiar with, I lived in Central America for a number of years in Honduras, over half the population was under 15, over half the population. How do you educate over half the population when the workforce is even less than that, right? The workforce is a fraction of that. These are huge challenges, and in a way, they're intergenerational challenges because you might need to borrow from the future to invest in the present, or human capital stock, that's going to create that future for you. I think there's also an analogy there for the environment because, typically, the environment is seen as, "Oh, that's our stock of wealth that we can draw down. We can burn down our natural wealth because we'll reinvest it," but at a certain point, you don't know how far you can actually liquidate your natural wealth without reaching irreversibilities or tipping points. And there are some countries, I'm thinking of the RLC in Central Asia where it went too far, and entire parts of the economy were wiped out because of the drawdown of the natural wealth. So I think both, for human capital and for natural capital, it's about finding that balance where you're regenerating your capacity to create wealth without drawing down a stock in a way that makes it non-productive in the future, whether we're talking about the stock of human capital, about people or about the productive base, which is the environment.

Rani Pooran: One last question on human capital, Steven, before we move on. How should we be thinking about this concept of human capital in a world where we have massive labor migration? Perhaps not right now with our COVID-19 situation but when we return to more normalcy, what does this mean? You've mentioned countries like India that have a huge youth demographic, Central America with a very young population and countries like Canada, the US, that rely on foreign labor for its workforce needs. What might be the implications of thinking about human capital in this context?

Steven Stone: Yeah. Well, it's interesting because with COVID-19, we're learning about how far we can push the boundaries of creating value virtually over distances through virtual networks, like this interview itself, which we are conducting over two continents, which is wonderful. And I think India has shown, and other countries have shown, that they can really add value from their labor force through remote connections. But at the same time, I'm also very aware that a lot of the OECD economies are aging, and they're aging rapidly, and in fact, you have quite a lot of infrastructure. You have produced capital, which is under-utilized in the United States, in Europe to a lesser extent, because you don't have that youth demographic coming along, which could render that part of the economy more unproductive. So frankly, when I look at it, I think both sides would benefit if migration were looser, if labor could move, because, ultimately, I think what you have is, you have sort of a out-of-joint trend of one part of the world aging very quickly with a lot of produced capital and infrastructure, which is going to become less and less useful because there's nobody to take care of it and maintain it, and you have another part of the world with a huge infrastructure deficit and a lot of youth, which could potentially help to keep things moving. So frankly, I'm a bigger fan of leaving things open, but I also feel at the same time, there's a lot that can be done virtually, and this is what we're learning about during this episode of the corona outbreak.

Rani Pooran: So the concept of comprehensive wealth has the potential in the way you've described it when we think about the different components, and the fact that all countries are developing, has the potential to shift the behaviors of different groups like consumers, investors, credit-rating agencies. Where have we seen movements in thinking?

Steven Stone: It's interesting. There's a couple of different schools of thoughts here because the World Bank has been producing data on comprehensive wealth for a decade now, and you would expect a lot broader uptake from countries, particularly finance ministries, which are the stewards of a country's wealth, to be really interested in tracking their wealth over time, and we don't see that much of it, frankly. I'm surprised. I feel like, "How could you possibly not look at your underlying stock of wealth while you're looking at how your GDP is growing?" but it's still, I think, on the discovery side for a lot of people. This is a new way of looking at how they manage their overall portfolio wealth, not so for businesses. I mean, businesses are quite used to having balance sheets with assets and depreciation, and that's standard practice. That's nothing new for companies or for individual. I mean, who doesn't look at their bank account or whatever they have, their investments? Countries haven't yet, which, I find, is a real lacuna because if you are, particularly youth, and we look at the youth movement now with Greta and others reminding us that we're not lending the country to the future. We're borrowing from the future, right? But we're borrowing essentially from the youth, and I think anyone that's concerned about a country 10 or 20 years down the road should not be looking only at GDP. They should be looking at the overall stock of wealth, so they really are complementary. I guess the other thing I would say, Rani, is, there is some opposition to the idea of being so transparent with the balance sheet of a country. In other words, some countries might not want to share information about their underlying stock of assets, and I also feel like that is misplaced. I feel like, essentially, once you have full transparency on these kinds of things, it just could create a race to the top, where we're all trying to improve the way we manage our wealth, and countries can benchmark against each other to look at how they're increasing not only GDP but how they increasing their overall portfolio of wealth.

Rani Pooran: You paint a positive vision or the potential for a positive vision in that last statement, Steven, where you talk about the transparency that countries could bring to their balance sheets, and this leads me to think about what the future of the comprehensive wealth model could look like. What would it take to get finance ministries to look at this more consistently, and how might they work with the private sector to do so?

Steven Stone: Well, I think there's a couple of pieces to that puzzle, Rani. I mean, one, as I mentioned, is youth. I think it probably speaks to youth because they're the ones who will be inheriting what countries leave behind, so if it's a sort of a resource-fueled GDP growth, that's unsustainable. Then there will be a constituency for that, and then I think we have to reach youth with that message. I think for finance ministers, they're probably also aware. They have tremendous amount of pressure just to close budgets and keep their eye on budget deficits and deficit spending, particularly now. There's going to be a lot of pressure following the COVID-19 outbreak and the whole effort to jump-start economies, but our capacity to do so is limited by our overall wealth, and I think companies recognize that. They're used to being very transparent with their balance sheets when they go out to investors and their earnings expectations, as well, which is a big part of their future viability and profitability. I think countries probably need to adopt some of that same discipline over time. My personal feeling of how change happens is, at the global level, it's quite difficult because we sometimes feel disconnected, but at the regional level, you can sometimes feel the power of benchmarking. So for example, going back to Central America, if I'm in Honduras, I would care about what's happening in Guatemala. I care about what's happening in Nicaragua because these are my immediate peers, and to me, it's very interesting. Are they growing their wealth as fast as I am, faster? Are they drawing it down? So I'm a firm believer in actually regional benchmarking and regional positive races to the top. I think that might be a better forum for actually creating that sort of awareness than purely at the global level.

Rani Pooran: So, Steven, in closing, what one thought would you want to leave us with regarding comprehensive wealth?

Steven Stone: One or two thoughts, Rani. One is for banking and financial community. I think banks and financial community can also begin to ask for, what are the balance sheets of nations? I think as bondholders or bond makers, there could be a viable interest there, a credible interest there, and I think countries should be up to the task of saying, "Yeah, we're growing our wealth. We have a strong growth package in place, and it's not just for the next 3 years. It's actually for the next 20 or 30 years," which is typically the length of a bond issue, right? They can be 10, 20, 25 years, so that's number one. I think the financial markets have a role to play, and I guess the second thing I would say, the second take-home message from my point of view is, it's just common sense for me at this point. And like many ideas that seem like they're coming out from left field, in the beginning, people laugh, and they say, "That sounds like a funny idea," and then after comes the second reaction, which is, "Are you sure about that idea? Let's challenge that idea." And then the third stage is, "Ah, how could anybody not see that? It's so obvious." So I think with inclusive wealth, we're probably somewhere into the second stage, between the third and the second stage, which is, "We don't quite understand it," and now that we're beginning to understand it, some are challenging it. I think it will become common sense in the near future.

Rani Pooran: Great, a very positive note to leave us on, on such a powerful topic. Thank you, Steven.

Steven Stone: My pleasure, Rani. All the best.

Rani Pooran: Investors, retail banks, NGOs, labor unions and policy makers have a critical role in shaping what the future of society looks like over the decades to come. Investing in a Just Transition will allow them to achieve the economic potential and manage the social impacts of the net-zero carbon challenge. We want to thank both Will and Steven for their time and expertise today, and thank you for listening.

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 You can listen and subscribe free to our show on Apple Podcasts or your favorite podcast provider, and we'll greatly appreciate a rating and a 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.

Disclaimer: The views expressed here are those of the participants and not those of Bank of Montreal, its affiliates or subsidiaries. This is not intended to serve as a complete analysis of every material fact regarding any company, industry, strategy or security. This presentation may contain forward-looking statements. Investors are cautioned not 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.

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