First episode of a five-part mini-series in partnership with RMI’s Center for Climate Aligned Finance. Dominique Barker in conversation with Brian O’Hanlon, Senior Principal at RMI and Executive Director of the CCAF to discuss the overall objectives of the center and why finance can lead on sectoral decarbonization.
Dominique Barker: Welcome to the Sustainability Agenda, a podcast series focusing on the evolving complexities of the sustainability landscape with a view on addressing current issues in a concise format to help you navigate and take action. I'm your host, Dominique Barker. Please join me as we explore today's most pressing matters with special guests that will give you some new perspective and help you make sense of what really matters.
Brian O’Hanlon: So the sirens are blaring, the ship is listing in the water, and there's two ways that you can approach this, none of which are very helpful. One is to just absolute panic and just start moving in extreme ways that are just not going to be supported by the community.
Dominique Barker: In partnership with The Centre for Climate Aligned Finance, or I'm going to call it The Centre today, we're pleased to introduce a little miniseries to The Sustainability Agenda. For the next five episodes, experts in the shipping, power and utilities, steel and aviation industries will be giving insights in how these high emitting sectors can transition towards net zero. The Centre was established by RMI, which used to be called the Rocky Mountain Institute. It was established in 2020 to help the financial sector transition the global economy towards a zero carbon one point five degree future. The Centre works to develop decarbonization agreements within high emitting sectors, build global frameworks for climate alignment and support financial institutions such as CIBC in decarbonizing their own lending and investing portfolios. On today's episode, I'm speaking with Brian O'Hanlon, Senior Principal of RMI and Executive Director of The Centre. We're pleased to welcome him to the first episode of this little miniseries. Good morning, Brian. How are you doing?
Brian O’Hanlon: Hi, good morning, Dominique. I'm really pleased to be here.
Dominique Barker: So let's just start out with defining climate alignment. Could you tell us about The Centre's areas of focus and how you help decarbonize high emitting sectors?
Brian O’Hanlon: Sure, Dominique. So the concept of climate alignment at its most simplest means looking at the global economy and simply asking yourselves, are the emissions trajectory on path to reach one point five degrees Celsius, which science tells us we need to achieve in order to avoid catastrophic climate change? You can shrink that down to look at an individual firm or a bank or really even a country and say, are those activities, both the emissions that are generated by itself from its purchases and also the result of its business activities, if you're a bank or an investor, are those contributing to a one point five degree world or a broader world as well? And at the end of the day, what we really need to do as a global economy is we need to shift from using dirty assets that are primarily driven by fossil emissions and switch to clean and renewable sources of electricity. That is a society wide goal that is very, very difficult. Now, of course, if you look at any part of society, you'll see that finance is the lifeblood of everything that we do. It's in every single activity, really, that we, as humans make. And what we've seen is estimates is that, in order to achieve a one point five degree future, we need anywhere between 50 trillion and one hundred trillion dollars of capital. And the IEA has estimated that we need at least 70% of that coming from the private sector. Now the good news, Dominique, is that financial institutions owning 70% of assets have pledged to reach net zero emissions by 2050. The bad news is that because this is a societal problem of which financial institutions are one actor, absolutely none of those institutions have any clear idea how they will be able to fully achieve their goals. And so what The Centre does is working at the firm, at sector levels and at the system level, we work to enable the implementation of those climate commitments.
Dominique Barker: Mm hmm. I just want to add one point. We talk about one point five degrees and just for our audience, because I really do feel this is not well understood, is one point five degrees is our best case scenario, which is actually a lot worse than today. So we're currently at plus one point one degrees and one point five is locked in. And so we really need to decarbonize because we're currently on a path to three to four degrees. So I just wanted to clarify that. So Brian, the Canadian banks signed on to the Net Zero Banking Alliance this past mid-October. How do you see that coalition evolving and why is it important for banks to sign on to Net Zero Banking Alliance?
Brian O’Hanlon: Sure. So the Net Zero Banking Alliance starts to provide some standardization, clarification and also some just baseline guidance about where the floor of ambition needs to be set. So what NZBA does is essentially put a mandate that financial institutions need to have a plan to achieve net zero emissions, and they need to have targets by the latest date of 2030. Those targets are really important also in the absence of a global government, because we don't have a global regulator of the entire global banking system, it's really important that there's a broad understanding amongst financial institutions of what is the appropriate criteria. So looking at issues such as carbon credits, issues such as how we're going to define individual sectors, it's really important for banks to have an understanding of what they are doing and have that be something that is comparable across institutions. And for your clients, too, it's very important that you have multiple financial institutions all moving in the same direction because that gives you the business certainty that is the bedrock of your activities.
Dominique Barker: Hmm. Yeah, OK. A challenge that we see in the financial sector is that FIs or financial institutions, They all want to decarbonize their portfolio, but we can't do it with scale as the world's population continues to rely on carbon intensive industries. And likewise, companies are hesitant to make those changes to their operating model because they fear hindering their own sources to investment in credit. So how can banks and companies work together to approach these concerns and to scale decarbonization efforts in order to help transition the real economy towards net zero?
Brian O’Hanlon: Sure. So I think you're absolutely right that companies cannot move without the ability of their investors and their creditors to support them, and at the same time, the ask on financial institutions is actually quite large. We are asking you to influence and push the global economy in a way that is unfamiliar from a financial institution. It really is not what society is asked in general. I think the first thing that you can do, Dominique, is to be calm, as you would in any emergency. So the sirens are blaring, the ship is listing in the water, and there's two ways that you can approach this, none of which are very helpful. One is to just absolutely panic and just start moving extreme ways that are just not going to be supported by the community. The other is to deny that the emergency is happening and sit down to dinner, even though the table is starting to tilt and the tableware is starting to slide off. And so what companies can do with their financial investors is start talking about what is the real realistic pathway to achieve emissions. If I'm in the plastic sector, what is the pathway to actually get to net zero packaging? If I'm a financial institution, you really want to have an idea that for a large percentage of your clients that are in a particular sector, that there's a general understanding about how fast that sector can change and then the financial institutions really need to take a look at how can we enable the fastest horizon of action that those actors can take? And then really, both corporations and financial institutions can raise a clear voice and give a very direct request to governments at every level about action that is needed to achieve 1.5 degrees.
Dominique Barker: And I'm going to ask you about government in a moment. But let's just start with the voluntary carbon markets, as you know, an area that's near and dear to our heart at CIBC. Do they have a role to play in the capital markets towards achieving our net zero targets? What are your views on that?
Brian O’Hanlon: Right. And I'll say that RMI doesn't have an institutional view. So this is my personal view on this. So I think that the first task that we all need to do is wring, because I don't think that we'll achieve our climate goals otherwise, is we need to wring out every single bit of decarbonization that we can first from actions really changing activities. At the end of that process, there will be hopefully a small number of emissions. You can't simply by 2050 be able to fully abate. And at that point, then you need to look at offsets, whether that is nature based investments or sequestration of carbon. So it should be kind of a last alternative to the actions that you take. Right now, the voluntary carbon market has a varied history, and it's very messy. Nobody really knows what is a quality coin and what is a fake coin, if you will, looking at early monetary systems. So the capital markets can provide clarity, certainty, clear terms and really reduce some of the friction so that to the extent that we are using voluntary credits, that those credits are of high quality, transparent and counterparties can transact in a way that is financially viable and economically sustainable.
Dominique Barker: Well, that's our goal. So that's good to know. Thank you for that. So with COP26, what do you think will be accomplished and what do you think will be some of the complications that can arise coming out of it? Make some predictions for us.
Brian O’Hanlon: Yeah, sure. Look, I think COP26 is going to have its high level of drama. The US is playing a huge part of that first by taking a momentary pause from its involvement in the UN process. At the same time, we'll wait to see whether or not the legislation comes through that allows the president to come forward with a credible NDC.
Dominique Barker: Sorry, NDC?
Brian O’Hanlon: Sorry, the National Determined Contribution. That's the language that countries use to say, this is what I am signing up for, to do my part. Yes, it's a very government term. Good catch. So I think that most of the news, if you read today, is going to be centred on the drama of governments. That's fine. That's how we organize ourselves as society. But society is also organized by economies and business, and this year is the first year that you're going to see, I think a broad recognition of all parties involved. The private sector has a real role to play that is additional to and complementary to the role of governments. So these broad coalitions of action, I think, are going to increase. You're going to start to see the level of detail that we need to have some confidence that we're moving in the right direction. And I also think, Dominique, probably my broadest prediction, but take a look at what's happening on trade policy. And if there are trade announcements coming out around hard to abate sectors from certain governments that could add a bit of a trade element to decarbonization.
Dominique Barker: That's quite insightful. Thank you. And I think you're on the ground there as well, and we'll be helping to contribute to the conversation. So that's terrific. So reducing emissions needs to be a global effort. We all know that. So what role does policy play? You mentioned government earlier and you just mentioned it in your past statement there. But what role does policy play in financing transition activities and what role do financial institutions play? And is there an intersection there?
Brian O’Hanlon: Yeah, there's absolutely an intersection. You just named air and water when it comes to the global economy, both have an extremely important role to play. Look, I think for most of the discussion on climate, we've looked at government for the solutions and by no means just the fact that RMI is focused mostly on private sector activities. By no means does that diminish the role that governments can play. Governments are the source of the fastest action possible when it comes to climate, but also if you're a business or an investor, the fastest route to instability and uncertainty, which could come if governments react too late and panic when they all sudden realize that the ship is sinking. So governments have a role to play early on in setting broad, clear standards. So in the US, we have the Food and Drug Administration, which sets broad rules to make sure that the food I eat is safe. And we need governments to play a bit of that role and then they need to nudge and sometimes push the global economy through both sticks of regulation, but also carrots for incentives to move the economy faster than it could go on its own.
Dominique Barker: And we've had a number of large corporations and I have here that 20% of the world's largest corporations have committed to achieving net zero carbon emissions. But how do we keep these companies accountable? Do you have any suggestions or ideas and some of our audience, our corporate clients? Should there be mandatory requirements or legislation to enforce climate commitments? And how do we follow this as we move towards that 2030 or 2025 interim target and then that last target 2040, 2045 or 50?
Brian O’Hanlon: Sure, absolutely. So I think that there are some roles that the government can play that can be enormously helpful, I think, and welcomed by the majority of your clients. The first is just simply truth in labelling. There are, and this will happen at the climate negotiations too, of all the blizzard of announcements and advertisement that you will see, some of which are in very good spirit and moving towards a solution, and some are false advertising. So policy and regulation can provide a protection against false advertising. The other thing that I know, Dominique, that your team has struggled with and your clients struggle with too is that if all six of the large Canadian banks have a different disclosure requirement of what they want their clients to do and tell them about, as far as the data and their efforts, that's a large business expense as well. And so I would love to see some sort of mandatory minimum bar of reporting that would just clarify and ultimately at scale save costs for everybody involved in the process here as well.
Dominique Barker: We certainly have a lot of empathy for some of those corporate clients, especially smaller companies. These are large expenses to have all of this disclosure, and it's very confusing and it would be useful. And I know there's different organizations that are trying to work to streamline all of the disclosure requirements.
Brian O’Hanlon: Now I want to speak a little bit to the financial institutions. I think really the role that your team, Dominique, should play and that every financial institution is to look at the tools that you have to influence corporate behaviour. And so I am really excited and view myself as a partner to helping to design instruments that provide real incentives, not just marginal incentives for making climate positive action. If you have a large ownership stake or are an asset manager looking at your engagement strategy, your stewardship strategy and again going back to looking at what is the voice and what are the messages and what are you supporting when it comes to policy group, I think that we will need to take a comprehensive approach of both clients in our own behaviour in order to get to the goals that we need to achieve.
Dominique Barker: Great. And The Centre helps financial institutions accelerate climate alignment at all of the firm, the sector and system level to decarbonize the real economy. What does that look like exactly? And maybe you could provide us with some examples or trends of these climate alignment efforts at these different levels?
Brian O’Hanlon: Sure. So one of the challenges that financial firms have is that often you need to connect the sustainability group with the key business lines. And so The Centre is working, for example, in we're going to be coming out with some future products that really translate the mess of methodologies and standards and reporting and not only provide clarity for firms, but also talk about how that is business relevant from an individual transaction perspective. At the broad sector level, let's say that you're a firm and would like to decarbonize in the shipping. Well, you want to be able to figure out the data about what is actually your emissions for shipping. You want to understand what's the trajectory of shipping between now and 2050 that would allow shipping to be carbon neutral or a carbon free sector. And you want to do so in a way that doesn't just shift one asset. If CIBC decides today that they would like to not finance something they consider carbon intensive, but one of your competitors picks it up, that is a net minus for your firm, but that is also doesn't help the environment. So what RMI has been able to do is to take first a small group of industry financiers and also demand sources and really align on data and the trajectory and the metrics, the how of how we're actually going to figure out how to report and after we report, making sure that the actions that the institution as a whole takes is in line with where industry needs to go. And we are doing that sector by sector. And at the system level, I think what we're doing is, as you go back to NZBA, which is a coalition of banks setting a broad commitment, they'll only be able to achieve their commitments if they're able to decarbonize in the heart of sectors. And so we are proud to be NZBA's first official external partner taking the work that we're doing at sectors and connecting that to the system as a whole.
Dominique Barker: That's excellent, Brian, and I've heard you describe it as the engine room and you're really the glue that brings everyone together. So I really appreciate that and that's a great setup for this miniseries that we have. And as Brian said, the RMI or The Centre is working with financial institutions and with different industries to help find that pathway to decarbonization. And that's really the point of this next series. We'll be taking a look at the shipping industry, which I believe is already done with the Poseidon Principles. Is that correct, Brian?
Brian O’Hanlon: Yes, that's correct.
Dominique Barker: And power and utilities, steel and the aviation industries. So thank you so much for that setup and thank you for The Centre's work that you're doing. We see you as a great partner and an industry leader and really helpful to the financial sector. So thank you very much, Brian.
Brian O’Hanlon: Thanks for the opportunity, Dominique.
Dominique Barker: Thank you. Please join us next time as we tackle some of sustainability's biggest questions providing different perspectives to help you move forward. I'm your host, Dominique Barker, and this is The Sustainability Agenda.
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