Dominique Barker in conversation with Sid Samarth discussing the types of sustainable finance products being offered, and the transition risk in Canada.
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.
Sid Samarth: I know historically there have been a lot of starts and stops, but interestingly, covid, in my opinion, has accelerated this focus. And you may ask why. I think it's really because it's highlighted the importance of science.
Dominique Barker: Today, I'm joined by Sid Samarth, who is helping to build sustainable finance franchise here at the CIBC. It's been extremely busy in the area of sustainable finance. Let's talk about why. Sid, welcome to the show today.
Sid Samarth: Thanks for having me on Dominique.
Dominique Barker: So let's start by talking about the types of sustainable finance products that are being offered and why you think corporates are so engaged to speak on this topic today.
Sid Samarth: Great question. And before we delve into the types of products I thought I'd spend a second or two mentioning what is sustainable finance, great idea. Sustainable finance is nothing but the incorporation of the E S & G into your financing structures. And this is a market which has been around for a number of years, but it's been growing quite rapidly, which is why we're seeing a lot of engagement on the topic, because there's a focus for multiple stakeholders when it comes to sustainability. And this is just another tool of the toolkit which helps to highlight that angle. But it's growing rapidly in the sense, that I put it in perspective, when this market started out, it took about eight years for us to do a cumulative of a hundred billion dollars in sustainable finance. And if you look at twenty, nineteen and twenty twenty, we've done in excess of five hundred billion dollars.
Dominique Barker: Wow. And that's global, correct?
Sid Samarth: That is global. That's correct. But what's quite interesting is also, is that when you think about six hundred billion dollars down in twenty twenty, that represents just about four percent of the total market. And so one of the takeaways that you have is it's a market which is growing quite rapidly. However, it's still very much in its infancy from that perspective. And so the products which are coming out are also being developed and there are a number of products out there. And sometimes it's quite confusing because you hear about green bonds, social bonds, sustainable bonds, and then, believe it or not, sustainably linked bonds, which is a totally different topic. But when you think about sustainable finance that really just two types of products. The first one is what I call the use of proceeds products, or the activity based products. And this is a product which I think has been more mainstream in the capital markets where the use of proceeds for a specific purpose and the borrower or the insurer is giving transparency to either the investor or the bank, giving them that money in terms of how they're using it. And more importantly, what's the impact that they're creating? And that's certainly been the base of sustainable finance for a number of years. However, we're seeing this concept growing. And we've coming into the second kind of product, which I call is the behaviour based product. And this is a product with the use of proceeds is for general corporate purposes. However, it's the cost of that capital which is linked to certain ESG outcomes. And if you think about it, this is a product which is quite inclusive. Why? Because you don't need to have green assets or social expenditures, which meets all the principles that we have in the market, but rather anyone who has a sustainability view and agenda can use that to integrate that into the financing.
Dominique Barker: So if I have to summarise those two types of products, there's the activity based where the proceeds go towards a certain activity. And the second behavioural, which brings me to the next question, which is really interesting, because Canada is probably overexposed versus some other countries to transition risk. So what are some of the tools at a company's disposal from your area of the businesses, so corporate lending and fixed income that a company can use in that transition?
Sid Samarth: That's a question which is very important because, I think globally we all recognise that financing just pure green projects is not going to help us achieve our ambition of being Paris aligned. We need to include our hot industries and help them decarbonise their operations and the products. And that's going to be happening to having capital flow into these sectors to help with innovation and to help with research to help us achieve these goals. And so transition finance is a very important tool. It's a tool also, which is still developing. And goes back to my earlier notion about sustainable finance is still very much in its infancy. However, there are a few things that I'll highlight from a global perspective when it comes to transition finance and in particular the three that I keep an eye on. The first one was some guidelines to a white paper, which is published by the Climate Bonds initiative back in September 2020, when they outline in their mind what were the key behaviours that a company needed to show in order to be eligible for transition finance. Following that up, you had the International Capital Markets Association, which is again a very important body because they are the ones that set the ground rules for the Green bond principles which have allowed the green bond market to grow as it has. And they set about some climate transition finance papers back in December 2020, and then the third one that I really keep an eye on is work which is being done in our very backyard with the Canadian Standards Association, which is supposed to come up with a taxonomy to help describe what are the activities and what are the behaviours that companies need to be doing as I see these changes happening and these white papers coming out. There are certain key attributes that I see through these white papers, which I think companies should recognise in order to be able to align themselves with this potential of capital, which will be moving towards transition finance. And there are a couple of key takeaways that I would share. One is the team off the governance strategy around transition is very important, in particularly investors and stakeholders want to see how the transition strategy is being implemented not only by the management level, but how is it being reviewed by the board as well. So that's key. The second one is as it relates to ambition, in terms of reducing what's called the operational footprint, so your scope one and scope two, but also your scope three emissions. What we've seen is from some of the organisations coming so far is that there's a big focus on scope one and scope two, but there's also a focus on scope three as well. And that's something which needs to be factored in going forward. And this whole notion of what is your transition pathway looks like? What is your decarbonisation pathway look like? And that's something which is not being vetted out by new organisations like the Science Based Targets Initiative or the Transition Pathway Initiative to thinking about governance, the strategy setting targets both long term and short term, and hearing more about these net zero targets is becoming important, but also disclosing in terms of how you're making progress, like what percentage of your CapEx and OpEx is aligned with your decarbonisation strategies. So those are some of the things which I expect to start seeing a little more of which clients should be thinking about in terms of aligning themselves with transition finance.
Dominique Barker: And maybe for our listeners who don't know, I'm just going to define scope one, two and three emissions. So scope one or the emissions that are a result of your production of widgets or whatever you're making. Scope two is the emissions from some of that energy input to make those widgets. So the electricity that you have to buy in order to make those widgets in scope three emissions, those that Sid just said are the important ones to think about as we go forward. And certainly as a bank, that's an area we're very focussed on. Those are emissions that you can influence. You're not emitting them directly, but because of your activity, you are influencing those emissions. And so, for example, Wal-Mart has a Target to influence its emissions through its entire supply chain. So that's great Sid. So maybe Sid, any really important takeaways that you want to share with our corporate clients. For example,
Sid Samarth: One of the things which I've heard time and again is, is this move to ESG real? And I know historically that have been a lot of starts and stops. But interestingly, covid, in my opinion, has accelerated this focus. And you may ask why? I think it's really because it's highlighted the importance of science. It has shown the light on why viewing the science of climate change is important and not just beyond this. We're talking about environment where when you think about sustainability, it does go beyond that. And I think the next phase of it is things related to popularity of goods, having the social licence to operate your business. These are all important things which stakeholders are really going to review. And quite honestly, your shareholders are feeling the same pressure from a number of stakeholders. So I think as an organisation, creating the narrative in terms of how you're addressing sustainability is going to be very important. And this can be done through disclosures, materiality assessments and the like. And I think you're going to hear a lot more in terms of accounting standards, helping to drive a standardised view in terms of sustainability. So my general advice is, think about it. What's your narrative to your stakeholders? And start to talk about it. Because I think that's going to be a very important part of doing business going forward.
Dominique Barker: That's great advice. And start moving in the right direction in terms of either having an impact on the environment or on social. So speaking of which, Sid, we're asking all of our guests this question, what is something that you or your family has done recently to reduce your own climate footprint or reduce inequalities in society?
Sid Samarth: This is a great question. I'll start off with the social piece. We live in a corporate world, and these days I barely move out of the four walls of my house. My wife is a teacher and she's what keeps it real for me. And the social peace is one which I say is related to education. I think a lot of us are learning about this as well. It's new. And a big focus that we are on, is trying to reduce inequalities in society. And through the school that she's at, we have a number of different initiatives which are ongoing. But I also think, and I have two young kids, And it's about them recognising the good fortune of being in a family which can provide for them. And so there's a number of things related to quality. Treating your peers equally. And if there's one shout out that I could give, to anyone who has young kids, is as a series of books from Todd Park. And so that's what so creating that awareness within the family about the social inequalities of how we could improve society I think is very important. And then when it comes to the environmental footprint, I have to say being aware is part of the contribution of others just segregating the garbage or whether it's turning off the lights. These days, it's becoming a little easier when you're making those decisions about changing your furnace to ensure that you've got the high efficiency one, because in the long term, it does have an economic payback from that perspective. So those are some of the things that I've been fortunate to understand and be able to make those decisions when we make decisions at home.
Dominique Barker: That's excellent. Modelling behaviour is really important for a kid. I do the same. I think that's important. Thank you very much for your time today. Thank you very much for your leadership at CIBC. And we appreciate you diving into some of these issues, especially since you've been so busy. So thank you.
Sid Samarth: So thanks for having me. Always a pleasure. Thanks, Dominique.
Dominique Barker: 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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