Sustaining momentum

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Royce Mendes: Happy Friday, everyone, and welcome to the 17th episode of Curve Your Enthusiasm. I’m your host, Royce Mendes, Executive Director and Senior Economist at CIBC Capital Markets. My usual co-host, Ian Pollick, Global Head of Fixed Strategy, is off again this week. But I’m thrilled today to be joined by a very special guest, Barbara Zvan. Just last week, the newly established University Pension Plan, which is a jointly sponsored pension plan for Ontario’s university sector, announced the appointment of Barb as the inaugural President and CEO of the fund. Previously, Barb held the role of Chief Risk and Strategy Officer at Ontario Teachers’ Pension Plan. But despite all that experience in the world of pensions, we’re actually going to focus today’s discussion on the topic of sustainable finance. Of course, Barb was part of the Expert Panel on Sustainable Finance, along with Tiff Macklem, now Governor of the Bank of Canada, as well as Andy Chisholm and Kim Thomassin. We’ll get into some of the findings of the report, which was released last year. Barbara’s also currently on the advisory board of the Institute for Sustainable Finance, just housed at the Smith School of Business at Queen’s University. So we’re really pleased that Barb made time in her busy schedule to join us today. Welcome to the show, Barb.

Barbara Zvan: Thank you, Royce. Thank you for having me here today.

Royce Mendes: The first question I have, and I’m sure it’s one on the minds of many of our listeners, is how should we be thinking about sustainable finance, particularly from the view of buyside investors in the current environment where we’re battling a global pandemic that is sucking tons of resources out of both the public and private sectors?

Barbara Zvan: Now, that’s a great question and one that I get very often, and I think COVID definitely made things maybe a little bit slower from getting a lot of the projects and things put in place that we need to do, but rightfully so. Governments and companies had to deal with immediate crisis. They had to make sure their employees were safe. You know, they had to make that amazing transition from work from home in a relatively short order that no one would believe if you told them beforehand. And that that obviously was a priority. But I think in some ways it did teach us a few things. We learned a few things about companies maybe we didn’t know about before. So the fragility of their supply systems, for example, which would help inform the conversation around climate change as well. There’s an interesting research piece done by a group called Malani back in May, and they interviewed over 20 institutional investors and they had some neat findings. And I think, you know, pretty intuitive when you stand back and think about it. But, you know, over three quarters of them believe that actually COVID will have a positive influence on the movement for environmental, social and governance. And a similar amount actually have maintained and increased their engagement activities with companies over this period. They verify that, you know, a very high percentage, almost 90% still have climate change as one of their top priorities and that they’ll be asking for enhanced disclosure on ESG given the things that they’ve realized over COVID. And I think it’s also done a great job in helping us appreciate maybe the social side. You know, people always talk about the environmental side, but COVID’s been a really good example to help understand some of the social concerns.

Royce Mendes: As I mentioned in the opening, the Expert Panel on Sustainable Finance released its final report last year. Can you give listeners a quick overview of the main recommendations and maybe a status update on the progress that’s been made towards those goals since its publication? I remember at the time you made a point to say that the report was really about the economy and jobs.

Barbara Zvan: Sure. So if we stand back and think about why the panel was created, it was really because the role of financial markets in terms of driving this change, driving change related to a transition to a low carbon economy wasn’t fully leveraged. And maybe I’ll just start with the realization that, you know, let’s understand, finance will not solve climate change, but it plays a critical role in supporting the real economy through this transition. And so really what we were aiming to do is, how do we channel the financial sector expertise, the ingenuity and their influence toward the challenges and opportunities posed by climate change? Really what we wanted to put together was a package of really practical concrete recommendations really to spur that market activity, the changes in behaviours and structures. Maybe the one critical point is that it’s a systems approach. So many people thought we’ll just be making recommendations for government. But if you go through the report, you’ll notice that we named multiple groups. It was governments, companies, investors each have a role to play. And given the reports on sustainable finance, I think we’ll just start with a definition of what we thought that should be. We found at the beginning consultations that a lot of people had a very narrow definition. You know, some may think it was just green bonds, for example. But we really wanted to lay out there that, you know, it’s really about how sustainable finance impacts capital flows, so how people make investment decisions or lending decisions. It’s about risk management. So think about the insurance you buy or how you assess the risk of an investment or a transaction going forward. And the financial processes need to change so think of disclosure, the valuation of an asset, the oversight, the company level and all these things would need to change to think about sustainable finance. So in the report, I would say there’s really three kind of overarching themes. The first one was that our environment and economic aspirations need to become one in the same because ultimately they’re indivisible. The second theme is that Canada has some catching up to do. So we think Canada can be a leader in some aspects in this transition as a resource based country. And we can be a trusted source of climate smart solutions and expertise. And the third theme is that really sustainable finance needs to just become simply finance. It needs to be ingrained in all those things I just mentioned around lending, investing, etc. So if you look at the report, there’s really 15 recommendations, but they’re structured into three pillars and I won’t go through each recommendation but I’ll hit on the pillars. The first pillar is really about opportunity and so really changing the conversation from burden to opportunity. And this is really trying to help investors see the opportunity then for citizens to see the opportunity. So you would see recommendations like mapping out where we need to go in more detail than what you would find in the Pan-Canadian Framework. So providing incentives for money to flow into sustainable finance products and about an action council to bring together CEOs of companies, the key influencers, as well as key government representatives and other stakeholders to talk about sustainable finance and how they implement it. The second pillar is really around the foundations for market scale. Think of these things as they need to exist to really bring sustainable finance mainstream. So this would be topics like data, disclosure, so how do we disclose on climate change. It’d be the regulatory framework. So these would be topics that you would find in the second pillar. And the last pillar was really looking at Canada’s emissions profile. What are the particular financial products and markets that need to be developed? So in this section you’ll find discussion around a transition taxonomy. So many of you would have heard about a green taxonomy from Europe, which outlines what’s green, so the notion would be what is acceptable during the transition period for a transition taxonomy. It would be how do we help the oil and gas sector? How do we deal with electricity that we need so much more of, the infrastructure? How do we deal with retrofitting so many buildings across Canada? So that’s a quick overview of the report. It’s available online. If people really would like to go through about 50 pages. I’ll warn people, though, in the final report, we just hit the recommendations and a lot of the context and background is in the interim report that came out the November before.

Royce Mendes: And can you talk to us a little bit about how much progress has made towards some of the recommendations since the publication of the report?

Barbara Zvan: So when we published the report, it was just before the summer of 2019 and the government went into an election. So that obviously put a bit of a pause on it. And once the election was over, there’s a process around, you know, when the ministers are chosen. So early in the year, actually we were making great strides forward. We had the support of the House of Commons top finance committee to actually say that this was the top priority. The fund is part of the budget process. But we were the number one recommendation and that Minister Morneau back in March, when he was talking a bit about the budget, but a lot about COVID even at that time, mentioned that the government was going to be very supportive of the recommendations from the Expert Panel. Unfortunately, maybe a week later, COVID changed our country. But we did see with the large employer relief program, that TCFD or the climate disclosure was included as one of the elements that companies had to commit to. So if the government’s going to fund you during this period, you know, hoping to become a more resilient company, please disclose on climate change as part of that. And then a couple of weeks ago, the government published an economic and fiscal snapshot, which is, you know, 168 pages, believe it or not. I’m not sure how they call this a snapshot, but of where they’ll plan to spend money. And on page 147, you will actually find the funding noted for the Sustainable Finance Action Council, which was our third recommendation. So I think publicly that’s the first sign that we’ve seen that the government’s moving away from COVID all their time and being able to spend a bit more time on sustainable finance.

Royce Mendes: Finally, I’m going to ask you to speculate a little bit here. Central banks around the world are allocating more resources to studying climate change and sustainable finance. Of course, Governor Macklem was a co-author of the report from the Expert Panel. Five years from now, how will central banks have integrated sustainable finance and ESG considerations into their frameworks and actions pertaining to monetary policy and financial stability?

Barbara Zvan: No, that’s a great question, and I think Tiff probably gets it more than I do. So just in terms of context, there is a group called the Network for Greening of the Financial System that started in 2017. And it’s a group of central banks and supervisors. The Bank of Canada joined, I believe, in 2019, in early 2019. And believe it or not, it has about 70 central banks and regulators as part of this and another handful of people observing. So when you think about the global economy and the people involved, it’s a fair number. And so what they’re doing is sharing best practices and contributing to the development of research. And where you see them focusing is a lot around stress tests. You know, how to do climate scenarios, how do you implement those for the banks? And you actually see Bank of Canada themselves published a paper by Erik Ens and Craig Johnston back in the spring around scenario analysis and the economic and financial risks from climate change. So a big focus area will be in those stress tests. Another area that you correctly noted was around monetary policy. And I think they’re still understanding the transmission channels. So you see research on the network for the greening of the financial system around how key economic variables are impacted by climate change and with respect to how they conduct monetary policy. You know, how it could blur the central bank’s assessment of this room for maneuver. You see the discussions around how it can affect their transmission channels. So I don’t think they will quite know exactly yet. But I think they’re trying to understand at this point, so I fully expect in five years you’re going to see much more thought process to it. I think that will also coincide with the physical risks starting to be more and more apparent. I know there’s one other interesting piece that someone asked me to share with Tiff when he became Governor, but it was two gentlemen of a university in London that basically went and looked at all the mandates of central banks and how much was aligned with climate change, how explicit it was. And so there’s even research in terms of trying to understand the mandates of the central banks out there.

Royce Mendes: Unfortunately, I have to leave it there because I know how busy Barb is at the moment. So thank you again so much to our special guest, Barbara Zvan. Hopefully you’ll come back some time and join us for a chat about the pension industry.

Barbara Zvan: That’ll be my pleasure. Have a great day.

Royce Mendes: All right, let’s talk about the week ahead. It’s all about jobs next week. Both the US and Canada will be releasing employment data for the month of July. And there’s a risk that it could represent the beginning of a divergence between the two countries. Some states in the US chose to reopen more aggressively, which has subsequently now led to a surge in virus cases. And we can see that just because things are open doesn’t mean people will go out and spend money if they have legitimate concerns about the risk to their health. As a result, some of the early indications suggest that the US actually shed jobs in July. Now, that’s not our base case forecast at the moment, in part because the survey week was around the middle of the month, probably before the economy really started feeling the effects of the rise in cases. But if things continue the way they are going at the moment, there’s a real risk that the US economy moves into reverse in August, particularly with the additional unemployment insurance benefits running out this past weekend. On the other hand, Canada’s more cautious reopening had left some of the readings on the economy lagging comparable numbers in the US for the months of May and June. But unlike the US, Canada hasn’t seen a resurgence of the virus in July, so economic momentum should remain intact. As a result, we see Canada overtaking the US in terms of the recovery in the labour market in the months ahead. For markets, what could drive risk sentiment then in the weeks ahead is the simultaneous drag from the virus on US economic activity and the hit from the expected pullback in fiscal support from the American government. If that is indeed borne out in the data, there will be two clear lessons. First, there is no real distinction between public health and the economy. It will be clear that keeping virus cases low is synonymous with generating a sustainable recovery. Second, pulling back some of the emergency fiscal support when an economy is still facing double digit unemployment rates and many parts of the economy are still shut down, may be more difficult than most anticipated early on in the pandemic. I’m going to leave it there. Thanks, everyone, for listening. I hope you enjoyed this episode. And as always, no bonds were harmed in the making of this podcast.

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