As companies look to reduce their carbon footprints, decarbonization strategies are taking center stage. Goldman Sachs’ John Greenwood and Cindy Quan discuss the efforts by corporations to reach their net-zero goals.
This is an unofficial transcript meant for reference. Accuracy is not guaranteed.
This is exchanges at Goldman Sachs and I'm Mouse Nathan of Goldman Sachs Research. Today we're going to talk about climate change and what companies are doing to reduce their carbon footprint, a trend broadly as the carbon position to do that. I'm joined by John Greenwood and Sydney Kwan who are spearheading and Four within our investment banking division top companies and sovereigns reach their net zero goals. Jonah's apart. within the financing group and as CO headed the divisions. Annabelle solutions, Council and Cindy's leading court conversations for the newly formed decolonization group, John and Cindy welcome to the programme. Thank you thanks out, and the pressure on companies to reduce their carbon footprint continues to bill John start by first exe, to us what decolonization actually means for companies and how its fitting into their overall yes, framework
So we often say that Deckard and that zero is the new yes G, Yes, she is obviously a very broad concept covering accompanies environmental, social and governance practices. In the last year there has really been a strong focus on the key part of Yes g, primarily com? from our institutional investors who are now integrating SD into their investment decisions. So Dick organization is simply the reduction of carbon intensity, removing carbon from a process wisely important, there is Ben massive focus on climate change, and how does the world combat climate change and Most of us has around the Paris agreement, which is now that there is a kind of broad alignment across the world to try to reduce It arises to one point: five degrees celsius, all have a part in this. governments, regulators, companies and consumers ethical.
Broad awareness that this cannot They come from government regulation and that companies really to change their own way. They go about doing business in order to reach the goals that we have set forth for the world under the Paris agreement, but it is said, the Paris agreement is not new. So why now for increased efforts from companies? I think what has really changed over the last say eighteen months is not just, bananas acknowledging that change is a big issue and the fact that they need to start thinking about their own carbon footprint and ways towards to reduce their carbon footprint. It's really come. From their shareholders. It's really coming from institutional investors. There has been increased focus now, from institutional investors too, Actually in bed, yes into their investment decisions, and so
What that means is that there is now a direct financial impact for corporate clients that do not in bed de carbon into their core business strategy. It will have an impact on their cost of capital. You'll have an impact on their evaluation, So how are you seen? Companies generally respond to this pressure and these chemicals, so I think simply where we ve seen as just corporate clients, making public statements with respect to their de carbon innovation strategy. They are saying we will become net zero by estate, and so just in the last year, we ve seen a massive increase in the number of clients that have ugly stated a carbon reduction goal in less than a year in the first half of two thousand and twenty one one in five. the world's two thousand largest publicly listed companies have now committed to a net zero emission that represents over four to try and sales.
In one of the things that we ve seen changing with regards to company disclosures is really their focus, accounting and disclosing of historically scope. One emissions which are emissions from sources that are owned or controlled by the company so thing combustion fossil fuels from boilers, generators, vehicles, plus historical, Companies have also reported on their scope to emissions, which are indirect emissions from purchased electricity, one The things that we ve seen when the course of this year is that companies are now expanding their emissions reporting as well to include scope, three indirect emissions which extends into their supply chain and their investments as well. Until now, not only has a scope ultimately increased, but the breadth and depth of the carbon emissions and Sir John, companies have clearly prioritize this is U Indonesia explained but ultimately what strategies are they actually pursuing to implement some of these goals? So there effectively three ways in which a company can reduce its car emissions. So,
One is through its own operations and operational efficiencies, and there are abroad. Number of thing is that companies can do with respect to its office. Is its factories? How there employees travel for an example, so there's a whole host of things in terms of reducing carbon emissions in your own operations. The second way It is through procuring a larger percentage of your electricity from renewable power, and that can be through wind or solar, and there are now and a host of ways to do that. What is that you can implement on site solar on top of your rooftop, have your headquarters are ways to do it. Virtually through virtual power purchase agreements where the solar or wind power plant can be hundreds of miles away from where your actual need is and you'll get the benefit of the Grenoble. And then, finally, for those emissions that you can reduce through your own operations or you can't procure renewable energy. It's about offsets so purchasing carbon credits and theirs
time going on right now under a discussion around what is good carbon ah said versus about carbon offset, but in the voluntary market or in the compliance markets, but that's another big area focus so difficult far by mad. How is that of all different, big markedly when did it all starts? I mean how do we think about just the perspective or commission perspective on the offset market shore so there? when offset market has been around for several years. It's basically started in the EU around the compliance markets But what we are seeing now, as the evolution is evolving into the voluntary market and the child, and that were finding? Is that trying to define a standard for what is a good carbon offset verses, a bag carbon offset? what are the standards that companies should be looking at a carbon offsetting? The volunteer market can cost anywhere from a dollar two hundred and fifty dollars when so, it's really understanding what is really providing additionality from carbon offset in there
things that we are currently discussing with our clients. A number of companies like Microsoft and others have set up their own standards and said this is what we consider to be a carbon offset that were willing to procure a lot of this is around going from just purely carbon avoidance to carbon reduction. So as an example, one of the most obvious place, As for carbon reduction, offsets, would be in forestry nature based solutions right where you're making it assessments any Reforest asian or afforestation of an area Cindy. Let me ask you: how widespread our net zero policies across large corporations today sure I'll send. So, as John had mentioned, we ve seen a tremendous increase and carbon commitments in the public space since last year. Twenty twenty one has really been pivotal year in the race to combat climate change started at the beginning of the year with the EU making a legally binding commitment to achieve not zero targets by twenty fifty followed, very close,
lay by China's commitment as well to achieve carbon neutrality by twenty, sixty and Everyone is also saying that President Biden has also returned the? U S to the planet, a cord which ultimately has many companies in us. countries achieving that zero by twenty fifty so these Commitments in these announcements have ultimately lead to a domino effect across the global corporate community. Race in their race to zero in this trend, is only going to be accelerated in the anticipation of cop twenty six in Glasgow later this year with numerous companies ultimately looking to between now and then announced additional net zero ambitions prior to the summit and so weak on week were seeing. You know in the double digit announcements every single week. Typically, on Monday is were corporates across all different sectors. All different countries are now joining in the race to zero were historically many of these companies have been competitors of one another, but ultimately, with the same goal now to be able to ultimately reduce their emissions down to zero
they're, gonna sacks achieved carbon neutral operations in twenty fifteen and is looking to further reduce its carbon footprint. How is your? leveraging the firms experience to support the decomposition efforts of clients across industries and geographies. Two hours, and we understand that these markets are changing very very rapidly. As we ve talked about in our clients, priorities are obviously rapidly evolving as well, and our firm, along with our corporal workplace solution, seem, has been committed to IA she leadership over the past decade and more progress in our learning over this time has really provided a blueprint for a market making teams so in two thousand and
five when the firm established its environmental policy framework, which provided the firm with its own road map for how we leverage our commercial businesses to address critical. Yes, she issues, while also serving our clients and our shareholders. We in the investment banking team have newly created a Duke harmonization group that, ultimately, is meant to be the entry point for our clients, as well as their newly changing commitment specifically in space and who are also looking for solutions to meet their own. That's your targets for big was interesting about this right is that by Gary Company, Michael its acts, trying to figure out our own path towards carbon neutrality and now to net zero. We learned a lot. You know that process, we learned a lot about how to set up the goals themselves. What is appropriately aggressive? We ve learned a lot about how to ensure that our energy and our carbon emissions story is consistent with our own court. strategy and that its core to our business and then also your house, disclose that to the market? In that
oh process, we now thought about. We ve been through the process or how can we help our clients go through that process right, and so it they make sense for our own de Carbon Zation group now within the investment bank, as we start to advise and support clients in their own targets for carbon reduction for sending first who did it for gold men to now help advise our clients in terms of how to get there and so white set there is our most active in these efforts,
would say I'll. Send you. Ultimately, it's really the carbon intensive sectors right. The majority of the activity has really been driven by and large, Tuck MA's John had mountains. You know the likes of Apple Google, Microsoft, who really been very innovative and allow the structures that they have brought to market in some of the targets. Ultimately, markers off was the first to come out with their own carbon negative goal, which is a new term that ultimately, they coined and followed very closely with by this onslaught of just net zero targets. But we ve also seem just a tremendous uptake in heavy industry as well the transport sectors following big tack and so four hundred companies now across some of the largest greenhouse gas emitting industries from like shipping to steel making have now. come together to ultimately de carbonized, not only their own operations, but given that they are in numerous supply chains as well to be able to bring down their emissions by twenty fifty,
It was interesting. People often say well, obviously, big tack and I've been the leaders and decolonization because they have the liquidity and balance sheets to focus on a right in thinking through innovation. So, for example, if you think about Google who now has a big focus on twenty four seven renewable right and great optimization, but he also to think that some of the carbon intensive industries where there is less liquidity on balance sheet, like the airlines etc, particularly during covert. This continues to be a big focus for those companies as well, and so, when you think about the airline industry, even in the car of what happened in the market. There looking at ways in which to adapt, chair, more sustainable aviation fuel right in
We are seeing this across all industries. This focus on. How can we reduce our carbon emissions because, ultimately, they are saying that the market is going to one punish those that are yesterday laggards and there are also seeing an opportunity in terms of being an energy thought later with that committee for growth? One of the things that were actually saying is that, from a key performance indicators perspective the one thing that binds all of us together every industry, every country is around emissions, and regardless of you know what industry or sector on the company is in. All of us have the same responsibility to be able to reduce our emissions, which is what is meant for the Paris climate accord is to bring together all of these desperate countries, as well as these desperate sectors to really come together under a single common theme, which is around emissions, is there a region that actually is leading Thou talk about the pace of adoption between the? U S, Europe, China so
I would say. Certainly this has been a focus. That's in Europe right in the EU has had a head start. I think this has become the phenomenon of focus in the? U S in recent years, governments did: a survey of institutional investors, sixteen hundred institutional investors and looked at the adoption of Yes g integration and to their investment strategy, and what you see is that for those already adopt yesterday into their investment thesis, was much higher in the EU than it was in the U S. But then, when we asked the question in terms of what are you Spectre: integrate yes G into your investment thesis within the next twelve months. You basically saw an equilibrium with almost all industrial saying that, yes, this is going to be a critical I'm in terms of how we make buy and sell decisions, and so, while the EU had probably a number of years headstart. We see the focus now being global across the: U S: EU in Asia.
right I mean there is certainly a narrative that companies should be doing this. People should be doing this. I would say for the broader good of climate change, but it's really when the investors start to get focused on where you potentially could see will It impacts the bottom line. Here there have been some high profile examples of activists, investors, you actually punish companies that aren't moving quickly enough to reduce their carbon emissions. not to mention other sticks such as carbon taxes, but talk about the carrots that increase the incentives for companies to decline. when eyes what are the tangible impacts from a balance sheet or lending costs perspective very interesting, because I think when most
see you're in boards have previously thought about. Yes, g one was from an investor relations perspective, but too is trying to avoid pitfalls and punishment. If you got it wrong right, and so there are a number of e g controversies that now everyone is very aware of and tries to avoid, but I think what is more interesting, is as you call it. The carrot for companies that really become thought leaders and he s g and truly try to integrate sustainability into their business strategy. The input that we're seeing now, which we probably couldn't have articulated just eighteen months ago, is that it does seem to be an impact both on valuation and on costs of capital for those companies that get it right so again, and why is this happening? It's driven by investor capital allocation into yes, g in two thousand and twenty, Gee mandated finds representative. Thirty one percent of all past then, flows verses, only
we percent, two thousand eighteen. So again, the driver for this is really coming from institutional investors, and so what has been the impact? One is that it's driving pricing valuation between low carbon intensive companies and high carbon intensive companies, and so, for example, when we look at my enterprise diet, but our multiples for low carbon intensive companies versus high carbon intensive companies. The way It is just growing each year, so, on average, between two dozen and tat in two thousand and fifteen. That premium dilation was about four point: four percent on average and in two thousand and nineteen to two thousand and twenty that has increased to fourteen point six percent, so a real increasing the difference in violation of companies that are considered kind of low carbon emitters versus high carbon mynors. One is that it's driving cost of capital, if you would it s about eighteen months ago, when clients asked, can you see a discernible difference and the cost of capital or the coupon on in
Gee linked by just verses payment alibi. The answer probably was no. What we were saying was a good thing to do, and you should spend the money to get an opinion provider to say that the process of this bond we're going into a green activity during covered. We saw a huge increase in the number of companies that were issuing green bonds or yesterday linked bonds, Cape yelling bonds, and we are now seeing an important difference in cost of capital. So for some of the largest issuers, both in the EU and the? U S were now seeing anywhere from a ten to twenty basis, points savings in terms of a company's s, G linked bond verses, just their play, vanilla bonds, and we expect that the adoption of Green Bosnia as she like bonds are going to continue and the wedge between pricing loss or continue to widen this a phenomenon that was mainly for large investment. Great companies is banned.
You know a huge increase on investment. Great. In fact, I think already this year in the first half weave surpassed tall issuances in two thousand and twenty, but we are now seeing it being adopted by a broader slice of the markets or even smaller high yield companies. In the first to myself, two thousand and twenty one surpassed all violations is in two thousand and twenty, and why is that? It's because people are saying that issuing an HE s. G link bond has real costs of capital. Implications is no longer now to have, but something that can truly impact the financials for coming and Allison like an end to that as well. On the peoples side of exchange sustainability, companies are realising that it's a great way to recruit and routine human capital. From a carrot perspective,
companies that truly embody there s g strategy in their day to day business. As so, it's no longer become just a stand alone strategy that is only manage buying in a small team. It's part of the ongoing process for all of their employees to really understand it's a corporate value, Millie at the end of the day, and were finding that from my next generation perspective, a lot of the new recruits to companies are looking for companies. Truly value. What the impact of the company is on the broader environment, given that, ultimately, in a whirl working towards the same goal with regard to ensuring that companies are minimizing their impacts directly on the environment and the legacy that they ultimately leave and from your seats and investment, banking house The focus on decolonization effect. And financing activities and these other activities, it aren't, you know, part and parcel of our companies, so its impact
being in a number of ways. I guess the first thing that I would say is again even eighteen months ago, when we were having discussions around yesterday with our corporate clients, we'd be having those discussions with the head of sustainability for that company in that person would often said either in the investor relations group or be reporting to the CFO or maybe even sit in their operations. What we ve seen is that this conversation is gone from periphery to core and, as the x dictation now of consumers and investors that this be a core part of the discussion. Of the ceo, the board. An executive management enter How are you addressing yesterday themes and so clearly, we ve seen a number of reasons situations where activists, investors have used the energy as a wedge. Obviously the recent situation with Exxon, and
Engine number one engine number one is a fun with only two hundred and fifty million in ass under management. They only had a forty million ownership stake, but through a broad campaign? They were able to get support from a large majority of shareholders to support the replacement of free board, members for Exxon and so within that frame of activism, were starting to talk to our clients about what is Europe as g vulnerability, and so we are our isabel tools to help our clients think about it areas are they potentially exposed from an energy perspective? How should they be SK closing their yes g initiatives and objectives and ultimately, how? Think about yes, she as a growth opportunity, as opposed to just punishment, and so there a number of discussions, and it can be quite complicated when you look at the escape for an example, just of yesteryear scores? There are done
in dozens of different types of organisations that provide yesterday scores to companies, and so is The US that a sea oversee oppose can be very confused. What is scores matter, less verses more and I think, generally, what were telling our clients is the following: one, that you obviously can lose if your ears scores are significantly lower than your competitors, but you're gonna win by just having a good. He asked you score. You need to have a here. Gee profile and strategy that is aligned to your core business. Not someone has just attached and so setting Europe yes, g objectives that align with Euro specific business, setting happy eyes that are relevant for your business and then disclosing your progress towards those goals and your annual financials, absolutely because it is the overall narrative, and it has to be credible. Does that go to your point that
exactly right. If it's just some stand alone, take the box, it's going to become very obvious, not just institutional investors and the Ngos that care a lot about this, but also your consumer, and that- has been significantly more scrutiny in the space over the last decade or so in the term green washing than his popped up. Given that many companies are realising that they are being out performed by other companies that have true credibility and value added in the sustainability space, and so in order to really be able to come to me, oh Quantico jump on the bandwagon they ve also. You know DUMBO check the box exercise but, however, amidst very clear, told timidly shareholders investors when it becomes a check, the box exercise versus something that's actually core and part of values. The company. Let me just ask you about carbon capture technologies. There seems to be a lot of scepticism broadly around them that they are too expensive to be practical, that nature based offsets aren't really removing carbon from the atmosphere.
Your view on that and how does that sit among all these other options? definitely an evolving debate, and I think, when people thought of out energy and energy sector, and he s g. There has traditionally been a focus on renewable power, wind and solar and obviously throughout their as well that's important. It's really carbon avoidance as opposed to actual reducing carbon capture and carbon and taking it out of the environment. We are seeing a important attack in documents in these cars reduction technologies. Clearly the first and most obvious one is true: nature based technologies through reforestation, afforestation, and there are a number of things that are becoming clear in terms of what really from a nature based solutions is: can you to be additional as opposed suggest, saving forests that already exist, for example, concept,
the other carbon capture technologies, direct air capture, there's also other types technologies around green hydrogen or biodegradable aspects, there's a debate in terms of it technologies themselves? You can prove that they reduce carbon or take carbon out of the atmosphere. The bay, question is: is it sustainable from an economic perspective and I think, we're we're sitting in that debate today is that premium of economics of a carbon reduction technology apply to steal and cement and all of the big carbon emitters versus the plane. Vanilla is still extremely high. But the view who is that this is going to reduce over time and wiser, going to reduce over time is because it's going to come from the demand side when all of these corpse clients are making
statements, that they are going to become net zero by two thousand and twenty five, or by two thousand and thirty, or by two thousand and fifty the only they're going to get there is to start spending capital against it, and so I think, as the capital flows and from the demand side, there's gonna be a proliferation of technologies, just like Andy semi conduct space and yours to see that pricing premium between your local technologies in current reduction technologies to the base case, shrinking overtime and Allison, I think one of the biggest debates that has only recently come up just given how new a lotta these technology based solutions are, is just one theory around leakage and then another fairy round permanence given These are all just gonna, say, unicorn, unquote, artificial technologies that actually actively like man made technologies that take carbon out of the environment, but they have to put them somewhere
or they have to transform the carbon into another product. Many of these, as John and mentioned direct air captured technologies are putting them back into the earth's surface, ensued. The conversation that did be around leakage and permanence is: is there any possibility that once they get put into the ground, does it come out the ground at some point in time, whether it's the next no five to ten years or is it you know in a hundred plus years or so, and then also how permanent is that solutions over just taking it from one location and putting an end to another location that really truly permanent versus some of the long tried and true technologies? That John had mentioned around nature based solutions which are trees or in part of the dna and the biofuel nature of trees issue actually actively take carbon out of the environment. That's how they survive ensued. Debate that has recently come up. It is one better than another. Is one solution longer term than another, and I think in others still needs to be significantly more real research and development in this space are really understand the long term potential of tree
versus technology based solutions. As John also mentioned, the technology based solutions are married. Spent seven so right now they are not scalable. They are independent solutions that quite a lot of real estate to be able to situate some of these technologies a minute spaces to be able to actually capture the carbon and so hopefully in the future, as the research and development ultimately continues in this space in the next. Hopefully, you know ten to thirty years or so we will see a lot of these technology solutions become more integrated as part of day to day into view. look around significantly in cities and metro politicians, what you see our buildings right and what our buildings made of concrete class steel, aluminium, and so what we hope is that the r and d really kind of picks up with regards incorporating allotted to capture components into every day activities into everyday materials were becomes significantly more scalable from an economics per se Dave, where its any product
We, as individuals can purchase any new developments that actually come out of the ground that are new and additional from what was already existing. Ultimately, has that component of carbon capture to it right, but we are far from very very far from national thanks. So much for joining us today, John and Cindy thanks Allison for having. As it's been a pleasure and certainly has been a great opportunity for us to discuss these topics it yesterday, as they go from periphery to court for our core clients I'll send. Thank you so much for having us. This is a topic that John and I in the rest of the team, as well as the farm really enjoys taking front foot on and being a leader in the space back includes this habit: heard of exchanges are common sacks thing through listening and if you enjoyed the show, we hope you subscribe and Apple pie and leave a rating and comment. This podcast was accorded Monday July, twelve, twenty twenty one
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Transcript generated on 2021-08-04.