Investors and climate

Transcript: Investors and Climate

Bob Carr: Well, my friends my name is Bob Carr, Professor of Business and Climate at UTS and I’m focused with you tonight on what's happening in the corporate sector on the climate challenge. Because my impression has been, it's hard to keep pace with how quickly things are moving on the corporate scene and in fact when we despair of what governments are doing or what governments are capable of, it's sometimes pleasant news to catch up with what’s happening from private equity, from banks, from pension and superannuation funds.Things seem to be changing with dramatic speed and they would need to. In the last couple of days, I’ve tweeted a number of stories about climate but the most concerning one was from the White Post and it's a story of how the disintegration of a permafrost and the plumbing of methane from disintegrating permafrost in Siberia is happening at an accelerated pace

According to some scientific data methane is emerging not just from old rotting swamps but from hard surfaces, from rock surfaces in response to a heat wave in 2020 that saw temperatures really punch through previous highs. More deeply disturbing evidence out of the northern summer and something that reminds us that in the middle of COVID, the climate risks are mounting and this climate crisis is a very real one. Of course, in a year dominated by climate diplomacy our panellists as you all know because you've read their qualifications and I won't repeat them; James Tayler, Iris Davila, Nicole Bradford and I thank them for joining us their superb qualifications, to deal with this hugely important subject.

I want to begin by asking James as I'll ask the other two, can you James give us a crisp summary of how your organisation moved on climate considerations and its investment decisions? How did this come about and we'll explore what it means in practice?

James Tayler: Thanks Bob and good evening everybody. At Ellerston Capital, climate considerations are firmly embedded in both our investment philosophy and our investment process. What does that mean in practice? It means that every investment decision considers whether climate risks are material or climate risks are an opportunity in the context of every investment that we might make. This extends also not just to the investments we undertake on behalf of our clients; it extends to us as individuals and us as a business, thus our corporate culture. We're currently going through the process of developing a public climate policy which will not only reflect how we invest our clients' money in this responsible way but also how we go about our working lives doing that, so how we go about offsetting emissions related to our travel, how we go about making sure we source the electricity that keeps our lights on, our PCs on responsibly.

Bob Carr: Iris I wonder if you can answer the same question, how did BlackRock come to make a decision that I remember at the start of last year got a lot of attention notwithstanding the advent in early 2020 of the COVID pandemic.

Iris Davila: Thank you and good evening everyone, just to make reference to what you're saying, at the beginning of 2020 in our annual dear CEO letter, that our own CEO Larry Fink writes, he set out our investment conviction and our strategy which is essentially that sustainability risk, including climate risk, is in fact investment risk. So that an integrated sustainably built portfolio could really help investors build more resilient portfolios and achieve better long-term returns and that's something that really has been an evolution of our thinking and frankly those letters over time, it touches to a couple different things. Right, it talks a little bit about, we have been advocating for a long time in terms of really trying to focus investors on the long term versus the short term and to do so, we need to think about long-term risk and climate is certainly one of those longer-term risks. In terms of what we've actually done, I'm happy to sort of go through that a little bit in a bit more detail but it does include some things that James you know mentioned and keeping in mind that obviously we bare while we do manage assets across the board, a majority of our assets are actually index portfolios and so that does help our long-term perspective, but it does include building sustainable portfolios, increasing access for clients to sustainable investing and the job that I do, enhancing sustainability and stewardship. But I might pause there because we can continue to go on and pass it on to back to you.

Bob Carr: Yeah thanks Iris. Nicole the movement of superannuation has been a very significant part of this picture. Would you agree that superannuation funds have set the pace in this debate in Australia? Nicole Bradford from Cbus.

Nicole Bradford: Thanks Bob and for those who may not know Cbus, we're a 65 billion

dollar super fund and we have around 800,000 members primarily in the building and construction industry. Now in terms of setting the pace I think absolutely, we're part of setting the pace. I think it's really a global agenda that set the pace so what we've had is the Paris Agreement and we've seen a lot of asset owners and investors broadly companies and countries respond to that and when we've also had the integrated the panel of climate

change with a special report from a science-based perspective. Then what we had that followed that of course was the TCFD, so the Taskforce and Climate Related Financial Disclosures. In conjunction with that we've had a lot of weather events, so we've got this coalescing of these signals that really direct I would say countries we now have over 70 per cent of emissions globally captured by country commitments and we have a number of investors as well, so I think we're part of a much larger movement as global investors, we see what's happening overseas you mentioned the Policy Environment Australia. However, we do see a lot of traction and trajectory overseas, particularly if you look at Europe and what they're doing and regulating both the investment manager side but also the pension fund sides, the superannuation funds over there on climate change and disclosures.

So, I think we're part of a broader movement but I think it's absolutely imperative that super funds really drive this because fundamentally, we're investing our members money on their behalf for their long-term retirement outcomes and we do that both through our investment managers, so we need to affect change and influence them and how they invest our members money, but also, we invest directly ourselves with companies, so we need to make sure that we're influencing the companies as well to transition. So, I think it's a big picture but I think fundamentally, asset owners, super funds pension funds absolutely need to be drivers of this change.

 

Bob Carr: Yeah iris what would have been the killer fact or the killer argument that got a company as vast as BlackRock, an entity as vast as BlackRock, to elevate climate in the way that happened in early 2020 from within the culture of the organisation? What was most important, extreme climate events, the emergence of regulatory pressure, or a combination of what other factors?

 

Iris Davila: Thanks Bob. I think it is a coalescence as Nicole mentioned, in terms of just reflecting back what we're hearing as a large global fund manager. So, it is in response to

as a fiduciary, speaking to client's, particularly as Nicole mentioned in Europe who are very concerned with some of these topics and you know keeping in mind that again we're managing money on behalf of clients so need to be incredibly receptive to them as one of our key stakeholders. I think the regulatory pressure is certainly one that in majority of the conversations leading into 2020 through 2018-2019 as we were meeting with central banks, with regulators globally in this increasing awareness that you know 2050 is not that far away, right? Particularly if you're an old fixed income fund manager and used to thinking about 30-year bonds that's less than the life of a 30-year bond, right? So, it really did crystallise that the timeliness of this potential you know risk and goal that we were trying to achieve in Paris and by 2050.

 

So, you know many of the regulators that we were speaking to as well were really bringing this forward and you know regulatory risk is one that we do need to be very mindful of. I think another one is just the broader move towards the various stakeholder capitalism model that we follow and that is to say employees, you know it's something that we that became incredibly important for our employees as well and you know we aim to try to attract good employees for long-term careers and increasingly the various stakeholders that we play into climate and climate risk is something that is incredibly important to them and they very much want to be aligned with a company's purpose, which is something we talk a lot about in our CEO letters as well and with our own clients and with our own employees as well. So, it was sort of a coalescence of all of those various factors, so clients regulatory market demand, employee demand etc. That really brought forth this realisation that there was a tectonic shift that was about to happen and that time was of the essence, so we really needed to bring this risk to the forefront and you know if you've ever heard Larry speak, there's one thing that financial markets do very well and that's when you can assess a future risk, they really try to bring it home, bring it back to that present value. So, once that came into focus, it really crystallised for us that we needed to think about how we were addressing this risk and whether investors more generally were focusing on this risk.

 

So, it sort of came back to the starting premise of, what climate risk is investment risk? So, we need to look at it with that same financial risk and let's be clear opportunity lens that we would any investment, because at the end of the day that is what we're here to do. It's to be a fiduciary on behalf of clients and to manage both the risk and opportunities across the board and across their portfolios.

Bob Carr: APRA is about to lay down new guidelines that will capture the private sector, in this country and crystallise what I think we've been talking about and that is the risk that climate represents. Is there a sense that you're ahead of where the new APRA policy will be? Do you think there are sections of the private sector that are lagging behind what APRA is on the point of decreeing is the new standard for corporate Australia? Any member of the panel, James, would you have a response to what APRA is doing?

James Tayler: Not directly in terms of APRA but bigger picture I'll echo Iris's comments. One of the biggest drivers here is client demand. Now the majority of our clients are Institutions, not dissimilar to Cbus and they are definitely driving demand for responsible investing and consideration of climate and that's not just something that's happened yesterday. This has been present for quite a few years now and that's usually powerful because as a commercial business, it's in our interest to satisfy not just existing clients but future clients. So, that's at an institutional level and the same is happening in terms of retail funds. people are becoming much more aware of where their super for instance is invested and becoming sensitive to that in the knowledge that perhaps that's supporting activities, such as coal mining which they might not be happy with. I think that's now flowing back up to the regulators and bodies like APRA and informing their decision, their decision making around that. Now, I can't comment so much about what we're seeing overseas, because we're purely a domestic business and we don't have any overseas investment management activities, but it's clear looking to Europe, we can see the influence of regulation and political leadership on our industry and that is also starting to filter down here to Australia as well, which is a good thing.

Bob Carr: Well, let me run through the panel. Let me get a comment from each of you on how your organisation would respond to the prospect of investing in a sector. So, beginning with you Nicole. A thermal coal mine, can you say emphatically that Cbus would rule out any of your members money going into such an investment?

Nicole Bradford: I can talk about the way we've approached it at Cbus. So, we don't have a sector-based exclusion for fossil fuels at this point in time. What we've done, and look I'm going to take it back to top down and then talk about how we've approached this in our portfolio. Fundamentally the way we think about climate risk, like what Iris said, is it's an investment risk and it's an opportunity as well and our premise is that we invest in the transition. So, what we want is our underlying companies and assets to move towards net zero by 2050. That means making sure that we allocate capital to the right companies and what we expect is that they will set targets, they will set interim targets that they will have their couple expenditure directed towards green solutions and that they start to transition their business so that's what we believe.

Bob Carr: Unlikely that a thermal coal mine would be able to demonstrate it's on a path to net zero emissions by 2050.

Nicole Bradford: I think over time absolutely. So, the way we've thought about it is we have a stranded assets framework in place and where we started, we have overarching portfolio commitments, so across our entire portfolio we've set net zero emissions by 2050 targets

and interim targets by 45 per cent. Now because we're with the building and construction industry when we started setting those targets within the property portfolio, and I can talk more about that in a minute, but then we when we started our stranded assets, we started in one part of the portfolio as well. So, the way we approach things at Cbus is we learn by doing. Now what we did was we set up a framework and we identified metrics in our quantitative portfolio for our listed equity stocks and what that does is this metric identifies forward-looking stocks, which we believe are not going to transition. So, for example it's based on a model buying stocks and we think there's climate value traps, so we say you can buy apples and oranges but you can't buy blueberries. Now that for us is across the fossil

fuel sector, it's not every company, it's the ones that we think aren't going to transition and that includes thermal coal companies.

 

So, we've applied that for this quantitative part of our equities portfolio and where we're at the moment is we're taking the insights from that to see how we can apply that and think about the concept of stranded assets because you're absolutely right. I mean, we've got the concept that we need to invest in the transition, but there are going to be companies and there will be sectors over time that won't be investible and they will be stranded assets.

 

Bob Carr: So, these are the considerations that at a Cbus committee meeting or board meeting would figure, if you looked at something in the fossil fuel sector, is there a transition plan to 2050 and an intermediate one a 45 per cent by what 2030 2035? Is there a danger of the asset you invest in being as a result of government policy and the shift in demand and other factors a stranded asset?

Nicole Bradford: Yes absolutely. So, where we're at I mean, these things take time. So, going back to that quantitative model that took us 18 months to basically identify the relevant metrics tested because we have a member's financial interest duty, so we need to make sure that everything we do is evidence-based and that the implications for the members, it does what we want from a climate risk perspective, but it also does what we want from a financial perspective. Then we implement that and then we use those insights, so it takes a while to do that. Now from a broader perspective, thinking about the assets and in which we invest, the way we thought about our targets is we've developed a scenario analysis so we know where we need to get to under different scenarios by 2030 and then what that looks like by 2050. So, we know that technically, it's possible for us to meet those targets, we've done it under a range of scenarios and of course the outcomes vary. Where we're at this point in time is we're looking at what that means for each asset class.

We're also looking at what it means for each sector because sectors will decarbonise at different rates and you need to take that into account. What we want is the companies and assets in our portfolio to be decarbonising at the rate of what each sector should and then either at each sector or above that line, we don't want companies that are transitioning that are below the sector average. Now this isn't if this type of information isn't really readily available, like as you say Bob, the pace is moving so fast that we're keeping up, we're data hungry, we want this information and these models are being developed as we speak. So, it’s just this continual evolution and work in progress, so we do know where we need to get to and we're right at that point where we're identifying what that looks like. Now that process to take our base to get a baseline of our whole portfolio and then develop these scenarios took six months, so then gives you an indication of the time that we need to be able to implement this, but we're moving as fast as we’re looking forward to more data.

Bob Carr: If you're at a conference with representatives of Norwegian and Canadian pension funds, would you be able to say as part of the exchange of information about your policies, that you'll be able to say that you are doing no bit less than they? That there's not a sense in which you as an Australian super fund, are performing slower or more tiredly than the very best of the Scandinavian or Canadian pension funds?

Nicole Bradford: Look I think in Europe they're driven by regulations so they're probably

moving faster. We're moving at the pace, I think there's a group of super funds in Australia who are leading and are moving as fast as they can, given the environment and the regulatory framework in which we operate. So, we're comfortable with where we're at and it's an absolutely live discussion ongoing from our board down through our investment committees and with the investment team. So, it's embedded in how we think about it and how we operate on a day-to-day basis and I don't know if we can compare like for like but it also depends on your type of portfolio that you have. So, for our portfolio we think what we're doing at this point in time is appropriate.

Bob Carr: Is there any sense Iris, in which BlackRock is different from Cbus? What stands out for you in what's similar between BlackRock and Cbus and where you might differ?

Iris Davila: Now Bob are you trying to put me in a tricky situation? You realise Cbus is a client of ours, so it's hard to compare and contrast sometimes these things, but I think it is an important point. Right so we are again, sort of a fund manager and so we are managing on behalf of clients like a Cbus. So very much we need to follow their lead as to where they want to take their portfolios and their investments. I think we share similarities in that again, we have very much a long-term perspective and are very much focused on that risk-adjusted opportunities and returns. But I do think that clients like Cbus and very much like the other superannuation funds in Australia are very much taking a leading role in pushing fund managers and trying to encourage better practices from fund managers but also from companies as well, because we haven't really gotten into the stewardship component, which we can discuss, which is that engagement with companies and really how we as a group are trying to encourage better long-term business practices at these companies that we invest in on behalf of clients, which all of us can discuss quite fulsomely.

But in terms of where we see you know Cbus versus BlackRock versus other clients, I mean the reality is that globally I think to Nicole's point, the Europeans are really leading from the front on these topics and certainly those pension plans that you mentioned are also clients of ours and so they are also pushing on us to engage with the companies that we invest in on their behalf. They're pushing us to create better products for them, you know a lot of our investments are again our index funds and so you're somewhat beholden to the index, so you don't have a choice as to what you own or don't own. So, what can we do in that equation? Well, we can instead create better products for clients and working with clients like Cbus to say, ‘well actually that index you've chosen is actually not a great index, it's not a great index because it might hold the bad companies that you don't want to hold’. So, let's work together and create and invest against a better index that excludes some of those, but that is a conversation that needs to be had in partnership with clients and in partnership with the market that you're in.

I've got to tell you, many of our clients in Alaska and Texas don't like our views and don't like some of the some of the discussions we're having right here today. So, it is a bit of a balancing act for us because again, it's not our money, it's not Larry Fink's money, it's our clients' money. So, we really need to be mindful of that whilst making sure that they are clearly an important stakeholder for us and be responsive and receptive and forward thinking in their views and what we can do is to Nicole's point, is really try to bring out the data component of this, because it is really challenging to try to find and bring together all this data. That's where I think the power of our platform is helpful, I think that's where when we're thinking about investment and investment risk, you know one of the things that we've done this year is bring in climate risk again as we started embed climate risk is investment risk. But let's look at climate risk and bring it into our capital market assumptions. So how do you bring that into the assumptions you're making when you're trying to allocate across different asset classes? How are you bringing that climate risk into pricing of securities and how do you build that into the system? So, again the end investors can have a look at that and with transparency and make that decision and decide, ‘okay this is an apples-to-apples comparison we'd rather invest in company A versus company B because they score better on certain metrics that are important to us.’ But those metrics might be different for various climate clients.

Bob Carr: Iris can I take a practical example? If I was seeking investment for a thermal coal mine, would I be wasting my time in going to your office and seeking money from BlackRock?

Iris Davila: Okay, so one of the commitments we did make in 2020 was in our active portfolios across equity and fixed income or other asset classes, if you have 25 per cent or more revenue in thermal coal you will be excluded from the portfolio, but that's in our active portfolios, that's where we as portfolio managers have the discretion to pick what goes in the portfolio. Again, the problem with that is that a majority of our assets are index funds so we are beholden by IMAs Investment Management Agreements, by guidelines to invest in certain indices so that is sort of within the realm that's what we have to do and so we may have problematic names in the portfolios that we manage because they are managed in an index fashion. So, what can we do in that situation? Well, we can work with clients to say, ‘look that index really doesn't work this one's a much better’ if you want to have an exclusionary portfolio like many clients do. Well, we can work with the index provider and create this index and we can manage against that index. We can't create the index because that would be against our fiduciary duty.

Bob Carr: Okay, that is the issue with the Adani. The link between BlackRock and Adani, because I've got five questions sent to me by people who oppose the Carmichael Mine Proposal and say it would be the prelude to other mine investment in the basin, and they're asking about BlackRock as the biggest investor in the Adani Group. So, just unpick that for me.

Iris Davila: Well Bob, I'm not surprised you have five questions. I thought you'd have 25 questions on this topic. I'm not trying to be flipping at it by any means at all because it's a very critical important issue when we take very seriously. So again, in our active portfolios we do not hold Adani, where we have discretion to pick whether we like one company versus another, Adani does not feature. However, we still have holdings in our index portfolios. Those holdings are quite small and I would question that number that we're the largest investor because I don't believe that to be true. Given what we know about their capital structure, given what we know about their free float, given what we know about the index component of it. So, if you think about the Adani in an index and then you equate that to our holdings that would be essentially what we hold, so nothing more.

Bob Carr: So, you're talking about a situation of managing a fund that has investments in it chosen by others, you're there as the manager?

Iris Davila: We have a fiduciary duty beholden by legal contracts to replicate an index when you're index investing. I think that's something that gets lost sometimes, in terms of index versus active investment. We do both, but our holdings in Adani are explicitly index holdings, where we do not have the ability to divest. In portfolios where we have discretionary capability, the active portfolios we do not hold Adani. So, our Adani holdings are predominantly to replicate the index as is necessary under our contracts. Now, what can we do? Well again we can work with clients to say, "Hey there are different indices out there look at those we will create products versus those indices to meet those requirements that you have and to try to avoid this issue". Importantly which we have with the issue, we haven't gotten into again yet is the issue of stewardship.

So, what does that mean? So, we believe we are stewards on behalf of clients, so we have the largest team, I think globally in terms of more than 60 people whose day-in and day-out job is to go meet with companies and speak to companies and really try to advocate for that better long-term sustainable business practices and really try to go in there and advocate and talk to companies and say, ‘we need again that better transparency and disclosure’, so that investors can make those decisions. So, in that case what we can do, the tools that we do have available to us in an Adani situation, is to use their AGM to either vote against directors, which we have done, or to vote against capital raisings that they might be doing that might impact certain projects which we have done. We can also try to look at it through the value chain, which again, I know that I spend a lot of time with James and Nicole in various forums and we do think about things across the value chain.

So, where else can we look at this issue and how else can we think about this issue not just on Adani, but who also is supplying to Adani who else is providing capital to Adani. Let's have these conversations as well and it's not very importantly, I must say it's not to try to tell companies what to do but again, it's back to this concept of trying to encourage that business practice and have them think about this risk. It's at risk of whether it be stranded assets, it's that risk of capital allocation. Is that a smart use of your capital if this is going to be getting so much negative reputational risk in the market? Is this something you want to be associated with; it's really thinking about it through that risk framework and again, opportunities for a good company not necessarily a naughty, but thinking about it in that framework where we can actually use our holdings in our quote-unquote influence, which we try not to use but say you know that perceived influence to have those conversations to try to encourage that better practice or vote against the directors, which frankly is sometimes the only thing we the only tool we have left in the toolkit.

Bob Carr: A vote against directors, yes?

Iris Davila: Yeah

Bob Carr: James would you would your policy permit investment in infrastructure linked to a coal mine or does that, as a question for all of you, does that instantly raise the question of the warning light, the red flashing light, this will be a stranded asset? Say a rail link to a floating coal mine, James?

James Tayler: This is where the argument around divestment gets a lot more nuanced. You know we explicitly will not invest directly in miners of thermal coal, but much of that infrastructure supporting that and other similar industries is absolutely investible. I think the important point to make here is that one of the unintended consequences of simply divesting or avoiding such companies, is that these companies end up in the ownership of investors that simply don't care and if we're trying to achieve transition and these assets owned by other capitalists that don't care, then we're probably going to be less successful in achieving that transition along a good timeline. So, what we can do though is as active owners of those kinds of assets we can engage with the companies. We can make sure that they understand that they need to transition those assets or that those industries are going to transition. As responsible managers of our client's capital, we will incentivise and hold those companies accountable. That kind of engagement entails sitting down with boards, sitting down with management asking them to make sure they furnish us with the right information, the right data to then start to hold them accountable. That allows us for instance to put in place incentives for managers that will actually reward them for implementing the right strategy for those companies to transition.

Bob Carr: James what would be the toughest question you'd put to someone trying to get investment funds from you for a bit of thermal cold related infrastructure, like a rail nick? Would you be focused on what might happen if there's a panicking move by government in response to international pressure to get out of anything related to fossil fuels? Again, the danger of a stranded asset, a rail link that's report that's no longer viable because the mine has been obliged to close.

James Tayler: Look it's highly unlikely we would consider an investment in that kind of asset because it's simply beholden to one industry and that's the thermal coal industry.

Our process identifies you know that risk, looks at the materiality and feeds that into the risk and the rewards related to that investment and a sole asset serving that in industry is unlikely to pass through that process in the context of our company. It gets much more nuanced when you find companies that serve that in industry, plus a whole load of other industries at the same time. That causes us then to focus on you know the exposure of total revenue to that one particular activity and if it is of the magnitude of 20-30 per cent, then we can have a constructive argument with the company and say well, ‘okay you're serving other industries, we would like you to you pivot or move towards serving those other industries at the expense of this one.’ If over time the company responds, then we can support or withdraw our capital otherwise.

Bob Carr: Nicole a question of you. How close are we getting to putting gas in the same category as thermal coal?

Nicole Bradford: Look that's the trickiest question of all. Gas the transition fuel and how long it will last? So, look I think there's a couple of things to tie together here, so going back to your question around APRA and their guidance. So, APRA regulates the superannuation industry, they also capture the banks and insurance companies as well. They've been talking about for several years now the concept of climate risk as a financial risk. They've just released guidance, as you mentioned, and its guidance it's not regulatory at this point in time but what it does do is it channels the expectation and obligations of organisations through the frameworks from APRA that are regulated such as the governance frameworks and the risk management frameworks. One of the key components in there is that it talks about risk management. So, what does that look like for a superannuation fund? Well basically it's you know; you need to identify, assess and manage and mitigate these risks and part of that for us is understanding the companies and assets in which we invest which we've talked about. But it also means engagement and I mean my interpretation and I'll caveat that, it's draft guidance at the moment and my interpretation of it is that they expect that we do engage with our investee companies and our fund managers for that transition. But we're you know a prudent organisation where that's not appropriate anymore and there are potential financial risks for our members and for their retirement savings that we would no longer invest in that.

The other point I wanted to make is one that Iris made as well, is about the toolkit because we talk about divestment and exclusion but it's absolutely one thing we have available to us as investors, whether it be investment manager or a superannuation fund to help manage this risk. There are a number of things we have and usually for us it's the tool of last resort, it's where everything else is failing, it goes through our escalation policy and its divestment and that's a serious thing for us and it goes to our investment committee, being a sector based or a company. Now on gas itself it is a tricky issue and the International Energy Agency identified that from 202, they just released their new scenarios on what the energy transition looks like net zero emissions by 2050, that from 2021 there should be no new oil gas thermal coal developments needed to transition the economy. So, that's the first point, that nothing new should be built. So, when you think about if you're looking to invest in any new assets or companies that are developing these assets, it raises an absolute red flag. The question then becomes around existing assets. What's their useful life and say private markets public markets, we're talking about stocks, listed equities, they're liquid, you can buy and sell out of them very you know very quickly. If you talk about private markets and gas and some of those assets in the infrastructure world, they can be privately held, they're a liquid and so you're looking at a long-term hold over decades.

So, it becomes a very different proposition, so for existing assets at this point in time, what we're looking at is similar to what Iris was saying. We start to bring these metrics into our investment decision making, so what's the price on carbon? What's the scenarios look like? What's the value going to be? Can they transition? Is there anything alternate? So, we talk about the railroads or gas pipelines, there's a lot of talk about hydrogen, can any of these pipelines be transitioned to a new economy and be useful in that. So, there's a lot of different things and factors involved in making this decision. Gas I think that's one that's is still under discussion and what's interesting is that Euro I know we've all said that they're leading in this space, they're still talking about gas. They have a taxonomy which we can talk about another time if relevant, that classifies economic activities based on their green or brown. They're still debating gas, so that's where it's at. It's a pretty tricky one to form a view on at this point in time.

Bob Carr: Yeah, thank you and Iris, can you give us a view given what Nicole just said about the International Energy Agency report that from 2021, no new oil gas coal investment. How does that feed into BlackRock’s considerations? Would a report like that really commit BlackRock to being even more explicit, especially about the question of gas, which as Nicole says is still being debated in Europe? A sense of how BlackRock would take that report and its reference to gas in particular. Iris.

Iris Davila: Yeah, and if I may I might just take a step back to say, not too similar to what Nicole said, but you know one of the things we are asking companies to do and it comes back to this disclosure and transparency point, is to show us a business plan, to show us their business strategy to get to net zero by 2050 under less than two degrees. So, report like the International Energy Agency changes that equation a little bit in the sense of its new information right and it's frankly new information that all of us as investors are still digesting and trying to really come to grips with what does that mean particularly for some of these trickier sectors like oil and gas. Similar I think to Cbus, whilst we made a commitment on the thermal coal, the 25 per cent Revenue, there still is that bigger point as well in terms of divesting versus continuing to engage because not only do you not want companies know, you don't want a conglomerate to necessarily sell off their thermal coal plant to a private company, but you also don't necessarily want them to sell it off to a government, think of Russia or something like that right, where you really have no say.

So, there is this value to having these engagement conversations with these companies and asking them these questions of, show us your transition plan, show us your plan to net zero by 2050 and then using that additional information that is provided by the International Energy Agency and how do you factor that now into those questions that you're asking and there again it comes back to capital allocation issues for them. How are they spending their capital featuring these scenarios and is that the best use of investors capital and those are the questions that we need to be asking companies and that's the way that kind of report would feature into our conversations. But it is still early days, this report was released not that long ago and so we as an industry are grappling with, well what does this actually mean for the sector? But let's also not forget we’re focused very much on the risk component, but there are also opportunities and we certainly believe that we should also allow companies. Technology is going to be part of that future solution. We need to allow companies to try new technologies, to invest in different strategies, to try it for abatement as well. So, it has to be a nuanced conversation. So, we can't say that oil and gas close tomorrow because that's not part of the overall thesis, which is we need to ensure a just transition, a just transition is not just immediate closure. We haven't talked about workers and the potential displacement of workers and how do you how do you feature that into some of these climate plans to 2050.

So, this is all part of the conversation that we as investors are having with these companies and asking them to provide us with better information so we can then assess these companies and say, look that company is actually taking these risks seriously, therefore we think we should allocate funds to them versus this company is not only not taking it seriously, they have their head in the sand, we should if we can maybe not invest in them and if we are invested in them, start thinking about their board of directors, start thinking about their strategy and start voting against them if they do not take investor feedback on board.

Bob Carr: Thank you. James Tayler of Ellerston Capital, how would you and your colleagues weigh the International Energy Agency report with its bottom-line conclusion that from 2021, there should be no new investment in oil gas coal? Do you take that seriously? That would feed into your investment considerations?

James Tayler: We absolutely take it seriously. This is from one of the global organisations funded by the industry that it's talking about. So, that was one of the biggest surprises from that was the severity of the implied change. The biggest issue is that with the complexities of energy systems vary from country to country. It's great that we are now operating in a multi-stakeholder system society. It's great that we have NGOs calling very loudly on other stakeholders to bring about change, to bring about just transition. The reality is that we also need good policy around this as well and unfortunately here in Australia, we're sitting in a bit of a policy vacuum where when it comes to transition and energy policy. I put it to you that if companies or capital was incentivised to invest in say batteries and battery technology, then we might bring about the point at which we can take gas out of the energy complex quicker than the status quo that we're in at the moment.

You have the same argument around nuclear energy, it's very nuanced. Switch nuclear off where it exists and energy systems don't work. Switch gas off at the moment here in Australia and the retail prices are probably going up and wholesale prices are going to be a lot more volatile than they already are and we're going to get more outages within the system, whether it be South Australia, Victoria or New South Wales and that's problems for everybody. So, it is very complex, but what we can do as stewards of capital getting back to your question, how do we approach companies that might be involved in the energy value chains? We have discussions with them. How that informs their capital allocation. Will we be happy to see huge amounts of capital being put towards technology and systems that we think will be outdated in half the time that the company thinks they'll be outdated. Of course, we won't be happy about that and we'll try and bring about change in that thinking.

Bob Carr: When your colleagues see headlines about extreme weather events, the floods in China, Germany and Belgium. The wildfires in California in conditions of unprecedented summer temperatures, what's happening in Siberia, what I started with reference to the permafrost, the disintegration of permafrost that releases methane. Do you talk over morning tea about how these headline grabbing events are going to force governments, even reluctant governments to increase the pace of change, the pressure for example to arrive at credible targets for 2030?

James Tayler: Absolutely. Normally our conversations start off in terms of where they actually impact on companies that we might invest in. The insurance sector for instance is going to be feeling this harder than anybody else. Owners of real assets so infrastructure, property and so on and so forth, those assets that actually suffer damage and suffer these

weather events. If those investors are not informed as to these risks, they certainly will be now and they should be adjusting their investment policies to reflect these risks. So, yes it absolutely does inform our day-to-day thinking around investing in the sectors that have a material exposure to these weather events but you know that's at an investment level,

but as human beings I think most human beings will reflect on what they see on the news, whether it be here in Australia or other parts of the world and many of us are sadly old enough to be parents and our parents and we hear it very much from our children. I'm forever chastised for the problems that my generation and my parents' generation have brought upon

my kids and that they will inherit and that's a hugely powerful driver of our behaviour and their behaviour and that ultimately will come into the system via how they choose to invest their savings or how they choose ultimately to vote when it comes to determining who the policymakers are.

Bob Carr: Nicole, extreme weather events. Does it create a sense among investors that as this decade goes on, as we go into the 2030s, extreme weather events could force governments around the world to move, almost overreact, to move unpredictably or to move in an untidy fashion to meet the challenge of climate and you've got to anticipate that? You've got to anticipate that in a panic a government in 2029 or 2034 would snap extra controls and extra restraints in place that will leave you with stranded assets and investments that simply can't proceed.

Nicole Bradford: Yeah, absolutely and you know I talked about scenarios before. So, we look at our scenarios and our portfolio from a couple of different perspectives. So, I've talked about the bottom up and the underlying companies and assets and what we expect of them from a transition perspective and where we want each sector to get to, but we also look at this from a macroeconomic perspective. So, when we're developing our broader investment strategy and we're just getting insights into what we think our long-term 10-year returns will be for our members, last year for the first time we brought this question into that strategy. We took a disorderly scenario and an orderly scenario, so from the Networking for the Greening of the Financial System so it's the NGFS and for those who aren't aware that's really central banks and our financial regulators ASIC and APRA all getting together and identifying working with other global counterparts and saying look we need to develop appropriate scenarios for the finance system to manage climate risk so that's what we've been looking at in addition to the IEA scenarios.

But to the point is they do identify disorderly scenarios, so we've put that into considering what the GDP will look like, will it impact inflation? So, we can start factoring that in from a growth perspective over 10 to 20 years, but that's absolutely at the forefront of our mind and we're starting to think about that from that bottom-up perspective how it might impact companies. It's an absolutely key risk for us that if these types of events will keep happening and if there is a point where you have a shock and it's left too late from a policy perspective, the impact of pricing other fuel impacts because we haven't acted quickly enough, is a massive financial risk so we do account for it more broadly.

Bob Carr: In other words, you accept there is a risk of a prompt response by world governments at some point if the weather events gather pace.

Nicole Bradford: Absolutely and to your point we've got to accept that things may not play out how we expect, so we may need to move quicker and that may impose that shock as you're saying, that we may need to move faster than what we expected.

Bob Carr: Iris what did Larry Fink’s kids tell him about the need to move? What might have been happening? What is the culture of your organisation, the ethos of Blackrock’s head office that saw that big announcement in early 2020?

Iris Davila: I might bring it back. I'll start with a very quick data point and then elaborate. So, we do like any hopefully good employer do employee opinion surveys. We've done a heck of a lot of them in the last few months and 90 per cent of our employees globally feel very proud for the fact that BlackRock has taken a stance on climate risk as investment risk.

So, that gives you a bit of a flavour of back to where we started the conversation of an important driver of some of our actions is again employees and employee base as an important stakeholder. Now to answer the question more broadly and to bring it back to basic principles, I think one of the most interesting things about 2020 and to bring it back to COVID was that you would have thought in such a period of upheaval, particularly when we're talking to some degree existential crisis in some of these companies and for some of our clients and frankly for people, you would have thought that this issue about climate would have maybe receded a little bit and people were perhaps more immediately focused on survival and yes that absolutely did happen. But it also didn't take away from the fact that our conversations on climate and climate risk intensified and I think they did intensify because what COVID did do is really bring that future risk that was somewhat theoretical into a practical example and show what can happen if you're not prepared and you're not thinking about risk through the frameworks that Nicole and James have talked about and if you're not thinking about future risks that might that might happen today, how does that impact your supply chains? How does that impact your employees? How does that impact the broader community that you're operating in?

So, despite all the tragedy that COVID has brought, it does I think have the silver lining in it really bringing forward that climate risk is again an investment risk and it's one that needs to be taken seriously and it's one that we need to think about today, because like everything else it might be developing a lot quicker than what we think it will and certainly from our perspective as investors and again I see James and Nicole on the panel, the pace of change, the velocity of change that we've seen just in the last couple years in our own intensification of conversations with companies and the developments that we as an industry are really trying to drive forward has been nothing short of remarkable in the sense of, this is now a very mainstream conversation. So, again across the platform that we operate in, climate is something that we're factoring in and it's every conversation I think we have some way shape or form comes back to this issue and I do think that COVID did accelerate that.

Bob Carr: James were you surprised by the speed with which the carbon tariff, the carbon border adjustment mechanism c-ban gathered pace in the in the European jurisdiction? The EU suddenly got an idea that I thought would languish for a few more years and it's proceeded through the parliament. Did it take you by surprise?

James Tayler: Not at all. I mean they've had a carbon trading ETS system

for more than a decade now. I’m pleasantly surprised by the appetite that the European authorities have shown. You know as a capitalist it's very easy for me to respond positively to putting a market price on an externality such as carbon incentives inform outcomes. Ultimately what's very disappointing is that it's not within the political classes here necessarily understood that we live in a global system. So, if other parts of the world start to put a price on carbon, then it will be imposed upon us whether we choose to adopt it locally or not. Any company exporting a product here will ultimately have carbon priced into it whether they like it or not. Any airline that flies from this country will ultimately have to face that carbon tax if it wants to land in one of those jurisdictions.

So, it’s disappointing that we don't see an adequate policy response to that, but no am I surprised about the pace, no and I think we're actually already operating in a somewhat disorderly system because the pace of change required is far greater than that which we're showing at the moment. I think we're going to see stranded assets galore not in 10 years' time, in two, three, four, five, years' time in various sectors. Indeed, looking through the energy space, you can certainly identify assets that we think are already stranded and it won't take long for...

Bob Carr: For example, coal-fired power plants but what other examples would come to mind in stranded assets? to put in place that scheme for instance and the whole of the EU taxonomy around the environment it's hugely positive.

James Tayler: Clearly coal-fired electricity generation assets in this country are looking pretty stranded to me, given the amount of days in the year that electricity has a close to zero price because of the huge amount of renewables that have come into the system, which is a hugely positive thing. That's clearly reflected in the strategy of one of the predominant owners of those assets AGL in this country. Clearly, they're acting with some haste now but I think there's a good argument that they could have acted with greater haste in the past few years around that issue, but their strategy is to put that problem ultimately to the market, to put a price on those assets, so we'll see within probably 12 months or so what the market thinks about the value of those assets.

Bob Carr: Other examples of assets becoming stranded in the next few years?

James Tayler: Well, a lot of this discussion around oil and gas exploration and activities and whether the billions of dollars that have been put into certain prospects in the oceans around this country are worthwhile investments. I suspect quite a proportion of those prospects will turn out not to deliver a suitable return for the investors of those companies that are making those capital allocation decisions currently.

Bob Carr: See that's a huge development isn't it when we see the market making a decision about offshore oil and gas.

James Tayler: Absolutely but that really to the heart of our discussions and the decisions that we make as fiduciaries on behalf of our clients. We have we have to make that judgment; we have to judge whether the companies themselves are making that judgement adequately and then ultimately capital will vote with its with its feet one way or the other and capital markets are highly sophisticated they're international, they're global in fact and the wise money tends to move pretty quickly.

Bob Carr: A yes, no answer from each of you, is corporate Australia ahead of Canberra when it comes to formulating responses and policy on climate, yes or no? James.

James Tayler: Yes

Bob Carr: Nicole.

Nicole Bradford: On the whole, yes.

Bob Carr: Iris.

Iris Davila: Pick up a point that James made it kind of has to be because...

Bob Carr: Yes or no?

Iris Davila: Yes, yes because of capital allocation global capital allocation.

Bob Carr: Well, that's interesting that you point to global developments. Paul Kelly in The Australian source interesting, said in a recent column about a week ago that global capital would make a decision to avoid Australia if there weren't appropriate responses from Canberra. In the Murdoch media I thought that very interesting, he was saying in effect and I'm sure each of you noticed his column, he was saying in effect that global capitalism make a decision that predetermines Australia will need to respond more decisively on climate. Any response?

Iris Davila: I think it's not only global capital but if you actually think of the markets that Australia exports to, they themselves are making policy decisions that directly impact the exports to those countries. So, again if you're thinking about it from a financial risk perspective and you're looking at individual companies, you need to be asking yourself are these companies looking at this and looking again at that potential future demand or lack of it and taking that into consideration in today's capital allocation decision. So, I think it's a two-way street, I think yes global capital but also our trading partners as well are being quite strong on some of their targets, whether or not they're valid or not is a Different conversation that we can don't need to get into today. Japan, South Korea and China have all made.

Bob Carr: Yes okay, this year is going to be dominated by climate diplomacy, Nicole what sort of extra pressure will COP26 and the meetings that lead up to it put on the Australian Government?

Nicole Bradford: It would be interesting to see wouldn’t it how this really starts to play out. I mean, it's hard for me to speak in terms of this government and the approach that is put on them. If we just look at it more broadly of what the purpose of COP26 is, it’s basically that they ratchet up targets and that's supposed to be done every five years and this is the year that needs we need to do it, we're a member of the Paris Agreement and therefore that's what we should be aiming for as a country. I think secondly from an investor perspective, we have now an investor stream which is the first time we've had that led by Mark Carney, a very influential person with his roles as former governor of the Bank of England and Canada

and chairman of the Financial Stability Board, leading that agenda. So, I think there's going to be a lot more pressure on investors as well both fund managers and super funds pension funds like ourselves in terms of not only our commitments but evidencing like we expect of companies and making sure we have transition plans. I think there's going to be a lot of focus more broadly on countries, companies and investors alike.

Bob Carr: Yeah, James is the flurry of international diplomacy directed at an effect on investment decisions, does it vindicate those in the corporate sector who are asking for more decisive action, more explicit goals for 2030, tougher decisions might affect investment in gas for example?

James Tayler: Does it vindicate the corporate sector's approach? Well, I would like to think that the corporate sector's approach informed by investors like ourselves is based on science to start with. So, it's a well-founded approach and hopefully that's flowing up to that policy making and diplomacy, reflecting business as a part of society I would hope.

Bob Carr: Just something of a footnote, can I ask whether there has ever been across your desk a proposal for an investment in a geoengineering adaptation to the climate challenge? That is adaptation to climate change through an investment in an engineering solution.

James Tayler: I think I know what you're referring to and I've started to see conversations around that. What I would say is that we predominantly invest in enlisted companies and I certainly observe a lot more going on at the earlier stage investment space asset classes such as venture capital and private equity, where there's certainly a great deal of new technological, ideas technology looking for capital finding, but that's not so much part of our business. So, I don't see so much so much of that.

Bob Carr: Is hydrogen figure bigger in all your calculations, can I ask you that question iris?

Iris Davila: Directly in my world it's one of those things that when we're talking to companies, again in sort of that stewardship role that we're asking them on that business plan, on that transition plan, are you looking at what your future petition is, particularly for oil and gas companies? If the hypothesis is that oil and gas will fall away, what is going to keep you going in the future? How do you exist as a corporate entity if your main product has gone away and what other alternatives are you investing in? Certainly, hydrogen is one that a few companies are looking at and are thinking about and to an earlier you know point, I do think we need to allow capital markets and companies to be able to invest in and sometimes fail, because there will be failure, we wouldn't have progress without failure. So, to allow some allocation of resources to these new evolving developing technologies or sources of income, that's good diversification of risk.

Bob Carr: Nicole, just extending that to you and this is my last question for this evening. Is there a single technological development in all that's crossed your desk that excites you that fills you with optimism for a technological leap that might be very helpful as we complete the challenge of medium-term goals and the big goal for 2050?

Nicole Bradford: Look, that's a that's a big question I'm not sure I have a particular answer to that one. I think we're a lot of, I won't say it's a necessary solution, but also one market that I’ve seen incredibly active at the moment that is in its infancy is the natural capital space and we haven't talked about that from the perspective of the role in carbon offsets or the role in solutions as well. It's absolutely in its infancy, it's got the ability to sequester carbon in different components depending what we're talking about, whether it's mangroves or whether it's forestry. But I think that's an interesting area and people are talking about it that it'll be another asset class, so I'm really quite fascinated to see how that area evolves.

Bob Carr: Thank you, thank you Nicole Bradford of Cbus and thank you to James Tayler and Iris Davila. This has been a terrific discussion and very useful, I hope practical as well. I thank all of you who've tuned in we've got some interesting panels coming up with a focus on the law and climate. Given that a lot of battles are now being fought out within the legal system both in Europe, Germany and Holland for example, and here in Australia where litigation over climate issues is becoming more marked, more productive. We will be broadcasting an address by the chief judge of the land and environment course in New South Wales on that theme of the law and climate. But, to our panellists tonight discussing the role of the corporate sector, all of you in agreement that the corporate sector is ahead of government. Thank you for your participation, please read the article in the Washington Post though about the disintegration of permafrost because it lends further urgency to the matter we've been discussing for the last hour and a half. Thank you very much.

Iris Davila: Thank you.

James Tayler: Thank you.

Nicole Bradford: Thanks everyone.