ESG and green loans

Chris: Okay. For all of you who are out there, thank you very much for joining us today for our presentation on environmental, social and corporate governance matters and green loans. We're hopeful that in the next hour we'll be able to bring you some highlights, current considerations and legal matters for ESG, as well as the potential opportunities that contemporary considerations of these issues afford. Many current discussions of ESG frame this group of issues, perhaps with a note of caution, or perhaps as one more item that companies or boards of directors or senior management need to take into consideration. But we also want to share with you the opportunities that are now emerging in the market place. Concrete opportunities, including those that may have a positive impact on the bottom line of your company or your client's companies. So that we see ESG as not just another duty, or another obligation, but a welcome addition to the corporate market place. We have a strong panel joining us today who will be working through these issues in a discussion format. Please feel free at any time to join our discussion by asking questions at any time using the Q&A box. The raised hand and chat box admissions are disabled even if they appear on your screen. We'll be pleased to make this discussion interactive by taking your questions, as they come, and of course at the end there will also be time for discussions.

Our panelists are John Uhren. He's Head, Sustainable Finance, Products and Strategy at Bank of Montreal. He leads product development and strategic initiatives across the enterprise, including raising capital and providing sustainable finance opportunities to clients. John is also a member of this ESAs groups Transition and Sustainable Finance Technical Committee. Prior to joining the sustainable finance team, John was senior counsel and director in capital markets legal at BMO. In 2017 he was one of Lexpert Rising Stars award winners as a top lawyer under 40.

Paulina Kursa is a Senior Director in corporate finance at Bank of Montreal and works with a number of mid to large private unpublic companies to provide an integrated sustainable solutions. She has over 12 years of extensive corporate and commercial banking lending experience which span various industries and include ... executing single bank underwritten as well as syndicated loans transactions. She's viewed as being a key relationship partner for clients by providing trusted guidance and expertise to help guide business ...

Stephen Pike is a Business Law and ESG Partner at Gowling WLG and is a Senior Advisor to global and Canadian businesses. He advises on corporate law and corporate governance, sustainability and ESG issues as well as risk management on product distribution related issues. He's a frequent writer and speaker on ESG issues including on an ongoing series entitled 'Insights for Canadian CEOs and Directors on Addressing Modern Slavery in their Businesses and ...'. He's Vice-Chair of the Corporate Social Responsibility Committee of the American Bar Association Business Law section and is co-editor of the upcoming book 'Governance Needs Sustainability: a Guide Book for Directors', which will be published in October by the American Bar Association.

My name is Christopher Alam and I'm the National Head of our lending practice at Gowling WLG in Canada.

I'll start by framing this discussion with a couple of examples of where we see some legal issues or some concrete legal statutory issues developing. Very recently in the early days of the Biden Administration the interconnectedness of climate change and ESG issues has come forward. We've seen the US Securities and Exchange Commission announced the creation of a Climate and ESG Task Force to develop an initiative to proactively identify ESG related misconduct and to look at material gaps or mis-statements in the disclosure of climate risks. The SEC has raised the concept of creating universal reporting framework and the Chair of the SEC has noted that it's time to begin to take critical steps towards a comprehensive ESG disclosure framework. This goes hand in hand with other departments in the United States, like the Department of Labour, that is considering what rules should be applied from the prior Administration versus the current Administration in order to make ESG important factors in governance matters. In Canada, back in 2019, if we think about the rules that governed the governance of directors, we know that every officer and director of a corporation in exercising their powers and discharging their duties under the Canada Business Corporations Act, must act honestly and in good faith with a view of the best interests of the corporation. Which has often in the past been a singular focus on the value given to shareholders. In 2019 those duties were modified to note that directors and officers may, in carrying out those duties, consider a number of factors which included employees, consumers, governments and the environment. While these don't appear to be mandatory factors I think both of these developments are examples of how governments are moving to codify ESG as an important framework inside the governance of companies.

But now, once again, from hearing the experts about the challenges and opportunities that ESG affords, and I'll turn it over to Paulina to kick us off with our first discussion point.

Paulina: Thank you Chris, and Gowling, for hosting us today. This is an incredibly important and topical conversation for our respective organizations and one that comes up often in discussion with our clients. So let's turn it over to Stephen and John, who I know everybody's very eager to hear from. So, Stephen, let's start with you. What is ESG, how do you define it and why should businesses care?

Stephen: Thanks, Paulina, and thanks, Chris for that warm introduction. There isn't a specific legal definition of ESG so I'm going to give you my definition of ESG. In terms of the 'E', I would describe that as the businesses impact on the environment and its use of resources and energy. As far as the 'S', the 'S" is a businesses relationship with people, both inside the business and the businesses value chains and outside, including the communities in which the business operates in society at large. In terms of the 'G', that's how the businesses run. From corporate governance at the board level to the boots on the ground mapping supply chains in Asia and Africa. These ESG factors, they can be objective, subjective. They can be qualitative and quantitative, domestic or global. They can be the spoke to a business, industry wide or right across our whole geographic area. These are the drivers of decision making, risk assessment and capital allocation. It's very important to remember that they're not silo and not independent. They're interconnected, and frankly, their interactive but at the center of any discussion where definition of ESG, we have to find the businesses stakeholders and, as Chris had mentioned under Canada Business Corporations Act, but also in terms of the definition of meeting set out by the Supreme Court of Canada in cases several years ago. Those stakeholders include shareholders and employees, creditors, consumers, governments, suppliers, the environment. So why should businesses care? Businesses should care about ESG because stakeholders care and as we're seeing more and more, literally on a daily basis, stakeholders are exerting pressures on businesses to deal with ESG issues. So, that's my take on what ESG means.

John: Maybe I'll jump in, Stephen, I think that was really good and I completely agree. It's about looking across the spectrum or value chain of a company and understanding what's most relevant to stakeholders. But I think it's important to point out ESG factors or issues, it's not like businesses are just waking up to ESG today and saying, "Oh my goodness. We have to start thinking about these risks." Historically companies have always cared about environmental risks and understanding what a risk like an oil spill could mean to their bottom line, or drought, or flooding or other environmental issues. Social issues like supply chain interruptions, from a governance perspective, thinking about things; there's probably a thousand management books that have been written about optimizing management and governance structures. So it's not like these topics are new but what is new is really the extent to which investors, customers, regulators, lenders, stakeholders are looking at these ESG factors and really thinking about how a company is addressing them and doing it thoughtfully. Investors have sort of led this, traditionally, or at least in the last 10 or 15 years. They've sort of led this intense focus on ESG factors and performance and I'll touch on that a little bit later when I talk through some of the trends we're seeing in the market. But a lot of it's customer driven as well. It's customers saying, "I want to own products from companies," or, "I want to invest in companies where my personal values are aligned with their overall corporate values or at least are not in direct competition with, or not empathetical to, those particular values." So back to the question of why should businesses care. For me it sort of comes down to risk and opportunity as Chris was touching on at the beginning. If you don't manage ESG risk well it can be detrimental to your business. But if on the opportunity side, now and this is increasingly the case, if you do it well, if you're a company that prioritizes ESG in a way in which you deal with all of your stakeholders, it can actually drive value vis a vis your competitors. It really signals to the market, to your investors, that you're not only here today in thinking about these things thoughtfully but you're in it for the long haul. Your company is looking to drive long term value in a way that aligns with a sustainable future. Those two ways of looking at ESG, with risks and opportunities, they're not mutually exclusive. In fact those companies that focus on the risks will be the most profitable and sustainable over the long term. It's this idea of a triple bottom line where, historically perhaps, companies focused a little bit more on economic viability but today, in going forward, it's not enough just to look at that. It's also about economic and social performance and viability as well, and really the thesis is, ESG done well can and ultimately should lead to greater profitability over the long term.

Chris: John, that's interesting you've talked about how companies need to project themselves into the market place because investors are interested in that. Your company, your bank, is indeed an investor. Are there concrete examples that you can tell us about how a bank looks at sustainability efforts and what an organization like yours, and Stephen, maybe you can touch on what we do afterwards, that you're doing in a concrete way?

John: Yeah. So, Chris, BMO touches it as an investor. We touch companies as lenders. We touch them in a variety of different ways and I think all are really compelling to say, we want to be working with our clients in a way that's forward looking where we can structure products or different solutions that help them meet their sustainability and ultimately their business goals. So for us at BMO, our purpose is to boldly grow the good, in business and in life, and with that we recently announced a new climate ambition for net zero greenhouse gas emissions, not jus operationally for BMO, but across our lending portfolio. So we're talking about working with our clients to try and transition to net zero GHG emissions over the next 30 years. We've stood up a climate institute where we have engineers and other environmental consultants that are focused on solutions for companies and that will help companies, our clients, address their climate risks. We also announced a trillion dollar sustainable finance commitment by 2025. <laughs> So over the next 4 years we're really focused on mobilizing capital towards companies that are pursuing sustainable outcomes, as well as managing company and assets under advice, in a way that aligns with a sustainable outcome or responsible investing thesis. From a products perspective we structure sustainable debt products, as an example. So green, social, sustainability bonds for our clients. Just last week Bell Canada came to market with a sustainability bond that we helped them put together their framework and bring to market. Then on the loan side of it, a bit more of a creative use of sustainable financing, and frankly, the traditional loan products, what's called a Sustainability Link Loan, and just last month we structured an SLL for Gibson Energy and it was the first Sustainability Link Loan for a North American energy company. The interesting part about this facility was that the interest rate margin that Gibson Energy pays can actually be decreased if they hit certain sustainability targets related to greenhouse gas emissions, but also some social and governance targets related to the diversity within their workplace, as well as on their board. Finally, we structured a label green loan for a company called Atlantic Packaging earlier this year, where they're using the proceeds 100%25 for building a 100%25 recycled container board facility in Ontario, and we were able to structure that in a way that aligned with their overall sustainability strategy. So apart from that we also have an impact fund where we're investing in early stage clean tech companies, scaling them and then introducing these companies to our existing corporate clients to solve some of the sustainability challenges that they're facing. Finally, just this week we announced a new energy transition group with the aim to advise companies, across sectors, on opportunities related to green technologies, introduce them to businesses that can help them solve some of the sustainability challenges they're facing. So green technologies are things like hydrogen, or electric vehicles or renewable power sources. We want to source these companies that are doing it well even, if they're sort of early stage, and then bring them to our clients that we know are focused on transitioning to green or even, frankly, less brown activities at some point in the future and we want to be part of this solution and be at the table to bring these solutions forward. We've got lots going on at BMO and it certainly aligns with our firm's overall commitment to boldly grow the good in business and life.

Chris: This is interesting to me, John, because when I practiced for about 20 years in the debt space and first of all, to see this much ... focused in not one narrow sectors. As you said, there's some ... business names that you had mentioned there. They're not all just in the energy sector. The goal of those funds, which is an incredible amount of money, is focused with a philosophy behind it which I think is more than just saying, "Oh, the real estate sector's going to be hot this year." or, "The manufacturing sector's going to be hot this year." It's got a real philosophy behind it and it sounded to me like you were saying that if you do this right there's actually benefit to the bottom line.

John: Yeah. Absolutely ... to the bottom line. Let's be clear BMO's not doing this for philanthropy. We very much believe that if we can be at the table with solutions for our clients, that sets them up for long term success. That then allows us to work with them, and bank them, and grow their businesses and create jobs in the communities over the long term as well. So it's very much looking with an eye to the future and it's, frankly, sector agnostic. There's no single sector where we're saying, "You're off limits as a sector." or, to your real estate example, "We're only focused on you because you seem to be a topical area where people suddenly care about Leaf certified buildings, etcetera. It's really across all sectors because every client that we speak to has a sustainability story. Some have already written it and some have it written publicly. Others haven't and part of the advisory service and strategic services we can help them with is aligning their strategy, corporate and sustainability strategy, with what will resonate most with investors and their customers and then bringing them products that, frankly, involve us as a bank having skin in the game as well. The Gibson Energy SLL I mentioned, we're talking about a decrease in the interest paid by Gibson if they hit these targets. That impacts our bottom line but what we've said is, "Look. Over the long term we wanting to be banking Gibson for the next 100 years." So to do that we need them to align their strategies with a sustainable future and we want to be part of that solution and that aligns with our overall net zero commitment as well.

Chris: Right. Which takes us back who if a company like that is successful, and has more clients because of what they do, it works out on both sides of the equation. Stephen, maybe, do you have any thoughts about how does a law firm take on this inside its four walls?

Stephen: I'll give you a few examples of what we're doing. I'll just give you a peek into things under the 'S' on the social side. Our firm is certified with a Progressive Aboriginal Relations Program, which is the world's only corporate responsibility assurance program for Aboriginal relations. We're also signatory to the Black North initiative law firm pledge. Our firm is committed to addressing and ending anti-Black and other forms of systematic racism in the legal profession in Canada. We've launched our own reconciliation action plan to help address Canada's mistreatment of Indigenous peoples and to make meaningful contributions to authentic reconciliation efforts. We're formally committed, like many companies and businesses around the world, to the Ten Principles of the UN Global Compact as well as supporting the UN SDGs sustainable development goals. We're the first international law firm to sign the UN Women's Empowerment Principles, which advances gender equality and promotes women's economic empowerment, in workplaces, in industries and communities. I'll just mention as final note that we're a supporter of the Legal Leaders for Diversity and Inclusion Trust Fund. It offers annual scholarships to young people with disabilities who want to seek a career in law and graduate from Canadian law faculties. So there's a few of the things that a law firm can do. We're really proud of all the efforts that we make in that area.

Paulina: Stephen, a lot of the work that's gone into the 'S' of ESG definitely sounds like your firm is well under way to being a trail blazer there. John, you mentioned a little bit about there are companies who have started the ESG story, and some who are maybe not there yet, or in the process of starting. So the four of us are lawyers and bankers. How we can we help those companies that are just starting there?

John: I think it's sitting down with them and for one, understanding what their objectives and priorities are. So, if it's a company that hasn't started a sustainability strategy, if they don't care about it then we're not going to try and take the time to convince them that they ought to. This is something that still has to be ingrained in the DNA of an organization. There's very few conversations I have these days where there isn't at least some thought being given to it, and again, often investor driven but often customer driven as well where management or C-suite or the board is being engaged directly by different stakeholders and pressing them to think a little bit more about their strategy, or to go a little bit further in some of their public commitments. So I think for BMO, what we can be doing and Gowling alongside as well, is as we're sitting down with these companies is really encouraging them by pushing them on the areas that matter most to investors. For example, SASB, the Sustainability Accounting Standards Board, puts out what they call a materiality map. This map, across 70 different sectors, identifies the most relevant ES and G issues for different companies, is broken down by sector. So what that says to me is we'll start with that map and say, "Okay. If I'm sitting down with a oil and gas company I know greenhouse gas emissions is going to be relevant." That's going to be an area that investors care deeply about. I know that upstream and downstream, depending on where they are, there's going to be material issues within their supply chain and the transport of their product. All the way through the value chain to end use. Think about scope 3 emissions, greenhouse gas emissions, how is the oil being burned in whatever the end product is? That's going to be top of mind as well for investors. So, then sitting down with the company and trying to help them either set targets or, frankly, bringing them technologies, to the energy transition group that I mentioned earlier, if we can bring them the solutions to some of these challenges they're facing then that's a huge unlock of value for them and can really help them in their sustainability strategy.

Paulina: Stephen, I know you work with firms like Gowling with clients who are interested in ESG and pursuing those further, so curious from your take from a legal perspective, how we could assist these clients.

Stephen: I think lawyers can help companies deal with ESG factors in a multitude of ways but let me give you a couple of examples to think about. ESG reporting. Well today, as Chris had mentioned, there has not yet been a harmonization of reporting standards and frameworks. So when you overlay that with mandatory reporting regimes for public companies it can get very complicated. As we've seen in examples in the US, where some companies are reporting differently internally then they are externally, it can bring to bear certain legal and regulatory risks. So lawyers can help ensure that the business is reporting in a way that mitigates legal and regulatory risk and lawyers can help by applying the requisite diligence to ensure that what is being reported is being done in a consistent and accurate manner. My recommendations to clients is always say what you do but make sure you're doing what you say. There shouldn't be any gap between the two of them. Let me give you another example. Lawyers often work with companies at the board level to help develop board skills, assessments and develop a board skills matrix. We see now with ESG we need to ensure that the board has appropriate, critical composition to deal with ESG factors. Not only do boards need a board skills matrix but they also need to go back and they need to look, and lawyers can help them do that, to do a systematic review of impactful ESG factors in the business and map the landscape of stakeholders in their concerns. Then take that work product and that analysis and then apply it at the board level to ensure that you've got the right combination of skills, expertise and experience. Lawyers can really help the board get positioned to appropriately, and successfully, deal with ESG factors and, as you will hear I'll make some comments about it a little later, when you don't have that you're really taking on a lot of governance risk.

Chris: That's interesting. You talk about the board a lot there, Stephen, and I know that obviously American law and Canadian law is not fully aligned but perhaps the spirits behind them, philosophy behind them, is a little bit aligned. Often we see standards that are American standards drifting up here a few years later. Are there differences or factors that we have to think about when we move across border? When we get into large companies and global markets, what's the current state around the world, very roughly speaking, in terms of other markets and how we think about these things?

Stephen: You know, Chris, that's a great question and you know through my work in ESG and discussions with lots of companies and lawyers in different jurisdictions, my view is that we have Canadian ESG factors. Those are issues that are bespoke to Canada and unique. While looking at cross border things with the US, or the EU, or other jurisdictions, there's many overlapping issues. There are many that are bespoke to Canadian businesses. I think investors and other stakeholders are well aware of them. So let me give you some examples. Canada's Indigenous peoples, they're stakeholders but they're stakeholders with constitutionally protected rights. That is very unique to Canada. Canada's an Arctic nation and we have social and social justice issues in the Arctic, as well as environmental issues that are exacerbated by climate change. You won't see that in many jurisdictions and so we need to be aware of it if you're doing business or investing in Arctic projects, for example, companies that are doing business in the Arctic. Human capital management in Canada. Canadian workplace laws are fundamentally different from those in the United States and in looking at social, under the ESG, looking at social factors you need to be aware of that. Speaking of the US, we share our border with our biggest trading and investment partner. Let's look at the ESG. Under the 'E' we have very different environmental laws and regulations. Very different approval mechanisms and processes for major projects in Canada, for example. Under the 'S' we have many similar social and social justice issues but we also have many that are bespoke to Canada. For example, Canada's Indigenous peoples, that I mentioned. French language rights in Quebec are unique to Canada and need to be considered when you're talking about the 'S' in ESG in Canada. 'G' for governance. Corporate governance in Canada and the US are so not on the same page. In the US law of the land is still a shareholder primacy. That means that the corporation exists for the benefit primarily of the shareholders. Whereas in Canada it's much different. The Supreme Court of Canada, many years ago, said it's okay to consider the interest of stakeholders when directors are involved in their decision making process, and shareholders are only one stakeholder amongst the groups that we've discussed before. In the US we see organizations, like the Business Round Table, coming forward and promoting corporate purpose as something that businesses should be focused on. Corporate purpose really means take into account the interests of stakeholders. So in Canada and the US we're not quite there in terms of alignment of corporate governance. I guess I would say a take away is there's a lot of overlap, but I think people looking at ESG need to be mindful of the differences, and pay particular attention to those ESG factors that are unique to Canada.

Chris: Interesting. Is that true, John, as well in the equity markets? Is there overlap? Are there differences or are we seeing large institutions take a global view to these things?

John: I would say that North America is a little more in sync as it relates to sustainable debts, sustainable equity markets. Europe has always been just a little bit of ahead of where we are in North America and it's been, as I've alluded to a couple of times, sort of investor driven to date where a number of the large asset managers in Europe, or investors in Europe, have sort of a more refined or defined green social sustainability mandate and are making purchasing decisions accordingly now. Part of it is in Europe there's regulatory backing. The various governments, and particularly the EU with the green deal in the EU now, there is regulatory backing to say that it's one thing for investors but companies actually ought to have net zero alignment by 2050. They ought to be focused on the ES and G of their performance, and it they're not, they're now in regulatory breach as opposed to simply falling out of favour with investors. But just moving back to North America for a second, the sustainable debt market here is on fire. Right? So last year alone we saw 700 billion in sustainable debt issues. So that's green bonds, social bonds, sustainability bonds, which are essentially a combination of green and social projects. Historically, green bonds have been sort of the lion's share of the sustainable debt products that we've seen come to market, by a variety of issuers; development banks, corporates, insurance companies, financial institutions, utilities, virtually all sectors. But it interestingly over the last year, year and a half, we're starting to see that proportion of green bonds is that, overall 700 billion proportion I mentioned in 2020, it's shrinking and what's growing in its place are social bonds, for example. So last year we saw Pfizer come to market with a billion dollar social bond, with proceeds used to fund vaccine research. I'm happy they did because I got my Pfizer shot recently. We also saw Alphabet come to market with a 6 and half billion dollar sustainability bond but part of the proceeds used in that bond were to support the BIPOC community and to invest in businesses owned by BIPOC individuals. That's a fantastic use of the sustainable debt market but it falls in the social bond category that we're starting to see more and more of. Then increasingly we're seeing Sustainability Link Bonds and I mentioned the Gibson example. In fact, in this year, in the first 4 months of 2021 we've seen a hundred billion dollars worth of Sustainability Link Loans and then we've started to see them granting into bonds as well. So Sustainability Link Bonds are the same thing as an SLL. It's the same thing as loan but on the bond side where the coupon payable by the issuer can actually step up and increase if the issuer doesn't achieve certain predetermined sustainability targets. We saw the first SLB in the US in November of last year, the company called Energy, and we're bookrunner on that transaction. We're involved in one of the poultry producer in the US as well called Pilgrim's Pride. I think Sustainability Link Bonds are an area to keep your eye on. I expect we'll see, over the next 8 months of this year, a number of Sustainability Link Bonds come to market in North America and fingers crossed in Canada as well. What makes them unique is they're open virtually to any issuer. Any issuer that's made a realistic commitment to some sort of sustainability improvement. Now whereas green bonds you sort of have to have, call it half a billion dollars worth of green proceeds, in bringing projects to finance. With Sustainability Link it's a general corporate purpose facility, or bond, but you ought to use the proceeds towards a particular KPIs that you've set along with the structuring agents that you've worked with. So I think that will be a really catalyzing type of asset class that we'll see here through the rest of 2021. Then on the equity side, 2020 was booming again. We saw 223%25 growth in ESG themed ETFs, specifically. So a lot of people pulling money out of vanilla or regular ETFs and mutual funds and pouring it into ESG themed funds, which can range anywhere from excluding certain sectors that are not green in nature, or all the way through to sort of best in class performers in different sectors, or even impact themed investments where your investing in companies that are doing really good, environmentally or socially, in the communities. We saw great performance as well from these ESG themed ETFs. I expect through 2021 we'll continue to see growth in this sector. Now, I can say that confidently because it really is investor driven, both on the fixed incomed or debt side as well as on the equity side. Climate change is actually the number one issue for asset managers in the US right now. 51 trillion dollars of AUM is currently invested through a responsible investing lens globally. So 51 trillion AUM invested under responsible investing lens globally. Recently there's been asset managers like BlackRock and Vanguard and others managing more than 22 trillion of assets that have committed to aligning their portfolios with net zero emissions by 2050. So looking at their investing companies and saying, "We want to align our portfolios with net zero." I think this is going to be a huge catalyst for the market and this has all been sort of in the last year or two that we've seen significant growth. Then finally, on the corporate side, there's over fifteen hundred companies now that have publicly committed or announced plans to be net zero by 2050, or sooner, which is in alignment with the Paris Climate Accord. So fifteen hundred companies is significant. It's actually a 300%25 growth since 2019. Companies are recognizing the importance as well. Probably because investors are telling them but it's a good flywheel to be spinning right now. I think it's only going to continue to grow the ESG debt and equity market into the future.

Paulina: We do have a question from the audience actually. Just a reminder for everybody, if you do want to ask a question to the panel, use the Q&A feature. How can companies use ESG to drive profitability and ROI and where do you see the growth opportunities? Maybe I'll start with you, John, since we just chatted on the topic.

John: This is my favourite topic because, at the end of the day, why else are we talking to our clients if it's not to drive ROI but to do it responsibly and sustainably. Right? The one is obviously, I've mentioned it but, you have lenders that are tying cost of capital to sustainability strategy and improvement. So the SLL example. So for one, if I'm a company and I'm looking to drive profitability, that includes lowering the interest I pay on facilities. Similarly in the bond market, we are seeing bonds pricing tighter if they have a ESG or green label to them. That's in part because the investors I mentioned earlier, some of them has specific green buying mandates. So a percentage of the portfolio has to be in green social or sustainable or ESG. But at the very least the vast majority of investors are UN PRI aligned. So the Principals for Responsible Investing align, which at the very bare minimum requires them to incorporate ESG and integrate ESG into their investment decision making. Finally, customers, right? Customers are so focused on ESG and aligning their purchasing decisions that, inevitably, a company is only going to grow if nothing else they're focused on ESG risk and building out their strategy as it relates to their sector. We're in the midst of the largest inter-generational wealth transfer in history with Baby Boomers transferring money to Millennials and to Gen Z'ers. It's the Millennials and Gen Z'ers that are increasingly investing and making purchasing decisions into companies that they believe in. That they align their personal values with. At the very least they're not opposite their values. So I think we're going to see continued growth and from an ROI driver perspective, unquestionably this is going to be a driver for businesses because customers and investors care and those are probably, arguably, two of the most important stakeholders.

Chris: I hear, John, you say a number of things about sustainability and the environment but we talked about some of the other items that fall in the ESG and, Stephen, one of the items is supply chain and supply chain obviously is important to ROI for a company. Right? The cheaper you can get your supply chain the better because that increases your profit margin. Do you think that ESG supply chain issues are going to, perhaps if the environment is up here and reducing greenhouse gas is up here is on the scale of important things to do, do you think that the supply chain issues are going to become more important and more important to Canadian companies?

Stephen: I certainly do, Chris. Let me take a step back and provide a little context in terms of supply chain issues relating to ESG. According to a World Vision Canada report, about thirty-four billion dollars a year of goods that are at high risk of having been made with forced labour or child labour are imported into Canada. This issue's attracted a lot of attention, as John says, from consumers and investors and legislators. We've seen lots of litigation in the US, especially on a consumer's side, from consumers who said, "I didn't want to bring force labour or child labour made goods into my house and serve this to my family for dinner." So, but that's just one example. In Canada why it's become even more important, not just consumers and investors, is from a legislative and regulatory perspective. As you know last July the USMCA, the successor to NAFTA, came into force and accordingly, under the provisions of USMCA, Canada then implemented it. One of the ways it was implemented was through amendments to the Tariff Act and the customs tariff with Canada. What they did was banned the import of goods, produced in whole or in part, with force labour including forced child labour. So those goods could no longer come into Canada. So what that meant was that, from a supply chain perspective, Canadian businesses who were importing these goods, allegedly 34 billion dollars a year, had to look at their supply chain, conduct due diligence, develop policies and procedures and contract to ensure that they're in compliance with applicable Canadian law. I'm sure that everyone of the loan agreements, or debt agreements, that you work on says that the borrower, the debtor, has to be in compliance with applicable Canadian law. So the law changed on July 1. Right now the Federal Government's investigating the importation of solar panels, of rubber gloves, of palm oil, different products that are alleged to have been made with forced labour outside of Canada. The second reason, from a regulatory perspective, is something called Bill S-216. This is Canada's proposed modern slavery disclosure legislation. It passed Second Reading in the Senate and was referred to the Standing Committee of the Senate on Banking, Trading, Commerce where it's being studied. This law would require Canadian companies that meet the high revenue threshold, or the employee threshold, number of employees, require them to report annually on steps taken to prevent or reduce the risk that there's forced labour, or child labour, used anywhere in their supply chain in terms of the goods that they make or the goods they import into Canada. They also have to report on corporate structure, on policies they have do deal with, forced labour and child labour and a number of other things. So, this from a regulatory perspective, it's becoming even more important. For Canadian companies that do business in the US, the US forced labour goods have been banned from importation since 2016 under President Obama, but the customs and border protection in the US are very aggressive in issuing withhold release orders to seize suspected forced labour goods at the border and then put the onus on the importer to prove that they're not made with forced labour anywhere in their supply chain. So, the other thing in the US for Canadian companies that want to supply goods or services to the US government, a Federal acquisition regulation prohibits the Federal contractors and sub-contractors from using forced labour or human traffic labour in a provision of any goods or services to the US Federal Government, which is the biggest consumer in the world. What we see for Canadian companies now, in terms of supply chain from the ESG perspective and not only on the environmental side, but on a social side is changes in consumer perspectives. Definitely investors who are trying to manage investment risk, and also from legislators who want to ensure that human rights are properly dealt with, are now putting pressure on Canadian businesses to step up to the plate.

Chris: John, I'll let you jump in but we have a question from the audience that, Stephen, you mentioned rubber gloves and, John, you mentioned the Pfizer vaccine and, Stephen, you mentioned USMCA which happened before COVID but then I guess has been more implemented and the transition at the start of turn COVID, we have a question from the audience as to how COVID-19 may have impacted the development of ESG or delayed it. Maybe to give you a double-barreled question, John, I'll let you talk about supply chain and whether or not you have thoughts about how COVID-19 was an impact. Obviously it affected supply chain.

Stephen: Let me just address it briefly from the social side, just moving away from supply chain for just one second, which is the first thing that we all heard and welcomed when the pandemic broke was employers and businesses around the world saying we're all in this together. Our top priority is the health and safety of our employees. So immediately there was a different lens cast upon employer/employee relationships in terms of, and that falls under the 'S' in terms of capital management, and I think that's fundamentally changed, in my view, the employer/employee relationship in terms of more collaboration and more opportunities for support, both from the medical side and from the mental health perspective.

John: My comment was going to be, call Stephen if you have any questions about your supply chain or some of the risks facing your businesses. But maybe this is my point to be on it is through COVID what we saw was an increased focus on supply chains. In particular, if I think about it, in Canada at one point we had three of the four major meat processing plants were shutdown because there were breakouts within the facilities. That could have caused serious disruption to food on the shelves in our grocery stores, etcetera. We managed to skirt it a little bit, to an extent. There was some shortages here and there but if you think about the interconnectivity of supply chains and how so much inventory is just in time, and first in first out, etcetera, it can be a real shock to the system if there are major supply chains, which of course fall under the 'S' for social risk within ES and G. On the positive side to the focus on employees Stephen was referring to, we had grocers like Sobeys who implemented a hero pay program, acknowledging that their employees, their front line workers, they were putting their health and safety in jeopardy every day. Loblaws noted a similar program which involved additional pay for them. So that was a really good program but truly putting your money where your mouth is and putting in the safeguards and whatnot to keep your employees safe. Which there was such a focus on that if you didn't do it well, and there's some companies and I'd rather not name them specifically, but maybe the most valuable company in the US right now, that through its grocer chain didn't do it very well. Suddenly you have these horror stories of individuals in their facilities who got sick from COVID, and then had to borrow vacation days from other employees, or ones that were fired because they got COVID. You hear these stories and inevitably these things stick, especially in customer's minds to say, "Next time I go to make a purchase decision I'm going think twice about that." The last point I want to make around the supply chain is we have companies like Walmart, that set up a sustainable supply chain finance program, where basically they looked across their spectrum of six hundred thousand, probably way more now but this was a few years ago, suppliers and said, "We're going to put you into individual groupings based on the items you supply. All the way down to apples or oranges or rubber gloves, as an example, we're going to put you as the five suppliers of rubber gloves into a quadrant and say, 'Those that perform best, not just from an environmental perspective, from a social and governance perspective as well, we're going to take the time to evaluate you, and we're going to work with a third party called EcoVadis in doing so, but we're going to sit down and if you do well, then we are actually going to incentivize you by giving you better financing terms. If you do less well, or poorly, and there's five suppliers, you're in the bottom quadrant, you're going to get worse financing terms.'" So for Walmart it made a lot of sense because, one, they had the purchasing power that they could sort of push down the sustainability measures and imbed them into their supplier's overall businesses, but it also made sense because Walmart had made their public commitments of scope 1, 2 and 3 and its overall ESG performance across its supply chain. But the third area where it makes sense is just from a credit risk perspective. The companies that are at least focused on their own ESG performance are more credit worthy all things equal. Walmart acknowledged that and said, "Look. We want to be working with those clients because they're least likely to default or disappear or not deliver in time, etcetera, because they're well managed companies that clearly are prioritizing ESG." Back to the COVID question, I was happy that people in LA could see downtown and people could see the Himalayas. There were dolphins swimming in Italy. That was all really good from an environmental perspective but I think it became really clear from a social perspective the winners and losers, as it relates to supply chains and the way they treat employees.

Paulina: So we do have another question from the audience and maybe I'll start with you, Stephen, on this one. Given there is a roadmap of looking to Europe where many companies have already put into place global policies that tackle these issues, do you anticipate Canadian companies complying before the laws come into effect and would compliant early be a way to differentiate yourself?

Stephen: I would say, first of all, there's a number of Canadian companies already that operate in different jurisdictions and have, with respect to those operations, have to comply with the legislation in those jurisdictions. So one example would be the UK Modern Slavery Act where businesses that are operating in the UK, and are of the requisite size to be subject to the Act, are filing those reports. Talking about the modern slavery, which is forced labour, human traffic labour, indentured labour, child labour in their supply chain, so they're already reporting, going beyond what's required in Canada. With respect to modern due diligence or ... slavery and mandatory due diligence legislation in the EU, I'm not sure that companies are necessarily complying with legislation before it's in place, but there are many companies that are already doing the work. They're already doing the due diligence. So what they want is they want to have a level playing field and say, "We're doing the work already on a voluntary basis. We're doing the due diligence. We're ensuring that our supply chain, there aren't human rights abuses occurring in our supply chain, or adverse impacts on human rights. We're already doing that. We don't need legislation to tell us to do that." So the legislation sort of comes into capture, if you will, or deal with companies that aren't willing to do it on a voluntary basis.

Paulina: I know you're addressing a lot of this in your upcoming book so, congratulations. I was wondering if you could maybe speak to a couple of companies who may need assistance with navigating through all the complexities of supply chain. There's obviously the consumer, there's government, there's international law too, so curious to get your advice on how you can help these companies navigate through all of this.

Stephen: It's a challenge, and obviously in every jurisdiction there's different legislation, but from my perspective I like to start with at the very top, a the board level. I've provided education, at the board level, and essentially the first step in my recommendation is always to adopt a governing principle in terms of your businesses position with respect to human rights in a supply chain. For example, it could be something as simple as our business does not tolerate or use forced labour or child labour in our operations or our supply chain. Once a business adopts a governing principle like that, and takes the position that's very clear in terms of from the top, how this business is going to operate then the question is how do we operationalize that? The next step being conducting due diligence, supplier mapping, supply chain mapping, to understand where, on our risk management basis, where are the greatest risks in our business, in supply chain. As a third step then to try and operationalize it in terms of putting in place the policies, the processes, the communication and training for employees and suppliers, the necessary codes of conduct and supplier responsibility standards. Then finally, remediation, because businesses also have to take responsibility for the adverse affects and adverse impacts on human rights that occur within their supply chain. That's in line with the UN Guiding Principles on Business and Human Rights. We see the guideline for multi-national enterprises. So really there is a structure to be followed, but it all starts at the top with sort of that binary decision, which is are we for it or against it?

Chris: Interesting. You touched on something there. We're coming up to the end of our hour, Stephen, so I invite any of our audience members who want to jump in with a question to get in now and we'll try to close to the top of the hour, because I know everybody is busy. But you mentioned a number of things there and I wonder if, John and Stephen, if you could talk a little bit just what do you think are the up and coming critical issues for business that are going to show up for ESG going forward?

John: Maybe I could start, and I'm going to give props to Gowling and BMO for this first one, but around disclosure. So how are you disclosing ESG risk? How are you disclosing your overall performance? We're seeing investors like BlackRock and others that are pressing their investing companies to align with SASB, which I mentioned earlier, the global reporting initiative. Or even the task force on climate related financial disclosures, TCFD. Even last year we saw the Government of Canada tie some of its bail out funding to companies committing to TCFD reporting. So that level of disclosure, which in that case requires scenario analysis, one and a half and three degrees scenario, that's not easy for companies to do but I think it's something that is going to be increasingly come under the microscope for all stakeholders. Secondly, I would say, executive comp tied to ESG performance. That seems to be one we're hearing from a lot of investors on right now. All of the major banks have committed to tying, in some capacity, comp to ESG. It's harder for other companies and other sectors, but nevertheless, investors are still calling for. Finally, around transition finance. I've mentioned our energy transition group earlier but how can we get capital to these companies that are committed to being sustainable, and being less brown in the future, but need the capital to allocate towards projects which will materially allow them to reduce their GHG emissions? We're a resource intensive economy here in Canada and our clients are the first ones to put their hand up and say, "We are committed to what the future holds. We want to transition our business." For BMO, it's important that we're at the table because if we're not, it's going to be another bank. Maybe a non-Canadian. Maybe a non-North American lender, but nevertheless, it will be someone else. We've taken the approach of we want to be at the table to bring those solutions forward and doing that through the energy transition group.

Stephen: Wow. I agree with John. Absolutely on all of those things. Let me add a couple of quick ones. One, activist investors and their supporters, like asset managers and pension funds. We're going to see much more pressure on boards. We saw it last week with ExxonMobil where engine #1, I think it's now got three seats on the board. So activist investors. Number two, climate change litigation. Last week in the Netherlands, Royal Dutch Shell was ordered to reduce carbon emissions by 45%25, compared to 2019 levels. Although apparently that's going to be appealed. But eighteen hundred climate change lawsuits going on around the world according to a database that I looked like at this morning, including twenty-five in Canada. We're going to see more litigation. We're going to see litigation, according to the experts, in the US where fiduciary duty of directors meets climate change and on the government's side. Last point that I'll make is just, I mentioned a couple of things earlier, but it's an increased regulatory burden on businesses to deal with environmental issues. Deal with human rights issues and deal with governance. We'll see that in Canada but also specially in the EU. Back to you, Chris.

Paulina: John and Stephen, this was great, for all of your expertise today. I think we've all learned a lot and I'm sure this will not be the last conversation as we continue to head towards the ESG path for many companies. Thank you for Gowling for hosting us today. There will be a recording of this for anyone who is interested in sharing it with someone else or if you missed it. As well we will circulate some information for the panel if you do have any additional questions. Thank you and enjoy the rest of your afternoon.

John: Thank you.

Chris: Thank you.

Stephen: Thanks.