B (7:14)

What a great story and I love your advice for those who are just thinking about finance and how, what they want to specialize in. Really great advice. All right, well, let's dive into our topic. You served as head of sustainability for Mercer and helped to advise asset owners with their climate mandates. What were you hearing from asset owners on climate change? What were some of the concerns that they had and challenges that they wanted to address?

A (7:47)

Yeah, so when I was head of sustainable investing for Mercer Canada, I really had the great fortune of working with whole spectrum of different types of asset owners, from pension funds that had whole climate and sustainability teams to, you know, foundations and endowments that were just beginning their sustainability or climate journey. So really being able to work with a broad spectrum of asset owners and recognizing that every journey was a little bit different. So, you know, I think it's just embracing and really, as an asset owner understanding, you know, what are your fundamental investment objectives, your fiduciary duties, that those have to stay fundamental and core to what you do. But that, you know, starting the amateur sustainability journey and also really integrating climate change ultimately really can enhance how you serve your beneficiaries and your investment objectives as well. I think often, especially for those asset owners that hadn't yet started and were just considering, often it seems extremely overwhelming. And I think part of the problem is sustainability issues are unbelievably complex. There's a lot of unknowns. The data quality is not as high as you have in sort of traditional financial modeling and analysis. So there is a lot more ambiguity. But I think there was a lot of wisdom in some of the frameworks and the approaches that Mercer developed, but also a number of asset owners really developed. And that was really to lean into having a process. So just lean into the boring side and create a really good process around advancing through time and committing to a pathway. So a sustainable investing or climate transition pathway, for example, and recognizing you're going to be on it for many years, you know, every year just progress a little bit. Progress a little bit. And I know that all sounds a lot easier than the then, but just maybe some more details there. So you know what, Number one, often a good place to start is to really think like, what are your fundamental, you know, what would be good fundamental sustainable or climate beliefs and policies to establish and have a big deep conversation around that and don't rush it. So often with asset owners it would take, I'd say the shortest was like six months to develop sustainable investing policy language or climate language to a year. And because you really want to see like what are other asset owner peers that are maybe more advanced, what are they doing? Really learning about what's available, what's possible, thinking through if, you know, if we develop a climate goal or language in our policy, such as, you know, we are going to commit to integrating climate risks and opportunities and the transition in our investment processes, like what does that actually mean? So think through the implications. Talk to your managers, if you have outside managers, talk to your consultants and have all of those conversations before, you know, the ink is dried to your policy paper. And that is an incredibly useful process. And then the second is to really, okay, once that policy's in place, make sure you're going to start to implement it. And that is, you know, really having some good processes that can be really, you know, checking in with your managers, monitoring what they're doing on your behalf to really support that policy. Yeah, looking at things like proxy voting, you know, if you have a climate transition goal, you know, how are they voting proxies on climate change? They don't necessarily have to lean into all the proxies. There may be very good reasons they're not voting all of them. But how are they talking to managers and so or you know, to companies that the investee companies and then from that as well, you know, there's usually, I would say four different ways to really implements sustainability and climate into investment processes. So one is to really take a total portfolio perspective. Don't just pick one particular asset class. Like try to think it through as a total portfolio perspective. You know, do lean into. It can be just really exciting to lean into. Looking at climate transition or climate solutions holdings, what's available, kind of what's coming down the pipeline, like really having that forward looking view and really talking to your managers about not only, you know, it's not just physical climate risks, but it's also climate transition risks. So not just the physical impacts of climate change, but also, you know, how are companies either doing new technologies, business practices to get ahead of regulatory changes, new technologies coming on board as well. And then in addition to that, it's looking at things you maybe want to monitor for or screen out potentially if you're seeing it as a high risk area. And really making sure also that your managers, especially those active managers, are really actively engaging and doing stewardship activities on your behalf, or that you yourself as an asset owner are doing that. And that can be an incredibly rewarding learning experience. But recognizing also that's often very resource intensive as well.

B (13:20)

So now you're on the other side, you're on the asset manager side managing climate transition portfolios and you've been doing that for a few years now. Have you seen a change in like the number of asset owner clients adopting climate change mandates or the types of mandates adopted over the previous few years?

A (13:45)

I would say one of the really big shifts has been around the topic of climate transition. I think previously it was all about just low, you know, low carbon or seeking low carbon funds or indexes or just on climate solutions. Now there has been a real embracing of the middle, recognizing we can't just lean into the bright green solution side of the economy and trying to really avoid the high emitting side. Most asset owners really have to maintain a fairly broad exposure to all sectors in the economy, in many cases really being kind of universal owners in many cases as well. And so it's recognizing there is this sort of light green to gray, big massive areas of our economy in the middle that are pretty high emitting, aren't yet doing enough to transition, aren't yet by any means climate resilient, really ready for, you know, we're seeing, as you can see, I think one of the big things and the big shifts for me and a lot of colleagues is we are really seeing the big physical impacts of climate change already. You know, the, it was always one of those things modeling off into the future. We're going to see, you know, more intense storms, more mega droughts, chronic soil degradation and so on, but we're really seeing a lot of that accelerating. And there's been some big news even out this week that we're maybe already one and a half degree or that's already locked in, you know, with our greenhouse gas emissions to date. And you know, that expectation wasn't there. We were really hoping to avoid that for quite some time. So, you know, I would say the physical impacts of climate change are already being felt. You know, we, we saw just horrific storms in the US this year. In Canada, we hit, you know, record billion, 7 billion in insurable losses within like two months this summer or 10 times the average over the previous 10 years. Big hailstorms, you know, big metropolitan areas getting massive floods, terrible floods in Spain as well. And you know, a lot of that is with climate change and air temperatures being warmer. The air is actually able to hold now more water vapor. And so our storms are becoming a lot more intense and damaging. So, you know, it's really, I think there's been a needed shift to really focus on the transition and the economy we have now, but also recognizing we're a little bit running out of time to make, you know, to transition the economy and also make it more adaptable at the same time.

B (16:29)

So now I want to talk a little bit about what it looks like to actually manage a portfolio for climate change. As a former portfolio manager myself, I'm curious what kinds of things you look at. Like for instance, how do you identify climate risk in a portfolio? We hear a lot about decarbonization. Is it, is it emissions that is a primary risk indicator? Are there other things you look at? Maybe you could talk a little bit about risk and then maybe how you might mitigate some of that risk.

A (17:09)

Sure. I'll caveat with, you know, I'm happy to share my, my experience and sort of what I've seen in but recognizing like I just, you know, had an amazing phone call with a fairly big pension fund here in Canada and you know, they have like a team of, I think it's 14 people working just on this question across all, you know, and I was really quite jealous thinking and they hadn't really nailed that either, you know, so recognizing this is, I think humbly, we're all trying to really wrestle with this question of moving forward and becoming a lot more climate aware and climate risk aware and really seeing the opportunities. But so I think the thing is like I've always tried to do the most and we have a pretty amazing team where I am now. We're also very lucky that we're owned by an insurance company in Canada that actually has also a dedicated climate team, climate specialists on board looking at the insurance side so we can tap into them as A resource. And our parent company is also a Net Zero Asset owner Owner alliance member. So we've really been leaning into, it's called the NZ aoa. I've been trying to avoid acronyms in our, in this space. In this space but maybe that's the one acronym I'll stick out there. So the Net Zero Asset Owner alliance has a very helpful framework for asset owners in terms of how to have sort of a total portfolio approach, how to really engage managers and kind of move forward and they have sort of a multi year plan where they co support each other on how to advance together and learn best practices across the entire market. So it's been a really demanding alliance but I would say an incredibly successful in terms of really helping asset owners advance. And then just to give you a bit more on the specifics so I would say you know, across the board as investors like one, we just need to become more aware. So even if you know, even before you make any Net Zero plans or you know, targets and I can get, I'll get a bit more into how that can help you on climate risk mitigation but I think first you have, you know it's good just to have as much educational awareness building internally as possible. So and we're on a journey even though we've, you know our, our parents made Net zero commitments, we're a Net zero asset manager. We're still humbly really learning every day about climate transition or climate transition risks. And again those are those risks that are about carbon pricing or new technologies, new regulations really making companies that are high emitting change or changing the landscape or what companies are doing or their business practices are going to have to evolve. And then of course there's the physical climate risk. So how are, how are companies managing catastrophes, lack of access for to water potentially and so on. So you know one, it's just I would say every security from the bottom up, like every security you're looking at, think about climate transition risk exposure, physical climate risk exposure, what are the opportunities around that? What is the company doing? If it's a high mining company, you will bet they are already on this. Like they have been looking at this for years and years and years. It's a great conversation to have with them. And you are not alone in the sense that there are incredible resources for investors on climate transition and, and also physical climate risk awareness. There are of course many vendors that will provide all sorts of analytics and data but I think a few of the places we've really gone to is one on the opportunity side, we've really leaned into the climate bonds initiative. So they have, for over a decade really been developing, I would say, with a cast of thousands. They work really closely with scientists, technical experts across different industries and sectors to say these are the projects and the opportunities for investors to really mitigate, you know, climate change and really invest in the opportunities. And it's really been a huge success story, I would say, over the last five years or so, where they've grown from, you know, tens of millions in green bond projects really based on their standards, to now we're 5 trillion in US dollars. And so we actually really lean into their standards to seek opportunities as well. So we've been very opportunity seeking, but at the same time, we're constantly on a journey of trying to learn about the transition. And part of the work we're also doing there is we do lean into. There's a really great institute in Canada called the Canadian Climate Institute. There's the Transition Accelerator, New Economy Canada. And these are all collaborative networks of business, industry, investors and NGO partners really thinking about how is the climate transition going to move ahead in the economy in Canada? And then how can we as investors really be proactive in helping the economy shift, working with companies, working with policymakers, regulators to make that happen? And I think that's one of the areas where that's really changed for us. And I think also for a lot of asset owners in the past, they have, you know, there's been a lot of focus on corporate engagement and talking to companies about what they're doing. But we're really recognizing, you know, for the entire economy to really decarbonize, to really be more prepared and resilient and make those net zero goals, we do really need to have regulators, policymakers, standard setters, you know, put in the incentives, the standards to level the playing field for that investment to really be unleashed, for example. So we've increasingly been really engaging there, and I think that has really been a sea change and an important sea change in the investment space as well. One of the other really key parts of making that net zero commitment and how we implement that is we do now have climate transition strategies, but also a climate transition framework that is really based also, again, on a number of global organizations like the Transition Pathway Initiative or the Net zero Investor Framework, where it's really showing how to assess companies on their readiness and their commitments and performance on transition. So that's kind of a new skill as a sustainability person. We've been learning is with those steel companies, cement Companies, consumer good companies, you know, we're, we're all going to still have to use all of these products in the world and they're all high rating hospitals. You know, what should we be really asking of those companies and how can we really track that they're advancing and getting ready for the transition? So we've really spent a lot of time and, and resources into really assessing our portfolios more and more around our whole, our investees and how ready they are for, for the transition. Recognizing it is a multi year journey. You know, it's not like a company makes a commitment and all of a sudden all this Capex, you know, billions starts to flow. They too are on a journey of really shifting their businesses, their strategies, two steps forward, one step back, sometimes depending on sort of regulatory triggers and so on. And so it's really having a longer term multi year view. It really is forcing that. And I think a lot of the short termism around wanting quick outcomes around carbon emissions and carbon emissions are very backward looking but it's going to take multi, multi year trends to really see if we're successful on this. And I think one of the ways we're trying to be more forward looking is really tracking commitments from companies, how ready they're getting, tracking policy, more tracking also where the solutions are and then that should trigger if we're successful, good decarbonization trajectory. But I think too often investors just look at I want to decarbonize 7% per year and my job is done. But to me you're not necessarily affecting positive change in your portfolio vis a vis what's happening in the market. So I think it's having a really holistic view on net zero is very important. Maybe the last and most important point is we do really think engagement with policymakers and companies though is critical to really ask shareholders as bondholders, investors make this a priority and why and really be on a journey of learning together. I think no company knows exactly, exactly what transitioning is going to look like and cutting each other breaks I would say to some degree. But making sure that commitment really sticks and looking for those big things like capex, making sure the lobbying a company's doing is aligned with climate transition policies and so on is critically important. And one of the exciting things here at Canada has been a network called Climate Engagement Canada and that is a number of managers, asset owners coming together and really collectively working with the top 40 public companies into Canada, both on the bonds and equity side around their transition stories. And that's been a really really exciting thing that's happened recently in Canada.

B (27:06)

So just to sum up a little bit, it sounds like you're looking at kind of each company holistically at their, not only where they are with their emissions, but their transition plans for the future as a better way to gauge the risk, the transition risk and possible physical risk for that company as well as the transition opportunities embedded within a company. So rather than kind of looking always separately for transition opportunities, kind of embed those within analysis of each company and using engagement levers as much as possible while we wait for the policy and regulation that's needed to take effect.

A (27:52)

Yeah, maybe, maybe just to sum up, it's really kind of a three legged stool I think you need to have before you go to net zero, like just have climate risk awareness. And then the second is, you know, a net zero commitment and transition approach is a way to try to really mitigate climate transition risk in particular and also physical risk and really especially if you're bringing in climate resilience. So it is, they, they do compliment each other and then the engagement is really critical to inform both and I would say also embrace the ambiguity and the toughness and, and you know, lean into peers. No one has got any of those three legs fully figured out. It really takes talking patience. But you know, there's incredible value to starting and there's incredible value at work. You know, working in these networks or looking at different standards and groups and there's just so many good resources out there. It just, you start to see the world like it's, it's like going from seeing the world in grays to colors. Like you start to see things in more colorful formats of kind of climate through a climate lens or sustainability lens. It just gives you better insights and more granularity on what companies are doing, what your portfolio might be exposed to, you know, are you taking weak bets versus the benchmark, you know, that kind of thing. So just, it makes your life kind of more interesting and exciting as an investor, I would say, and just seeing opportunities as well. Great.

B (29:27)

Well, the last thing I want to touch on because before we wrap up is you mentioned earlier fiduciary duty and that it was important to do this within the context of fiduciary duty. And I wondered if you just had a comment or two on that. I know it's a question that comes up a lot, a lot of confusion around that.

A (29:50)

Yeah. So I, you know, I would say taking a sustainable investing approach or really looking at climate change means, you know, having a multi year long Term view, it means not ignoring any fundamentals of fiduciary duty. Good management practices don't make absolute transition goals that don't necessarily make sense. Like keep track of your risk budgets, your, you know, your tracking errors. If your carbon emissions are going to drag you to take overly big bets, don't, you know, I would say don't do it. Engage your bigger emitters, look at the risks you have, but don't do things in a vacuum. You know, really do keep that as being fundamental. I think two, you know, price your sustainability and climate goals well. So don't buy into sustainability solutions or climate solutions at any price. You know, be an investor and wait for the right opportunities. And you know, ultimately it's also creating multiple incentives. So if you do have climate goals, impact goals, I think it is important to really have a conversation with your managers around. We are asking more of you and we value the more that we are asking. I think quite often people just want to check a box. You know, say we're, you know, our, our portfolio is, you know, down 7% in emissions. We check that box and off we go. But I think to have a meaningful partnership with your managers, it's recognizing that they're adding value for you in the long term in terms of better climate insights. They're adding value for you in really trying to push for change in the economy and in your portfolio through engagement. It's recognizing that it's having maybe more of an incentive structure that really recognizes multiple goals, not just the quarterly beating the index, but maybe having some longer term incentives in place or value adds to recognize some of your other sustainability objectives that ultimately are value add as well to your fiduciary goals.

B (32:09)

Well, Monica, it's been a pleasure to have you on the podcast today. You have provided so much practical advice and I think really helped demystify climate investing for those who are thinking about it, whether asset owners or asset managers. I know our listeners will very much appreciate the information you've shared today. So thank you so much for joining us.

A (32:35)

Oh, you're welcome. It's my pleasure. And just a last parting word would be there's, you know, no wrong questions or approach. Just starting to walk down that journey of deeper understanding and talking to your stakeholders and those that support you in your investment. You'd be surprised at how much support there is out there. I have to say, if I could give a shout out to the CFA Institute, you know, one of the things that we found really helpful is your net zero resources and research out, including recently on benchmarks and Net zero and transition plans.

B (33:12)

Super helpful.

A (33:14)

We're a big fan also of the CFA ESG disclosure standard. So we actually have over two years now leaned into that standard for our Impact fund because we do find it really helps our asset owner clients really understand what we're doing on climate or sustainability or impact and just really encourage folks to ask for that and ask for that standard. We find it's just a really great way to build a partnership with, you know, between investors and we all need a lot more transparency in sustainability frankly. So just wanted to give a shout out back to the work that CFA Institute's doing.

B (33:52)

Thank you for that. And for those of our listeners who aren't familiar with those ESG standards, they are called the Global ESG Disclosure Standards for Investment Products and the purpose of those standards is to help investors compare products with ESG or climate disclosures for managers to use the standards to promote transparency for their products and comparability and consistency of information disclosed. I know when I was first working on developing the standards with our ESG technical committee and my teammates, we found so much variation in the type of information that was disclosed and where it was disclosed. So having managers who follow these standards put all the information in one document, make it clear, consistent and transparent is really a win win for both managers and investors. And you also mentioned our Net Zero Investing Hub. That is something we've recently launched and I do encourage all of our listeners to visit the RPC website and to look for that Net Zero Investing topic page. So thank you Monica. It has been a pleasure.

A (35:12)

Likewise. Thank you so much.