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ESG and the future of sustainability

Jun 1, 2022

Time: 44 min  Date: 2022/06/01
 

 

This episode features Osler’s Andrew MacDougall, partner, Corporate, in conversation with Michael Torrance, Vice President and Chief Sustainability Officer of BMO Financial Group, about the importance of ESG to sustainability and corporate responsibility. ESG reinforces the idea that there is more to assessing a corporation’s performance than financial results to achieve long-term shareholder value. Good governance requires effectively integrating environmental and social considerations into all corporate decision-making that has a societal impact.


ESG Explorer Podcast

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From evolving regulatory requirements and investor activism to the physical effects of climate change on business operations and more, Osler’s newest podcast, ESG Explorer, looks at the developments and issues affecting your business. Alongside knowledgeable guests from Osler and across the business world, Osler partner Pat Welsh guides listeners through the critical topics modern organizations are facing.

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Host

Patrick Welsh
Patrick G. Welsh
Partner, Regulatory, Environmental, Indigenous and Land; Litigation
Toronto

Guests

Andrew MacDougall
Andrew MacDougall
Partner, Corporate
Toronto
Michael Torrance
Michael Torrance
Vice President and Chief Sustainability Officer
BMO Financial Group

Transcript

[MUSIC PLAYING]

PATRICK WELSH: Welcome to the ESG Explorer podcast brought to you by Osler, Hoskin, and Harcourt. This show explores all things ESG, Environmental, Social, and Governance, that are impacting Canadian businesses. This podcast is for the curious, not just for the converted. I am Patrick Welsh, a partner in Osler's Regulatory, Environmental, Indigenous, and Lands group. Now, let's go exploring.

PATRICK: In this episode, we will speak with Michael Torrance, vise president and chief sustainability officer with BMO Financial Group. Michael leads the strategy and implementation of sustainability, governance, disclosure, engagement, and innovation at BMO. Before joining BMO, he was a partner at an international law firm where he spearheaded the creation of a global ESG risk advisory practice. He's also the host of BMO's sustainability leaders podcast.

Michael is interviewed by Andrew Macdougall a partner in Osler's corporate group and a recognized expert in corporate governance, executive compensation, and shareholder activism. Andrew frequently advises boards and management on governance and disclosure issues, including oversight and accountability for ESG and public disclosure and voluntary reporting on ESG issues and practices.

ANDREW MACDOUGALL: Michael Torrance, welcome to the podcast today. It is so wonderful to have you here with us. And to speak to our listeners a little bit about sustainability and what it all means. So for the benefit of our listeners, can you tell us a bit about your role as the vise president and chief sustainability officer at Bank of Montreal and how long you've been in that role.

MICHAEL TORRANCE: Certainly well, thank you, Andrew and to Osler for inviting me to speak. It's always great to see law firms engaged on this topic. Being a lawyer myself I think that there's a real important role that law firms and legal advisors play in this space.

So in terms of my role now, I oversee the bank's sustainability, related strategy, disclosure, external engagement. And I'm really focused on the management of sustainability of us as a corporation. And I make that distinction because there are other teams within the bank that are more focused on Client Advisory or development of products and services related to sustainability. My focus is on the management of the enterprise sustainability.

And so what that means in practice is often advising our executive committee, our board, and working with many different teams across the bank to develop programs and practices that align with international best practice when it comes to topics of sustainability which are very broad and can be things across the environmental, social, and governance dimensions from climate change to diversity and inclusion, human rights types of issues and governance practices related to sustainability. And my team oversees the development of our annual reporting. And as I mentioned, we do a lot of work with investors and others who increasingly have a very strong interest in how well we manage these topics as an organization.

ANDREW MACDOUGALL: So you're clearly well versed in sustainability and have the expertise to talk about what ESG means which is the topic for today's conversation. The acronym stands for environmental, social, and governance. And I'll want to dive into what each of those components mean. But before we do, I'd like to spend a couple of minutes discussing some of the other terms that have been used over the years that people may have heard, things like corporate social responsibility, social license, and then sustainability generally. Can you give us a bit of a description about what each of those terms means to you?

MICHAEL TORRANCE: Absolutely. And maybe I'll approach it by just stepping back from the alphabet soup and the different terms although I'll address those in my comments. But just to maybe try to get to the point of what are we talking about.

So what we're talking about is the role of the corporation in society fundamentally. And the corporation is a very powerful vehicle for advancing economic innovation growth, generating financial returns for those who take the risk of investment. And it's an incredible economic vehicle. But there's been a dialogue over the decades and even centuries that the corporation has existed about what is the true purpose of the corporation and what should the strategic focus of a corporation be.

And that's not fully defined even now. But I think when it comes to this topic, what we're seeing is an awareness that the impact of a corporation is more than an economic or a financial impact. That it is a real world actor that has impacts on the environment, on society, on people, on all of the other factors that it interrelate with. And also it is affected by those things. So there's an outward in view of impact and an inward out. So impact is an important consideration.

When I think of ESG, I think of that as the component pieces of sustainability. And when I think of sustainability, I think of it as the ability of the corporation and of broader society to endure over time by managing adverse impacts well and promoting positive impacts to grow beyond simply just financial considerations. It's a very holistic way of thinking about corporations and the role of corporations in society.

And that can be defined in many different ways. So if you talk about corporate social responsibility, you're focusing in on corporations should think about their responsibility beyond their role in generating profit or growth. They have a responsibility to a broader set of stakeholders, whether they be the environment or communities or workers.

And social license is just another way of thinking about that, but basically it's actually moving more towards a recognition that of the outward in dimension of sustainability that the corporation's very survival actually depends on it managing these things well. And that's what gives it a license to operate. And if it doesn't manage these things well, it won't have that license. And so even the profit and economic and financial objective of the corporation will be impeded by poor management.

And then sustainability again is this idea of-- the definition of sustainability. There's many different definitions. But one is just basically the ability to endure and survive over the long term. It is dependent upon both how all actors within society manage these issues and also specifically to the corporation, its own survival is dependent on how well it manages these issues.

So when you start to think about it like that, and then you begin to define the sub elements of all of the factors that affect the capability of the corporation to have social license and to endure, they are well defined I think by the ideas of environment, social, and governance. The environment being things like pollution generated, resource management, effects on biodiversity, how companies are affecting massive global policy and societal issues like climate change.

ANDREW MACDOUGALL: Resource use and waste management and all of that.

MICHAEL TORRANCE: And corporate activity generating all sorts of positive benefits for society, also has these potential negative impacts. And so they have to be well managed because then there's social implications of that plus there's other social impacts. Companies have workers, workers are people, they have human rights. Companies that are interfacing with communities. They have maybe affecting indigenous rights. There's all social impacts that companies have. Again, have to be managed well.

And then the governance piece I think of the G more as the G of the E and S rather than G in and of itself because when we're talking about sustainability. So it's about how well does the company integrate these considerations into the business from either a strategic perspective, from a management practices perspective, from a risk management perspective.

How does the company talk about these issues? How does it engage with external stakeholders? How does it receive feedback? How does it be transparent? All of these things are part of the governance approach for the management of environmental and social issues.

ANDREW MACDOUGALL: So you see the GP is an overriding umbrella piece of the puzzle that looks to embed the E and the S components into decision making throughout the organization. Would that be a fair description?

MICHAEL TORRANCE: That's how I view it. I mean, that might not be how everyone views it, but I do. There's a lot of focus now on the purpose of the corporation. And there's been several efforts to redefine the purpose, to broaden its purpose beyond shareholder returns to also be a social purpose and to encourage companies to define that social purpose. And we at BMO have done that. We had an exercise where we re envisioned our purpose as an organization to be to boldly grow the good in business and in life. And we created several purpose related commitments that embodied that objective.

One is to promote a thriving economy, which is obviously core to our role as a bank and our role in the economy. The second was to remove barriers to inclusion particularly in relation to our workforce and in relation to our customers. And the third was to promote a sustainable future which has several dimensions, including mobilizing sustainable finance as well as a net zero ambition to really integrate climate change into our strategy and our risk management and to be a thought leader with our clients to help them transition to a low carbon economy.

And thinking of our purpose, it's partly what we are. But it's the advertent, it's a conscious recognition that we are more than, again, just these machines that generate profit. Businesses don't exist in society unless they play a social role, unless they have a social purpose, a social good that goes beyond just making money for shareholders. Because if they didn't have that role or if they were only doing harm, they wouldn't exist. Society can bring them to an end very quickly.

And so again, there's a very pragmatic way of thinking about this. That you're not saying it's a regulatory type of license. But we're talking about companies and investments that need to be able to exist for decades and centuries even, that's the goal. So you have to have a view for long term value if you're a genuine company that most big companies or even small companies want to be. They want to be able to survive and endure and be successful and have value for the long term.

ANDREW MACDOUGALL: I love the concept of purpose because it does really help define where the organization sees itself in the broader context of society because every corporation is just a means by which human beings execute and achieve certain endeavors. They could do it in a different corporate form. They could do it as through a governmental organization. But understand how this organization achieves. What it seeks out to do is, I think, pretty key.

So thank you Michael, I'd like to pull it back a little bit and come back to the environmental end of things. And in particular, I'd like to ask a little bit about climate change. And it seems to be dominating the discussion these days. And I'm curious about what your thoughts are about climate change as part of the environmental piece of ESG. And whether it's going to be dominating the discussion on the E side of things in the foreseeable future.

MICHAEL TORRANCE: Yeah. I mean it's a fascinating case study in sustainability. And again, I'm a lawyer by background. So I think about maybe sustainability a little bit differently than other practitioners might. I do think of it as a process of social normative ordering really.

Like law, it's very much like law but it's different because the role of state versus non-state is much more muddy. It's largely driven by the establishment of standards which become embedded in corporate governance and driven by investors and other stakeholders. But increasingly, there are pretty clearly defined rules that must be adhered to in order to be considered good practice or good governance. And there's also a mechanisms to analyze whether companies are aligned or not with those standards and also forces that can push them to be aligned if they aren't which is really the basic components of any regulatory system.

It's just that in the case of corporate sustainability, the standards might be developed through some combination of industry practice through standards that may or may not be endorsed by states. They may be developed by industry associations. The mechanisms for evaluation might be things like ESG ratings or positions taken by major asset managers or government. And the methods for realignment could be things like shareholder proposals or proxy voting as opposed to courts or regulatory bodies.

Climate is the quintessential example of that. Massive impacts companies and economic activity human activities having on the planet on our potential future well-being, creation of massive externalities and harms that are not being captured adequately by financial systems or economic systems. And so identification of a problem and a solution.

The problem being how economy wide emissions are affecting the climate and all of the other implications of that, the social harms that will cause. And the solution being reducing or eliminating those emissions over time. Climate change I think has taken hold as a clear topic that relates to corporate sustainability that can be addressed in part by investor and financial institution engagement on the topic and will only be solved with a real economy transformation that necessitates the role of the corporation and changing the way corporations operate in order to reduce emissions.

ANDREW MACDOUGALL: I mean, maybe one way to look at climate change is it's one of those things that affects everybody on the planet. It is a global issue. And that means that it needs a global solution.

So it can't be a solution by any one government, it has to be a cooperative effort. It be a solution that's operated solely in the public sector, it has to be one that has the private sector engaged in it. And that means that everybody has to contribute to the solution which-- I mean, it's intriguing that you seem to have taken on this really big problem that requires so much coordination among so many very different players as the one that we're going to target and tackle on the environmental side of things.

MICHAEL TORRANCE: Yeah. I mean, I guess that's probably why is because the view is that there's huge implications if we don't. And so that drives an urgency to what's happening. But there's also a massive opportunity if we do. And I think that's the part that is what's also a catalyst for private sector activity.

That if you're talking about $150 trillion of investment to actually do this transformation and there's a real social need for it to happen and environmental need, interest in all of our well-being, governments are aligned on it, private sector, most people in society are aligned on it. Then doing that and making that happen presents a very big opportunity. And at BMO, that's part of the reason why we've established our own net zero ambition.

ANDREW MACDOUGALL: Can you tell us what is Net Zero. What does it mean to be, and I mean, how are the way, how do you get to Net Zero. Do you just stop doing everything?

MICHAEL TORRANCE: Yeah. So the basic idea is that the atmosphere is a finite space. And the cause of climate change is increasing concentration of CO2 or greenhouse gases in that atmosphere. And so essentially because it's finite there's a budget about how much greenhouse gas emissions we can put in the atmosphere before you reach certain tipping points, and the effects of climate change become more pronounced and more harmful.

So the idea of Net Zero is we need to get to a point in time when we're not putting into the atmosphere any more of these gases than we're taking out. So there has to be a balance and equilibrium. And Net Zero therefore means that exact thing. That we will in some future point in time sooner the better be able to sequester, capture, have carbon sinks like forests take out of the atmosphere and not put any more into the atmosphere through our own economic activity than we can deal with.

So the timing of it based on scientific modeling is that really we should be doing that by 2050 at the latest. If we don't, we start to hit some of these tipping points and the more severe effects of climate change begin to occur. Decarbonization efforts have to be undertaken with that timing in mind.

ANDREW MACDOUGALL: And let's pause there, decarbonization. When you were talking about emissions that we're putting into the atmosphere, which is CO2, how does that relate to decarbonization?

MICHAEL TORRANCE: Yeah. So decarbonization just means reducing emissions from economic activity, whatever they may be. So whether it's a power plant, or a cement manufacturer, or a foundry, or cars, they're all creating emissions. And so we want to create a declining amount of emissions to be able to achieve that future state because right now if all keeps going the same way, we would never be able to capture or sequester or have sinks to deal with the amount of emissions we're putting out now.

So the goal is to try to reduce that, not to eliminate it, I think that's a an area of confusion. There will probably be emissions in the economy even in 2050, it's just that we'll be able to deal with them better.

ANDREW MACDOUGALL: Got it. So decarbonization means we just need to reduce what we're doing now so that we can get to the point where we're not adding more to the atmosphere than we can take out. And I guess opportunities lie in those sequestering and other tools to take out of the atmosphere. The emissions that we would have otherwise added to it.

MICHAEL TORRANCE: Yeah. Either capturing them so they don't go in the first place or ultimately we would probably want to get to a point of net negative where we're actually able to use things like direct air capture which is being worked on by innovative Canadian companies like Carbon Engineering to develop technology to actually take these gases out of the air and you get into a net negative position if you can do that.

ANDREW MACDOUGALL: So 2050 is the goal that people have decided upon for this? They took the date out of a hat.

MICHAEL TORRANCE: Well, no. I mean, it's all based on best available scientific modeling. That doesn't purport to be perfect. But there's a lot of effort put into the analysis of this problem. There's an organization called the International Panel on Climate Change, IPCC that is the world standard for understanding the implications of climate change and human impacts on climate change. And really sets the underlying premises that are used by policymakers when they develop agreements like the Paris Agreement.

And so we as private sector companies, you have to accept that analysis as it is because it represents consensus of 196 governments and all civil society and business. It is what it is. And so we now have to as I recently heard someone say, Net Zero has become a key organizing principle of business.

So in other words, you're going to be evaluated as a business by how you are aligned or misaligned with that objective. And that's just an objective reality. You don't have to personally believe that for that to be the case.

And so in terms of good governance, you now have to especially if you're a larger company and you have investors that are actively engaged on this and you have a significant role to play in the economy, be thinking about how this trajectory will either affect you outward in or how you can affect this policy goal inward out.

And when it comes to a financial sector, organization like us, financial institution, a bank asset manager, the major way that we can affect this is by allocation of capital and being able to help those that we bank and finance achieve their decarbonization objectives in the real economy and be the one that can provide them financing to achieve that goal, advise them on what this all means and maybe the pathways that their industries should be following in order to achieve these goals.

So there's a very important role that we play in the economy to be able to advance this. And so that's why we integrated this idea of a Net Zero ambition right into our purpose commitment because we see that's a way that we can grow the good and that's what our purpose is.

Also we focused on the way that we partner with clients. So the way we describe the Net Zero ambition is to be our clients lead partner in the transition for a Net Zero world. Because again, it's not just for us to like cut a bunch of parts of our lending portfolio out so that on paper Oh, look how green we are. That really has no positive impact on society. We have to decarbonize the real economy. So there's actually less emissions.

So the way to do that is going to be to lean in, to engage, and to be able to come up with innovative strategies with our clients to help achieve that objective. And to be more transparent about what we're doing. We've just joined the Net-Zero Banking Alliance which is a global initiative that was spearheaded by Mark Carney and an organization called the Glasgow Finance Alliance for Net Zero. There's insurance industry aspects of it, asset manager aspects, banking aspects. We are part of the Banking Alliance and the asset manager alliance for net zero.

And that framework ostensibly calls for us to implement a methodology for quantifying finance dimensions, and then understanding decarbonization pathways for different sectors, and then set targets for ourselves to use in strategic planning and risk management and how we think about our efforts to grow sustainable finance, for example.

And so these initiatives help to embed the topic of climate and Net Zero more into our business, and ensure that we're taking what actions we can to help facilitate that goal. But we're not able to achieve this goal ourselves. Government has to be a major player in helping to achieve this outcome. It's like a stool and there's three or more legs to the stool. If one of them isn't there, then the stool is going to fall over.

But we're recognizing that we are also one of the major players and we have to do our part. And so industry engagement like this adoption of standards like NCBA or another one we call the partnership for carbon accounting financials, and adopting very technical approaches to understanding climate risk and opportunity and being transparent about that as a major way that we're going to do that.

ANDREW MACDOUGALL: I like the description that you can't just do it yourself. I mean this is a global problem you need to cooperate across multiple industries and geographies in order to find a solution. And a financial institution is right in the thick of it because the decisions that the financial institution can help different organizations, different geographies deal with things.

Let me come back to and I want to transition us to another concept that we have, which is the just society or just transition because one of the difficulties you face with climate change is that we have very developed economies that are focused on the issue, but we have a number of economies that have a long way to go. How do you view the just transition concept as part of the climate change movement.

MICHAEL TORRANCE: Yeah. Just transition is an important concept. And I think it has different meanings. There's just transition and then there's climate justice. I think those are two themes that-- in the COP26 meetings, for example, I saw a lot of focus on and reference to, and they mean different things.

Just transition recognizes that we're talking about a major economic shift. We're talking about a shift on the scale of the Industrial Revolution. So when you do that kind of a transition, there is going to be people who are adversely affected by that. Their jobs could be affected, communities could be affected by changing industries.

And so we can't just ignore that. We have to be alive to that. And we have to, I think, go into this with a view that that is not a desirable outcome for people to be left behind.

So a just transition takes that into account. And thinks about investment and transition and innovation as including the investment in people to help mitigate the worst impacts of the transition from an economic perspective. And I think that can be true in a developed country or in a developing country.

Climate justice is a slightly different concept, which is focused on the uneven impact of climate. So physical impacts let's say are often felt more severely in poorer areas of the world or less developed areas of the world. So there's a lot of analysis about parts of the world that are going to experience temperature changes potentially with climate change that will basically make them near uninhabitable without air conditioning and all of the luxuries that we often have but many people in the world don't, could affect food supplies, could affect water availability.

And this is where there's a fear of potential for there to be mass migration and flows of populations to just try to avoid these physical hazards that are developing and being exacerbated by climate. So that's the climate justice topic because these are communities that are already disadvantaged. Probably didn't contribute in most cases much to the actual problem which have been created by more industrialized parts of the world and really be advertently and thoughtful about how your approach to climate change mitigation and pursuit of policy goals like Net Zero are taking account of these issues and bringing people along and not creating further disadvantage situation for certain people or communities.

ANDREW MACDOUGALL: We can't leave anybody behind. This is really what you're saying.

MICHAEL TORRANCE: Yeah.

ANDREW MACDOUGALL: But I like this because now we're starting to focus on the social end of things the S in the ESG component in environmental and climate certainly tend to dominate the conversation, but there is a big need to focus on people. I mean, people are employed, they're employed at the bank, they're employed at the organizations that are financed by the bank, they're engaged in the communities in which organizations operate. So how does the bank take a look at the S component in ESG?

MICHAEL TORRANCE: Yeah. It's a hugely important part of how we think about sustainability. And we have teams in the bank. For example, we have a diversity, equity, and inclusion team. We have an Indigenous banking team that works with the diversity equity inclusion team with a focus on Indigenous topics from human resources perspective or from a community engagement perspective. These are examples.

Human rights is a big topic. And whether that's Indigenous rights like I just mentioned or it could be human rights even in how we evaluate risk in our supply chain, or are we considering human rights impacts applying topics or standards or frameworks like the UN Guiding Principles on business and human rights, which talks about the role of due diligence. And how to think about direct or indirect impacts on human rights from the business. How to try to use leverage to mitigate those impacts. These are all social dimensions of sustainability.

The role of the sustainability team or diversity, equity, and inclusion team is to be focused on these issues and understanding what good governance good practice looks like and be able to engage internally, externally, and put a sharper focus on these issues in terms of how we manage our day to day, which may well include but go beyond compliance with law or legal expectations. But it will certainly include that from managing the workforce in a largely our workforces in North America. So we have a very strict regulatory regime around also in promote but zero barriers to inclusion which is one of our objectives.

Why? From a business perspective there's actually a very strong business case to do that. If people can be authentic at work and really self-actualize at work, you're going to have a better performing better motivated, more loyal workforce. There's a business tie-in that's quite clear. Diverse teams make better decisions. There's many empirical studies that demonstrate that.

ANDREW MACDOUGALL: Now, we're getting into the G component again.

MICHAEL TORRANCE: Yeah. And it's the right thing to do. So you've got this convergence between the different motivations. But ultimately what you try to do is to be a world class organization. What would you have to do? What steps would you have to take? And that helps to formulate your judgment on the programs, the areas of investment, the resourcing, the training that you have to do to be able to achieve these goals.

ANDREW MACDOUGALL: Well, thank you. That is very helpful. I want to take advantage because we've got just a little bit more time left. But I want to take advantage of the fact that you're at a financial institution and address another term that gets bandied about, which is the concept of sustainable finance and the other term of responsible investing.

And can you tell our listeners what does sustainable finance mean. And why it's important. And how does it differ from the concept of responsible investing?

MICHAEL TORRANCE: Absolutely it's a really good question. So the basic idea is that finance has the potential to influence positive sustainability outcomes. The very original incarnation of this was the green bond which came about it was first pioneered by the World Bank that I believe was the International Finance Corporation. They developed this idea of a green bond.

So the innervation of a green bond is you're basically telling the investor will only use this money to invest and grow green initiatives. And there has to be some ongoing communication. So every year we'll give you a report about how we've done that. How we've deployed this capital to build wind farms or to make our buildings more environmentally friendly or whatever it may be. In the case of a bank if you issue a green bond, you're probably committing to lend money to green companies solar farms or whatever it may be. So that was the original incarnation of sustainable finance and express linkage between a financial instrument and a sustainability goal.

ANDREW MACDOUGALL: To get a better return, if it's a green bond than a regular bond, is that part of the appeal?

MICHAEL TORRANCE: Not necessarily. That's not how it originally started. But now this market has exploded. And you're talking about growth rates every year of like 20%, 30%. And now one of the major catalysts for sustainable finance and the creation of sustainable finance products was an increasing demand by investors who want to hold those assets. They want to have that green bond. That demand has grown a huge amount.

So now you actually are seeing it's just basic economics of supply and demand. The amount of demand for these products. If they're very good quality. It's getting to the point where there actually could be a benefit, a market based benefit.

So if it's a bond, you might get have basically a lower interest rate to pay as a company that creates the green bond. There are premiums now associated with these products now that the demand has really been fostered. So sustainable finance though has grown far beyond green bonds. Now you have even just in the bond space social bonds. So we just issued a social bond this year where we've committed to using the proceeds to fund women owned businesses.

We have also done what's known as a sustainability bond, which has both green and social dimensions. But it's a similar concept, we've told the market what we intend to use the funds for, we've given a clear framework, we had a third party review it, say that this is credible. And then every year we go back to our investors and we tell them what we've done and we give them an impact report. Beyond that, there's also things like sustainability linked loans where banks are working with clients directly to say you have this massive $100, $200, and $500 million facility that you draw upon as debt. You can use it. It's like a credit line that you or I might have to fund your business to grow or to do whatever you want to do.

Let's integrate sustainability into that. So we'll say if you are able to achieve sustainability performance goals and you would work with the client themselves to develop those, maybe it's an emissions reduction goal. Maybe it's a goal to have a certain diversity of management.

Whatever it is as long as it's a legitimate and credible and measurable sustainability objective, if they achieve the goal there could be a positive benefit for them in terms of a lower interest rate they'd pay. And if they don't, there might be an increased interest rate that they'd pay. So it's a way for them to integrate their financial strategy, which is a very core strategic imperative of any business with their sustainability strategy and to start to create positive incentives to achieve and pursue sustainability goals.

ANDREW MACDOUGALL: Really seeing a demand from the investor side of the equation for a lot more of an opportunity to invest in projects that are not only good for the investor but they're good for society more broadly and then from the banking and financial institution into things stepping up to the plate to help deliver those products through the sustainable finance initiatives.

MICHAEL TORRANCE: Yeah. Absolutely. I mean, that's my observation as well. And I would say going back to your question about the difference of responsible investing and sustainable finance, what you just described of the investor interest, that's related to what's known as responsible investing. And responsible investing is on the side of the big pools of capital that are held by institutional investors, pension funds, sovereign wealth funds, whatever the case may be.

If they decide to invest that money with an ESG lens or a sustainability focus, that is by definition responsible investing. And what they might invest in might be sustainable finance products or services. So they might want to buy those green bonds or they might want to whatever the sustainable finance is more the products or services that you see being created by financial markets with, again, the same motivation of advancing and integrating sustainability in finance.

ANDREW MACDOUGALL: Fantastic. We're coming near the end of our time together, Michael. And this has been a wealth of information for us all. I thought I'd ask the question, any predictions on where we're going to go in the near future on ESG? Is this growing? Is this going to focus on certain areas? Just a couple of thoughts.

MICHAEL TORRANCE: Well, I think in terms of trends, climate has been a major focus. I think there's also going to be a lot of focus on other very important and often related topics like biodiversity for example, which is an area that we've really been focused on. We've been chair of the cross-sector biodiversity initiative which is a partnership between a financial sector industry association called the Equator Principles and a mining industry association, ICMM, and a energy sector industry association called ETICA, all focused on best practices around biodiversity.

We're seeing a lot of focus on that topic partly because there's going to be a new global biodiversity framework released very soon, which is going to really set the policy framework for mitigating impacts on biodiversity. Much of which it impacts on nature really which have to be done in order even to achieve climate goals. So there's a lot of interconnectedness. So that's going to be a major theme.

And human rights has been on the radar for a long time. I think that's going to increasingly be more prominent. But overall, I would say the trend of sustainability is the mainstreaming of all of this.

It's going to be less and less novel for sustainability to be part of how regulators think about financial or economic regulation. It's going to be less novel and how companies think about how they should be strategically planning, how governance works. And so in that respect, 5 or 10 years from now, you're a governance professional and you know I'm a sustainability professional, I think increasingly will just view this as being part and parcel of good governance.

ANDREW MACDOUGALL: Right. Sustainability was maybe at one point in time and add on. A nice to have or when you would pay some attention to but not that much. And now what we're going to do is we're going to inculcate it into the whole process, bring it into the governance, bring it into the decision making, bring it into the accountability framework that we have already established for financial reporting and decision making generally. And that is very exciting.

And I love that perspective very much, Michael. Thank you. Any last comments before we wrap up here?

MICHAEL TORRANCE: The only other thing I guess I'll flag is that there's been a great initiative with the International Sustainability Standards Board of the IFRS. And Canada recently has been given a very prominent role to host an office there. Both have been very supportive of that initiative. So just for your governance, audience, I would say that that's an area also to keep in mind and perhaps would be an interesting topic for a future podcast.

ANDREW MACDOUGALL: Oh, absolutely. Integrating listen to the financial reporting framework. We are definitely going to do that. Michael, thank you so much for your time today. This has been incredibly enlightening.

And you must really, really love your job because it certainly shows in the discussion we've had today. And I think you've got your own podcast as well, which you do with the bank. And you're one of the hosts for Sustainability Leaders, I think it's called?

MICHAEL TORRANCE: That's right. Yeah.

ANDREW MACDOUGALL: So I encourage everybody listening that they should listen to those podcasts as well and get the benefit of all the knowledge that provides. Thank you again.

MICHAEL TORRANCE: Thank you, Andrew.

PATRICK: Andrew terrific conversation with Michael. We covered a lot of ground in that conversation.

ANDREW MACDOUGALL: He's definitely very passionate about the topic and very knowledgeable. So really good session. It was a delight to talk to him.

PATRICK: Absolutely. So we heard Michael talk a lot about the purpose of the corporation and the role of the corporation in society, especially as it relates to the topic of ESG. And I was struck by Michael's comment that BMO embraced a mandate to boldly grow the good in business and in life. And that was interesting. And it seems like a far cry from perhaps previous notions of shareholder primacy.

I mean, is that consistent with what you're seeing and what you're advising when you speak to boards of directors these days? And what questions are they asking you.

ANDREW MACDOUGALL: So those are good questions to ask, Patrick because there has been a big movement away from this concept of shareholder primacy that's particularly relevant in the United States, but has had some influences in Canada. And really what that means is that there's just more to assessing the performance of a corporation than the financial results that the corporation achieves.

And what we're really talking about here is this intersection between the interests of shareholders and the interests of other stakeholders of the corporation. And the fact that in order to do well for the shareholders over the long term, you have to be able to take account of and address the interests of those other stakeholders because corporations they don't operate in a vacuum. They're part of our society, part of our social framework. And that carries with it the benefits and obligations of other citizens.

And I think the Supreme Court of Canada, they did a really good job when they said that corporations need to be a good corporate citizen. We didn't really understand what they were getting at the time, but I think that has really been an important concept that we've now inculcated into Canadian law and our approach. And the board level, these ideas of considering stakeholder interests are absolutely getting considered.

Like ESG is definitely a topic of discussion and understanding who your stakeholders are and which ones are key drivers of your success and which ones are key impact stakeholders in those that the outside in and the inside out concepts that were raised on the session. All of that is being discussed at the board level. So it's really quite consistent with where we're going and really the changes that are happening today.

PATRICK: Absolutely. And in unpacking that notion of being a good corporate citizen, do you find in explaining to the board of its various obligations and of balancing stakeholder interests? Do you find the distinction among ESG to be useful and how do you unpack that? And how do you explain that to boards?

ANDREW MACDOUGALL: I find the distinction between E and S to be very, very useful. The environmental end of things and the social end of things. There's a clear delineation between the two of them.

It's the G part that I don't frankly find. It's terribly helpful as part of the analysis. To me it's really how are you overseeing the E and the S part. How are you getting those considerations on environmental and social matters into the decisions within the organization so that you've got accountability for it.

I think Michael made the point that at some point in time there's just going to be this merging of the concepts of ESG and governance. And to me I think we are working our way towards that. And the G part of the ESG component will sort of subsume all of it and it will all just become one.

But we're not quite there yet. We've got a ways to go. So separating the environmental and social components that to me makes a lot of sense. So that you do think about those issues.

PATRICK: I think that's right. And it's clear that we've got a lot more to unpack and, of course, miles to go before we sleep. So thank you Andrew for that terrific interview and we look forward to having you on the podcast again as we continue to explore these ESG matters.

ANDREW MACDOUGALL: Thank you, Patrick.

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PATRICK WELSH: Thanks for listening to this episode of the Osler ESG Explorer podcast. This podcast is presented by Osler, Hoskin, and Harcourt LLP, a leading national law firm with a singular focus-- your business. We advise clients on an area of domestic and cross-border legal issues, drawing on the expertise of over 400 lawyers to provide the answers you need when you need them.

To access any resources discussed in today's episode and to listen to other episodes, visit us at osler.com. Be sure to listen and subscribe to the ESG Explorer podcast on Apple, Google, or Spotify. Until next time, I'm Patrick Welsh.

The content in this podcast is for general information only and does not constitute legal or other professional advice. Specific advice should be sought in connection with your circumstances. The views expressed are those of the guests and participants and not those of Osler, Hoskin, and Harcourt LLP. For more information about Environmental, Social, and Governance matters, please visit our website at osler.com

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