Electrification of the Economy Presents Risks, Opportunities

Table of Contents

What Does Net Zero Mean?

Companies Have Made Commitments, but the Path Is Unclear

What Does Net Zero Mean for Investors?

Climate Change Investing Opportunities Are “Huge”

Electricity Generation and Distribution—Not Oil—Is the Key Hurdle in the Energy Transition

Scope 3 Emissions Are Big Challenge for Consumer Packaged Goods Companies

Net Zero Is Not 28 Years Away. It Is Now.

Net Zero Will Cost More the More We Delay

80% of Carbon Emissions Come From the Energy Sector

Morningstar Is Bullish on EVs, but EVs Are Not Enough

Robust Technological Innovation Is Vital to Eliminating Fossil Fuels

Will Consumers Be Willing to Pay to Be Green?

Business-As-Usual Will Fail. A Change in Mindset Is Required.

The Energy Transition is a $70 Trillion-$100 Trillion Opportunity

Is Nuclear Power a Sustainable Energy Source?

Nuclear Is Carbon-Free but Relatively Expensive and Carries Obvious Risks

Bitcoin Mining May Benefit From Renewable Energy, but Transmission Systems Are Lacking

Infrastructure Is the Best Investment in Energy Today, Not Renewables

California’s Policies Have Created the Best Lab to Test Energy Transition Strategies

Unilever Was Early to ESG and Paid a Big Price

Stocks Mentioned Unilever General Mills Clorox NiSource Edison International

Adam Fleck: Good morning, everyone, and welcome back to the Morningstar Investment Conference.

Thank you so much, Leslie, for the introduction. I'm Adam Fleck. I head up a team focused on ESG—environmental and social and governance factors—within our Equity Research department at Morningstar. I'm really excited to invite you today to join our panel discussion we're going to be having, as Leslie said, focused on a very important topic in our space, and that is "net zero" and the implications of this vast promise for investors.

What Does Net Zero Mean?

Now, I think, we've probably all heard the term "net zero" before. But what does that mean? Let's set the stage. Net zero aims over the next several decades to balance the world's greenhouse gas emissions to zero by both reducing the gross carbon emissions we're producing and by negating any emissions that are remaining using available means. You can sort of think about this like trying to stop the level of water rising in a bathtub. You can turn off the taps; you can pull the drain; or probably, it's some combination of the two. But how do we get there? Is it even achievable?

One of the hardest parts about driving toward net zero is really getting everyone on board with how we're going to get there and what needs to be done. And we're going to hear from an expert panel today that, frankly, also doesn't agree. And that debate, I think, and that discussion, I hope, will be helpful to provide insights for you and how we're thinking about the path to net zero.

Companies Have Made Commitments, but the Path Is Unclear

Now, net zero is important. There's a reason we're talking about it. I think we've all probably heard or seen the cataclysmic commentary from governments or industry bodies if we don't stop the world's warming to 1.5 degrees Celsius by 2050 versus preindustrial levels. And frankly, these real concerns are leading companies to make plans and commitments. You can see here, the top 2,000 companies in the world by revenue, about half have made some plan or commitment to a science-based long-term or ambitious goal to reduce their carbon emissions through net zero, or carbon neutrality, or some other goal. But not all these goals are equal. Target dates vary widely—anywhere from 2030 to 2050. And only about two thirds have made any kind of public interim targets. So, it's a real question if we're actually going to get there.

We also have to think about what emissions we're exactly talking about. So, for instance, you might have heard before the different "scopes" of emissions. And on the next slide, we've got a definition of that—scope 1, scope 2, and scope 3. Scope 1 emissions refer to any emissions that are directly produced by a company; scope 2 to any emissions produced in the process of a company purchasing electricity or energy for its operations; and scope 3, a very wide amount of indirect emissions that are created both upstream and downstream. So, a company here, for example, might have scope 1 emissions from its vehicles or its buildings, scope 2 from its purchase of electricity, and scope 3 from everything from business travel all the way through consumers using its products. And I bring that up, one, because we're going to talk about it on the panel what that means, but it's also really, really important. Anywhere from 50% to 90% of emissions reduction that needs to happen, it's estimated to reach Paris Climate Accord goals, need to happen in scope 3 emissions. But you can see here of those companies, of half of the largest companies in the world that have made targets, only about half have even talked about reducing their scope 3 and put out a target for those emissions. So, this is a really important area.

What Does Net Zero Mean for Investors?

But let's bring this back to the matter at hand. What does this mean for investors? After all, we think it's critical not just to understand the societal benefit of reducing carbon emissions and what that means for stakeholders, but also the economic implication for shareholders, for investors at the end of the day. Across our broad equity research team, for instance, that I'm a part of, we have 120 analysts globally. And we're not trying to make normative judgments, what's good or bad, what's a good producer of carbon, what's a bad producer of carbon, and try to suggest avoiding those, but rather focus on the potential harm that could manifest to a company's cash flow or its competitive position.

And that's because ultimately, we're focused on valuation, not values. And that risk focus, that intersection between traditional analysis and ESG analysis is an important area for our equity research team to sit. We need to be focused on any material risk facing a company, whether it's E, S, G, or any of the other 23 letters of the alphabet. And that absolutely, in many cases, includes risks that companies are not prepared for net zero, whether that's not being prepared for a transition to net zero and a lower carbon emission economy, or that the transition to a lower carbon emission economy doesn't happen and climate change continues to manifest. And maybe we're all looking for oceanfront property in Denver.

Those are real risks. And there's real outstanding questions to the feasibility, the measurability, and the accountability to company management teams to reach net zero. That can lead to potential impacts from different taxation schemes, new government regulations, or changing consumer preferences that could impact the cash flows of the companies we're looking at. And those are just the long-term issues. There's also the fact that there's always going to be short-term problems that come up that challenge our long-term thinking. Most recently, of course, we've seen the war in Ukraine and the energy inflation back here at home.

So, we're going to dive into those questions today. You're going to hear from a panel diverse in background, in thought, that offer different perspectives and underlying assumptions. After all, addressing net zero and climate change is a hard question. It has different considerations, angles, and solutions to get there, not to mention, the potential for failure.

Joining me on our esteemed panel, as Leslie said, are several different members of research groups across Morningstar, and I'm going to go ahead and introduce them for you now. Joining me first is Alex Osborne-Saponja. Alex is an associate director at Sustainalytics in our Climate Solutions Group. She has been with Sustainalytics about three years but prior to Sustainalytics has more than a decade of experience in sustainability consulting. Following Alex, we have Travis Miller, a member of the equity research team along with myself. Travis heads up as a strategist our U.S. utilities coverage. He has been with Morningstar a little more than 15 years. Erin Lash, also part of our Morningstar Equity Research team. She heads up our Consumer Equity Research team as a director. She has also been with Morningstar a little more than 15 years. And last, but certainly not least, Nadja Dreff is a senior vice president at DBRS Morningstar, which is our credit and fixed-income research team. She is based in Toronto, just like Alex. And while she has been with DBRS for just about under a year, she has 11 years of experience with the Insurance Bureau of Canada and nearly a decade with the Central Bank of Canada. So, please join me in welcoming our panel for today's discussion.

Welcome. Thank you very much for joining us bright and early this morning. Good to see you all. I do want to start with just a general overview. You're all coming from very different backgrounds, as I mentioned, and different perspectives, certainly different parts of Morningstar. I'd be keen to know, when you think about net zero and the area that you're researching, what are the challenges or opportunities, just to set the stage, that you think the area you're looking at is facing? Alex, we'll start with you.

Climate Change Investing Opportunities Are “Huge”

Alex Osborne-Saponja: Thanks, Adam. Sure. I want to point out from the outset the opportunities are far greater and far outweigh the challenges, but the fundamental challenge is that we need to understand what net zero is and what that really means. Net zero is a systemwide change, and business as usual is no longer fit for purpose in a net-zero economy. We're a frog in a pot of boiling water. And if we don't turn down the heat, the impacts will be irreversible. Continuing to emit greenhouse gases at the rate that we're doing has always already led to meeting and exceeding ecological tipping points. And that ecological and natural capital underpins our financial capital, and without that we don't have anything to invest in. That being said, the opportunities remain huge.

If you're invested in clean tech or low-carbon companies or a fund over the past five years, you'd have received 107% return on your investment. That's not to say you wouldn't have received a return if you solely invested in fossil fuels. But that would have been around 32%. You don't need to be a climate scientist to know that 107% return on investment greatly exceeds 32%. And that's an opportunity that I would have thought most investors would want to be part of.

We're seeing companies invest in being low carbon. We're seeing a plethora of financial services that are aligning to net zero. At the moment, the voluntary carbon markets are worth $250 billion. That's small, but that will grow and that will mature, and it will become even greater. We'll see seeing peak oil declared by oil companies in the face of net zero. We're seeing utilities companies invest in renewable energy, storage, and improving the energy efficiency of their clients. We're seeing agriculture investing, carbon-positive technologies, and not just being net zero but being regenerative. Companies don't do that just for the sake of doing good, they do it because it increases their revenues, increases their profits, and there's wider opportunity beyond that.

Fleck: Great. Thanks for that perspective, Alex. Travis, we'll turn to you. Same question. Alex mentioned, obviously, the opportunity that exists for energy companies. You're following utilities, which Alex mentioned. Can you walk through challenges and opportunities that those companies are facing?

Travis Miller: Sure. Yeah. We talk about challenges and opportunities, and you look at the panel, you go to any of these conferences, ESG, there's climate, you see green, you see net carbon panels, all of these panels, right? I challenge you the next time that you go to one of these sessions, and not just Morningstar, it's all these sessions, right, you will see anytime there are more than two panelists, there's always the energy and utilities guy. They bring them up there; they think this is Jerry Springer, that all of the people on the panel are going to tar and feather him, punch him in the mouth, beat him up, and then send them off skulking because this is, again, net zero, it's ESG. So, that's my challenge. And I thought, well, I'll lean into this. I'm up for this. This is ready. I'm here. And then, I get to think the other day, it's not just me being energy and utilities. They put me on a panel with three brilliant women. I don't stand a chance, but I'm going to give this a go here. And it's 8 o'clock in the morning.

Electricity Generation and Distribution—Not Oil—Is the Key Hurdle in the Energy Transition

So, here we go. With energy and utilities, I want to leave you with two things here. Two things to remember on energy and utilities. First of all, we are the problem. Energy is the problem. 80% of carbon emissions come from the energy sector. So, to get to net zero, we have to solve the energy problem. And by problem, I mean carbon emissions. So, two things I want you to take away when you're thinking about investability, when you're talking to people about net-zero carbon. One, electricity. Net zero is about electricity. Forget about oil. Net zero is about electricity. If we can solve the electricity problem, we can get to net zero. If we don't find a way to make electricity our primary energy source, we will never get to net zero. And we'll talk about that a little bit later. So, point number one—this is a conversation about electricity.

Point number two. The scale and scope of getting to net zero is unfathomable, very, very tough. And I try all the time—how do I convey the size, the scale, the scope in the energy sector of getting to net zero. Throughout human history, wood and coal were the primary energy sources. It's only about 60 years ago that oil became the primary energy source globally. Natural gas has been on an exponential growth pattern and will probably pass oil within the next decade at the rate that it's growing. Those four sources are all fossil fuels. They all emit substantial amounts of carbon when burned and converted to energy. We have to eliminate the four top energy sources in human history if we're going to get to net zero.

And again, trying to think of ways that we convey the scale of this effort. And I think back the tech revolution, and I was a journalism major. My first job out of school was sports writing, and for a long time, sports writing, you had two ways of getting your story into the paper. One was, you scribbled your notes. We were writing on deadline, because all the games were late at night. So, you scribbled your notes on paper, you picked up the phone, you called your copy desk, and you dictated to them the story. They typed it out, and it went out to the printer. The other way was you raced in your car—this is if there's a blowout and you end up getting out of the game—you race in your car back to the news desk there, you type out furiously your story, and you just hope that you get it right before the deadline hits. There was just technological revolution in sports writing just about as I was getting out of college, and it was termed The Shack. And it was literally from RadioShack. They had developed this technology where it was a keyboard. It was about this big. Just the keyboard of keys that had a screen on it, digital screen, captured about four lines of text. So, you could type and see four lines and then scroll through. The technological revelation there was that it had a phone cord hooked on to it. You could plug a phone line in one end, plug the other line into a telephone, dial the correct number for the copy desk and it transmitted your story. Huge, huge thing. Only the most veteran at the newspapers got those things, and they were The Shacks and the people who got them were brilliant. Think about now. Now, in sports writing, you don't even need a sportswriter. There are algorithms out there. You feed in the box score, and it spits out a story that's 500 words, 300 words, 200 words, whatever you want, the algorithm does it.

We are at The Shack level of net zero. We have to get to the algorithm. And along the way, think about investability, RadioShack. We have RadioShacks out there in net zero. We need Apple, Microsoft, Google, Amazon. These have not been developed yet. We're still in the early, early days in technology in the energy sector of net zero.

Fleck: Thanks, Travis. Erin, you heard maybe how we might think about technological development to get to net zero. Your companies you're following are obviously further down the value chain. They're the ones consuming the electricity that Travis talked about, and as Alex talked about, maybe on the forefront of some of this paradigm shift in how they do business. Maybe walk us through some of the challenges and opportunities you're seeing in the consumer side.

Scope 3 Emissions Are Big Challenge for Consumer Packaged Goods Companies

Erin Lash: For consumer product companies, I would say that the biggest challenge harkens back to something you mentioned during your opening remarks, Adam. It really stems from the fact that 85% to 95% of their emissions reside in that scope 3, so completely out of their control and require significant collaboration with their partners, that could be upstream or downstream, meaning ingredient manufacturers, suppliers, transportation providers but also retailers and end consumers. So, a significant amount of work that needs to go in to making any meaningful dent as it relates to the scope of their emissions.

But secondarily, we view another challenge stemming from the fact that it requires significant investment. But it's not the level of investment that we believe is the challenge, but where that investment is ultimately going to come from, and the extent to which that takes away from investments to support their competitive position, the research and development, the marketing, labor and fixed assets. That's where the key challenge resides. But there are opportunities, consumers have a penchant for environmentally friendly fare. And so, firms that aren't investing with products that align with that trend are bound to be left out. Secondarily, we acknowledge the fact that there are savings to be had from pursuing a path toward net zero. That could be optimizing delivery routes, using less resources, minimizing waste, and those savings can be funneled to other areas of the business. So, there are a combination of opportunities and challenges for consumer product companies at this juncture.

Fleck: Thanks. Really interesting to think about the balance there. Nadja, obviously, final comments on the panel of opening remarks for this morning, but you're focused on insurance companies, banks, thinking about the financing, and I think this might come up a little later, but there's a lot of financing that's needed to think about getting to net zero. What are some of the opportunities or some of the challenges you're seeing in those firms?

Nadja Dreff: From financial institutions' perspective, actually, just like Erin mentioned, it's the scope 3 emissions that pose really the greatest challenge, and it's something you alluded to in your opening remarks, Adam. So, not a surprise at all. I'm just going to walk you through what financial institutions go through when they have to account for scope 3 emissions.

Whenever they offer a loan, or make an investment, or provide insurance coverage, they have to evaluate their clients' emissions and then count them toward their own net-zero targets. So, you can see how that creates a disincentive really to work with carbon-intensive industries such as coal industry or oil and gas companies. On the other hand, not providing those financial services to these companies would also not serve our society's goals. What we need to do is strike the right balance, and that's extremely challenging.

On the opportunities side, I would say there are many opportunities, even though they may not get as much attention right now. But in terms of transition to a low carbon economy, those financing needs are estimated at about $100 trillion over the 30 years, so many opportunities. And keeping with the theme of energy transition, that is going to create investment and insurance demand, opportunities that financial institutions are very much ready to embrace. What we need to do essentially is make sure that investors have the confidence and certainty that the society as a whole is moving in that same direction.

Fleck: Yeah, that makes sense. Thanks very much for that. I know each of you have also brought some data you wanted to share via slides here. So, let's walk through those, and then, we might turn to some audience questions. Please, if you've got any that are burning, no pun intended, please do enter them into the app, and we'll be happy to get to those. I've got lots of questions, too. So, I'm sure we'll have a robust discussion.

Alex, you've got here a slide that shows companies' net-zero commitments. And I talked a little bit about how not all commitments are created equal and it's not sufficient just to put a long data commitment out there. Companies often have lofty targets. But you can see here, it's not always enough via this example company. So, walk us through what the key takeaway is here.

Net Zero Is Not 28 Years Away. It Is Now.

Osborne-Saponja: Sure. And just before I walk you through the graphic that you're sharing, I think it's really important to understand that net-zero reduction needs to be based in warming and keeping warming below 1.5 degrees, and that reduction needs to be supported by real capital investment. And really, what we're looking for is to bring emissions reductions and investments together to really achieve net zero.

So, if we look at the red line, this is what most companies and most people perceive a net-zero target to be, a nice slow decline to zero by 2050—that's pretty cool. That is not cool. That is 2.5 degrees warming; that is horrible; we'll all die of Lyme's disease. What we're doing at Sustainalytics is taking emissions data and investment data. This green line is for a European utilities. We've taken their capex spend going forward and aligned that to their emissions, and we've projected this out. And as you can see, the green line is way above zero in 2050. That's between 3.5 and 4 degrees. That's even more horrible than the red line. And the thing about these net-zero targets is—it's not just Sustainalytics as a climate solutions provider who are getting wise to these; consumers are also.

Last year, Shell made a bold claim that they had a net-zero target. Some groups called absolute BS on this, and they ended up in court. Through that litigation, the court decided that Shell needed to tighten their target, and they needed a strategy to meet that target. This changes the narrative on net zero and decarbonization generally, because in addition to that, the court ruled that Shell not only had an obligation to make a profit and return for their investors, but they also have to meet the fundamental human rights, and that puts net zero in this wider global context. And we can understand what that really means.

Going back to this green line, this company's carbon budget, the actual amount of carbon they're allowed to emit under a net-zero scenario, is shown by the blue line. And as you can see here, there is a deep, rapid decarbonization in the 2020s and into 2030. And that's because once you emit carbon, it perpetuates in the atmosphere for 100 years, and it slowly warms our atmosphere. That means we need action now. 2050 seems far away. But really, you need to invest and decarbonize now. And that means not hoping that you can suck the carbon dioxide out of the atmosphere in 2045 because the damage will already be done.

Fleck: Powerful stuff. Thanks, Alex. I know you also wanted to talk a little bit, maybe a little deeper on that point on investing now versus waiting and running business as usual. So, walk us through here what this data is showing us.

Net Zero Will Cost More the More We Delay

Osborne-Saponja: Sure. Thanks, Adam. So, as Erin very rightly pointed out, it will cost to transition. And the longer you wait, the more it will cost. Equally, if you adapt now, you'll reduce your operating costs. You will reduce your volatility and your exposure to fossil fuels. You'll reduce your regulatory burden, and you'll probably receive extra funding and be able to compete really well in a net-zero, low carbon economy. If you put off net zero and continue with business as usual, if you blunder on, as you've always done, you'll increase the costs of operating, you'll increase your regulatory burden, you probably won't be able to compete with others who are transitioning and are aligning to a net-zero economy.

Yesterday, Kunal stated that investment is about sustainability. And if I was an investor, I would be asking, Are you good at your job? Are you investing? Do you want to be part of the net-zero economy that's worth between $70 trillion and $120 trillion? So, yes, net zero is expensive, but it's not as expensive as the cascade of change we'd see if we carry on relying on fossil fuels to underpin our economy.

Fleck: Thanks, Alex. Travis, we'll turn to you maybe thinking about some of the points Alex made about the need to transition because of the systemic risks that exist. Maybe walk us through first, just to set the stage, building on some of your points earlier about where we sit now, where are the carbon is coming from. What is this pie chart showing us?

80% of Carbon Emissions Come From the Energy Sector

Miller: Yeah. So, again, two takeaways that I want you to walk out with. Electricity is the solution, and this is a huge scale issue. The pie chart here, as I said, 80% of carbon emissions come from the energy sector, this pie chart breaks it down. It's roughly three equal slices of the pie—there's electric power, there's small vehicles and light-duty trucks in there along with cars, and then direct energy use, and that's commercial, residential, industrial, importantly, and I'll talk about this a little bit, aviation, shipping, large marine, all of that. That all goes into direct energy use. But I think about the pathways to net zero in the energy sector as a highway with off-ramps all over the place, neighborhood roads. To get anywhere near a net zero, to solve any of these carbon emissions, we need a clean power sector.

So, that slice of the pie, the purple, up there, that has to happen first. If we start to electrify the rest of the economy, if we go EVs, if we convert homes and businesses from gas heating to electric heating, and we don't get a clean electric system, we're not going to solve the carbon issue, we're not going to get to net zero. So, that's like the five-lane highway, the electric power. We have to get to clean. The problems there: One is, we don't have enough wind and solar right now to do that. We need a solution simply to create more electrons. We don't have a reliability solution. Storage is the key there. And we don't have the infrastructure in place. And you'll hear me say "infrastructure" whenever I'm talking about energy—infrastructure, infrastructure—that is the key in electrifying the economy. And that's, frankly, where a lot of the investable ideas come from in the energy sector and utilities. So, we have to solve that problem.

Morningstar Is Bullish on EVs, but EVs Are Not Enough

Cars—it's the easiest solution, right? EVs. We'll just put EVs on the road. The problem is, we're actually quite bullish on EVs. We think that, by 2050, two out of every three cars sold in the world will be EVs. The problem with that is that doesn't get us anywhere close to net zero. What we have to do—we've seen through other studies, we've backed this up in our calculations—the most reasonable estimates say we have to get to 100% EV sales by 2030, 2035 to get to net zero. And the big problem there is that you have all of these gasoline-powered cars on the highway—15%—15% of cars, even when we get to beyond 2040, 2050, are still going to be on the highway. Cars last, and their lives are 12 to 15 years. We also don't have the charging infrastructure. Again, big statement here, infrastructure. We don't have anywhere close to the infrastructure for charging that's in place. So, that's a big piece of the pie right there we've talked about, two thirds of carbon emissions, very difficult right now to get rid of.

Direct energy use, a bunch of different things again in here. For residential and commercial, we have to convert from gas heating and oil heating to electricity. That means buying all new appliances—again infrastructure. That means building wires where there are pipes right now—infrastructure. I mentioned aviation, shipping. Right now, there is not a technology out there that can fly planes and run ships that is noncarbon. It's jet fuels, bunker oil, other oils. It's just very, very, hard on a weight-by-energy-use type metric to get to shipping and aviation. So, that's the carbon mix right now and how challenging it is.

Fleck: Given that, Travis—I mean, I know your next point here is looking at oil demand. So, you've got this balance of forces between more EVs on the road but still having gasoline cars, challenges with aviation and bunkers. What are you seeing for oil?

Robust Technological Innovation Is Vital to Eliminating Fossil Fuels

Miller: Yeah. Well, as I say, this is a challenging problem. We're quite bullish on the vehicle side of it, but even then, you don't get anywhere close to net zero. You don't get anywhere close to eliminating oil. So, the red line there is our forecast for oil out through 2050. It peaks around 2030, comes down about 10%. This is not a scenario where you get to net zero in oil.

Again, electrification, I want to leave you with that. I want you to understand electrification. Electrification is going to take care of oil. But as we sit here, oil is not going away. Aviation, again, shipping, those are going to continue. There's no technology to get rid of oil in those two. Right now, residential and commercial heating globally is a very big oil demand source. And you also have this mix shift from using oil to move things back and forth, to using oil to produce things, mostly, plastics, petrochem, stuff like that. So, yes, motor vehicle, oil consumption, gasoline is going to come down. Industrial demand for oil might come down a little bit. But we're going to have a mix shift, and you're really not going to see a huge decline in oil demand.

Fleck: Very interesting. I'm sure you and Alex might have some debate here as we go on, which I think is really, really great. But let's move on to Erin to talk a bit about the consumer space. I know you talked about consumers expressing their preferences earlier and perhaps, maybe voting with their wallets. And we talked about earlier government regulation and how that might stem from continued oil change, trying to stop warming and systemic risk. What about consumer preferences? What should we expect?

Lash: Yeah. This slide shows that consumers are favoring environmentally friendly products. And they've suggested that they're willing to pay a premium for those products to the tune of 30% to 40%, which is quite significant. But this really hasn't been tested, particularly against a backdrop where consumers are facing inflation across a number of different facets that they're exposed to, combined with potentially a more recessionary environment. And we've seen in the past that, though consumers say they're willing to pay up for products, they aren't willing to make sacrifices, whether that pertains to taste, functionality, quality. And so all of those factors, we think, could lead consumers to say one thing and do another.

Will Consumers Be Willing to Pay to Be Green?

We've seen this in the past. Clorox Green Works is a great example. It's a bit dated. But back in 2008, Clorox launched their Green Works product line of cleaning solutions. This initially was a huge hit. However, by 2011, it was about half the size from a sales perspective than it was in 2008 on the initial launch, obviously, following The Great Recession. We've also seen this with health and wellness products. Consumers have suggested that they're willing to pay up, but when push comes to shove, that doesn't necessarily pan out. And so, we think that against the current backdrop, where inflation is running rampant, that this could come under pressure to a much greater extent than what these consumer surveys would suggest.

Fleck: Very interesting. Yeah, great examples. That's helpful to frame that. Thanks, Erin. Nadja, we'll wrap up with some comments here from you. Maybe taking a little bit of a shot at Canadian banks. I'm a dual Canadian citizen. So, I feel like I'm able to do this a little bit. But there was a great headline from The FT a month or so ago talking about how Canadian banks have signed on to net-zero commitments but are doubling in 2021 their financing of oil sands companies, which are some of the heaviest polluting areas for oil, really, globally. So, maybe walk us through your reaction to that. How can a bank be both net-zero-aligned and financing oil and gas companies?

Dreff: Well, I knew you were going to ask this question. I prepared the response, obviously. But this huge headline behind me, so I find it personally somewhat misleading. So, I'm going to address that aspect of it first. So, the doubling in oil sands financing happened from an unusually low base in 2020. This was the year where we saw major economic slowdowns around the world. So, to be comparing it to this outlier year is probably not appropriate. The more appropriate comparison would be to prepandemic levels. And if we look at those, then we do see a downward trend in financing. And that's what we do want to see.

And one other comment I wanted to make about financing and emissions and relating those to net-zero targets, I would say that financing doesn't really tell us the whole story of where emissions are going because we don't know what purpose this financing serves. To give an example where there's a transfer in ownership of an oil asset: If there is a loan that supports that sale, sure, there is financing. But then, all that happens at the very end is that this oil asset changes ownership, so what changes is who owns the asset but not so much the emissions over time. And we also know that financing could support renewables as well. So, that's my note to just be careful in how we look at financing versus emissions versus net-zero targets.

And now, as to your question about Canadian banks and their contribution to net zero, I would say that they certainly are contributing and the answer to that is, yes, they are very much part of the solution. As you have mentioned, they are all members of this U.N.-convened alliance, Net-Zero Banking Alliance, that holds its signatories to the highest standards among net-zero commitments.

Fleck: Appreciate the clarification. I can't believe the media was misleading, Nadja. It's unbelievable to me.

Dreff: Well, I'm glad you asked me, so I got a chance to speak about it.

Fleck: Perfect. I do want to go to audience questions, but Alex, I wanted to give you one chance to respond. You obviously laid out quite a challenge to get to net zero. You heard from Travis maybe painting that we're not going to get there on the current trajectory and Erin's concerns about consumers and what they say versus what they do, and, of course, Nadja's points about financing and a continued need to move into transition phases. Just wanted to get your thought there and, particularly, Nadja's point about divestment and what that might mean for oil and gas companies before we move to audience questions.

Business-As-Usual Will Fail. A Change in Mindset Is Required.

Osborne-Saponja: Sure. Not a hard question to answer at all. Divestment is probably the stick to maybe engagement, and stewardship is the carrot. We probably won't meet net zero by 2050 based on business as usual, as I've said, and really, it requires a paradigm shift, a mindset shift, and will and passion, actually, as well. So, divestment plays a part. But if we turn the taps off tomorrow, we'd be in even more of a state than we already are. And it is a transition. But it needs to be fast, and it needs to be cost-effective as well.

Fleck: So, when you say it would be in a state, you have to balance the need to get to net zero from a systemic perspective, but maybe as some other panelists have talked about, the economic implications of simply turning off the taps on carbon emissions tomorrow?

The Energy Transition Is a $70 Trillion-$120 Trillion Opportunity

Osborne-Saponja: You have to be realistic. That's not going to happen. But the mitigation solutions that exist are largely cost-neutral or generate returns on investment. Like I was saying before, net-zero economy in 2050 could be worth $70 trillion to $120 trillion, and that's through investing in solutions that exist now and not solutions that exist in the future. That includes electrification and some divestment, but largely engagement with those companies whose business models are integrated and intertwined with fossil fuels to help them move away and help ensure that they have longevity in the future as well.

Fleck: Great. We've got about 15 minutes left. So, let's move—if there's any audience questions, we'd love to tackle those.

Is Nuclear Power a Sustainable Energy Source?

Syl Flood: There are many audience questions. The most upvoted one is the following: What role should nuclear play in the path to net zero? There seems to be some dissonance with those pushing to net zero and the need for stable sources that do not emit carbon.

Fleck: I think that's a great question. And Travis, I know you and I have talked about this. And I'd love to get Alex probably your opinion and anyone else who wants to chime in. So, Travis, do you want to maybe tackle that?

Miller: Sure. Yeah. Nuclear is a critical part. Again, electrification is the big theme that I want to leave you with. Nuclear is the largest, most reliable source of electricity in the world that's carbon-free. It is a critical source. And we've gone through ebbs and flows over history. The ESG advocates said nuclear is bad. Now, we're kind of swinging back to the other side, where they—you do the modeling and the algorithms and all of the analysis, you have to have nuclear in the mix to get anywhere close to net zero. Nuclear is about 20% of the U.S. electricity mix right now. It's not going to grow much, but it has to be there. Wind and solar are not reliable sources of electricity generation. They just can't serve demand 24/7 like nuclear can.

And the other thing to make a point about is that nuclear is actually the safest electric-generation technology out there. A lot of people get real worried about radiation and don't want to live near a nuclear plant, so NIMBY-ism. The thing is, if you look at coal plants, you look at gas plants, even wind turbines and solar manufacturing, nuclear has the lowest rate of safety incidents of any power-generation technology. So, I'll leave you with that. It's the most reliable, it's a critical carbon-free electricity source that has to be around, and two, it's safe, and we need it.

Fleck: Alex, I'd love to hear your opinion as someone that's looked at net zero and energy—response to Travis on nuclear.

Nuclear Is Carbon-Free but Relatively Expensive and Carries Obvious Risks

Osborne-Saponja: OK. Well, I think in an ever-changing world and heightened physical risk, Japan might have something to say about the safety of nuclear reactors. But ultimately, to transition to net zero, we need cheap energy, and we need cheap, low carbon energy, and we need it now. Nuclear energy is 4-5 times the price of renewables, and it takes on average 10 years to get a reactor up and running. We don't have time for that. We simply do not have time. And in terms of its reliability, we've seen, especially in Europe, solar, and wind, and other renewables be imported into countries that have been dependent on nuclear energy. So, I'm sorry, I don't remember the year, but France actually imported renewable energy from Germany because their nuclear capacity wasn't quite up to scratch. And we have to look at the wider elements of a net-zero transition, which is a fair and just transition. And that means having clean affordable energy for all. And if nuclear is 4-5 times the price of renewables and storage that already exists, then that doesn't fit with that.

Fleck: Some good debate there and a challenging topic. We could probably have an entire session just on nuclear energy. But maybe turn back to another question.

Bitcoin Mining May Benefit From Renewable Energy, but Transmission Systems Are Lacking

Flood: Can you comment on the impact crypto has on carbon emissions and how you see the future of ESG impacting crypto?

Fleck: Yeah, I think that's a really good question. Obviously, crypto gets wrung up by ESG and carbon emissions on just the production of the energy consumption of mining. I'll turn it over to the panel. I don't know if anyone has any response to that audience question.

Miller: I'd say, I'd take it from the electricity side, it's a huge thing. You see it in the headlines all the time, the amount of electricity that's consumed by crypto servers. So, Texas is the epicenter right now, all the move of crypto to Texas. And the reason in Texas is that you have a great area for wind energy in West Texas, one of the best in the world. The problem is no one lives there in West Texas. So, that is the greatest place right now to put huge data centers, hook them up to winds. Problem is, there aren't enough wires to get from West Texas to North and South Texas, where you have Houston and Dallas and all the load for air conditioning, electricity.

So, all of the crypto data mining, all of that is going into West Texas, sucking up all that excess wind energy that simply can't get anywhere else because there are no wires there. So, that's going to be a real key area to watch is West Texas. If they can do that at large scale, put a lot of crypto, a lot of data, a lot of carbon-free—this ends up being carbon-free because they're using the wind and solar—if they can do that and make it work, maybe it's scalable. Maybe that's something that you can do across the world. And electricity costs are going to be a key input to crypto valuation. I don't know how to value crypto. But I know that electricity is a massive input in terms of cost to crypto. Watch those headlines, and remember electricity is the story.

Fleck: But really, about infrastructure, really coming back to your earlier points. Maybe while I've got you, Travis and Erin, as our equity analysts on the panel, I think it'd be important to ... we've kind of danced around the issue of investability. I want to bring it down to the company level, specifically. Travis, maybe who are the winners or losers, or which utilities do you think look really attractive right now as we think about this transition? And Erin, from the consumer perspective, which companies might be both managing this appropriately and managing the consumer preference changes while also trading at a reasonable valuation? Travis, maybe start with you.

Infrastructure Is the Best Investment in Energy Today, Not Renewables

Miller: OK, I'm still defending myself here. I'm getting a go on here. But I'm going to leave you with two things in terms of investability, and they're not the obvious things. The places we like right now in the utilities and energy sector are infrastructure. It's not renewable energy right now. It's not next year that's the big headline, that's the big green company in the U.S., some of the Europeans. It's not there. What it is is infrastructure builders. So, there you're talking about utilities that are building the small wires, the neighborhood wires, the transmission lines, everything in the infrastructure to get the electricity to the EV chargers, to the home, so you can electrify the homes and the businesses, to the factories, so you can electrify those. So, it's infrastructure.

California’s Policies Have Created the Best Lab to Test Energy Transition Strategies

And California is going to be the number-one place. And when I say California, everybody turns their heads and walks out. California is actually one of the best areas for utility regulation. I don't want to keep it to utility regulation. A lot of other things that happened in California that aren't the best. But utility regulation is very good, because they've set out the policy of 2045 a carbon-free economy. And they know that all along the lines of policymaking in California, they know they have to electrify everything. That means getting all the gas out of homes and business. That means every car being electric. That means finding some solution for industrial, electrifying industrials. This is a big issue. California is going to be the epicenter of it. Look at some of the California utilities, what they're doing.

And then, also a transition story. A lot of people shy away from coal and gas and say, no, we don't want to invest in those, off limits. Those are going to be the biggest growing companies, the companies that are retiring coal plants, moving to either gas, which is our lowest carbon fossil fuel source right now, or renewables energy. So, a good example here is NiSource in Indiana. So, they've got a large gas distribution system. They're growing their electric. So, about 60% earnings from gas, 40% from electric. Their strategy is to electrify Indiana essentially and electrify with renewable energy.

Fleck: So, NiSource might be the…

Miller: NiSource, I'll leave you with that. And then, the California utilities. Among those, Edison International, EIX, is my favorite.

Fleck: Great. Erin, same question for you. Then I have one more question for the panel before we wrap up. Companies that you're finding attractive right now?

Lash: I would just highlight the fact that, as I alluded to at the beginning, we're paying attention to not only what the companies are saying as it pertains to net zero and moving down that path, but how they're supporting their business and their competitive position.

Unilever Was Early to ESG and Paid a Big Price

Unilever is a company that was very much out in front trying to tackle this issue. But that came at the expense of sales and profitability, and ultimately, what they were doing for driving that improving performance from the financial side. So, not considering all the stakeholders that they were theoretically answering to. And as a result, their valuation suffered, stock price performance lagged their peers, and that didn't manifest because of their performance from a financial perspective.

General Mills has been on the opposite side of the equation. From our vantage point, General Mills has been doing a great job not only of reporting, from a sustainability perspective, the progress that they've been making but holding their executives accountable to achieving the targets that they've laid out, both as it relates to their incentive compensation but also board oversight, and really working, for instance, with their farming partners to help them move toward regenerative agriculture, trying to get the carbon emissions out of the atmosphere and into the soil to a much greater extent, and partnering with them as they make that transition. And we expect more along that path. And so, that hasn't come at the expense of improving sales and profitability and investments behind their brands, which we view as key.

Fleck: OK. So, a couple of good ideas there maybe to explore after our session. One last question. I know we're just about at time. I'll be looking for a very quick answer from each of you, and that's just a number, a percentage. We're going to go in reverse order here. Nadja, I'll start with you. What is the likelihood, in your opinion, percentagewise, that we reach net zero by 2050?

Dreff: I'm not going to start with a percentage. I'm going to tell you what I think is a key determining factor. I think the answer ultimately depends on what the political leaders' commitments are to setting and meeting the net-zero goals, because I think that is going to have a major effect on the path that we ultimately end up on.

Fleck: So, a need for political leadership is a determining factor there?

Dreff: Determining factor, and without—and each country has a different economic structure, different composition, different growth, and those things are certainly going to affect, as well, the political leadership and their objectives. So, I don't think there is one single number to be quite frank, and each country will set its own path. But in terms of financial institutions, which I'm here to talk about, a large number of the very big global financial institutions are members of this global alliance, and they have already committed to 2030 targets that will ultimately take them to 2050. So, if those goals are something that they adhere to, then we will get there.

Fleck: OK. Well, Nadja has kindly pointed out the fallacy of my question. So, maybe we'll end it there. I think it's a great place to end.