Citigroup Inc. (C) Earnings Call Transcript & Summary

Good morning to everyone. I'm Nicolas Bornozis of Capital Link, and I'm delighted to welcome you to today's event. Today's event is a forum on decarbonization in shipping, and the focus is on moving from discussion to delivery. Decarbonization is the next frontier for the industry to conquer. It's a topic that is at the forefront of every discussion. So many events are taking place about this. Our event, I think, differs in 3 major ways: number one, the topics. We have a compact, comprehensive agenda of all critical topics of the industry. Number two, the speakers. We have speakers across the industry from all major stakeholders who are going to have healthy and very insightful debate on the critical topics of the industry. And number three, we have heavy shipowner engagement in our forum. At the end of the day, shipowners are those who are going to implement everything that needs to be done about decarbonization or anything else in the industry. I am humbled and grateful to our steering committee, starting with our Chairman, Grahaeme Henderson; Michael Parker; Nikolas Tsakos; Charles Darr; and of course, Esben Poulsson. All 5 of them have been particularly supportive and helpful in terms of sharing their insight and wisdom to put this event together. And I'd like to thank Grahaeme in particular, who is also our conference Chairman. So without any more delay, I will turn it over to Michael and to Grahaeme. I would like to thank the sponsors for helping us to put this event together. Without your support, it would have been difficult to do so. So thank you to everybody. And I will turn it over to Michael and Grahaeme with my sincere thanks.

Good. Thank you very much, Nicolas, and good morning, everyone who's watching us. And good morning again, Grahaeme. Before I turn back to you, Grahaeme, to kick off our conversation, as we agreed, I think it's appropriate if we open our conversation this morning with a brief tribute to John Angelicoussis, who sadly died last weekend, well known to us both, a good client of yours, a good client of Citi's. He was a great man, and he's built a great company that Maria, his daughter, takes over. He had a very keen brain. I remember the amount of time he spent before he got into the LNG business. He's very thoughtful, not an extrovert in the sense of John Fredriksen, who I saw paid some very kind remarks -- has very kind remarks about John in the last couple of days. Two very different people who had a lot of respect for each other and a good example of how our industry is made up of very different personalities. I think one of the things before I hand to -- John was a quiet man and not someone who stood up and led from the front on some of these big issues because he was very thoughtful. But I know that he was actually beginning to focus a lot on this issue of decarbonization and the environmental impact. And I spent many hours talking to him about the Global Maritime Forum, and he did sign up his company to be a partner of the GMF 2 years ago and attended, as you know, the summit we had in Singapore. And I'm very confident that Maria will continue that thinking and that work. And so I think it's a sad day that he's no longer with us, but his spirit is with us in the context of this conference. And with that, I'll turn it over to you, Grahaeme.

Yes. Thank you, Michael, for those really good words. It's very, very sad news indeed, and we'll all miss John immensely for his contribution to the shipping industry. And like you, I always enjoy discussing with him and also events such as this. It's difficult to move forward following that, but in terms of this conference, let me try and do that. So as Nicolas said, this is a unique conference and it is bringing together into one place the key stakeholders and particularly the shipowners. They'll be the ones who drive decarbonization of shipping. The vision for this conference was for the opportunity to hear about the progress that's being made around delivery to understand the next steps in the reality of decarbonization. Up until now, we've heard a lot of discussion and a lot of debate about decarbonization, all very necessary to gain a common understanding of the various perspectives and issues. But whilst keeping that healthy exchange going, we need to move firmly into the delivery phase, and it's not going to be easy. There are many, many challenges. We'll need new ships. We will need upgrades to existing ships. There are new fuels, a completely new infrastructure at hundreds of ports and terminals globally, new standards and procedures to manage that important subject of safety, regulation, finance, verification that everything is working as we think it should do and that we are actually getting a reduction in emissions and all of this while we keep our vital business going and knowing that we're just one part of a large global supply chain. But despite those challenges, I really do believe that we can do it, and I believe it's vital that we start that delivery now, and this conference is perfectly positioned for that. So Michael, in terms of just discussing some of these subjects, what do you see as the main barriers on shipping's pathway to achieving zero emissions?

Well, I think as you -- as Nicolas and you have just illustrated, I think the industry was not of one mind, is very committed to this process. And I think that the debate that will go on over the next 2 days is not all one direction in the sense that everyone agrees with everything everyone says. I think there is -- and that's exciting because I think it means that a lot of innovation and ideas get created out of that. And we've seen that in some of the meetings -- virtual meetings that have taken place in the last year. But what I feel is it's got to start from the top. So the risk to this, in my mind, is words rather than real commitment by politicians. We're spending a lot of time in, as you are also, Grahaeme, in focusing on COP26 in Glasgow. I hope it is not postponed and that, that meeting takes place. And next week, President Biden has his climate summit, which we hear President Xi will also join, obviously, virtually. So I think that political commitment is going to be very important. I think accompanying that is the instructions or the advice that the climate change conference gives to the IMO. The IMO as the industry's regulator has a very important role. And it's easy to criticize the IMO for some of the things that have happened in the past around regulation, but I think this is an opportunity for the UN through the IMO to accelerate the pace of the policy changes in collaboration with the industry. I think it's absolutely crucial that regulation is discussed with the industry to avoid things like the ballast water treatment issue. And I think those 2 things are absolutely crucial. If we don't get those right, if we don't get the leadership and then the consequential regulatory changes with a map -- I think there has to be a map with clear signposts because we know that this 2050 target only works if certain things start to happen by 2030. And I think a key component we probably won't see agreed in Glasgow is the market-based measures that governments want to bring in. We know that carbon pricing is going to be essential not just for shipping but for the global economy in terms of getting the motivation right. And I think there is a risk that if we have many different market-based regimes, those inconsistencies will actually be not so much a disincentive but will discourage some of the things companies like you, both as a shipowner and a cargo owner, want to do. I think fourthly, lack of finance if there is no clarity on that pathway. There is huge investment. You hear it from Larry Fink and others looking to invest in the right things to help this transition. And I think that whether it is through regulators regulating banks or regulators regulating the shipping industry, that consistency of taxonomy, the consistency of what we are measuring and the transparency around that so that we measure the progress we make to that goal, I think, is very important. So understanding that pathway and people being committed to do things by a certain point in time is key to making sure that we lower as much as possible those barriers. What's your perspective?

Yes. No, very much agree with those points. I mean just extending into a few other areas. So it was -- this is a key topic actually that we've been looking at in Shell. And as part of this, and you were one of the participants, Michael, we interviewed 80 senior leaders from across the shipping sector and produced a report of shipping decarbonization, All Hands on Deck, we called it. And we asked them very specifically what they saw as the main barriers amongst the very many areas. And you've mentioned a number of them, things like the business case for this, disruption, the high costs involved. One of the most frequently cited concerns was the lack of alignment around what fuel to use, and I just wanted to spend a minute on that because 80% of the participants in that report saw this as a major barrier to decarbonization. And so for Shell as a fuel provider, charterer and a ship manager, we were also grappling with this issue: which fuels, which technologies will get us to net 0 emissions. And what we see is that it probably will be a blended solution in that for different parts of the industry, there may be different ways forward. So for short-sea ferries, as an example, it may be suitable to use batteries. For container ships, which are on set routes of A to B and back to A again, it could be ammonia is most suitable. But what our work has shown is that for international shipping, the conclusion is that hydrogen is the most appropriate fuel for the future. And there's a few key reasons for this. The first one is around safety. We've been undertaking testing of hydrogen with the view that the safety risk can be managed, and that is not the same with some of the other fuels. Secondly, on costs, all of those future fuels are higher priced than hydrocarbon equivalents. However, most of the other industry sectors are progressing hydrogen, so whether that's road, rail, air and heavy industry. And so shipping will not have to pay for those costs themselves and be able to use the existing high-cost infrastructure. And what we see is as demand increases, the price of hydrogen will fall through economies of scale as the production process is optimized. And then thirdly, when we look at total emissions, hydrogen in combination with fuel cells and starting today with LNG, offers the industry the quickest and lowest emissions pathway to net 0 reductions. So when compared to other potential 0 emission fuels, hydrogen has some very clear advantages. But what I will say is whatever the solution for the different sectors of shipping, we need to coordinate our efforts. I've just said a few words about hydrogen, but this is not a competition. We need to work together. We need to understand what each other -- which groups are working on the various fuels. We need to remain open to new ideas, test different views, trial new technologies so that we can unite around the fuels and technologies for the future and start to really make progress as one shipping team, make progress together. One of the other things that's on my mind, Michael, is what do you see as the most significant drivers for change for shipping decarbonization?

Well, I think in the end and the beginning but actually the end in the sense that it's only become visible more recently, that is the consumer. In the end, this is about the planet we all live on and it's about this quality of life we live in the environment. There are lots of very broad topics on that, that fill the papers and produce some very excellent books. But I think it's the consumer who will drive this because consumer behavior, this is now going to be a factor, not just price, not just quality, but the environmental footprint of what the consumer is buying. Now to some extent, as you refer, the infrastructure around new fuels will dictate how we power our houses, if you like, what our boilers use, all those sort of things where consumers may have less choice in the end because of the infrastructure that is developed for it. But I think in the end, particularly when it comes to -- the container sector is a good example of this. The data around emissions on the cargo will play a large part in informing that and motivating that. I've been criticized recently in a number of other webinars when I mentioned the name Bill Gates. But I think what Bill Gates has done whilst writing a book that he doesn't need the money for, what he's done is he's focused on the need to address the hard-to-abate sectors early and to allow the other sectors who are already engaged in this like the auto sector to continue. They don't need the subsidy in the same way or the help from governments. And so that combination of government and the consumer, I think, will ensure that shipping, as one of those sectors because of its role in the global supply chain, is actually addressed first. Part of it, I think, is because, as you've outlined, the technologies exist, so the issues that you and others are looking at in terms of scaling that infrastructure, distribution and of course, safety being the primary factor in all of that. So I think that ability to do this is a key part because I think that's what investors and regulators and others will see, that actually, if we can accelerate the decarbonization of an industry like shipping, so we help the broader global economy and infrastructure. I think another feature is the collaboration we've seen in the last year, which I find incredible. In my 43 years of banking and 36 in this industry, I've never experienced the sort of collaboration we've seen in the last 18 months around these issues. And I think that's important because of the commitment that is shown by, as Nicolas said, the number of different people who are contributing in the next 2 days. That collaboration from shipyards to scrap yards via owners, operators, cargo owners like yourself, financial institutions is something we've never seen before. And I think that we've created something that has its own momentum and has created expectations about the ability to do something. I think the third thing is about the visibility of solutions and the ability to ramp those up. I think the report you referred to that you produced was excellent in reading, not just what I felt but also the other people you interviewed. And I think what it also encapsulated was this recognition that fossil fuels have a role to play in this transition, and we need to be practical and realistic about that. And so it is that managing visibly the transition while still focusing on the need to start investing now in those alternative solutions. I think that visibility comes in a couple of areas. We have, through the Getting to Zero Coalition first-movers group, over 100 pilots now which have been identified as having been ultimately 0 emission fuel possibilities. And I think that will be an important part of illustrating to politicians what the industry is already doing. But things like the LNG bunkering infrastructure that you and others are building out, that's clearly going to be a foundation for what will come after it. And therefore, using existing investments in some way to adapt, I think, will be important. And then finally on this point, I think what we saw in the North Sea and in Denmark with offshore wind. And I was a great skeptic, but the way in which that has worked in the U.K. in terms of contribution of renewables to our energy sources is fantastic. And it was that combination of government's underpinning contracts, the private sector investing, and we've seen what sort of transformation can happen. So it is those real-life examples we should use as precedent, taking the investments already being made and just make sure that they are visible to everyone, and I think that's where money will follow, frankly. Investors will want to invest in those things that look like they work. Money has to take some risk here, but I think people want to see what can work and be part of accelerating that process.

Yes. That's some really great points. And I'd like to pick up on the collaboration one a little bit later, but maybe just to extend into the technical areas. And the first key driver in terms of shipping decarbonization I see is around energy-efficient technologies. This allows us to reduce emissions and fuel costs now. There is a business case around these as well, so there's good sense in putting them in place. But also critically, through making these ships more efficient, that will enable us to use the future fuels because all of those future fuels have got a lower energy density than the traditional marine fuels that we use today. So fuels like ammonia, like methanol, hydrogen, all of them need more fuel quantity to travel the same distance. And this presents a challenge for us because, of course, that could displace a cargo space in terms of putting in place the extra fuel requirements. But what we do know is that -- versus a 2008 baseline, which is being used by the IMO, is that the global fleet has already been able to achieve a nearly 40% reduction in carbon intensity with the greater use of efficiency measures, things like digitalization, improved ship designs. And what we've seen in our Shell fleet is that there's a further 25% reduction which we can achieve relatively straightforward while using energy-efficient technologies, things like Flettner rotors, using wind and also air lubrication and also further digitalization performance management of the ship. And if we can reduce the energy required in this way, that will enable future fuels. The second key technology area is -- and you mentioned it as well, is the wider use of LNG as we develop these future fuels and their solutions. LNG is the lowest emission fuel available at scale today and into the foreseeable future so we should be widely using LNG and doing the very best we can now. And thirdly around new technologies, we know that currently on ships it's going to be very difficult to use the current setup to get to net 0. So key to unlocking net emission fuels is fuel cell technology. Our modeling shows that the fastest way to get to net 0 with the lowest total emissions is one that includes the accelerated adoption of LNG, combined with the widespread use of energy-efficient technologies and with fuel cells ready to transition directly to 0 emission fuels at some time in the future. So we are joining a consortium of companies, which we will be announcing very soon, across the value chain to collaborate on trialing of these fuel cells on board deep sea ships, and that trial will be using LNG initially to power the fuel cell and then use hydrogen or any other 0 emission fuel. And that's the beauty of fuel cells in that they are agnostic in terms of the type of fuel. And then we can grow the capacity and scale as those fuels become available. What we've done is there's a lot of modeling around this. And what that shows is the ship using high-efficiency LNG fuel cells and adopting these energy-efficient technologies, we could reduce greenhouse emissions by up to 80% versus that 2008 baseline. And then with the 0 emission fuels, it's possible then to push forward to 100% reduction. So the pathway is there. It's through fuel cells, it's through energy-efficient technologies, and it starts off with LNG and then moving into other fuels later. But certainly, these are the significant drivers that we see in Shell. I suppose the other thing that we've all got to think about is what part each of our companies, ourselves, we can play in this. So I just wondered, Mike, in terms of Citi, what are your -- what is Citi doing in terms of their part to help shipping make progress on delivery? And how will you encourage others to do the same?

Good question, Grahaeme. And let me start with our CEO, Jane Fraser, on her first day as CEO a few weeks ago highlighted Citi's commitment to net 0 by 2050 in terms of our portfolio. Not the first bank to do that, but others have followed since. And I think that's part of the banking sector recognizing the role that we play in encouraging through how we manage our portfolios. And within the shipping context, I'd probably be aware of the Poseidon Principles, with 25 signatories representing about 50% of the outstanding debt of the industry. And I think that the impact of that will take some time, but I think we'll be seeing eventually allocating capital in a way that has motivated shipowners to make the right decisions. It is ultimately though about working together, and you've talked about a collaboration you're going to announce shortly. But you're already part of the Getting to Zero Coalition. And I put up -- I chose to use as my backdrop Getting to Zero Coalition, the GMF, the World Economic Forum, Friends of Ocean Action. Through these sort of partnerships and coalitions, strength in numbers and also recognition by politicians, I think the impact we've had through the GMF is a good example of that. It's got to include cargo, and you play a very important role in this because I've often accused you being schizophrenic as a company. But I am -- my grandfather was your second oldest pensioner when he was alive, and I am a small shareholder. But you do play a very important role in -- as you own the cargo as well as move the cargo, your role in this is absolutely crucial. And I think you're a global company. Citi is the most global bank. Together, we, with other people, will make this happen. I think that my internal partners in the supply chain, what I mean is Jane, what I mean is my colleagues who look after other industries that are crucial to this, whether it's metals and mining, the consumer industries, obviously the energy and power industry, that are working together in large institutions to make sure that we're sharing what's going on, I think, is also going to be crucial because it's collaboration not just within the sector. It's collaboration between sectors. And I think that is going to be crucial to that. And you sort of sit in that crossroads because of the role you play in both the key industry to this, which is replacing existing fuels, and as a major cargo owner and transporter of those. So I think we're good examples, if you like, of global institutions that have to play a leading role. And I'm confident Citi will continue to play its part at the forefront of these initiatives.

Yes. Well, in Shell, we've set a target to be net 0 emissions energy business by 2050 or sooner, and we said that is in step with society and our customers as well. And that means reducing emissions from our operations and from the fuels and other energy products we sell to customers. It also means capturing and storing any remaining emissions using technology or balancing them with offsets. That means reducing emissions in our own fleet. For example, as I referred to, we're retrofitting air lubrication. We're measuring, reporting. We're managing down emissions from our charter fleet as part of the Sea Cargo Charter which we recently signed into. It means partnering with customers to help address their emissions. Shell is one of the largest biofuel blenders and distributors in the world and was the first fuel supplier to provide certified second-generation suitable biofuels to some of the world's leading shipping companies. Helping customers, businesses and others to address emissions, including sectors such as shipping is a fundamental part of our strategy to get to net 0 emissions. A global policy regime is going to be an important foundation for worldwide progress to be made. Shipping is an international industry, and the most effective way to drive change while maintaining a level playing field is with global regulations. But as you referred to earlier, Michael, it will require extraordinary collaboration across the industry, and this is where I see Shell playing an important role. We've got a lot of touch points, not just in shipping, as you've mentioned, but also with other sectors, aviation, road freight and heavy industry, too. We're going to need to work together in shipping and also with those other industries to develop the fuels and infrastructure for the future, and I think that Shell is well placed to drive that cooperation. What I've really sensed is a real passion as well from a lot of people, including yourself, Michael. How optimistic are you that we will get there and that shipping will, should I say, lead the way or at least be part of leading the way in terms of getting to 0?

I think there are 2 things I would say. One is this data availability on emissions. For the first time, shipping can emerge and tell the true story about what the emissions really are in the supply chain and how it's going to address them. And so that hiding away historically has got to finish, and I think this collaboration makes sure that, that will finish. I think this -- I think data is key to it because data is what regulators and investors all need to see. And I think that gives me optimism that when this data is available pretty transparently, it will be difficult for people to avoid the issue. And I think that's what I think will make this happen. I'm also confident that the work I've seen, some of which I'm involved in, that people, as you say, are really passionate about making this work. I think the key thing to me in the end there is shipping is the key industry in the global supply chain, given 80% of all cargoes go by sea, and that is a role shipping should be proud of and not hide away from the positive impact it's making. But it should recognize it's not just about the ship. The ship is a very important part of it, but it's the cargo and that the cargo is moving from A to B. And the maritime sector is a key part of it, but not all of it. And it's that partnership, as you say, with other modes of transport that's going to be important as well as the owners of the cargo.

Yes. Thanks, Michael. Well, it's been great to talk to you. I've really enjoyed it as always. We often have catch-ups when we discuss these topics. And like you, I believe we can do it, and I think this conference is a key part of that. So back to you, Nicolas.

Well, I would like to thank you both for all your help and support, along with the other steering committee members for this great conference. And also, thank you very much for this very insightful introduction into what I think is going to be a great today event. So thank you very much for opening the conference. Thank you.

Thank you.

Thanks, Michael. Thanks, Nicolas.