Dow Inc. (DOW) Earnings Call Transcript & Summary

Good morning, good afternoon. My name is Sarah Williamson. I am the CEO of FCLTGlobal, and I really welcome you here to our webinar today. FCLT's mission is to focus capital on the long term to support a sustainable and prosperous economy. And we're a nonprofit that does research and creates tools to generate that long-term value creation for savers and communities alike. So thank you for joining us today for a conversation with corporate and investment leaders following the 2021 UN Climate Change Conference, or COP26, as we all call it. We know that COP26 took place in the face of a rapidly growing consensus about the worsening impacts of climate crisis, and government business leaders alike understand that urgent and ambitious action is needed to mitigate the worst of impacts of climate change. Capital allocation is critical in this context. There's a huge opportunity for both public and private finance to fund the development of infrastructure, technology, innovation needed to transition to a more climate-resilient economy. And many companies and investors have established net zero and other climate change commitments. However, skepticism remains about the short-term implications of such commitments and how they translate into action needed for positive long-term impact on the planet, the economy and the performance of the organizations themselves. So the goal of today's webinar, one of a series that we've done on investing in the face of a sustainable transition, is to look at the post-COP26 landscape and consider what practical actions companies and investors can take to be best positioned for long-term success in this new environment. So one of the key takeaways is how important capital allocation is. And so I'm really excited to have with me today some of the leaders in the corporate and the institutional investment communities who are allocating that capital in this transition and can share some of their takeaways and really think about how they're managing both for a rapid transition to real-world decarbonization and sustained value creation for their own organizations. So let me introduce them in alphabetical order. We're pleased to be joined today by David Blood, Founding Partner and Senior Partner at Generation Investment Management. Generation's mission is to ensure that sustainable investing drives the transformative change required for a net zero, prosperous, equitable, healthy and safe society. Jim Fitterling, Chairman and CEO of Dow. Dow is a global material science company with the ambition to be the most innovative, customer-centric, inclusive and sustainable material science company in the world. Pam Holding, Co-Head of Equity and Asset Management, Lead on Sustainable Investing at Fidelity Investments. Fidelity is one of the largest asset managers in the world, investing over $4.3 trillion in assets under management. And Kim Thomassin, Executive Vice President and Head of Investments in Quebec and Stewardship at CDPQ. CDPQ is one of the largest asset owners in the world with the ambition to be a successful investor and partner of choice around the world, a source of constructive capital and creator of enduring value to benefit clients and Quebec's economy. So thank you all for joining us today. Let's jump in.

David, let me start with you, if I could. It was great to see some of the private sector commitments coming out of COP26, many of which you were involved in. And the challenge now seems to be to connect the finance, the investment money that is there being committed with where it's actually needed. Investors, of course, want to make investments that have a strong risk/return trade-off and then are green. But the capital needs are mostly in developing countries that tend to be high risk and somewhat challenging to invest in at scale. So how do we bridge this gap?

Well, thank you, Sarah, for the question, and thank you for including us in this discussion. I very much look forward to it. We agree that asset owners and asset managers, how they consider capital allocation will determine how quickly and how, I guess, transformatively we transition to a net zero future. But I think it's probably important to take a step back and consider the framework that we're operating on. To achieve our objective of eliminating global temperature rise to less than 1.5 degrees C, we need to do 2 things. First, of course, we need to achieve net zero by 2050. But actually, more urgently, we need to cut carbon emissions in half over the course of the next 8 years. In essence, at its core, this is a capital allocation problem. We need to think about how we are going to get capital to the right industries, the right geographies quickly. So what we've historically been talking about -- or more recently been talking about, I think, is probably better to say -- and Governor Carney has been quoted consistently saying that, "Every financial transaction must take climate into consideration," and we very much agree with that. And in effect, what we need to do is make climate-led investing a capital allocation imperative. And ultimately then, to answer your question very concisely, what we need to do is ensure that climate impact as well as, frankly, the Just Transition becomes part of our traditional risk and return framework. We need to add impact into the calculation of risk and return.

We all know about risk and return and how we thought about that over time and adding impact is a good way of thinking about that. Now Jim, let me turn to you. As Dow has pledged to be climate neutral by 2050, and as David just talked about, COP has made it clear that actions need to happen sooner than 2050, we're not going to start doing this in 2049 and that, that actually needs to be backed by real capital allocation decision, so can you talk to us a little bit about what Dow is doing to ensure that its long-term goal is supported by these shorter-term strategies? And how do you talk about this with your investors? How do you get them comfortable with these short-term/long-term trade-offs?

Sure. Sarah, great to be here. And I agree, we cannot wait until 2050 to begin this work. In fact, we've been working on this for the last decade. We've reduced our CO2 emissions by 15% over that time period, and we've laid out a plan to reduce it by another 15% by 2030. So a net zero total of a 30% reduction by then, all driven by investments. But it's a combination of things. Optimizing our current facilities, obviously, is the best return to shareholders, better energy use and optimization. Increasing renewables in our power mix has been a big part of it. We're over 850 megawatts now of renewables in our purchased power mix. We're on a trajectory to have 25% of our purchased power mix to be renewables. We can't do everything that we do with renewables just because of the nature of the energy intensity and the cost of renewables being a bit higher. We have to do some things with existing technologies. So we're focusing on clean hydrogen and carbon capture use of storage. And we're also looking longer term at lower carbon-emitting technologies for power, specifically, like advanced nuclear, where we wouldn't necessarily be an operator but we'd be an off-taker of an advanced nuclear facility, which produces electricity and steam in the kind of proportions that we need. I would say the biggest part of our plan is really around decarbonizing the core but doing it in a way that allows us to grow. I think investors understand the need to decarbonize the core. It really removes the tail risk from an investment in a company. But they also want to see a company to be able to continue to grow and to grow profitably. And so we've shown that we can do it. If you look at our investments in the U.S. Gulf Coast over the last 10 years, we built a large facility there which has a 60% lower CO2 footprint than any of our facilities in the world. And that was done without any specific bells and whistles, if I can say, around new technology. So we made a pledge. At the beginning of October, we walked our investors through a road map on how we would get our Scope 1 and 2 emissions to zero by 2050, and it showed the progress that we could make at each decade. And we committed to take 1/3 of our investment capital every year for that time period and focus it on decarbonizing and growing the core of our business. One of the big projects we announced was in Fort Saskatchewan and Alberta, and policy comes into this for investors because policy is very important. We went there because we have an excellent footprint. We have access to low-cost feedstocks. We have obviously some infrastructure there. There is a carbon capture trunk line in Alberta that runs next to our facility. So we made an investment announcement to put new brownfield cracker there at this site, and what we would do is build an auto thermal reformer that was large enough to convert all of the back-end gases off of those 2 crackers into clean hydrogen. So think of it from a circularity standpoint, when you crack ethane to make ethylene, you create hydrogen and some other gas off the back end. We convert that to hydrogen, and that fuels the entire facility. We'll make the whole facility net zero carbon emissions and triple the capacity at the site, and the CO2 we capture will go to the carbon trunk line in Alberta. It's made possible because the government supports investments there. They have incentives to help us make the capital investments we need to build the circular hydrogen plant. But they also have a price on carbon. And today, that price on carbon is about $40 a ton. I suspect that by the time we get the plant up and running, it will be closer to $100 a ton, and that helps offset the operating costs because these technologies are more expensive than what we do today. So I think investors can see that you've got a path. You can do it affordably. You've got policies that support that growth and they understand that you can continue to grow and get your footprint down to zero by 2050.

Well, that's a great example of laying out a capital allocation plan, laying out a long-term road map, partnering with the government, which is obviously easier in some countries than others, and has real world impacts. It's not just on paper. So you were just talking about Alberta. Let's switch to Quebec where it looks like there's a lot of snow in the background. Kim, the transition pathway and the time line of this transition was a huge focus at COP as was the investment divestment debate, sort of this transition investment, divestment whole issue. CDPQ's new climate strategy addresses this issue directly, and it includes details on your plans to create a transition envelope to fund heavy emitting industries, sort of what Jim was talking about a minute ago, but also your plans to exit oil production by 2022. Can you talk us through how you make that decision on when you want to fund the transition versus when you want to exit a business?

Thank you, Sarah, and thank you for having me. And I took some good notes while David and Jim were talking, so maybe we'll get back to those points a bit later. But a bit about our transition envelope and engagement versus divestment. So for us, engagement is a key lever of influence in achieving our climate strategy. It's always the path of engagement that we will prefer and advocate for initially. So we engaged, following different steps and considering different factors, we adopt the progress and the quality of the dialogue we have with companies. We, of course, also consider the ambition and the potential in carbon reduction that the company will present to us. We also take advantage of our presence on Boards because we negotiate governance rights when we invest into a company at times. So we use our great ambassadors who are our directors on the Boards to raise those issues and to support best practices. But sometimes, in some cases, after a lot of engagement, sadly, we come to a point where divestment has to be used as a last resort decision, if you want. So to go back to the USD 8 billion transition envelope that you've mentioned, we announced this envelope as part of our renewed strategy. We had initially done and announced our climate investment strategy back in 2017. And recently, a few months ago, we renewed that ambition in light of the emergency and urgency to address the fight against climate change. So that envelope, that USD 8 billion envelope, is part of that strategy. It's what will allow us to make new investments that will target every emission sectors, sectors such as materials like steel and copper, transportation is another one and agriculture. So we need to decarbonize these sectors that are essential for the transition into the real economy. And we will invest, Sarah, with the best-in-class players and, what we call internally, first-class companies, that have a clear net zero target, and they will have certified plans detailing such target towards net zero. So we will engage with them to help reduce their emissions and measure their progress. And we will also work with third-party experts that will assess and certify their progress. So one example of our engagement, if I want to mention what we've done, is Apraava Energy. It's a major power producer with over 3,000 megawatt in India, a beautiful investment we have in India. And we invested in this company back in 2018 with the ambition to support its transition. So now, it increased its renewable mix by nearly 25% in the last 4 years. It wants to double its capacity in the next 3, 4 years by focusing on low carbon growth. And it made a formal commitment to obtain the SBTi certification, the Science-Based Targets initiative, that one of the third-party experts that I referred to that we will be working with as part of that transition envelope. And then lastly, on the point of us making the decision to exit the oil production sector, so when talking about transition, the sector facing the most uncertainty in our book is oil production. So we believe that the risk-reward outlook for oil producers is not optimal, especially in the long term. So that's why we committed to complete our exit from oil production by the end of 2022. We want to stop contributing to the growth in the global oil supply, but it's an exit that was already undertaken. So it's one that was orderly, if you want. And yet, to ensure that our support and the transition is there, our capital remains available to energy companies who have a real transition and real transition projects and initiatives. And an example of that is our investment with Lightsource BP. It's a portfolio of solar projects that we're very proud to have in our portfolio.

Right. Thank you. That's really helpful. And I think in seeing how an asset owner sort of comes through this process of having a plan for when do we stay, when do we go, what are our criteria is really helpful. Now Pam, let me turn to you. At Fidelity, of course, you are managing money for clients rather than your own money, in some way. And you have fiduciary duty to maximize returns over time. Generally, to have strong return, the best way to do that is to invest in companies that are forward-looking. How do you think about incorporating climate strategies in your investment decision-making process? How do you evaluate their long-term strategies? Kim talked about this a little bit. Jim talked about it a little bit, thinking about a carbon price. So how is Fidelity thinking about looking forward with these topics?

Yes. Thank you, Sarah. Great question, and thank you for having me on the panel as well. And maybe I'll start my answer to that question by stating the obvious, I mean, yes to everybody on this panel but hopefully to everybody on the webinar as well. And that is that climate change is a global issue that affects every country, every sector, every industry and every business. So assessing climate strategies is critical to understanding the investment risks and opportunities with all of the companies in which we invest. It's really central to understanding the long-term return profile of our investments. Now granted, as we all know at this stage and maybe even into the future, it matters more to some sectors and to some companies than to others. And obviously, that's where it's really helpful to have a team of a couple of hundred analysts in fundamental equity, fixed income, quant, ESG, data science to really help us determine where those risks are most material, which sectors and subsectors, if you will, are most exposed; and then how do you rank order of the companies within that sector based on their climate risk exposure. So I mean, at Fidelity, we've done this by developing a proprietary 2-part evaluation process, one that combines a quantitatively derived systematic score for each company. Think of it like a current snapshot of where that company stands today on the material issues that we've highlighted for that company in that sector. And we marry that with a bottom-up, forward-looking score that is derived from our fundamental analyst teams. And based on our legacy of active investing and our in-depth knowledge of companies and management teams, this forward-looking score is basically our assessment of whether a company is positioning themselves to be a leader or a laggard on key issues that are material to the risk-return profile of the company, including environmental issues. So with our systematic rating, we can score almost 7,000 companies globally now. And we then use that score, as Kim talked about, to actively engage with management teams on areas of potential risk or opportunity and delve into their strategies on how they're going to mitigate that risk or, conversely, capitalize on that opportunity. And the power of this 2-part process that we put into place is that it's truly a long-term model, which is what we all need. It's grounded in the belief that every company is on a journey, including Fidelity. And many companies right now, as we all know and see, are changing or reinventing their business models, either because it's a business imperative or because they are looking to capitalize on what looks like a multi-decade potential investment trend. So we have to think long term as investors in order to address both the climate crisis and to identify those companies that will emerge as the winners or the leaders. And remember that the leaders or winners in the future may not be the ones with the best profile today. It may be those companies that are positioning themselves to be leaders in the future. So I think in that way, as investors, we're really trying to fulfill that kind of dual mandate, if you will, our fiduciary duty to maximize returns as well as our duty to help mitigate further climate degradation. So bottom line, assessing climate strategies and risk is just part of a sound investment process. It's both good business and the right thing to do.

Right. So Jim, let me come back to you. You just heard a bunch of investors talk and, frankly, forward-looking investors, about how they think about a company. And you talked a few minutes ago about how you've laid out some of your plans and some of your road maps. Can we ask you, as perspective from a corporate who deals with a lot of investors, probably some that are more forward-looking and some that aren't as much, how do you think investors can build a better dialogue and better trust around some of these issues? Because we do hear some people really thinking about these and some people being concerned that other investors are perhaps not as serious.

Yes. I think it's a timely topic, Sarah, because it involves getting into the details of your investments and getting into the details of the opportunity, really. I mean we look at climate as a risk, but it's also an opportunity for growth for many of our companies. And the investor community is not that different from our other stakeholders. They want us to succeed as a corporation, but they also want to see us being part of the solution to the greater sustainability and climate goals. We're increasingly seeing that they want to get into the details because the plans, they want to understand the plans and how they help us reach the climate goals. But they also want to know that the things that we're investing in are financially feasible. They like commitments, we know that, and they love results. So you have to walk the talk and you have to deliver on the commitments that you've made. When we had the Investor Day in early October, I think we got a lot of good dialogue with our investors because we put a stake in the ground on our targets and then we backed them up with some very specific and practical investment plans. So we said, "Look, we can decarbonize the core of the company and grow the company at the same time. We're committing 1/3 of our capital to decarbonize our asset base. And at the same time, we're going to add $3 billion of EBITDA growth to the bottom line." And I think they wanted more, essentially. Once you start to lay out the plans and show them that, obviously, they want more and they want more details to understand how you're going to get to the targets. We've talked a little bit about renewables today. And as I said, that's a big part of our mix. So we've just announced 8 new renewable agreements for power at different sites around the world. Those have significant reductions to our CO2 emissions, 600,000 tons of CO2 per year. The project that I mentioned in Canada, that will take almost 1 million tons of CO2 out of our footprint. 20% of ethylene and polyethylene production, at that point, will be carbon-free. And then you look at Terneuzen where we're retrofitting a site. And I would love to make an investment in the U.S. Gulf Coast, but I think we've got to get through our current plans in the administration and get to a price on carbon that helps these globally competitive industries, we might call the hard to abate sectors, to be able to compete and also get a return on their investments for clean hydrogen, circular hydrogen, carbon capture and use and sequestration and other technologies that they want to invest in. So I think that's the dialogue that we're hearing. It has increased dramatically over the last 3 years. I would say, 3 years ago, it was an interest in the targets. Today, it's an interest in the investments. And there is a sense of urgency. I wouldn't say emergency as much as urgency. Like, what can you do by 2030? There's a unanimous consensus that if you don't make progress in the next decade, you're in really tough shape. So I would agree with everybody on the call, that's our viewpoint as well. We've got to make a substantial move by 2030, and we've got to have a clear path by 2050. I talked mostly about Scope 1 and 2. We're also working on our Scope 3 emissions with our suppliers, building that into our supplier partnerships with a clear line of sight to what they can help us do. And we're also working on our products. Many of the products that we sell are for energy-efficient buildings and other operations. And those are taking on a higher level of interest as you look at building codes around the world and things that governments are driving to try to reduce power consumption in the biggest place that we all occupy, which is buildings and offices.

I love your path from commitments to targets, to investments, to results. That's sort of a very clear business path. One of the things, David, maybe I'll come back to you, that came out of COP that I think we've been involved in and are very excited about is this idea of an International Sustainability Standards Board and some convergence around some of the metrics and disclosure about climate and also some other issues. So we also know the U.K., where you are, has mandated some disclosures in this space. So how do we think about these disclosures? And how do they help us on this path that Jim just outlined? Rather than becoming sort of a check-the-box-out exercise, how do we use them to really help us get there?

Well, we definitely agree that the International Sustainability Standards Board is a big deal. I think if those of us who've been part of this discussion for the last decade or so, if you would ask me even in the beginning of this year that I thought it was possible that they would be able to bring all these folks together, I would not have been betting a lot of money on that outcome. So that's a great tribute to all those who have been very involved in it. There have been a number of other initiatives over the course of the last couple of years around disclosures, the Task Force in Climate Change Disclosure (sic) [ Task Force on Climate-related Financial Disclosures ] being one. There's been a number of initiatives now aligned with GFANZ grouping around portfolio alignment. These are important steps. But I think another way to get at your question is to acknowledge that there are a number of challenges to green finance. There are the challenge of action, which the panelists, I think, have done a great job of identifying and one we're going to have to really focus on going forward. But there are a number of other challenges. So for example, often, we're hearing about whether we should just be focused on the public markets. There's a sense of coverage. Are we just focusing on public companies? Or what about the private companies? And wouldn't it be terrible if public companies were brought private and then they continue to operate in darkness? And then, of course, that would be a terrible outcome. And therefore, how we manage coverage of climate change disclosure, as an example, will be critical. Now of course, as Kim knows, the truth of the matter is these disclosures will roll down to the asset owner community, and they themselves will be focused very clearly on the private owners of capital. So it doesn't completely go away, but still coverage is critical. The incentives around capital allocation, the incentives for a CEO such as Jim will be critical as we think about this. So there's incentive challenges for the companies themselves and those of us who are allocating capital to try, in the best of our ability, to assess those and provide some input associated with it, but then incentives for our businesses as well. And Pam made note of it that we're all in a transition. We're in transitions in the businesses we're allocating capital to, but we're in transitions in terms of understanding the challenges of capital allocation in our own businesses and what we can do and what we can't do. This is certainly not a straightforward exercise. Measurement and reporting, which was the genesis of your question, to be candid with you, and I've done a lot of work on this in the portfolio alignment streams, we are in the very earliest days of assessing data. Many companies don't have data. And even the best one in the world won't get them to the quality of the data that they need to have and will have going forward. And those of us who are trying to compile this data, we don't have access often to it. And so we make assessments or judgments, and those will be wrong for sure. And these issues are complicated, as we know. So I think we have to just recognize that we do not have a perfect situation by any stretch of imagination. That, in fact, this is a journey, and we're going to learn by doing. What we can't do is just say, "Right, well, let's just wait for this all to get sorted out and, in 10 years' time, we'll get back to it." We're going to have to collectively do the very best we can and just recognize that we don't have perfect data. What's the expression? We shouldn't let the perfect be the enemy of the good. We need to get started. We need to learn and we need to keep at it. But let me just close by saying, there is a real risk of green wash, particularly in the asset manager and the asset owner community, and we have to be very careful of that. And it's true also for CEOs and businesses such as Jim. But let's just focus on ourselves, for the asset owner and asset manager community, we need to be very clear that the steps that we're taking are going to ultimately drive to the net zero and that we're going to have to demonstrate that we're not just talking about commitments, we're not just talking about plans, but we're talking about actions, and then we're going to have to prove it. And we're going to have to prove it in the next couple of years. The point about the GFANZ commitment of $130 trillion is that those who made these necessary commitments are on record. And the risk of not fulfilling those commitments is to, in effect, I think, lose our license to operate. So the world expects the finance industry to act, and we are certainly now committed to act. And if we don't, we're in real trouble.

Yes. I take your point very well. And Pam, let me come to you because I think there has been a lot of focus on the corporate disclosure and getting information from the corporates. And obviously, as an investor, as David said as well, sometimes you have perfect data. A lot of time, you're thinking about the future. Where you don't have the data, you make that leap of faith. How do you think about both making that decision around the corporates with sort of on limited data but also to this green washing point, looking in the mirror, right, looking at the mirror as investors ourselves and making sure that the data that the investors are getting out there to their clients and to others are fair and clear and that we're being straightforward in terms of what we're actually seeing and what we're not?

It's a really, really good question. And access to data, transparency of data is something that we consider every day as investors. And it's cited as a key challenge, both from the corporate perspective as well as the investor perspective. And it's true. And we're constantly trying to find new ways to fill those gaps. David mentioned some of them. And we're also working very closely with industry peers, with climate vendors and NGOs, with regulators, about the need for better and clearer standardization of data around some of these issues. As David mentioned, we totally support what the ISSB is doing and other related frameworks, but we're not there yet. So as a result, there are instances where, as you say, data is sparse and, frankly, it's not highly comparable from company to company. So what do we do to mitigate that? Well, I mentioned we came up with this 2-part rating process. We obviously engage directly with companies on a very regular basis and delve into a lot of these issues to try to fill in some of those gaps. We have teams of quants and data scientists who are working to uncover proprietary data to fill in those gaps, again, as where we see them. And where the data is sparse, we're also combing through a lot of the qualitative content, trying to glean any information that we can out of that. But as you say, we do this across a lot of metrics, not just climate-related ones. And there is a sense that investing along climate-related metrics feels different. So my personal view is that's because there is fear about the consequences of getting it wrong. And that's kind of a green washing-type thing from the company perspective but also as an investor with a product out there in the market. This is a very politically and emotionally charged topic. If I think about it as an analyst, if you incorrectly assess data that leads to mistakes about forecasting same-store sales growth or unit sales, that might affect the share price or security price in the short term, maybe even the business prospects in the longer term. But if, as an analyst, you incorrectly assess the company's potential impact on the global environment, if as investors, we direct capital towards a company that fails to implement positive change towards their pledge or, frankly, maybe even more importantly, if they fail to understand their climate-related risks, this could not only affect their security price performance and business prospects but also enact permanent or long-term damage to our global environment and economy. So it is different. And as investors, we have both the carrot and the stick, if you will. The carrot is our ability to direct capital towards those companies, again, we determine to be the leaders of the future. And the stick is the opposite. We can divest capital. We can also use our proxy vote to vote against management teams who aren't fulfilling their pledges. And like all decisions, these aren't easy decisions, but the lack of accurate data really does contribute to that unease. And I think the more we get these frameworks in place, both for companies as well as for asset managers, the better our investor base will be able to determine whether or not we are green washing. And again, we can help determine whether companies are green washing through our capital allocation.

Yes. No, that's really helpful. One of the things that I worry about is that people think that ESG ratings will all magically align once we have a little bit more disclosure. But that's not going to happen because people are looking at very, very different factors, different data, but also different considerations. And so much of disclosures, of course, are factual and historical whereas so much of the judgments that investors make are forward-looking where you, by definition, don't have information about the future.

That's exactly right. And that's why I think the power of the model we put into place is that forward-looking rating and the relationships we have with the management teams to really assess whether, frankly, a management team is capable of implementing the pledge or the transition strategies that they've outlined to the public.

Right. All right, Kim, let me come back to you. I have 2 questions that have come up, both in this conversation and before, that I want to direct to you. One is this issue of private investing. I think that, that was raised a couple of times here, which is there is a narrative that public companies are in the spotlight and are cleaning up their act, but it's very easy for private companies that are a little bit more under the radar to be less worried about transition or being green or making commitments or any of those things. So as a big private investor, I'd love to get your perspective on that. And then the other thing I'd like to just throw out there is, and I think, David, you mentioned this briefly, too, about the Just Transition, which is one of the things about COP is it did underscore the disproportionate impact of climate change on certain more vulnerable communities. And so I'd love to get your perspective on how companies and investors deploy capital to address climate change and support those vulnerable communities rather than sort of the easy answer of pulling away.

Okay. Thank you, Sarah. So on the first question for private companies, we give them as much love and attention and scrutiny as we give the public companies. So our commitment towards climate change, our strategy, adapts to all companies in our portfolio whether you're public or private. So no matter the asset class, no matter the amount, we apply the same climate change lens, same ESG profile analysis. And it's also where we normally have more Board directors appointed, in private companies, just because it's trickier to appoint Board directors in public companies if we want to be able to continue to manage the stock without getting into embargoes and all those matters. So we work very closely with private companies, and we've developed tools internally as well and worked with external experts to adapt those tools for the private sector and are really pushing on TCFD disclosure. We've done that through the ILN network. We've worked with many large institutional investors to provide a framework for companies to disclose in accordance with TCFD. They're free of charge. They're accessible on the ILN network website. I'm happy to provide that after the conversation. And this is really where we're seeing a lot of private companies asking us for help: how can we adapt, how can you support me, how can you adapt. So our teams are very busy working with the private companies. And sometimes, it's a matter of getting 2 and 3 of them to work together and share best practices between them. So very, very focused on the entire portfolio. So we apply the same measures and targets to the entire portfolio. Going back to your question on the Just Transition. So we've seen that the issues around the S and E of ESG are really converging. And the way we deploy capital, frankly, is evolving. We need to consider actual and potential impacts of the climate crisis before we invest. But we also need to make sure that we're supporting the right transition strategies and that, in doing so, we consider the sectors, the geography, the demography and the people. So companies and investors have joint and common responsibilities. We need to be investing in the right climate solutions and innovation. We need to be promoting carbon emission reductions and clear strategies and pathways, as we've discussed. We need to push for more disclosure on climate risk. I think we've all agreed to that. And we need to use our leadership and influence to accelerate the transition, as Pam was mentioning. So while doing this, we also need to put people first. And it's one of the strategies or the mindsets with which we think about this, how do we put people first. So if we want to achieve the transition to net zero, it needs to be a Just Transition. So we need to make sure no one is left behind. It means implementing training programs and job creation in new sectors. It's also about upskilling and reskilling workers, for example, in the energy sector. And to do that, there's a huge, huge need. And here I use urgency plus emergency for everyone to collaborate and everyone to work together. We need to get everyone involved: investors, yes; companies, absolutely. But also government, so that the right policies are put in place, on the one hand, carbon pricing and taxation; and on the other hand, developing training programs.

Right. Well, Jim, you mentioned carbon pricing as well. So let's come back to that, and we've got a couple of questions on that coming in as well. How do you think about a carbon price? That means different things to different people. Some people think about that as incorporating a potential future carbon price in an investment they're making today. Some people are actually charging a carbon price between divisions, for example. Some people are advocating for a carbon price with policymakers. There is this concern about the Just Transition. We all saw what happened with the yellow vests protests in France, for example. So can you talk to us a little bit more about how do you think about that carbon price policy issue?

Yes. I think it's a very timely topic, Sarah. We think about it, obviously, as prioritizing the investments but also, longer term, looking at global trade as well. Many of us have been using internal hurdle rates on a price on carbon for some time. We've been part of the European system for over a decade, and there's been a trading system in Europe on carbon. It started out with a relatively low price on carbon, in the range of EUR 12 a ton. It is now above EUR 55 a ton, and I would venture it's going to go to EUR 100 a ton. But it was driven by allowances for industries and allowances that reduced over time. So the only vernacular in the U.S. would be the old cap and trade system that was discussed here. But in Europe, you've had targets, you've had reduction targets and they've originally declined at about 2.5% per year on CO2 emissions. So if you were keeping up with those reductions, you could sell credits into the system. If you were not, you had to buy out of the system and the system generating money for investments into low carbon-emitting technologies. I think we need to get a program like that here in the United States, similar to what Canada is doing as well, because that puts you on a level playing field, especially with the developed economies. And that would potentially have you to be able to do free trade between the developed economies without having to go to an onerous and very difficult to implement carbon border adjustment mechanism. It could also allow developing countries a different standard than developed countries in the near term. But you do have to have a price on carbon to drive it. All of these solutions are higher cost than what we do today, and you can see through the energy crunch that's hit us going into COP, smaller changes, 15%, 20%, 25% changes in the price of things gets a tremendous amount of attention. Some of the solutions we're talking about today are 15 to 60x the cost of natural gas. And so we've got to think about ways that fuel the transition, and I think these policies around price are it. Now taxes have gotten a lot of attention. But remember that taxes raise revenue for the government to redistribute. And sometimes, it isn't clear that they're being redistributed to solve the target of lowering CO2 emissions whereas programs or systems like a trading scheme, where the money goes back into reducing CO2 and helping countries hit their CO2 reduction targets, actually have a direct benefit. And we're more for the latter versus the tax system. And I think it helps drive investments. That investment up in Canada will be a multibillion-dollar investment that will get our Scope 1 and 2 to zero. And I think we're going to prove out that technology. And then hopefully, we can, by that time, have policies in the States that allow us to come and do the very same thing here.

That's interesting to think -- oh, sorry, Pam. Go ahead.

No, no, I was just going to add to it. I think everything Jim said was spot-on and carbon price is going to be kind of a key determinant of how industries move forward in many ways on various projects. But back to the data question, data is still scarce. Comparability is still low. And I think, actually, some of the things that came out of COP26 helped support that, right? So maybe we'll be able to avoid double-counting and additionality and all things that confuse investors and, frankly, people who are buying and selling carbon credits. Hopefully, we'll have a little bit more, again, structure and framework around that so that we can have more confidence that those credits are really offsetting environmental damage. But I do think data is going to have to continue to improve in that regard as well in order for it to be truly effective.

I agree with Pam. We've published a very detailed report. We signed on to the TCFD climate provisions, and we're building it into our audit plans so it's traceable and auditable because, as we know, we're going to continue to have to report this. We've been reporting for a long time. But as we put the data out there, the transparency in the data helps us internally and externally. As we engage with the ESG ratings agencies, we start to have the discussions about apples-to-oranges comparisons. I think that helps improve the quality of the data that we put into the reporting to make it easier for investors but also allows me to go back internally and say, "Okay, now I'm going to incentivize my own management team. Next year, we will put a carbon metric into our own short-term and long-term incentive plans, which will be independent of our financial metric." And I've said to the team, "Here, look, we've got 1 capital dollar. That capital dollar has to do both grow us profitably and reduce this carbon footprint." And I think the data is our friend. I mean the transparency enables us to have the discussions and us to have the challenging conversations about what needs to happen next. So we're taking that to our suppliers. And many times, we go to them and they say, "Look, we haven't even begun to get our hands around this." And our answer is, "All right, let's get started. You've got to get onboard with this." And I think large companies have to help small- and medium-sized companies develop their systems and bring them along so that we can get to that level.

Sarah, if I may, I'd like to mention on the point that was raised by Jim on incentives. Back in 2017, we elected to have a portion of our variable compensation linked to reaching those climate change targets and reductions that we've set out for the entire CDPQ team. So every employee, a portion of our incentive compensation is linked to us reaching those goals. So it's had a great culture impact, and it's also aligned everyone. And if we fail to reach them, there's a big stick in a smaller carrot, but it's had a very good impact on everyone's alignment towards fighting climate change.

So we'll add one to our list then. We had commitments, targets, investments results and now compensation, right? Exactly. Rewards [ or not ] for that. David, let me come back to you. How are you thinking about either building these sorts of targets into your compensation or into offsets in your own portfolios? Or how are you thinking about baking in sort of the metrics, taking them beyond the companies but really putting them into your portfolios?

We made a decision that we would be net zero by 2040 in our portfolios and, obviously, much sooner than that in our businesses. And we did that, frankly, because we can. It's much easier for a smaller, focused boutique to make these sorts of decision than it is for Fidelity or for CDPQ. And it's even a bigger challenge in many respects for Dow. So our view is that this transition to net zero is urgent, it's critical and it's hard. And those who can do better, faster should do that. Secondly, we've been at the sustainability challenge and the ESG challenge for nearly 20 years. That's kind of all we do. And so we're both a traditional investment manager, but we're also advocates for sustainability. So our entire organization is built around this framework. And so there hasn't been much change in terms of what we do because we've been at it for quite a while. But ultimately, it does come down to how we're going to focus on actions going forward. I'd like to say that the road to Glasgow was really important. But frankly, the road from Glasgow is even more important and how we think about taking these commitments and these plans and driving action. The next 2 or 3 years will be telling. And I'm not sure I know exactly how we're going to get to where we need to get to, but I do know that we need to do our darndest to do it. And I think, frankly, some of the work that Jim is doing on the hardest-to-abate sectors is what we're going to need to do. I didn't answer your question, Sarah, in the beginning. About 2/3 of the capital that we need to transition to net zero will be in the emerging markets, and so we better figure out how to allocate capital to the emerging markets. And that's why I said climate-led investing is really going to need to be a critical part of how we allocate capital because if we just do the easy stuff, we will not achieve net zero by 2050, and we certainly won't cut carbon emissions in half in the next 8 years.

Well, it sounds to me like none of you are doing the easy things. You're all doing the hard things. And I have to say we really appreciate that. I'm going to do a quick lightning round. We have about 5 minutes left. If you could each think of one practical thing that you would like perhaps an investor or a company to do, just briefly, that perhaps is hard but is pushing us a little bit, what would those be? Kim, maybe I'll start with you. One thing you'd like to see.

I'd say embark everyone on the journey. Pam mentioned it. Know and acknowledge that it is a journey. I've been around the table since 2017. And every day, we continue to do this and bring our climate strategy forward. So we need to have everyone around the table. So that would be my...

Get going. Just get going. Whatever you want.

Yes, keep going, all of us.

Yes. That's great. Pam, how about you? One thing you'd like to see the community do.

Yes. Obviously, I felt what Kim said. I think that's exactly right. But maybe I would say don't be afraid to engage on this topic, both with internally, as Kim talked about, but also externally. So as investors, engaging with corporates and really pushing management teams to have clear transition strategies that we, as investors, can evaluate and compare to others.

Great. All right. David, what one thing would you like this community to get going on?

We'd like to see climate-led investing be a separate asset class.

Okay. That's very straight forward. And Jim, how about you? You have a chance to talk to investors here. What would you really like this community to do differently, think really what would get us moving?

I think engaging the employees at every level has been critical. First, they're going to deliver the results for us. And secondly, they all want to be part of the solution. I think if people think that hard-to-abate sectors are really not worried about this or want to put their head in the sand and see it go away, that's not true. All of our customers and all of our employees want to see us be part of the solution and solve the problem. So we've got to incentivize that. But we have to make sure that the things that we're investing in are really long-term economically sustainable. And they just are not going to survive on the subsidies alone. The right smart policies and systems will drive this faster than any internal metric like an internal price on carbon that we can create.

Great. All right. Well, we will wrap it up there. Again, thank you to all of you for being a part of this conversation, for being a part of FCLTGlobal and our mission to focus capital in the long term to support that sustainable and prosperous economy that we all want for ourselves and for future generations. We have a conversation coming up on Thursday, December 9, about the economics of resilience, so capital allocation and investment horizons during COVID-19. For those of you who are economically oriented, we're talking to the economists from GIC, the Government of Singapore, Mastercard and Wellington. And finally, we'd really like your feedback and your comments on research that we have. Just let us know. We welcome all [ covers ]. We're really trying to push how we can, through the capital market, support this transition to a sustainable economy, so fcltglobal.org. So thank you all very much, and I hope you enjoy the rest of your day.

Thank you.