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Sustainable CRE Part 1: Sustainability Strategy and the Role Banks Play

Michael Torrance:

Welcome to Sustainability Leaders. I'm Michael Torrance, Chief Sustainability Officer with BMO Financial Group. On the show, we will talk with leading sustainability practitioners from the corporate investor, academic and NGO communities to explore how this rapidly evolving field of sustainability is impacting global investment, business practices and our world.

Speaker 2:

The views expressed here are those of the participants and not those of Bank of Montreal, it's affiliates or subsidiaries.

Speaker 3:

Today's episode is part one of a two-part series from a recent BMO Real Estate Forum around building a sustainable future hosted by Mike Beg, BMO, Senior Vice President and Head Real Estate Finance, and moderated by Karla McCarthy McCarthy, head income Property finance for BMO Commercial Bank, Canada. Listen to what Jim Ritchie, president and CEO of Del Terra and president of Tridel and Graeme Armster, director innovation and sustainability of Tridel had to say around their sustainability strategy and more.

Mike Beg:

Greetings everyone. I'm Mike Beg, SVP and head of BMOs Commercial Bank Canada Real Estate Finance team. Thank you all for joining us today. We are excited to be joined by industry leaders who are actively involved in Canadian commercial real estate and have perspective on key sustainability topics and the outlook for what's ahead. We'll start with Jim Ritchie and Graeme Armster from Tridel Group, one of the first and largest high-rise condo builders in North America.

Jim Ritchie:

Well, thank you, Mike. Just a moment to talk about Tridel. Our roots go back 89 years. We've developed about 89,000 homes closing in on that 90,000 mark, a variety of different forms. And I'm also proud to say in terms of our discussion today about 24,000 green condominium homes. We are one of the largest developers and builders of sustainable condominium residences. I'm going to pass this over to my colleague Graeme.

Graeme Armster:

Hey everyone. So Jim gave us a good snapshot of where Tridel started on this sustainability journey and obviously it continues, so this is a good time to maybe talk about where we're heading in the future and some of the things we're looking at. So it all starts with some of the key concerns that are on our radar today. Physical consequences, managing the physical consequences of climate change, managing this transition to a lower carbon economy, all while continuing to improve on community wellbeing. I'll urn it over to Karla McCarthy now.

Karla McCarthy:

Thanks very much Jim and Graeme. So Tridel has had a proactive innovation and sustainability strategy for over 20 years. Jim, what advice would you give to others looking to drive better sustainability outcomes in their own businesses and do you think it's a case of trade-offs or synergies between sustainability and the economics of the business?

Jim Ritchie:

I would say on this journey you need alignment with leadership and you need it from the very, very top to be supportive because there's a lot of bumps in the road to get to the outcome that you're looking for. To your point about trade-offs, the fact is that in our industry and certainly in the greater Toronto area, our cost of construction has seen over the last couple of years double digit increases. We've had obviously those cost pressures, we've had scope changes in the product that we bring to market, and as much as I think we all will agree that there's a crisis today in affordability with housing. This is something that in the near term in terms of the capital cost side, we have to try and manage that cost side and get a solution that works on the overall outcome. I think it can be done, but it's not an easy path.

Karla McCarthy:

Great. Thanks very much, Jim. Mike, perhaps you can talk about what role we can expect banks to play and what will the bank's needs be given that banks will also be working towards their own carbon reduction strategies and also an evolving regulatory environment.

Mike Beg:

Thanks, Karla McCarthy. I think banks can and should do a number of things. The first of these is lead by example. For instance, BMO has been carbon neutral in our own operations since 2010, and in 2021 we set a target to mobilize 300 billion in capital to clients pursuing sustainable outcomes by 2025, a target we're close to meeting one or two years ahead of central. Looking further forward, we've set a target for net zero finance emissions by 2050.

The second of these I think is to look at how we price climate risk into our underwriting climate risk incorporates both transition risk, which is the risk that a business's model will become obsolete because of the transition to net zero and physical risk, which is the risk that changing climate and extreme weather will actually threaten a business' operations, for example, through rising sea levels. Both of these will increasingly have a material impact on borrower risk profile, asset risk profile, and the cost of capital to finance assets with climate risk. This will increasingly provide powerful economic return, optimizing incentives to businesses to adopt climate strategies. Certainly carrot versus stick.

The final thing I'd like to mention is that banks will need to be bold in innovating in terms of the products and services that they offer. Banks have powerful attributes that can help accelerate the net zero transition. Those include deep databases, a deep client and customer relationship portfolio, as well as partnerships with government regulators and other corporates. So while we'll be able to remain focused on being responsible stewards of Canada's financial services, banks can and must be ambitious and contributing to ecosystems where real change can happen. Back to you, Karla McCarthy.

Karla McCarthy:

Great, thanks very much Mike. It's clear that everyone has a role to play in terms of sustainability. Graeme, can you perhaps touch on the concept of timing of decarbonization, so based on the age of a building and how to think about potential retrofit strategies?

Graeme Armster:

Yeah. So thank you Karla McCarthy. It's a great question. So Tridel is in terms of the space that we work in, that question has a couple different answers. So we do have a long-term asset ownership part of our business in long-term care facilities, and so from that scenario we can answer the question looking at it from that angle, but then as well we build new condos and often I guess if I approach it from the new condo side first. In the past when we built our buildings, there was a focus on delivering a product that was a high quality product to our customers that was built to last and we still continue to take that approach. And the products that we put in our buildings were good quality products that had a good life cycle to them, but ultimately at the end of the day they would need replacement and that in a condo would be budgeted for in the form of a reserve fund.

Now that's changed slightly given what Brent said in terms of regulatory changes, people targeting to be net zero by certain dates. And if you look at the life cycle of a typical component in a building, if it's an HVAC piece of equipment, maybe it's anywhere from 15 to 20 years, and right now if that piece of equipment burns gas. From a new construction standpoint, we're right on the cusp of especially in Toronto, if your target's 2040, we're right on the cusp of having to consider either a low carbon solution now or if you put the carbon solution in that burn that creates carbon and puts that into the atmosphere. Then to Brent's point, you could be at risk later on of devaluation your property potentially a brown discount, and that's something you've got to consider now and right at the new construction stage. So lifecycle was always thought about before only from a cost perspective. Now carbon is coming into the picture there.

If you have an existing property like we have with some of our existing assets, the next thing is, okay, well now how do we decarbonize what we already have? And really the best approach there is to map out through a building assessment the life cycle of all of the components in your building and really start to develop a solution that, and an action plan that's communicated to the operations team that's following through with it so that they know that when something reaches end of life, you replace it with a low carbon solution so that you're setting yourself up for the future. Because you don't want to be in a position where you're retiring a piece of equipment well before it's end of useful life. It's not good for the bottom line and the economics, but it's also not good for the environment.

Obviously there's this new topic of embodied carbon coming out and if you look at the carbon that went into manufacturing that piece of equipment or component in your building and you retire early, you're doing harm to the environment as well from that perspective. So you got to think of all these things when you're coming up with your capital replacement strategy. Right from the get go, it's now money and carbon and then obviously if you have an operating building, money and carbon come into play. Thanks, Karla McCarthy.

Karla McCarthy:

Great. Thanks very much, Graeme. That's a great insight in terms of thinking about your buildings and where you can opportunistically invest based on the lifecycle. Jim, as we look at new construction, does the marketplace a premium on environmental performance and energy efficiency? Do buyers primarily value reduced utility expenditures or is the social capital of being green recognized?

Jim Ritchie:

I think today's astute consumer already believes that there's a sustainability value proposition embedded in this product already. It just seems to be natural to them that an environment today in the world in which we live in, I think no matter what type of product you're looking at, we have to be cognizant of that. But I can tell you that a building that adheres to great sustainability building practices, it's built better. The home itself is quieter, it's healthier, it's more comfortable, and yes, it does consume less energy. So there is value to that. In terms of the operating cost, I don't think the consumer understands that to the extent that they should at the point of sale. This is something that becomes somewhat more relevant when they live in the home and they actually experience the home with these green features together with a lower operating cost. So it seems to be more relevant at the end of the process instead of the front end.

Karla McCarthy:

Perhaps Graeme, I'll just stay with you for a moment while we're on the topic of construction. So emissions from building operations aren't the only dimension to sustainability and real estate. There's also the waste generated in construction and the emissions embedded in building materials like concrete and steel rebar. Do you have any advice for other builders out there around minimizing waste and the associated expense due to that waste on the construction site?

Graeme Armster:

Right off the hop, to your point, we're looking at emissions now and waste generated through emissions. So often the thought was if we design a building to be very, very energy efficient, it will use less energy and subsequently generate less emissions. What was often overlooked in that approach though is the amount of emissions that went into the materials, whether it's insulation or other components to that effect, triple glazing. Those added materials that went onto that building to reduce energy consumption, had manufacturing or embodied carbon emissions associated with them.

So we can't approach building construction focusing just on one aspect and expect to resolve the problem. So the discussion is growing and the viewpoint on the emissions generated in the construction industry are growing more and more rapidly. One other thing to consider from a resiliency aspect, we don't want to finish this beautiful building and then all of a sudden have an extreme weather event as a result of climate change, come in and knock this building out and next thing you know we're starting from scratch again and all of the emissions that went into building that building are doubled because we got to replace it and do it over again. So that's another component. And then even during the construction process, there are tools now that can be utilized to minimize risk and waste from that perspective.

Karla McCarthy:

Thanks very much, Graeme, and that is all the time we have today with our panel. Thanks for all the great insights on this important topic and I'm going to pass it back over to Mike.

Mike Beg:

Thank you very much, Karla McCarthy. It's still very early days in ESG and the evolution between banks and their clients, but if nothing else, we hope that today's speakers may have helped inspire you to have an ESG strategy if you don't, or further build on the one you have. On behalf of BMO, we want you to know we're thinking of you, your families and your organizations.

Michael Torrance:

Thanks for listening to Sustainability Leaders. This podcast is presented by BMO Financial Group. To access all the resources we discussed in today's episode and to see our other podcasts, visit us at bmo.com/sustainabilityleaders. You can listen and subscribe free to our show on Apple Podcasts, we're your favorite podcast provider and we'll greatly appreciate a rating and review and any feedback that you might have. Our show and resources are produced with support from BMO's marketing team and Puddle Creative. Until next time, I'm Michael Torrance. Have a great week.

Speaker 2:

The views expressed here are those of the participants and not those of Bank of Montreal, it's affiliates or subsidiaries. This is not intended to serve as a complete analysis of every material fact regarding any company, industry, strategy or security. This presentation may contain forward-looking statements. Investors are cautioned not the place undue reliance on such statements as actual results could vary. This presentation is for general information purposes only and does not constitute investment, legal or tax advice and is not intended as an endorsement of any specific investment product or service. Individual investors should consult with an investment tax and or legal professional about their personal situation. Past performance is not indicative of future results.

Sustainable CRE Part 2: Carbon Strategies and Retrofits

Michael Torrance:

Welcome to Sustainability Leaders. I'm Michael Torrance, Chief Sustainability Officer with BMO Financial Group. On the show, we will talk with leading sustainability practitioners from the corporate, investor, academic and NGO communities to explore how this rapidly evolving field of sustainability is impacting global investment business practices and our world.

Speaker 2:

The views expressed here are those of the participants and not those of Bank of Montreal, it's affiliates or subsidiaries.

Speaker 3:

Today's episode is part two of a two-part series from a recent BMO Real Estate Forum around building a sustainable future, hosted by Mike Beg, BMO, senior Vice President and Head Real Estate Finance, and moderated by Carla McCarthy, Head Income Property finance for BMO Commercial Bank Canada. Listen to what Brent Gilmore, Chief Commercial Officer, Canada Green Building Council and James Burrow, Director of Sustainable Finance for BMO Capital Markets had to say about carbon strategies and retrofits.

Mike Beg:

Greetings everyone, I'm Mike Beg, SVP and Head of BMOs Commercial Bank Canada, real estate finance team. Thank you all for joining us today. We are excited to be joined by industry leaders who are actively involved in Canadian commercial real estate and have perspective on key sustainability topics and the outlook for what's ahead.

Karla McCarthy:

Okay, let's get started. Brent, could you perhaps give us a quick summary of the Canada Green Building Council and comment on what, if any energy efficient regulation we can expect to see over the near term, and what building owners can do to anticipate it? How quickly is this moving and is this something owners should be planning for now?

Brent Gilmour:

Thank you. Carbon has value now and it's going to be impacting real estate decision making as we go forward. So at CGBC, we're seeing that firsthand as an industry driven nonprofit, we're working with engineers, architects and designers, to builders, manufacturers, real estate professions, owners, tenants and policy makers and advisors really to enable Canada's building sector to implement on their sustainability efforts. We're seeing a significant uptake now for large building developers and owners with some 200 plus buildings registered to become zero carbon just in the last six months. But we're also seeing a real interest in learning about what zero carbon net-zero emissions really means for buildings. With thousands of people coming forward and going ahead trying to seek training and insight on what does this mean for decision-making. But we're also now increasingly seeing a real change in the regulatory space through our advocacy and government affairs efforts.

And the market has shifted when it comes to thinking about sustainability, but particularly as it relates to ESG and reporting. This is due to what we heard is a wide variety of drivers and market needs. Maybe this expectation now for carbon disclosure, whether driven by investors occupiers or regulation, is really starting to enable people to think differently about how they're going to have to act now in terms of expectations for decarbonizing with their assets going forward, and how they can do that through green building. And it's the latter on the disclosure and regulation that I think is really driving a lot of this conversation both for new but increasingly on existing buildings, particularly large buildings. We have nearly 500,000 plus large buildings across Canada. They make up something like 50 megatons of emissions on GHGs going forward, out of the overall nature of emissions for the building sector.

But at the same time, we're seeing less than a 1% deep energy retrofit rate. So in order to hit 2050, if you've been listening to these objectives of net-zero emissions, you need to be about 3% to 5%. That's a significant gap. So what's on the horizon that's guiding and informing investment decision making just about everything federal. We're seeing a lot going on here in the next little while. Particularly the federal government is increasingly focusing and driving its policy and program efforts to crowd in private investment wherever it can. Case in point, they are launching and will announce their green building strategy, formally referred to as the net-zero emission strategy. It is a unifying narrative across the federal government and how it's going to support this net-zero transition expected releases in the fall following the budget. And so we can anticipate a set of new funding in this space.

But I think what we're really hearing though is that you're seeing a lot of calls to facilitate and fund the retrofit of large buildings. You're seeing the importance of the deep carbon retrofit accelerator that was just launched, 185 million, to help those who like to aggregate other building owners and operators already pull them together to advance the potential for deep carbon retrofit. But we're also seeing, as was announced now last year or the year before, pardon me, the Canada Infrastructure Banks Building Retrofit initiative, that was the 2 billion set to help crowd in private sector capital starting at 25 million. That's really starting to move. And you just continue to see these investments about what can move people to retrofit. And most recently, the commitment by the government of Canada for a 30% clean technology investment tax credit tells you that they are not letting up on what they think they can or need to do in response to the US Inflation Reduction Act. But we won't stop there.

We're seeing really strong regulatory signals forthcoming, particularly with things that matter to those who are assembling land today, who are giving thought to what might be required in the future only in 2025. We know the national building code in 2025 will be adopted by provinces with 18 months. Why is that? Well, this past year there was a reconciliation agreement among all the provinces and territories in the federal government on construction codes to bring those into alignment before 2025 as much as they can. And in 2025, they're going to introduce new things such as metrics in some stringency now on operational carbon. That wasn't there before at all. That's a big leap in the codes community and I think for a lot of us who deal with buildings, and they'll go well beyond energy efficiency. In 2030, they expect to introduce embodied carbon, which you started hearing a bit about from Tridell as well. And you have provinces like BC who are just ratcheting up still what the level of the building code might be through their own step code process.

But what might be a bit more of a shocker in terms of what we're seeing move so quickly is the standards and performances. That is really happening at the local level, often with permission or endorsement or by legislative enactment of provinces on the disclosure of carbon. So in Vancouver, effective now in 2024, annual energy and carbon reporting for a large commercial multi residential buildings will be required. That's only going to ratchet up every year in terms of the size of buildings that are expected to have to report, but also if you're an existing building, what you're going to have to do so you don't get penalized in terms of your carbon going forward. The similar is in Montreal. Now we're seeing that all buildings new or existing will have to affix a carbon label, A to F. F, you're net-zero F, you probably don't want to be in that level.

Going forward, all of this is going to be changing the mindset of the real estate community. I think increasingly, even going further in Montreal, all in all existing non-commercial buildings that are rated F that are over 160,000 square feet, they have to start within four years. How do they get the next level? So there's expectation to move. So what do you do about all of this if you are in this space? Well, let's get right to it. Every new large building going forward really ought to be zero carbon right now, because if you're not, you're going to be expected to be there at some point between now and 2050 and it's going to cost you a lot more to get there later. And you're dealing with the portfolio level of buildings. The reality is they'll have to be retrofitted to lower carbon performance sometime between now and 2050, and that transition cycle, you might only have one, maybe two chances at best to do that in terms of being a cost-effective.

And so we can't encourage owners and operators and investors enough about focusing on transition planning and targeting your investments carefully, particularly when you're going to have to make those capital investments. So the number one suggestion right now, where is carbon in your transition plan for your assets? And if it's not there, it needs to be there soon. Thank you.

Karla McCarthy:

Thanks very much, Brent. That was a lot of great information. James, Mike mentioned that BMO intends to lead by example with our own products and services. Can you expand on how BMO is practically doing so.

James Burrow:

I'd be very, very happy to Carla. Thank you. I think first of these is the retrofits kind of platform or financing ecosystem that we are developing. So I think this ecosystem or platform is designed to solve a couple of market frictions. The first of these is the availability of the right type of debt to finance retrofits. And the second of these is the difficulty would be retrofitters having actually piecing together retrofits in a seamless way. So I'll start with the debt. I think traditionally in many cases retrofits, particularly deep retrofits that have a fairly aggressive carbon reduction profile, which is what everybody's really looking for. They tend to have longer paybacks in excessive 10 or 15 years, but debt would typically be term debt that would only be available to be amortized over say five years. So you have quite short-term debt with long-term paybacks, which means from a short-term cashflow perspective, that's a pretty difficult kind of debt obligation for a lot of developers to take on.

The other thing is really price, especially in these environments where interest rates have gone up over 400 basis points over the last year. The cost of debt is really not very cheap at all, especially at the moment. So I think with our retrofits platform, we are looking to address both of those frictions, the price and the term of the debt. So the final piece there I mentioned is the difficulty of actually executing these projects, particularly for smaller building owners with less developed sustainability capabilities or contracting capabilities. And we've actually signed partnerships with energy services companies to be able to deliver retrofits in a very seamless way alongside BMO. So maybe I can just speak a little bit about why I think borrowers, why I think BMO's clients need to be thinking about retrofits now and a little bit about the product that we've designed to help them.

So I think firstly, decarbonization is coming. GHG Intensity Regulations are coming this decade. The city of Vancouver, for example, has implemented GHG intensity targets for larger building owners from 2026 onwards. And what I mean by GHG intensity targets are saying that per square foot of building space which you own, you will only be able to admit a certain amount of carbon dioxide. So in other words, there's going to be a cap on the amount of GHG emissions building owners can emit, and if they breach that fines will be coming. That's what Vancouver are looking at. Toronto and Montreal are too, and some of the smaller Canadian cities will also be following.

So as you think about those regulations that are coming in the second half of this decade and think about the net-zero targets that a lot of builder owners are setting for 2050 or even earlier, for example, the city of Toronto has actually set a 2040 net-zero target for all private buildings in the city, is that capital planning for building owners must be sequenced very, very carefully.

So for example, if your natural gas furnace is reaching the end of its life in 2025 and a new furnace will have a remaining economic life of 25 years, say, that means that that new furnace will last till 2050. Well, if you have a decarbonization plan and you want to hit net-zero or you need to hit net-zero or under emissions caps, you just won't be able to have a gas fired furnace. You will have to convert to a heat pump. So you're going to have a major problem if you've got to strip out that gas furnace 10 years into its economic life. It's effectively going to become a stranded asset and a big loss for the building owner. So you're at a fork in the road, you replace like for like, probably not. So you have to start thinking about different decarbonization technologies like heat pumps, which are widely available on the market now and maturing rapidly if not already pretty mature in a lot of jurisdictions.

Finally, I guess the other reason why now is the time to start is because incentives are available for early movers. Canada Infrastructure Bank has put its very cheap money out in the market, which we can help channel to clients, and I'll come to that in a minute. And there are lots of other incentives at the provincial and the municipal levels for people who are doing retrofits. I guess the opposite of incentives are almost the penalties for operating a more carbon intense model. And the big one there is that is the federal carbon price, which is going to hit $170 a ton in 2030. So if you're emitting more than a thousand tons of GHGs each year, that carbon is going to have an impact. That carbon price is going to have an impact in the range of hundreds of thousands of dollars for building owners each year.

So how is BMO positioning to support our clients as they think about making this transition? I think number one is we're the only Canadian bank in partnership with Canada Infrastructure Bank that allows us to structure our retrofit debt around CIBs deeply discounted impact capital, which is typically priced between 2% and 5%. So we can actually channel that CIB money out to our clients at those very, very low rates between 2% and 5% to help them do retrofits. And I guess the interesting thing about that money is it is linked to GHG reductions. So the greater greenhouse gas reductions the client manages to do, the cheaper the pricing on that debt becomes. I think there's lots more details about the product that make it interesting, including how we can actually reduce some of the fees that we charge for project sponsors who are striving for ambitious greenhouse gas reductions, looking at how we can increase the amortization period on the mortgage, which will refinance the retrofit debt and looking at how you can take equity out of the building.

So free up cash for building owners who have done these retrofits. Because effectively a retrofit makes a more valuable building, meaning that it's more lowly levered or is in relative terms there's less debt on the building. So you can take some of that leverage out in terms of equity, freeing up cash for the building owner. So yeah, I think we have a really unique, really differentiated offering that none of the other Canadian banks are doing at the moment. Honestly, I hope they follow suit. The more money that it's getting out there to decarbonize the economy, the better. But we are proud to be leading the way in this area. So yeah, I think that pretty much sums up the BMO product and why we're looking to do it.

I think the second example is something that we have announced recently and that was the acquisition of Radical, now known as BMO Radical. And Radical is a company that offers us deep capabilities in carbon markets, namely the ability to trade carbon credits, the ability to create carbon credits and the ability to advise our clients on emissions footprinting.

So what that means for real estate clients is if you don't necessarily know where to start with your sustainability journey, a great place to start is to understand what the profile of your own emissions is or are. BMO Radicals emissions footprinting services will be able to work with you to do that. Once that initial emissions footprint baseline is set, we are then able to advise on strategies to decarbonize in a way that is timed and cost-efficient and integrated into your business plan, and we're able to integrate carbon credit trading and the purchase of carbon offsets into that plan as well.

The idea being that you should strive for as many real-time material reductions in your carbon emissions as possible because there is no substitute for just real reductions in emissions, but for those emissions that you can't reduce yourself, you're able to buy offsets on the voluntary carbon markets. So I think that the retrofits platform and our acquisition of Radical are two good examples of how we're innovating and how we're seeking to lead and be our client's lead partner to a net-zero world.

Karla McCarthy:

Great. Thanks very much James. So Brent, maybe I'll direct this question to you. As regulatory and stakeholder expectations shift and evolve, can we expect to see impact on demand for certain ties and property value?

Brent Gilmour:

Thank you. I think the short answer is yes. So the question might be how do you have that certainty with so much understanding of what's going on in the marketplace? I think of when we're just to take the look at what's happening with carbon disclosure and expectations on getting a label, that will affect perception but also value in both outcomes. The question is when and how fast is carbon valuation entering into new and existing? At the end of the day, it's starting to take off on its own. How much carbon is in that building and what is its value? And I think the way we are seeing this now in terms of playout in the marketplace, it's still very early, and I think people should have regard for that in terms of what the implications are, the level of comfort of those who are doing that valuation and going forward.

But for instance, we did some work with JLL and Sage GBC, and we asked asset owners and investors what that cap rate the premium might be willing to pay on a net-zero carbon asset. And this is where people started to care a little bit more. And so the response in these kinds of understandings is you're starting to see if you're thinking basis points maybe up to 25 or more, the compression factor. Meaning in a traditional non-net-zero carbon building, it was estimated that at a 5% capitalization factor, that cap rate, what people are willingly going to pay for a net-zero carbon equivalent would be about 4.75%. So what does that translate into? Maybe a 5% premium in terms of value that you might see going forward already today?

And that was just based on the handful of buildings that are exchanging in the market sector in Canada already. And so I think as time evolves, you can assume that this would just grow. And I think as local markets expect or require you to disclose your carbon, someone's going to put a value on that and it'll find its way into your transaction. It's just a matter of not when maybe so much as how that transaction is going to start to value carbon.

Karla McCarthy:

Okay, thanks very much Brent. So with respect to managing risk relating to climate change and decarbonization, there are a number of underlying things that don't necessarily jump out such as increased demand for certain materials and increased costs, for example, adding electrical capacity. Are there certain things people should be thinking about now and planning for?

Brent Gilmour:

Yes, as you think about the trade-offs of costs coming forward in embodied carbon and materials. And so what you're starting to think about there is can you start to see, and I'll give it three quick examples. In terms of what you might be purchasing. There is the requirement for the importance of declaring. So these EPDs that are on materials, the way you can know what's in the material and its carbon. These are things you're going to have to pay more attention for in terms of being able to do your whole lifecycle costing, potentially for a building going forward and understanding where those trade-offs might be as an example. Other examples that you're going to have to continue to work through, and depending on the types of energy systems that you're connecting to and what you're using and what you want to do on site versus what might be provided by utility, could incur additional costs.

Particularly if you're trying to focus on aspects, say it is electrification, you might not have been anticipating the need to have to pay or incur the costs of the upgrade to the grid to your building and those associated costs with other installations of equipment. These are things that people are starting to realize that weren't there before, might now need to be. And so as you go through, it's again about trying to ensure you have a complete picture of what that looks like as you go to cost out, whether it's new or if you're dealing with a retrofit of existing buildings, what are the options that make the most cost-effective sense relative to your carbon leadership objectives you're trying to also achieve. So I think the word, balance, is really critical, but it's also transition planning. So looking to see when the timing might be best for when to invest is increasingly critical.

I'll just add here something that James really emphasized and his response to timings and the various new products coming from BMO. Not everything is going to be achieved on day one, in terms of when you can move forward. Buildings don't work that way if it's existing. They're not designed as a linear point A to point B. Think of it as more step, it might make more sense to think about your windows at one point just because they're coming up in terms of their lifecycle. It might make more sense to focus on your mechanical system at another time, but you have to have the complete picture to be able to act and to get the best pricing, the best construction results and the best opportunity, whether it's for your investor or for those that are providing support.

And so again, having that capital plan in place takes the shock factor out, allows you to better prepare for your pricing benefit from the cost savings that come through, not just from the aspect of energy savings, which are significant as we think about these, as costs go up for those sources, but also from the unknowns as continuation of carbon valuation goes, whether it's through carbon price as it is today and continuing to go up, but also future things that we don't know about. And I think excellent example and resiliency. You can't always anticipate the true costs that are coming forward when things are disrupted, whether it's in the operations of your building.

And putting that together as your overall valuation of what you're trying to accomplish and the trade-offs within all of them, because they all come down to a cost, really helps you put into perspective the picture of what is maybe a brown discount and what is ultimately the bottom line that you need to try and protect yourself from going forward.

Karla McCarthy:

And that is all the time we have today with our panel. Thanks for all the great insights on this important topic and I'm going to pass it back over to Mike.

Mike Beg:

Thank you very much, Carla. It's still very early days in ESG and the evolution between banks and their clients. But if nothing else, we hope that today's speakers may have helped inspire you to have an ESG strategy if you don't, or further build on the one you have. On behalf of BMO, we want you to know we're thinking of you, your families, and your organizations.

Michael Torrance:

Thanks for listening to Sustainability Leaders. This podcast is presented by BMO Financial Group. To access all the resources we discussed in today's episode and to see our other podcasts, visit us at bmo.com/sustainabilityleaders. You can listen and subscribe free to our show on Apple Podcasts or your favorite podcast provider, and we'll greatly appreciate a rating and review and any feedback that you might have. Our show and resources are produced with support from BMO's marketing team and Puddle Creative. Until next time, I'm Michael Torrance. Have a great week.

Speaker 2:

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