BMO Equity Research on BMO Radicle and the World of Carbon Credits

(Disponible en anglais seulement)

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 3:

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

Doug

Hello everyone, and welcome to our discussion today on BMO Radicle. My name is Doug Morrow, and I work on BMO’s Equity Research team as an ESG Analyst. And I have the pleasure of moderating today’s session where we’re going to explore a little bit BMO Radicle’s business model and some of the ways that we think Radicle can create value for BMO clients. So I’m delighted to be here today with Saj Shapiro, the Head of BMO Radicle; Chelsea Bryant, Managing Director Trading at BMO Radicle; and Rachel Walsh, who covers the carbon markets and carbon innovation opportunities on BMO’s Equity Research team. So maybe let’s start with a quick round of intros. Saj, if I can start with you please?

Saj

Sure. Thank you, Doug. My name is Saj Shapiro. I’m Head of BMO Radicle. I’ve been involved in this industry since I think the very first study that I undertook in 1998 to look at the carbon intensity of oil field equipment, and since then I’ve been involved in various activities. Over four years ago took hold of Radicle and help grow it to where we are today. We’re very excited to be at a point where we believe it’s a bit of a tipping point about what we can do in industry, how we can work together with BMO’s clients, and what we can do generally in identifying sustainability opportunities and challenges and helping customers on their journey.

Doug

Great. Thank you, Saj. Chelsea, over to you.

Chelsea

Thanks so much. My name is Chelsea Bryant and I have the pleasure of leading our trading sales and marketing teams here at BMO Radicle. I’ve been in trading environmental commodity markets for over a decade. They really like grabbed my heart and my gray matter and never let to go. And so it’s really exciting to be here today to talk to you in terms of our breadth and depth of exposure and experience across environmental commodity markets. We currently transact in Alberta and Canadian compliance markets, as well as the California cap and trade system, the CORSIA global aviation scheme, and across a swath of voluntary carbon markets, including the big hitters like Verra, Gold Standard, CAR and ACR. As well, our credit development teams have engagement across BC and Canadian low carbon fuel standards and the Australian Compliance System, so we’re touching a lot of pieces across the global landscape here at BMO Radicle. Back to you, Doug.

Doug

Wonderful. Thank you so much. And Rachel, over to you.

Rachel

Thanks, Doug. So I am the Carbon Innovation Analyst in the Equity Research Group at BMO, and there are two main facets to my coverage. So I cover carbon markets and other mechanisms that put a price on carbon from a macro perspective, and then I also cover companies that generate revenue in those markets.

Doug

Wonderful. Thank you so much, Rachel. And thank you to all of you for those backgrounders. So maybe let’s jump into it now and really I think just to set the scene a bit, as listeners may know, two weeks ago BMO completed the closing of the acquisition of Radicle, and as we heard from Chelsea already one of Canada’s largest developers of carbon offsets and a market leader in carbon credit origination and trading. I think that when many companies or non-specialist investors, if we can call them that, hear the phrases carbon offsets or carbon credits there’s definitely a clear sense of opportunity because everyone can see that the impacts of climate change are becoming more significant and more severe; and that using market instruments to price and trade carbon is going to be an important part of the solution. But in my experience, in my conversations, I think it’s also easy to get tripped up a little bit when discussing the carbon markets partly because of the perceived complexity of these markets and also frankly because they remain new to a lot of organizations, even though carbon markets have been around going way back to the 1990s. And as I understand it, first theorized way back in the 1960s. So Rachel, if I could start with you, can you please just maybe start us off by summarizing the state of play for carbon offsets in Canada and what the regulatory backdrop looks like?

Rachel

Thanks, Doug. So I think to start off here, it might be helpful just to describe what an offset is and what it accomplishes. So an offset is the reduction or removal of one ton of emissions in one place to compensate for emissions elsewhere. Now these offsets can be turned into fungible credits and sold in a centralized market. And I will note while there are small differences, we do use the words offset and credit almost interchangeably. So by creating that market-based mechanisms, efficiencies are gained across the entire system because they provide more flexibility for emitters, and that’s relative to the pursuit of internal emissions reductions independently. So let’s imagine a scenario where it costs a facility $100 per ton to reduce their emissions while it costs another facility $50 per ton to reduce their emissions. If we’re able to trade those reduction units, we can realize twice the amount of reductions with the same amount of capital. So you can see clearly efficiencies gained across the system through the use of those tradable offsets. Specific to Canada, regulators have been using these offset markets to drive emissions reductions for regulated entities. At the moment, we have a system in place for large stationary emitters. So you can think of things like refineries, chemical plants; things of that nature. These systems, they’re either run by each individual province or they’re run by the federal government, but they require emissions to be reduced gradually over time. One market of note that I’ll point out is the Alberta TIER(?) market, which is very relevant to our clients. In addition to that, we are also seeing some other regulated markets pop up, particularly the clean fuel standard, which will drive down the carbon intensity of liquid fossil fuels. So certainly a lot of moving parts on the Canadian compliance side of things, but I’d say the big takeaway here is that access to these markets is largely restricted to those regulated entities, and we call them regulator compliance markets. As a result of that, participation in these markets is not optional. There’s also a unique international market that’s been emerging, and while it’s been around for a long time, to your point, it’s gained a lot of relevancy of late, and this is for emitters who would like to offset their carbon footprint voluntarily. It’s called the voluntary carbon market. Unlike the compliance market, no restrictions here in regard to who can access it. So a large industrial company could purchase offsets, so could a small company, and even you or I could access this market and purchase offsets. ` I will note here, though, that credits between these compliance markets and the voluntary market are not interchangeable at the moment. And while this market still remains relatively small compared to compliance markets, it’s seen really impressive growth over the past few years, and that’s tied to the explosion of netzero targets. There are some emerging central exchanges for this market, but largely these voluntary credits are purchased over the counter through a broker, so I would just note that as well.

Doug

Got it. That’s really helpful, Rachel. Thanks. It’s a really critical distinction between the compliance and voluntary markets. So Chelsea, taking that background and then translating that to Radicle, if you can just talk about how Radicle develops carbon offsets, and also what new market participants should be thinking about as they look to engage in the carbon markets.

Chelsea

Absolutely, Doug. So I think the first thing to note about Radicle specifically and what’s a unique differentiator of our credit development services is that Radicle has invested and developed a proprietary software platform that is utilized by our incredible credit development team. And so that specific platform provides a level of data transparency and integrity that is industry-leading. And so if you think about sort of the traditional way of generating carbon offsets, there’s a lot of black box approaches across the industry. Where we really differentiate is having access to this proprietary software that then provides that level of data transparency. Again, when you think about trading an offset credit you have that project proponent, that project developer that creates the credit, but then you also have third party verifiers that need to verify that the information that’s used to create this asset is accurate. And depending on the system, sometimes the regulators may select the verifier, sometimes they exist in these systems, but effectively across every system there are third party verifiers that verify this information. In the case of Radicle, third party verifiers can then go into our software platform and actually see the specific calculations of how those offset credits are created, which again provides that level of data transparency, which is unique in this industry. On top of that, I had obviously mentioned, and you had reiterated, about Radicle being the largest developer historically of Canadian compliance grade offsets, so we have a lot of breadth and depth of experience. And for those of you that aren’t familiar with this fun fact, Alberta was actually the first carbon market in North America. So organization has been in this system since the infancy of the program. We’ve now expanded our reach into Latin America and Australia in terms of our credit and development services and have significant depth and breadth of experience across a multitude of different project types, so that’s both naturebased, renewable energy, and industrial project types. As we get into a little bit more of the weeds of carbon markets during our discussion today, I’m sure we’ll touch on that a little bit more. I think the other thing that’s really important is the number one question that I get asked is, what is the price of carbon? And unfortunately I wish I could just reach into my like crystal ball and tell you there was one price for carbon, but really there’s actually 50 different prices for carbon, or more, at any given point in time, and it’s completely dependent on the system that you’re looking at. So whether you’re looking at a compliance system, whether you’re looking at say low carbon fuels versus you’re looking at offset credits, whether you’re looking at a voluntary market, involuntary market, if you’re looking at removals versus avoidance reduction ton, there is a plethora of different carbon pricing. And so an even like more interesting piece about this is that these markets are opaque. And so as my fellow panelist had mentioned, a lot of these still trade OTC through bilateral contracts, and so you don’t have full pricing transparency. So at the same point in time you can have the exact same carbon offset with the same specs and it could have multiple different prices, depending on the counterparty you’re talking to. And so that’s a really, really complex piece of these markets that new market participants need to get their heads around. And so it’s really, really important to look at developing your strategy of how you want to engage in these markets. Not all projects are created equal, so it’s really, really important to dig into technical due diligence when you’re looking at what you are buying specifically. And then it’s really, really important to understand that, again, vast majority of these markets trade through bilateral contracts. There isn’t a standard form of agreement. There’s no “is done” in these markets. And so how you structure that agreement and how you negotiate the different components is incredibly important to maximize your value and to mitigate your risk of engaging in these markets. And that’s something that we do hand-in-hand with our clients.

Doug

It’s interesting because Chelsea when you talk about how there’s no one single price on carbon, it reminds me of a question I often get is, Doug, what is the size of the ESG assets under management market? And I say, well, it really depends what you mean. It could range anyway from X to Y because there is no single market standard. So that’s a really interesting insight. And Chelsea, just one last followup. Just in terms of the history, when did that market in Alberta begin?

Chelsea

2007.

Doug

2007. Okay, got it. Thank you. So Saj, turning to you now. Based on what we’re hearing, I think it’s clear that a huge part of the value proposition for Radicle is in the advisory services space and really just helping companies understand perhaps first and foremost where their greenhouse gas emissions come from, how they can be measured and monitored over time, and how ultimately they can be mitigated. So can you maybe just walk us through some of the advisory tools that Radicle has set up, and perhaps comment on the level of knowledge that you see in the market in terms of awareness about the importance of greenhouse gas mitigation across some of the companies that you’ve worked with.

Saj

Thank you, Doug. I think, as we just heard from both Chelsea and Rachel, this is an incredibly complex field. The level of knowledge and awareness among corporates varies dramatically. And even regular entities and carbon programs all have a pretty basic understanding, some more sophisticated than others, but essentially of their Scope 1 and 2 emissions. And then as soon as you get into Scope 3 it becomes that much more complex. BMO Capital Markets BMO Radicle December 19, 2022 Page 6 And so really for us as Radicle, what we’ve done is we presented an advisory services as the frontend piece to what is really a full service carbon emissions reductions business. And really we assist businesses in precisely measuring, managing, and reducing carbon footprints. And all that by using our climate accounting software, that Chelsea alluded to; that we are software-based. So that first initial piece of software is called Climate Smart, which essentially accounts for your emissions. We then have a carbon credit project development expertise and software that allows you to develop credits through your reduction activities. And then carbon credit trading services that Chelsea runs that we pair with strategic advice from carbon emission experts. What that does is allows us to help our clients minimize their impact, maximize their return on their company’s carbon emissions, and also drive home some more planet-positive emissions. What that means specifically is that the initial foray into our business, a client will come in and get just very initial training sessions about greenhouse gas emissions and measurement best practices, which essentially allows them to just speak in carbon and be able to address some of the concerns that they and their industry and their clients will have. And then we have proprietary software supportive program that makes it easier to enter and store your data, calculate and learn about your emission footprint. And from there you get access to one of our sustainability advisors who essentially works with each customer individually and helps them learn about how our software works and how it generates actionable emission reduction plans. And then lastly, as I mentioned, the software that produces emission reductions. Some of these reduction activities do qualify for creating carbon credits. So really together with BMO clients, we think that it’s never been more important to be able to really understand and speak to your emissions, both as a risk and as untapped opportunity for yourself and for your company. And for me personally, I’ve been involved in over 25 years of everything from entrepreneurial initiatives to large corporations. And this is a challenge at every step of the way about where you invest, where you identify the risks to your results, and how you manage that over the long-term.

Doug

Just to make sure we’re all on the same page here, you referenced Scope 1, 2, and 3 greenhouse gas emissions under the Greenhouse Gas Protocol. Can you just quickly summarize for the listeners the differences between those and what they mean? Because I know obviously Scope 3 these days is a much more important area of focus for investors. But can you just unpack what those three scopes look like?

Saj

Yes. It’s relatively straightforward for Scope 1 and Scope 2. It’s essentially the first one is what you do that you are in control of in your shop, in your facility, in your office; essentially the emissions that you create yourself. The Scope2 is essentially what you buy. You can buy your heating and so forth. But Scope 3 is really where the rubber hits the road, if you will, because it’s downstream effects from what your products do, from how your users will use your product, and how your clients at the very end of all of that will utilize it. So it’s very difficult once you get downstream how you calculate that up and how you assign each of those emissions to which product, which service provider. Because as you know, every product that we have today in our homes is manufactured in one place and transported by another company and probably packaged by even a third company, and then there’s logistics and so forth. So it’s very difficult once you get there. The ability that we have with our software is that it’s able to embed your Scope 1 and Scope 2, and then we’re able to take in your suppliers and your clients and take their emissions and their accounting up, and that would become your Scope 3. So as we get broader across this new BMO Radicle universe, we will be able to capture all of those _____, not just for BMO’s clients, but for BMO itself.

Doug

Got it. Okay. That’s helpful. I have just one more followup then. You hinted at this in terms of talking about BMO’s clients, but when you consider the breadth of the services and industries that the bank is involved in, what do you see as maybe some of the low hanging fruit that Radicle can help BMO clients capture right out of the gate over the short run? And then maybe looking ahead, how do you think those opportunities could potentially evolve over the mid to long-term?

Saj

Thank you. That’s a great question. The easy answer right off the bat is that we already have these services today. All of BMO’s clients that are at any stage of their energy transition can utilize our services right now. And we think that our services, our expertise, and our software is really key for BMO to fulfill its commitment to help clients understand managed risks, but also the opportunities of the energy transition that we’re all currently experiencing. So from my perspective, I think that all the BMO clients want to learn about their carbon footprint, so they can subscribe today to our Climate Smart advisory services and to our software. We have a large inventory of high quality carbon offset projects that businesses are able to invest in today as part of their sustainability goals. And in fact, as far as the breadth of the clients, there are credit development opportunities right now for EV transportation, for oil and gas, BMO Capital Markets BMO Radicle December 19, 2022 Page 8 solar, AG, forestry. I can just go on and on for opportunities to actually monetize the emission reductions that we can help companies develop. Longer term, I think there’s lots of opportunities for us to innovate with combined new products and services. It’s a very fast evolving carbon market, and Chelsea can probably speak to that in a lot more detail. But there are a lot of creative financing arrangements that can enable emission reduction activities and technologies. And there’s also international reach, diversification of the clients we can grow into. You have to remember, in this industry and in our world today, there’s a rise in cost of carbon. There’s going to be a lot more complexity, new markets, trading opportunities between different entities and countries. And so being able to navigate all that, I think is key for large corporates and for small commercial enterprises. So over the long-term, we think that a company’s climate risks only increase. And so the more action you take and the earlier you take it, the easier that transition will be.

Doug

Fantastic. Thank you. Thank you very much.

Saj

You’re welcome

Doug

So Chelsea, turning back to you for one second. Rachel talked about the importance of net-zero targets and in terms of driving the voluntary market. And right now about 90% of global GDP is covered by a net-zero target of one kind or another, which obviously implies substantial demand for voluntary offset credits. But we’ve also seen some critiques emerge on the market in terms of the integrity of some of the carbon offset frameworks that we’ve seen, and even the extent to which they contribute to decarbonization in the real economy, as well as where they fit in, in terms of like an overarching emissions mitigation hierarchy. So I’d be really curious to get your thoughts about these critiques and how you see the carbon markets potentially evolving over time.

Chelsea

Absolutely. So I think this goes back to my comment that not all credits are created equal, and so there are going to be criticisms of certain systems. There’s going to be new systems that come up and whether they meet sort of that level of an integrity robustness looking at permanence and additionality will remain to be seen as some of these pieces come forward. But it’s really, really important to think about this more holistically and say it’s not an either or. Like we simply globally will not be able to reach net-zero targets without offsets and we won’t be able to decarbonize our economy without making changes within our own corporation operations and supply chains, so the Scope 1, BMO Capital Markets BMO Radicle December 19, 2022 Page 9 2, and 3 emission. And the first step of that is obviously being able to measure those and knowing what that looks like. But when you look at reaching net-zero and you look at the marginal cost of abatement within your organization, there is a point when it is not economically feasible to be able to do the entirety of your emission reductions within your own Scope, 1, 2, and 3. And there is not the specific technologies that will bridge us into the future that exists today at a commercial scale. And so it’s really, really important to understand the place that offsets have as this bridge mechanism into the future. There are amazing, high quality projects that exist. There’s great quality registries. Obviously mentioned from a voluntary carbon market standpoint you have Verra, you have Gold Standard, CAR, ACR. There’s others. But there are high quality products that are in the market today. And the carbon price is absolutely pivotal in ensuring that these activities continue into the future. So you can see when you’re looking at red plus projects as an example, specific project examples where you can see the deforestation rates that happen around these projects. And so this is not something that can’t be dug into from a technical rigor standpoint. Again, going back to you need to understand what you’re purchasing. And each project, it’s not saying specifically this grouped thing is all at the exact same level of integrity. It’s really getting into an understanding, at a project level, what you’re specifically investing in and what the impact of those projects are, both from meeting a net-zero target standpoint, but also when you’re looking even at the cobenefits of these projects as well. Because it’s not just the environmental benefit that you can see from these investments, but there’s also a plethora of co-benefits that come from them. And so I think those pieces are really important to understand and to dig into when you’re looking at this. The other piece that I think is really important to understand is that there’s a few different entities that are looking at voluntary carbon market integrity, but if we villainize everything that exists today, I would say perfection is the enemy of the good. So you can’t say that everything that exists today doesn’t work because there actually won’t be anything that you can use. And so the question is then, what are we doing? So it’s really, really important to look at it and say, holistically what is this doing? Yes, there are, in anything, going to be bad actors. So again, it’s incumbent on us to do our due diligence and ensure what we’re investing in is high quality and meets those integrity standards. But also it’s really important that the integrity standards allow these systems to come into existence and to scale to the level that BMO Capital Markets BMO Radicle December 19, 2022 Page 10 is needed. Because if you look at the net-zero commitment, we saw a 4x growth in the volume of transactions between 2021 and 2022. If you look at what’s happening now and into the future in terms of demand from net-zero, the curve is like this. So ultimately we need to be able to scale these markets to be able to meet that demand curve. And in order to do that, we need to have a way of looking at this that is inclusive to allow these activities to actually be able to create credits.

Doug

I love that expression that you used about not letting perfection become the enemy of the good. It’s one that I personally have used myself when talking about the difficulties around measuring a company’s broader ESG performance because we’re still on the pathway to really rigorous and comparable standards, so I think there’s a parallel there. And Chelsea, if I can just ask one followup. I remember when I was learning about the carbon markets, I would come across these words that you used at the very beginning of your response, which were permanence and additionality. It was so obvious to me how crucial it is to understand these two concepts for understanding the carbon markets. Can you just maybe quickly summarize what permanence and additionality mean and how important they are to the functioning of the markets?

Chelsea

Absolutely. So when you think of permanence, it’s pretty easy. It means that it’s a permanent emission reduction or removal. And so a good example of this would be, say for instance, if you have pumped CO2 into a well and you cap that well, if all of a sudden you were to have like an explosive event where that was released, then that would have a permanence issue. So it’s not permanent because it’s obviously been released. I mean we’re not seeing those types of events happening across the board, but just giving you an example of what that could be. Another example would be if you had a forest that we sequestering carbon and that forest burnt down, then obviously it is not having permanence in terms of that emission sequestration. So the one piece I would say, though, in the voluntary carbon market is that they use a concept called buffer pool. So there is an actual aspect of carbon credits that are held back from every single issuance. And so that’s at both a project level and more at a systemic level for the entire system. And so if you were to have a situation where in this case you had a catastrophic fire, the registry itself is actually already held back credits from each issuance in order to account for some of these types of events to happen in order to ensure the integrity of those credits that are created. So buffer pool is a really important concept to look into as you’re educating yourself on carbon markets. The other piece is additionality. So this means that the credits themselves are additional. And so a good example of that is if a practice becomes business as usual, then you would not be able to create carbon credits from it anymore because it’s now the standard practice. It’s no longer additional to what you would otherwise be doing. So a great example of this is when registries or systems, compliance system is an example, retire specific protocols. And that’s because they have additionality tests that are completed in order to calculate when a practice becomes business as usual and therefore is no longer additional and those credits then won’t be created in the future. But it’s a great way to have that technology bridge into being at a point where it is no longer considered additional. And so we’re starting to see this happen in voluntary carbon markets when you look at renewable energy in jurisdictions that are not least developed countries as an example.

Doug

Got it. Okay. Thank you so much for that clarification. I find it absolutely fascinating. So Rachel, if we can turn back to you for a second with the penultimate question. Close observers of the market would’ve seen that in recent days and weeks that we did see a fairly steep decline in the price of carbon credits in the voluntary market. Although the prices have recovered to some extent, I’m just really curious to get your views about where this might be heading, what we might be seeing for future prices? And frankly, what type of or what level of prices we would need to see the Paris Agreement stretch go up 1.5 degrees reached. How do you see this all potentially playing out?

Rachel

I think there’s two key elements to that question. The first being, what does it take to drive a net-zero economy? And so when you think about the average cost of abatement globally, all estimates at the moment kind of indicate that price is somewhere between $80 to $100 US per ton. Now that’s going to vary by jurisdiction. You’ll probably see higher prices in more developed nations, lower prices in less developed nations. But what do we need to drive a net-zero economy? The second part of that question is how long is that going to take? Because when you think about that 1.5 degree scenario, we ultimately have a budget of carbon that we can emit cumulatively into the atmosphere. The longer it takes us to achieve a net-zero economy, the more carbon we’re actually going to have to remove from the atmosphere to keep warming within that level. So when you think about the pricing there, I mean there are some lower cost removals options, but those are typically tied to, as Chelsea was alluding to, this permanence issue. So if we pursue those independently, we’re kicking the can down the road. So we really need to pursue these removal storage options that are longer in duration. If we look at forward cost estimates for those technologies, a best case scenario at the moment is kind of around that $150 US per ton. So certainly mid-century to late-century we’re going to need to see carbon pricing on that order of magnitude to keep within the 1.5 degrees warming situation. Especially we’ve been seeing more and more headlines. We’re not making meaningful emissions reductions. The longer it takes to make those, the more we’re going to have to remove from the atmosphere, the more we’ll need to see that $150 pricing environment.

Doug

And Rachel, you talked about carbon budgets, which is an absolutely fascinating concept. How close would you say we are? I mean I realize it can probably vary a lot around the margins, but how close would you say we are to exhausting the idea of our carbon budget?

Rachel

Well, for 1.5 specifically, the IPCC now thinks that that’s out of reach. So when you think about removals from that perspective, they’re going to need to be very significant through the second half of the century to reach that. And we’re even not on trend on for a 2 degree scenario. So we’re certainly going to need removals to keep warming within a reasonable level, regardless of how you frame it, as things currently stand.

Doug

Got it. Got it. Thank you very much. And then, Chelsea, I’d be really curious to get your views in terms of what you’re seeing in terms of the difference between futures and OTC voluntary markets. Do you have any comment for us there in terms of what you’re seeing?

Chelsea

Absolutely. I think it’s really interesting. If you’ve been following the futures markets over the last couple of weeks, in general, we are, from a voluntary carbon market standpoint, futures markets are actually really quite new. And so there are a lot of financial players that were exceptionally excited about getting into carbon markets, but didn’t necessarily have the intent of taking delivery of these credits because obviously you can have financial exposure without the intention of actually holding the underlying asset, taking it to delivery, understanding the market, understanding end users and who you’re ultimately going to sell those to. And so it’s really, really important aspect of looking at carbon markets is that they can be quite liquid. And so you can see shifts in pricing that can happen fairly quickly. We obviously saw that happen in 2021 with a very substantive run up in voluntary carbon market, as there was large amounts of demand and there’s only a certain amount of supply. And then conversely, as we look at the futures markets over the last few weeks, and even actually outback throughout this year, there’s been a lot of volatility in those markets as well because again, these markets are still nascent. They can be a BMO Capital Markets BMO Radicle December 19, 2022 Page 13 liquid for extended periods of time. And so if you’re forcing – force liquidation into an illiquid market, then you can obviously see some pretty substantive price reactions. So it’s been really interesting to follow the futures market pricing and the equivalent instruments that are being transacted OTC and seeing that there’s actually been a decoupling of those prices. And so with the futures market as it came down and softened, we were seeing a premium for the OTC market, anywhere from $2, and I think I even wrote a report that was up to $8. So an $8 a ton premium for an OTC transaction of something that was equivalent to the future’s contract. And I mean that’s not surprising because again, as we’ve talked about earlier today, people want to know what they’re buying. They want to specifically invest in one project or two projects or three projects. Those projects that they’ve done significant due diligence on, that they’re confident in, and that has alignment with their impact story and what they are wanting to support financially. And so when you’re looking at a futures contract, you don’t have that specificity of exactly what you’re buying. And so with financial players that are in these, that aren’t necessarily intending to take delivery and potentially transacting in and out of them, you can see a decoupling of pricing between the futures contracts and what’s trading OTC. So really, really interesting nuance to the voluntary carbon market and something we’re certainly going to be following very actively as it evolves over time.

Doug

Thank you so much. Fascinating. I wish we could explore all these concepts in extreme detail, but we are running close up to time. I would like to close out with something I call lightning round where we just go around and ask each person on the panel what development or issue they would most like to see happen or expect to see happen in the carbon markets in in 2023. So Chelsea, we’ll start with you and then we’ll get Rachel and then Saj, please. So just high level thoughts about the thing you would most like to see happen or expect to happen in the carbon markets next year.

Chelsea

I think the one thing that I would obviously very closely follow is compliance market development. And so it’s not necessarily all going to happen within 2023. But if you look at things like CORSIA, which is the global aviation scheme, we’ve seen really quick recovery in the airline sector from the COVID levels of traffic, and so there was a very quick recovery. And at the same time you have CORSIA, which is now in involuntary stage, but in 2024, the obligations of entities that are under that. And again, you have over 70% of eligible jurisdictions already opted into the system. This is going to be a substantive draw on supply from the voluntary carbon market as you have this sort of compliance level demand coming in. The same thing can be said about Article 6. Now, again, I don’t think that’ll happen in 2023, but Article 6 evolution and how some of these voluntary carbon market instruments will become future compliance instruments under Article 6 and have the ability for countries to meet their NDCs, I think is a really, really important development. So voluntary to compliance conversion, that’s what my point of topic would be.

Rachel

I think for me, this will kind of touch on Chelsea’s prior point on integrity in the voluntary market, but this market is self-governed and as a result it’s come under a lot of scrutiny of late, especially with the uptick and acquisitions of greenwashing. So as a result, I’m looking forward to developments from those integrity initiatives and best practice guidelines for offsetting. I think that could help build a lot of clarity in the industry as a whole. And I think the voluntary market could serve as a really efficient tool in transition, based on my prior points. But ultimately that growth is going to be predicated on its ability to deliver high integrity products. So really important we see those things improve over time.

Doug

Saj, last word to you

Saj

Thank you. I think I would take both the concepts that Rachel and Chelsea have brought up. Integrity from Rachel and compliance markets from Chelsea and essentially marry the two together. So we as a company come from a compliance background, which means that we do everything with a high degree of accuracy and transparency and integrity. So from that compliance background, we’re able to apply that same rigor onto the voluntary market for all of our clients. For us as a company being 100% transparent with our clients about how the process works helps us cultivate a sense of shared purpose and close collaboration. And essentially we empower our clients. We believe that that level of transparency also gets not just the engagement, but elevates the level of discussion and understanding about this market. And so from that perspective, we as a company joined with BMO because I think that there’s – Chelsea mentioned before, perfection and expertise. Those are some of our core concepts of values and our culture. And what we found with BMO is that there’s a strong cultural fit and an overlap in many of our shared core values. And so for us at Radicle, we’re always pushing for change. We work every day to push for positive change to our environment and we think that the new relationship with BMO enables us to do more together than either one of us could do on our own and have that much of a broader reach. So we think that just furthers along not just our vision, but to boldly grow the good for us has a big environmental side to it.

Doug

Wonderful. Well said. That’s great. Thank you so much to Chelsea, Rachel, and Saj for sharing their insights and expertise with us today. We really appreciate it. And with that, we end _____ discussion. Thank you. ‘

Saj:

Thank you for having us.

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/sustainability leaders. 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 3:

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.