The road to net zero: Financial sector commitment and what it means for clients and society

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Amy West: Thank you for joining us today on the TD Securities podcast series, The Road to Net Zero. Today we'll be discussing why financials are committing to net zero and what it means for both clients and society. I'm Amy West, Global Head of Sustainable Finance and Corporate Transitions at TD Securities.

In the past two years, there's been a significant shift in how ESG is viewed, from a nice-to-have corporate citizenship initiative to a material financial risk. Not surprisingly, the way that companies address ESG has shifted in turn. Most recently, we have seen financial institutions take a more proactive role in supporting decarbonization initiatives and announcing net zero by 2050 ambitions.

As part of banks, and all financial institutions social-licensed to operate, there's an active role to play in being part of the climate solution and how we achieve a low-carbon economy. Last November, TD Bank Group became the first Canadian bank, and one of the first global banks, to set a target to achieve net-zero greenhouse gas emissions, associated with our operations and financing activities, by 2050. Today, we're going to learn more about what that means for TD, the growing importance of partnerships, and a bit around transparency and collaboration, as we work to achieve this goal.

Joining me today to discuss and unpack this topic is Andrea Barrack, the global head of sustainability and corporate citizenship at TD Bank Group, as well as Nicole Labutong, North American lead for the Partnership for Carbon Accounting Financials, otherwise known as PCAF. Thank you both for joining me today.

Andrea Barrack: Glad to be here.

Amy West: So perhaps first, I could hand the microphone off to you, Andrea, and have you tell us a little bit around what your role is at TD. And then, Nicole, we'd also love to hear a little bit around your role at PCAF as well.

Andrea Barrack: Thanks, Amy. Yeah, so I get to help TD demonstrate how we have a positive impact on society and the environment. We do that through a number of levers-- our philanthropy, our people. We're 90,000 strong-- but most importantly through our business. And so as part of that, I get to lead the ESG Center of Expertise. And that's bringing folks from across the bank to help deliver on our purpose and our ambition.

Amy West: Thanks, Andrea. And Nicole?

Nicole Labutong: Great. Thank you so much for having me. My name is Nicole Labutong. I'm an associate director at Guidehouse, a global management consulting firm that, among many other services, supports Fortune 500 companies in developing and implementing their sustainability strategies.

Guidehouse serves as a secretariat for PCAF, for which I'm the North America lead. And before my time at Guidehouse, I led technical work on science-based targets at CDP, where I developed criteria and guidance the company used to determine how to meet the goals of the Paris Agreement.

Amy West: So it sounds like we have the two perfect people on the phone today, to unpack what net zero really means and, frankly, how it's defined. So maybe I'll start with you, Andrea. Last November, TD announced its ambitious climate action plan. Can you give us details of what that means for TD and its clients?

Andrea Barrack: Sure. Thanks for the question. It's clear that climate change is an urgent environmental and business challenge. And at TD we're proud of the long history we have in environmental leadership and, actually, overall ESG leadership.

In November, as part of our new ESG strategic framework, we announced the bold climate action plan that includes the target of net-zero greenhouse gas emissions. This plan builds on strong progress and reinforces our commitment to deliver growth while protecting the planet.

But I want to emphasize that, at TD, we do take a balanced approach. We strongly support the transition to a low-carbon economy. And at the same time, while this transition is taking place, we believe it's important to support responsible energy development that meets the needs of economies in which we all live and work today.

But we know we can't do this on our own. So we need to take a collaborative approach to make progress, working with NGOs, government, and, critically, our clients. This is not a linear and a clear path. The journey to net zero requires new innovations, new strategies, broad adoption of new technologies, some of which actually have yet to be invented. We don't even know what they are.

And we're going to work across the economy to drive progress. And we realize it won't happen overnight. But as part of our efforts, TD will support our clients through their own transitions to a net-zero future. We know many clients share our ambition for transition to low carbon. So we want to be on that journey with our clients.

We believe we can have a positive influence by staying engaged. We'll also support responsible energy projects within a clear framework, as we balance the current needs of our economies with the imperatives of the low-carbon economy. For our customers, we're going to be able to offer investors ESG-focused products that meet their values-driven and financial goals, and identify new growth industries and segments that address-- and hopefully, address their financing needs, supporting innovation and science that's going to unlock new solutions.

While climate change is a risk, we also see it as an opportunity to grow the business.

Amy West: So Andrea, you're talking about the new net-zero plan as something innovative, new, and as you put it, an opportunity. But this sounds a little similar, since 2010 TDs, also, was the first bank to become operationally carbon neutral. So what's the difference between what you've been doing, being carbon neutral, and net zero?

Andrea Barrack: The space has a lot of terminology that needs to be demystified, I think. We'd probably be all better off if we could simplify our language and use fewer acronyms. In essence, TD has been carbon neutral since 2010. And the difference between carbon neutral and net zero is really about the level of ambition.

Carbon neutral allows for a little bit more of a business as usual approach, relying more on carbon offsets than actually reducing our GHG overall. Whereas net zero is a more of a challenge concept, driving an overall reduction of GHG emissions. And so for TD, when we set our net-zero target for 2050, it was with that bolder ambition.

Amy West: With so many unknowns in achieving a goal of net zero by 2050, Andrea, I know you've spoken about the importance of partnerships in this journey. One of the partnerships TD recently joined is PCAF, Partnership for the Carbon Accounting Financials, an initiative led by the financial industry to develop a harmonized global standard, to measure and disclose greenhouse gas emissions of both our loans and investments. Nicole, could you explain what PCAF is?

Nicole Labutong: Sure. Happy to. So let me go back in time for a bit of context. In 2015, in the lead-up to COP 21, for the first time in over 20 years of United Nations negotiations, countries around the world were going to set a goal to limit global warming. At this time, a group of Dutch banks wanted to understand their portfolios' contribution to climate change. They believed that measuring financed emissions would allow them to understand their carbon hotspots and subsequently reduce those emissions. But there was no consistent set of rules to calculate what those financed emissions were, and so they created PCAF.

So fast forward to today. We have the Paris Agreement, which was signed by nearly 200 countries at COP 21, and it says that we have a goal to keep global temperatures in check. But what does this mean for individual companies?

PCAF provides financial institutions with a standard methodology to measure and disclosure their financed emissions so that they at least know where they're starting from. To know how much to reduce your emissions, you need to know what your emissions are in the first place.

And from those initial 14 Dutch banks, back in 2015, PCAF has now expanded to 115 financial institution members worldwide, with assets totaling over $29 trillion. And our membership continues to expand. These PCAF members commit to measure and disclose at least part of their financed emissions portfolio within three years of joining the PCAF initiative.

We now have members with headquarters in all regions, in a wide range of sizes, from credit unions to some of the world's largest banks, like TD. And as of late 2020, we now have the PCAF global standard, providing a clear set of rules to account for your financed emissions.

Amy West: If I can just ask a question for a lot of our listeners on the line, what exactly is carbon accounting?

Nicole Labutong: So carbon accounting, or greenhouse gas accounting, is the process to calculate the amount of greenhouse gas that an organization emits into the atmosphere. By understanding how much emissions your organization is responsible for generating, you, in turn, understand your firm's contribution to climate change.

This information is the basis for many other climate activities, such as climate-related transition risks and opportunities, understanding what those are, and setting science-based targets.

Amy West: Thanks for that. And if I can ask, why is scope broadening now, to include Scope 3 emissions, whereas before we were potentially only talking around operational emissions?

Nicole Labutong: First, provide a definition of what scopes are. Scopes determine the level of ownership, or control, a company has over their emissions. Many firms start with accounting for what they directly own and control and the energy they purchase. So these are considered their Scope 1 and Scope 2 emissions.

Those emissions are easier to measure and reduce. It might include, for example, a financial institution's office buildings and the electricity they consume. However, being financial institutions, their biggest impact are actually their loans and investments, which are part of Scope 3, which are their indirect emissions, as they're defined.

So there's been more pressure for organizations to look at their indirect emissions and their value chains and decarbonize their mission hotspots. And this entails things like engaging with their clients and measuring things that they haven't before. And there's also that wider push for net-zero targets.

We all know what the long-term goal is. So the idea is that everyone should be doing their part and aiming for that same net-zero goal, regardless of scope. So whether you're an investor, or borrower, or a client, or asset manager, we're all aiming for that same goal. And we're all trying to reduce our emissions to net zero, regardless of scope.

There are not only opportunities to reduce Scope 3 emissions, but for financial institutions to engage with their clients.

Amy West: Thanks for that color, Nicole. That's really helpful to define. So Andrea, thinking a little bit more around what Nicole said, how does PCAF fit into TDs impact approach?

Andrea Barrack: Yeah. Good question. So this is a new and emerging space. And TD is committed to help finding industry-wide solutions. But we can't figure it out alone. So we recognize the value of collaborating with peers to help develop that more consistent and rigorous methodology to calculate finance emissions.

So PCAF really is a key partnership, for us to deliver on our commitments and ensure transparency and credibility of our reporting. In fact, our participation is proving helpful already, in informing our understanding of our own financed emissions, also contributing to the development of calculation methods. So we've made progress, so far, on data measurement and analytics, as it relates to calculating our own emissions. And that's going to be key in setting interim emission-reduction targets.

While calculating baselines across our portfolios, though, we have identified key data challenges. And we're developing plans to address those gaps, to improve the accuracy of our baseline and quality of disclosures over time. And PCAF has been great in helping us to think through those challenges.

Amy West: So with respect to climate change, I think we can all agree that the science is clear. The impacts of rising global temperatures are already affecting economies and communities worldwide. No single company can, or should, be asked to address this challenge on its own.

And I think important to note, that all sectors, not just the financial sector, are obviously going to need to work alongside international, national, and local governments to create policies and solutions for a sustainable path forward. It will mean translating longer-dated 2050 climate targets into timelines and shorter-term targets that can inform lending and investing decisions today.

The inherent uncertainty around which pathways the world might take to a net-zero future creates a universal challenge. At the heart of this challenge is quality and consistent data, which are needed to form the foundation for the decision making. And there is growing widespread support for standardization of climate-related disclosures.

Now, Nicole, you shared with us what PCAF is. But I'd like to dig a little deeper on two other big initiatives we hear a lot about-- the science-based targets initiative and the task force for climate-related financial disclosure. In order to better understand their interconnectivity and whether it's possible to do one without or with the other, how does PCAF integrate with the science-based targets initiative, Nicole?

Nicole Labutong: Those are two important groups in the alphabet soup of climate initiatives. The good news is, is that if you're involved in one of these initiatives, it supports the goals of the other initiatives. And all of these efforts that you're talking about are related. What they all have in common is that they're standardizing climate actions that weren't previously standardized, creating transparency and harmonization for the business community.

So you need to understand where your emissions are to understand how much to reduce them. The Science-Based Targets Initiative, or SBTI, for short, is a collaborative effort between four well-known NGOs and is largely considered the gold standard in science-based target setting. Over 1,300 companies, across many sectors, are following their criteria and recommendations for setting science-based targets.

The SBTI framework recommends that financial institutions use PCAF to measure their finance emissions as a starting point for target setting, when applying the sectoral decarbonization approach. And that's one of three approaches you can use to set targets. In some, they use PCAF to measure what your emissions currently are in science-based targets, to understand how much to reduce your emissions going forward, to align with climate science.

Amy West: So if I can ask, how does the Task Force for Climate-Related Financial Disclosure, TCFD, fit into the science-based target equation?

Nicole Labutong: So TCFD provides a framework to help companies understand what information financial markets need to effectively measure and respond to climate-related risks. Both SBTI and TCFD can guide companies to reduce their emissions. TCFD's framework provides recommendations on metrics and targets. And the SBTI is in line with those recommendations, asking companies to measure and disclose their emissions and progress towards their science-based targets annually, so they both can help determine performance and climate-related risks.

Amy West: And Andrea, I know that TD Bank Group has been one of the initial financial institutions that was part of the TCFD pilot. How do you see TCFD fitting into the science-based target equation?

Andrea Barrack: Our net-zero commitment requires really three things. The first is understanding our current impact on climate change. The second is figuring out what we need to do to impact our net-zero goal by 2050. And the third is being transparent about our progress and challenges.

And so we see PCAF as helping us to understand our current impact. The Science-Based Targets Initiative helps us to figure out what we need to do in the short, medium, and longer-term to reach our goal. And the TCFD provides a reporting framework, to be transparent about our journey.

Amy West: Andrea, as the financial community begins down what is going to be a very long road, 2050 net-zero target, what three things do clients need to be thinking of to engage with the financial community?

Andrea Barrack: Yeah, so clients are likely thinking about the same things that we've been thinking about, just in a different context that's relevant to their business. So I'll give you five things, actually, because that's the questions that we're asking ourselves. And that includes, first of all, where are we today and what are the gaps?

Secondly, what is our long-term vision? And how will we know if we're on track? The third is, what's planned to reach our goals? What actions can we take? Fourth, what are the levers that we have to work with? And lastly, how are we reporting on our progress? And this approach and these questions actually help us with our broader ESG issues, by the way, not just climate change. But as you can see-- and you said it, Amy-- it does represent that long road, that journey. It's not a single step. And it has to be fulsome.

Amy West: Thanks for that, Andrea. And thanks to both Andrea and Nicole for your insights today and for sharing a little bit about both PCAF, SBTI, TCFD, and how, really, all of companies and financial institutions are targeting the road to net zero. So thank you so much for joining us on this discussion.

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Amy West: This material is for general informational purposes only and is not investment advice, nor does it constitute an offer, recommendation, or solicitation to buy or sell a particular financial instrument. It does not have regard to the specific investment objectives, financial situation, risk profile, or particular needs of any specific person who may receive this material.

No representation is made that the information collected herein is accurate in all material respects, complete, or up-to-date, nor that it has been independently verified by the Toronto-Dominion Bank or any of its affiliates.

This podcast may include forward-looking statements. Forward-looking statements include, but are not limited to, statements regarding TD's objectives and priorities related to the road to net zero.