Carbon: the next major global commodity?

SPEAKER: Welcome to "Viewpoint," a TD Securities podcast. Listen in, as we draw perspectives from a variety of thought leaders on key themes influencing markets, industries, and the global economy today. We hope you enjoy this episode.

AMY WEST: Welcome to Episode 14 of "Viewpoint," a TD Securities podcast. I'm your host, Amy West, Managing Director and Global Head of ESG Solutions, at TD Securities. In the past year, we have seen more than 60% of Fortune 500 companies make emissions reduction or net-zero commitments. There are a number of ways to get to net zero, and all of them will take technological advances, operational changes, and the further development of carbon markets, particularly the voluntary carbon markets for companies to be able to achieve their goals. Recognizing the critical importance of growing the carbon markets, our ESG Solutions team added sector specialists to partner with our clients, as we work to provide an entire suite of low-carbon solutions. I'm joined today by Andrew Hall, who has just joined TD and is leading TD Securities Carbon Markets Advisory Practice. Andrew brings over 15 years of experience in the environmental commodity markets. Welcome, Andrew.

ANDREW HALL: Thanks, Amy. It's a pleasure to be here.

AMY WEST: Andrew, your recent addition to the TD Securities team, I'd love for you to just tell our listeners today a little bit about yourself and your background. And then I want to dive in on the new carbon advisory platform that we're looking to build and, ultimately, a little bit of an explanation on, when I say low carbon solutions, what exactly are we looking to provide to our clients?

ANDREW HALL: Sure. So as you mentioned, I've been in the carbon markets for about 15 years, since about 2007. And I originally came into the space at that time, when it was still quite nascent. The EU ETFs the European Emissions Trading scheme had just launched, and when I was in business school there was a lot of news articles about the environmental commodity markets, the carbon markets specifically. And since that time, we've seen the markets grow quite significantly, to the point now where it's approaching $2 trillion in overall market size. In joining the team as the head of the Carbon Markets Advisory platform, we're taking a three-pronged approach to building out this business for our clients. One of the things we've seen coming out of COVID is really a convergence between ESG and carbon markets, and that ESG has, in part, driven companies to create these net-zero commitments. And then what they're looking for then are ways to achieve that in the short, medium, and long term. Our platform, our three-pronged platform, is built around that, with the first area that we're focused on is providing trading or market interaction solutions for our clients. So by way of example, if we have a client that has made a net-zero commitment and is looking to transact in the market, we can help facilitate that transaction by introducing them to offset projects, such as nature-based solutions or energy efficiency or industrial gas reduction projects. The second prong of the business is focusing on what I call capital formation or capital placements, and that is where we have clients, then, that are looking to not only buy offsets but potentially invest in offset projects. And so helping to introduce the projects and then helping to structure those types of investments. As you know, we ourselves have just recently made our first investment, as TD as a firm, in a nature-based solution project in Northern Ontario called the Boreal Wildlands Project, and so leveraging that experience, helping our clients execute similar type of deals. On the flip side, we've also got clients then that are looking to raise capital for projects. So really, it's just putting those two parties together. The other aspect of that is we've got some companies then that are looking to access the public markets in order to raise capital, particularly on the project development side. The third and final prong of the business strategy is around advisory and, in particular, energy intensive sectors. So when there's any sort of M&A activity, whereby a client might be acquiring or divesting an asset, having an understanding of what the carbon liability or, depending on the incidence, what the carbon opportunity coming from that might be and then rolling that into the valuation for that particular transaction.

AMY WEST: That's fantastic, and I will say, when I think about banks, it's not a surprise to hear of us underwriting a bond or advising on a renewables project. But TD announcing the investment into the Boreal Wildlands Carbon Project, that's pretty different, and it was the largest-ever conservation project in Canada. And so to see a bank show up, I think, involved in that was a little bit of a surprise to many in the market. Can you tell our listeners a little bit more about the project and also maybe give a little bit of a behind-the-scenes look at what drove TD's involvement?

ANDREW HALL: It's an interesting transaction, in part, again, given the length of time I've been involved in these markets, traditionally, there hasn't necessarily been a lot of investment from more traditional financial market players in these types of projects. And that's changing very, very quickly, using our own investments, $10 million, into the Boreal Wildlands Project as an example. When the project itself was a partnership with the Nature Conservancy of Canada-- the Nature Conservancy is one of the most established players in the nature-based solution carbon-offset project space. They've had a project in the Southern BC called Dark Woods for over a decade now, and over that time, it has consistently been producing and then monetising high quality offsets from that particular project. This Boreal project is then an extension of that, and again, due to the development in the market and the ability for folks, like TD, to come in and start to make investments in this, they were able to, as you said, secure funding for the largest private conservation effort in Canadian history. So I think a significant achievement in terms of bringing together folks that are looking to preserve public lands and financial institutions, and we expect more announcements like that over time. Project size is 1,500 square kilometers, so it's a significantly sized project. It's nearly four times the size of Vancouver, so very large in terms of geographic scope. And in addition to carbon reductions and removals, it also provides additional benefits, such as watershed conservation, biodiversity of flora and fauna, as well as traditional land uses, depending on project type. So for us, it's a very exciting project, and we're proud to be part of it. And over the scope of the next 30 years, we expect to receive about 100,000 tons per annum from that project that we'll be able to use for our own uses or to sell to our clients.

AMY WEST: The carbon markets are certainly an area that's getting a lot of discussion in the ESG world, at the moment. And maybe I'm being a little overly ambitious, but I can easily see how carbon could become the next major global commodity. Not to date you, but since you already mentioned that you've been involved in the carbon markets for quite a long time-- one could say, since before it was cool-- why are the carbon markets garnering such interest right now, Andrew? Why do you think they are likely to be part of the solution and the drive to net zero.

ANDREW HALL: Carbon markets, I think, play a really important role as a bridging mechanism. Amy, as you said, companies then that make these net-zero commitments, oftentimes, particularly if they have long-life, fixed-capital assets, for them to sort of flip a switch to move to a low-carbon trajectory on their own is very, very difficult. And so the role that offsets play is, while these companies start to explore longer term or medium term solutions to reduce emissions within the scope of their existing business, is carbon offsets that allow them to achieve emissions reductions at a lower cost. And therefore, from a global climate change perspective, you still end up in the same position. Emissions are being reduced, just at a lower cost. What you'd expect to see over time, and we certainly already see this in the compliance markets is, as the cost of carbon increases, and then at the same time, you have technology improvements and efficiency improvements, is that the number of internal reductions or the cost effectiveness of making those internal reductions become more and more viable. And that really is the key purpose of that carbon market is to create that carbon price, to create the experience in pricing carbon, and then over time, to begin to make those the own internal company reductions. What the price point is is going to be dependent on the company and on the industry. For some folks that will be at a price point $20, $30. For others, it will be into the hundreds of dollars. One of the exciting things that we also see coming out of the evolution of the carbon markets that doesn't necessarily get a lot of airplay is the amount of private capital investment that's flowing into technologies and projects and solutions that, over time, I think, are really going to accelerate not only the innovation that's going to allow carbon reductions to occur but also the cost effectiveness of that. So it's just going to push down the technology cost curve and accelerate it to a point where it will happen much sooner than I think we might otherwise see in the absence of the carbon markets. And the other benefit that we see from the carbon markets as well is that some of these what we call the co-benefits. And using our own project as an example, it's the preservation of landscapes. There's one example where protecting the watersheds, the flora and fauna, allowing traditional land uses as well, I think are often hard to quantify economically, but I think, intrinsically, they have a lot of value, and that value is now starting to be recognized through the ability to monetize offsets from preserving these forests, in this case, but emissions reductions in other sections as well. So I think that makes it a pretty exciting time for the carbon markets. As you said, they're growing very quickly and really coming into their own. More and more companies are looking to transact in the markets, use that as a first step to achieving their net-zero targets.

AMY WEST: I like the way you explained that. What's technologically feasible and what's commercially viable, you need to actually find the middle ground here. So excited for that. Now, as great as that is, I have to play devil's advocate for a moment. A lot of clients or other listeners may be wondering about some of the recent issues that they've heard in the media around carbon offsets. Maybe we can call this the John Oliver effect. Can you help us cut through the noise here? What are the challenges in this market, particularly around credibility, and what should a company be thinking of, as they look at this space? And ultimately, I think the question here is how can they credibly access the market?

ANDREW HALL: I think what we're seeing here is a couple of things. The first is that the carbon markets are new to a lot of people. The markets themselves aren't new. So you're getting a lot of people that are slowly getting up the learning curve, and then you get headlines that probably cast some aspersions on the carbon market and the validity of it. Oftentimes, you hear it's used as a way to get out of jail free, and it goes back to that point I was making earlier. In that these markets have been around a long time, and they've gone through public scrutiny. And they've had lots of opportunities for projects to be validated and verified by independent third parties, which is part of the process. The other thing too that we're starting to see is the standards, under which the offsets are created, are becoming more and more established. So you've got, for example, Verra, which is the largest voluntary offset standard that's out there right now and is the one that we've used for the Boreal Wildlands Project. They've issued nearly a billion offsets since their inception, which has been perhaps a little over 20 years now. And so there's been lots of opportunity then for those projects, and the protocols that sit within them, to be tested and tried. And I think it's not to say it's perfect. There's still, as with any sort of asset and transaction, there's an element of buyer beware. But I think a lot of the challenges or criticisms that exist in the market today are more a reflection of people's newness to the market and just trying to get a grip on it. It is casting a bit of a shadow, I would say, in the short term, making people maybe a little bit reticent to transact, but I think it's always ebbed and flowed, these markets. And I think at this point, it'll just be people getting up the learning curve, becoming more comfortable with the types of projects that are out there. That will continue to allow the market as a whole to grow and accelerate and be part of the net zero and low-carbon transition solution.

AMY WEST: Well, Andrew, I can't thank you enough for sharing your knowledge with us today and for really breaking down what I feel like is a fairly complex topic and one that you're helping us make sense of. Before we go today, I'd like to ask you one question, one final question, which is, for a client or a customer that's listening today to "Viewpoint," what would be the first way that they can get some new information, learn a bit more? What would you like to share with them today?

ANDREW HALL: I think the first step for companies, then, is to begin to reflect internally on what it is they want to achieve as part of this low-carbon transition and how aggressive that they want to be. One thing that we always emphasize to clients is that, while any sort of environmental regulation has traditionally been a command and control type of approach, what you're seeing with regulations now. And also with the voluntary market, is there's a lot of flexibility and optionality in terms of how clients address their carbon emissions and how they begin to lower them over time, such that it's actually becoming a source of competitive advantage. We see that certainly in the compliance markets, and I think we're going to increasingly see that in the voluntary markets, as companies figure out innovative ways to transact offsets but also to begin reducing their own footprints. Reducing the footprint as well is something that's not mutually exclusive to being financially successful as a firm. To the extent companies can reduce their reliance on fossil fuels or become more efficient in their electricity consumption, that also reduces their exposure to the energy complex. So I think, long way of saying it, I think firms just really need to look at it holistically and decide how aggressive they want to be. Decide what's feasible in the short, medium, and long term, and really have a clear strategy, even though some of the technologies are still emerging, and they may not know. But have a rough outline and clear strategy in terms of how they want to begin to drive down emissions associated with their business, such that the market knows, then, that they've thought about it and have an understanding that it's going to be a process that occurs over time. Really understanding what they're doing and why they're doing it.

AMY WEST: Well, Andrew, thank you again for joining the "Viewpoint" podcast today. For more information on the carbon markets or what TD is doing more broadly in the ESG space, please, reach out to the ESG Solutions team. Thank you for being here today.

ANDREW HALL: Thanks very much, Amy.

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