Managing and Monetizing Your Transition to a Net Zero World with BMO and Radicle
December 01, 2022
|
Business Strategy
December 01, 2022
|
Business Strategy
When Calgary-based Radicle Group Inc. was formed in 2008 in Alberta as the first North American compliance market, the climate change narrative was still mostly off-grid for all but the most dedicated scholars.
Over the following 15 years, as the narrative moved into the mainstream and eventually took center stage, Radicle advanced from spreadsheets with handwritten calculations to software to help its clients understand how to not only manage greenhouse gas emissions, but, ultimately, how to monetize work to offset environmental impacts.
“We have added and enhanced our resources and technology, automating many of these services with expertise built into new protocols, new jurisdictions and new markets that are being born every day, and we are keeping our eyes and ears on all of that while at the same time incorporating these very complex variables into straightforward steps for corporations to undertake today,” says Saj Shapiro, previously Radicle’s CEO and now Managing Director, Head of BMO Radicle.
On Dec. 1, BMO Financial Group completed its acquisition of Radicle, expanding carbon credit development capabilities, its footprint in the environmental commodity market, and deepening its commitments to help clients understand and assess energy transition risks and opportunities.
The following are excerpts from a conversation with Eric Jacks, BMO Capital Markets Head of Global Markets Origination, and Saj Shapiro on what the Radicle acquisition does for BMO, its clients, and the promotion of the transition to a net-zero world by 2050:
Let’s start with what Radicle does, and why that is important to the energy transition.
SAJ SHAPIRO: At Radicle
, we use our proprietary technology and expertise to help corporations meet greenhouse gas reductions targets, and we implement solutions in the most efficient and financially feasible way to help reduce emissions over time. Whether corporate clients are mandated through regulations to reduce emissions, or they’ve made voluntary commitments, our advisory services team will help assess where they are today and draw up plans for future reduction strategies. Our software and programs help companies disclose and account for emissions, as well as calculate and generate emission offsets. At the end of this process, Radicle has a carbon credit trading desk that helps companies monetize those emission reductions, or, alternatively, purchase offsets from other emission reduction activity.
As the conversation around climate change gains momentum and increases in significance in corporate boardrooms, climate action is no longer about just meeting social and client expectations, but about meeting obligations while making smart, climate-informed investments in a complicated world. What Radicle brings to the table are strategies to incorporate complex systems into straightforward commercial solutions that corporations can undertake today.
At Radicle, we are bringing expertise and technology and it’s being matched with the expertise BMO provides.
What was BMO’s rationale behind this acquisition, and why now?
ERIC JACKS: When we announced our climate ambition to be our clients’ lead partner in the transition to a net-zero world, launching the BMO Climate Institute and our Energy Transition Group over the last 12-to-18 months, as we looked at the landscape of BMO versus its competitive peers, there were some areas where we were clear leaders. However, specifically with respect to environmental commodities, we saw an area where we were behind. With the acquisition of Radicle, we gained a lot more than just capabilities in environmental commodities from a typical trading lens. We also gained the expertise to measure emissions and then develop carbon offsets.
What do these capabilities bring to clients, exactly?
ERIC: Most immediately they bring the ability to transact in several compliance and voluntary markets. So, we can offer clients, either in energy transition or other corporate clients, pricing, and execution. It also brings the ability to help clients understand their greenhouse gas emissions, what they can do to change them and the pathways available to develop offsets that will help them defray the cost of making those changes.
SAJ: We are transitioning to a point where publicly listed corporations will be mandated to disclose their emissions. Private corporates are also making voluntary climate commitments to address expectations from their shareholders, customers, and employees. Moving forward, whether it is because of regulatory or voluntary mandates, there will be growing costs associated with addressing ESG commitments. In that world, emissions become revenues, margins, and risk, and all this conceptually lives in the world of financing smart investments, where BMO is a world-class leader. With BMO and Radicle’s combined expertise and resources, we have so much potential to drive this change forward in a positive way.
These capabilities must apply to absolutely everything the bank touches, so how do you go about deploying Radicle’s expertise?
ERIC: In time, it’s our hope to deploy these capabilities across BMO Financial Group broadly, but there are immediate applications for many sectors where there are already regulated compliance entities. There will be some clients and areas where it’s a natural and immediate fit, and there will be other clients and areas where there will be more of an education. Within our capital markets business, we have literally hundreds of clients that have stated goals with respect to their greenhouse gas emissions and which would benefit from these new capabilities. Within the Commercial Bank, we also see an opportunity to use Radicle’s capabilities to build tools that help clients meet their needs. Maybe a little bit further in the future, there could be some exciting possibilities in personal banking as well.
Let’s talk a little bit more about environmental commodities, offsets, how they work, and how they will help the world pay for the transition.
ERIC: Offsets represent a situation where someone has reduced the CO2 emissions that would have otherwise gone into the atmosphere. Every tonne of CO2 that is reduced is one offset, and there is a price for that offset that can be traded. We talk about them sometimes as commodities, but they are not quite that, as they are intangible. They represent either the right to emit under a regulated scheme, or removal of carbon from the atmosphere, so, really, they are like a record-keeping mechanism that uses a market structure to show who is emitting carbon or who has reduced the emission of carbon. They trade in financial markets and the associated price signals affect peoples’ behaviours.
Can you give a ‘for instance’?
SAJ: Let’s take the example of a warehouse that we recommend electrify its fleet of forklifts. That is going to require some amount of investment capital, but making the switch to electric, will not only save on diesel costs going forward, but they will also reduce their operating costs and increase margins. At the same time that this investment reduces their emissions, these changes will also generate an environmental commodity that we can sell into the market and monetize on their behalf.
Why is it important to originate high quality offsets?
SAJ: It comes down to the sustainability of those offsets. There are protocols, very scientific formulas, for how you undertake carbon reductions or removals to ensure they are higher quality. There is an unmatched level of stringency, expertise, and rigour that we bring to the market, and that imbues our products with a very high level of quality. There are also different aspects to removals that help to characterize benefits. For example, is it adding something that wasn’t there before? Is it permanent? Is it going to be there for a long time? Does it have other benefits, does it help the local community?
If you can reduce emissions in the future, it’s worth more than if somebody has already done something in the past. If you can do something in a new way that hasn’t been done before that creates a bigger impact, that can have a higher value.
The market is a very efficient pricing mechanism, so where there is a low-quality offset, it is priced accordingly by the market and the forces of supply and demand. The markets in which you can transact, in which customers are going to demand certain types of offsets, or investments in certain jurisdictions, are all factors that determine the pricing of the offsets, and their supply and demand.
We started this conversation talking about all the unique capabilities that Radicle brings to BMO, but will these one day soon be table stakes for any bank?
ERIC: Yes. Carbon markets are only going to grow in importance. They are one of the key tools that we have as a society and as a planet to change peoples’ behaviours. Ultimately, this is a resource allocation and financing question, and banks are at the heart of how people and companies and society make decisions around resource allocation and financing things. This is something where, eventually, all large and significant banks will have to have some expertise to be able to appropriately serve their clients.
SAJ: I will add that where we are today as Radicle, and where we will be in six months as BMO Radicle, will be a different world. We’re not standing still. We’re moving forward with a combined commitment, vision, and expertise to affect change at a global scale, and that is what is so exciting.
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When Calgary-based Radicle Group Inc. was formed in 2008 in Alberta as the first North American compliance market, the climate change narrative was still mostly off-grid for all but the most dedicated scholars.
Over the following 15 years, as the narrative moved into the mainstream and eventually took center stage, Radicle advanced from spreadsheets with handwritten calculations to software to help its clients understand how to not only manage greenhouse gas emissions, but, ultimately, how to monetize work to offset environmental impacts.
“We have added and enhanced our resources and technology, automating many of these services with expertise built into new protocols, new jurisdictions and new markets that are being born every day, and we are keeping our eyes and ears on all of that while at the same time incorporating these very complex variables into straightforward steps for corporations to undertake today,” says Saj Shapiro, previously Radicle’s CEO and now Managing Director, Head of BMO Radicle.
On Dec. 1, BMO Financial Group completed its acquisition of Radicle, expanding carbon credit development capabilities, its footprint in the environmental commodity market, and deepening its commitments to help clients understand and assess energy transition risks and opportunities.
The following are excerpts from a conversation with Eric Jacks, BMO Capital Markets Head of Global Markets Origination, and Saj Shapiro on what the Radicle acquisition does for BMO, its clients, and the promotion of the transition to a net-zero world by 2050:
Let’s start with what Radicle does, and why that is important to the energy transition.
SAJ SHAPIRO: At Radicle, we use our proprietary technology and expertise to help corporations meet greenhouse gas reductions targets, and we implement solutions in the most efficient and financially feasible way to help reduce emissions over time. Whether corporate clients are mandated through regulations to reduce emissions, or they’ve made voluntary commitments, our advisory services team will help assess where they are today and draw up plans for future reduction strategies. Our software and programs help companies disclose and account for emissions, as well as calculate and generate emission offsets. At the end of this process, Radicle has a carbon credit trading desk that helps companies monetize those emission reductions, or, alternatively, purchase offsets from other emission reduction activity.
As the conversation around climate change gains momentum and increases in significance in corporate boardrooms, climate action is no longer about just meeting social and client expectations, but about meeting obligations while making smart, climate-informed investments in a complicated world. What Radicle brings to the table are strategies to incorporate complex systems into straightforward commercial solutions that corporations can undertake today.
At Radicle, we are bringing expertise and technology and it’s being matched with the expertise BMO provides.
What was BMO’s rationale behind this acquisition, and why now?
ERIC JACKS: When we announced our climate ambition to be our clients’ lead partner in the transition to a net-zero world, launching the BMO Climate Institute and our Energy Transition Group over the last 12-to-18 months, as we looked at the landscape of BMO versus its competitive peers, there were some areas where we were clear leaders. However, specifically with respect to environmental commodities, we saw an area where we were behind. With the acquisition of Radicle, we gained a lot more than just capabilities in environmental commodities from a typical trading lens. We also gained the expertise to measure emissions and then develop carbon offsets.
What do these capabilities bring to clients, exactly?
ERIC: Most immediately they bring the ability to transact in several compliance and voluntary markets. So, we can offer clients, either in energy transition or other corporate clients, pricing, and execution. It also brings the ability to help clients understand their greenhouse gas emissions, what they can do to change them and the pathways available to develop offsets that will help them defray the cost of making those changes.
SAJ: We are transitioning to a point where publicly listed corporations will be mandated to disclose their emissions. Private corporates are also making voluntary climate commitments to address expectations from their shareholders, customers, and employees. Moving forward, whether it is because of regulatory or voluntary mandates, there will be growing costs associated with addressing ESG commitments. In that world, emissions become revenues, margins, and risk, and all this conceptually lives in the world of financing smart investments, where BMO is a world-class leader. With BMO and Radicle’s combined expertise and resources, we have so much potential to drive this change forward in a positive way.
These capabilities must apply to absolutely everything the bank touches, so how do you go about deploying Radicle’s expertise?
ERIC: In time, it’s our hope to deploy these capabilities across BMO Financial Group broadly, but there are immediate applications for many sectors where there are already regulated compliance entities. There will be some clients and areas where it’s a natural and immediate fit, and there will be other clients and areas where there will be more of an education. Within our capital markets business, we have literally hundreds of clients that have stated goals with respect to their greenhouse gas emissions and which would benefit from these new capabilities. Within the Commercial Bank, we also see an opportunity to use Radicle’s capabilities to build tools that help clients meet their needs. Maybe a little bit further in the future, there could be some exciting possibilities in personal banking as well.
Let’s talk a little bit more about environmental commodities, offsets, how they work, and how they will help the world pay for the transition.
ERIC: Offsets represent a situation where someone has reduced the CO2 emissions that would have otherwise gone into the atmosphere. Every tonne of CO2 that is reduced is one offset, and there is a price for that offset that can be traded. We talk about them sometimes as commodities, but they are not quite that, as they are intangible. They represent either the right to emit under a regulated scheme, or removal of carbon from the atmosphere, so, really, they are like a record-keeping mechanism that uses a market structure to show who is emitting carbon or who has reduced the emission of carbon. They trade in financial markets and the associated price signals affect peoples’ behaviours.
Can you give a ‘for instance’?
SAJ: Let’s take the example of a warehouse that we recommend electrify its fleet of forklifts. That is going to require some amount of investment capital, but making the switch to electric, will not only save on diesel costs going forward, but they will also reduce their operating costs and increase margins. At the same time that this investment reduces their emissions, these changes will also generate an environmental commodity that we can sell into the market and monetize on their behalf.
Why is it important to originate high quality offsets?
SAJ: It comes down to the sustainability of those offsets. There are protocols, very scientific formulas, for how you undertake carbon reductions or removals to ensure they are higher quality. There is an unmatched level of stringency, expertise, and rigour that we bring to the market, and that imbues our products with a very high level of quality. There are also different aspects to removals that help to characterize benefits. For example, is it adding something that wasn’t there before? Is it permanent? Is it going to be there for a long time? Does it have other benefits, does it help the local community?
If you can reduce emissions in the future, it’s worth more than if somebody has already done something in the past. If you can do something in a new way that hasn’t been done before that creates a bigger impact, that can have a higher value.
The market is a very efficient pricing mechanism, so where there is a low-quality offset, it is priced accordingly by the market and the forces of supply and demand. The markets in which you can transact, in which customers are going to demand certain types of offsets, or investments in certain jurisdictions, are all factors that determine the pricing of the offsets, and their supply and demand.
We started this conversation talking about all the unique capabilities that Radicle brings to BMO, but will these one day soon be table stakes for any bank?
ERIC: Yes. Carbon markets are only going to grow in importance. They are one of the key tools that we have as a society and as a planet to change peoples’ behaviours. Ultimately, this is a resource allocation and financing question, and banks are at the heart of how people and companies and society make decisions around resource allocation and financing things. This is something where, eventually, all large and significant banks will have to have some expertise to be able to appropriately serve their clients.
SAJ: I will add that where we are today as Radicle, and where we will be in six months as BMO Radicle, will be a different world. We’re not standing still. We’re moving forward with a combined commitment, vision, and expertise to affect change at a global scale, and that is what is so exciting.
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