Financing a Sustainable Future - Pierre Palmieri at Climate Change Summit 2023

Absolutely. Well, first of all, good morning to all of you. It's my first time in Romania today, so I'm very happy to take this opportunity to talk about something I'm very passionate about. Yes, I think climate change is the biggest challenge for our generation, and it impacts all players — public authorities, corporates, financial institutions, individuals, you name it. As far as financial institutions and banks are concerned, we have of course big challenges and opportunities. In terms of challenges, first, what people need to understand is banks do not generate massive CO2 emissions as such — we have very little scope one and scope two — but we have a huge scope three, because it's through the financing of our clients that, of course, indirectly we have to tackle massive CO2 emissions. And the difficulty is that we have to understand all the sectors, all that is at stake in any type of sector — agriculture, chemistry, metals, you name it. And therefore, I think the first challenge is complexity, and this is why we have to invest in a lot of knowledge, in a lot of technical people who are able to understand all this complexity. The second big challenge is managing our risks, and we are facing new types of risks today. If I give an example: if we are financing transactions with mortgages or securities of assets that might tomorrow either not be eligible or be at physical risk, we might end up with massive stranded assets. And this is a problem that we need to anticipate, and it's not only a problem for one institution but it can be a systemic risk. And this is why the central banks are focusing a lot on this, rightly so. But it's not only about credit risks or physical risks — we are facing new types of reputation risks, legal risks, regulatory risks. So that's the second biggest challenge. But of course, there are massive opportunities. First of all, the investment needs are huge. Alone, the investments in green energy, according to the IEA, will have to triple in the next decade. So huge investment opportunities, but also, more importantly, new things to invent — innovation, innovation of our clients, new business models. And this is how banks can come along with new ideas, new types of services, new types of advisory. Last, if we think about a sustainable bank — what does it mean and how does a sustainable bank look like? Well, I think a sustainable bank would be a bank able to tackle this complexity, able to understand the new types of risks, but also it's a matter of culture, a matter of mindset, a matter of making sure that this is not only a matter of few specialists in a bank, but it impacts all the teams, all the departments throughout the whole organization. And it's about making sure that day to day we integrate ESG considerations in the way we do business. It's what we call ESG by Design.

Well, our strategy is first to reallocate capital in the right way. This means taking into account new trajectories — so for each sector, we look at what needs to be done, how we should adapt, what are our new targets, and we fix targets by 2030, in some cases 2025, in order to make sure we allocate our capital to the right sectors, the right companies in each sector, and the right projects. So that's number one. But second, our strategy is also to invest in new projects, new energies — green energy, but also energy efficiency in all types of sectors. And last, and I think this is extremely important — we think about accompanying our clients through their process and their journey of transitioning. But also we think about the clients of tomorrow, because a lot of clients that would be the big clients of tomorrow don't even exist today. You know, one of our biggest clients is a big gigafactory — it was created seven years ago and it's already a huge client of ours. Because it's a real new industrial revolution, there will be a lot of entrepreneurs, startups that we are going to be part of this big transition.

Well, so in terms of targets, what we have done is we have announced very recently a new trajectory on the oil business. For upstream oil and gas, we have taken very ambitious steps — we have decided to decrease our exposure between 2019 and 2030 by 80%. So it's massive. I think it's probably one of the most ambitious targets in our industry. But it's not only this — for each sector, we have set targets. For instance, cement, steel, and several others. Progressively, we are going to do this with all the sectors, all the most emitting sectors. And we look at a criteria which is carbon intensity. It's not that we want to finance less aluminium — it's that we want to finance greener aluminium where the emissions intensity is lower. And these are the targets we fix for each of our sectors.

I think, of course, I already mentioned huge investments. This will bring a lot of opportunities in terms of project finance, export finance, any type of capital markets, any type of financings. But I think more interestingly, it will bring new types of products, new types of advisory for our clients. And this is really what we are focusing on.

Of course, we're not going to explain to an aircraft producer what is the best product for him — he knows this far better than we do. But what we can bring in terms of expertise is: what are the different public policies, what are the other sectors that are linked indirectly to their own sector doing, what are the implications of all this, how are the investors going to look at their own ESG strategy — equity investors, banks, debt investors — how can they sell this to the market. So there are plenty of new types of advisory that we can bring to our clients, and that are opening a lot of opportunities for a bank like us.

Well, our focus, as I was saying, is not to — except for oil and gas, of course. Coal and upstream oil and gas are going to decrease in our portfolio, and that's public. But for the rest, we don't want to decrease our exposure to a given sector. What we want to do is to make sure that each sector becomes greener. And this is why we are working with all our clients, in professional associations — for instance, the ResponsibleSteel in steel, the Poseidon Principles in the shipping industry, the Hydrogen Council — in order to accompany our clients and understand what is happening in their own industry, in order to bring them the right advice.

I think it does have an influence. If I look at what happened after the beginning of the war in Ukraine — you all know the big energy crisis that occurred — I think as far as ESG is concerned, it had a negative implication because some countries had no choice than restarting coal power plants and so on. But I think in the medium to long term it will be beneficial, because there is an understanding in Europe that securing supply of energy is critical, and developing green energy hits two targets at the same time: security of supply and fighting against climate change. As far as inflation is concerned, it's very tricky, because green energy will generate inflation — what we call green inflation. And I think one of the biggest challenges is that inflation, as we all know, hits first the most modest people among ourselves, and therefore we need to have a new social contract to make sure that this greenflation that is going to happen will be compatible with equality and the new social contracts. So I think that's a big challenge that we all need to be aware of.

Okay, so predicting things for 30 years is never very easy. Well, maybe I'll use three different quotes — one for fun, one for wisdom, and one for hope. The one for fun is from UNESCO, well known here: you can only predict things that have already happened. One for wisdom is that people who have the knowledge don't predict, and people who predict don't have the knowledge. But the one I prefer is the one for hope, from Alan Kay, who says: the best way to predict the future is to invent it. And here we have a unique opportunity to shape the future. If we can reinvent new public policies, new public-private partnerships, new industrial schemes and solutions, new ways of financing them, a new social contract — then my belief is that in Europe we will have more growth, we'll have more energy autonomy, and of course we will meet our targets — the Paris targets and net zero by 2050. Nothing is impossible around this. It's a matter of ambition. It's on you, it's on me, it's on each of us, it's on us.

Yes, I think there are big trends in mobility. We are pretty much involved in mobility through our ALD, which just changed its brand to Ayvens, which is the biggest car leasing company in the world. In terms of mobility, there are some mega trends. The first mega trend is electrification — we will move from thermal to electricity, and this is going to happen anyway, it's in the regulation, so it will happen. The second thing is more digital, and digital is part of the solutions — we didn't have time to mention this, but of course it's part of the solutions that will enable energy transition. And importantly, it's about going from ownership to usership — more shared approaches to mobility. And all this will have positive implications on mobility, and this is why we are very much focused on this. What is interesting with electric vehicles is it's a very good example of what we call the value chains. We've got different departments in our bank: some are specialized in mining, so they understand cobalt and lithium that are very important for electric vehicles; some understand the gigafactories and finance these companies; some are specialists of the automotive sector; and some are specialists of infrastructure and therefore understand the charging infrastructure that is needed. What is important for a bank is to make sure that we finance and understand the whole value chain — we bring all the collective intelligence of the different teams in order to maximize and optimize our approach to mobility.

No, it will not be the same. There will obviously be changes. Probably more consolidation at some point — there has been very little consolidation in Europe since the big financial crisis, so I believe that this will happen at some point. That's number one. The second is that the European Banking Union, which is in the making, I believe will — if it's not happened in 30 years, it will never happen. But I think it will happen, and therefore it will bring much more flexibility and much more efficiency in the banking system. And then I think the banks that will resist and still be there in 30 years are the banks that are able to make long-term investments, who understand the big changes and what is at stake, that are not going to be only short-term focused. These banks will be around, and certainly we will be.