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Lindsey Hall: Hi. I'm Lindsey Hall, Head of Thought Leadership at S&P Global Sustainable1.

Esther Whieldon: And I'm Esther Whieldon, a Senior Writer on the Sustainable1 Thought Leadership Team.

Lindsey Hall: Welcome to ESG Insider, a podcast hosted by S&P Global, where we explore environmental, social and governance issues that are shaping investor activity and company strategy. Over the past few months, we've been talking on this podcast with some of the world's largest asset managers and owners about how they embed ESG into their strategy.

And in recent episodes, we had guests from State Street Global Advisors and BlackRock talking about their approach to ESG investing. Last week, we talked with the largest pension fund in the U.S. known as CalPERS. Now today, we're digging into a different but vital part of the sustainability value chain in an interview with one of the largest banks in the U.S.

Esther Whieldon: The world is facing some ambitious environmental, social and governance targets. The Paris Agreement aims to limit global warming to 1.5 degrees Celsius relative to preindustrial levels. And the UN's Sustainable Development Goals, or SDGs, aim to end poverty, improve health and education, reduce inequality and spur economic growth. And all of this is while tackling climate change and working to preserve the world's oceans and forests.

If we're going to meet these ambitious goals, it's clear that banks will have a central role to play in financing the changes that need to happen. Just this month, on April 4, the UN's Intergovernmental Panel on Climate Change, or IPCC, released its latest big report covering decarbonization pathways. And that report found that climate-related financial flows from both private and public sources needs to increase by a factor of 3 to 6 from current levels, and that's a really big number.

Lindsey Hall: So in light of these challenges, we wanted to understand, what are big banks actually doing. To get a better sense, we're talking today with Karen Fang, the Global Head of Sustainable Finance at Bank of America. And I had a lot of questions for Karen, including how is the bank working to meet its own net zero goal? What is its take on the newly proposed climate disclosure rule from the U.S. Securities and Exchange Commission. And how is it measuring emissions throughout its value chain.

Now in April 2021, Bank of America announced a goal of deploying and mobilizing $1 trillion by 2030 to accelerate the transition to a low-carbon sustainable economy, and that's part of a broader $1.5 trillion sustainable finance goal that also focuses on a range of social issues. So I started our interview by asking Karen, what has the bank learned in this first year since setting that goal? What worked well? And where has that money been deployed thus far?

Karen Fang: We announced this goal in 2021, and that's the first year of our 10-year journey to deploy the $1.5 trillion. And as you articulated, the first trillion is for environmental transition aka climate finance, right, to help all of us reach net zero in the next 30 years. And the rest really is for social equity and social inclusion. So we imagine any funding that's for health care or education or community development, financial and digital inclusion, racial and gender equality. So that's the balance of the $500 million.

That's exactly, as you say, it's the mobilization and deployment goal. So it is the capital we put on our balance sheet in terms of the financings and investments we make and do as well as capital markets advisory activities, and we're seeing a huge boom and huge interest from the entire investment community in more sustainable investing as well as just green and climate and social finance.

So essentially, our job is not just to deploy our own capital, which we have seen an over 70% pickup in 2021 levels in terms of balance sheet deployment in these assets against 2020 levels, but also really responding and leading in ESG capital markets in sustainable investing arena to really make sure issuers and investors are connected in a very efficient manner, and we're really helping contribute to the growth of the overall ESG capital markets as well. So the numbers are definitely coming from both E and S and coming from both the balance sheet deployment by BofA as well as our capital markets and advisory activities across our business.

The lessons learned, I would say probably is the capital markets are growing at a very fast rate. I mentioned our balance sheet deployment numbers picked up dramatically year-over-year. But the capital markets activity and M&A and IPO activity for these clean energy companies, for example, socially responsible companies, that picked up even faster. So I think the challenge is that we want to make sure that all the different investor groups that are really focused on this.

We have clear measurements in terms of impact, in terms of returns, making sure ESG Capital markets is growing with less growing pains perhaps than normally with the brain. We have a clear framework, what is the use of proceeds-based ESG bond. What are these KPI-linked structures? Are the KPIs stringent enough? These are the things that we're working through to make sure we're not growing just growing fast, but we're also growing in a very responsible manner.

Lindsey Hall: A quick note on a couple of acronyms you're hearing here. M&A is mergers and acquisitions, IPOs are initial public offerings and KPIs are key performance indicators. Is there anything unexpected that you've encountered in the process so far? Any lessons learned that you think would be useful for our listeners to kind of understand the lay of the land and hopefully, learn from your experience.

Karen Fang: Yes. So a very pleasant surprise is that as you have pointed out, we have a $1.5 trillion goal for the next 10 years. So simple average run rate, we're looking at $150 billion of sustainable finance mobilization and deployment a year, right? But when you look at what we did, we just published this in our annual report, we actually have accomplished over $250 billion in 2021 on those. So that clearly is an indication that not only we, Bank of America, as one of the leaders in sustainable finance is doing a lot of activities, the entire capital markets and financial markets are picking up a lot of steam as well momentum in terms of deploying for the climate transition to a low-carbon economy as well as more social inclusion.

So that's the good news, right? So we're deploying at a massively higher pace than our anticipated annual pace. But I think the lessons learned there is the capital markets piece, which could be episodic, right? And we think about M&A activities, IPO activities, primary issuance for equities and debt, these things do have seasonality, and they do get affected by geopolitical events as well as inflationary pressure and other forces. So it's not something that we can count on. Capital markets activity don't work that way, right? Because they get affected by macro headwinds and tailwinds. We just have to be very mindful that it's not going to be a straight line in terms of anybody doing sustainable finance.

Anybody committed to ESG, we will see road bumps. We'll see things that's out of our control, geopolitical events, war, energy crisis. These are things we have to be very mindful to tackle together as we remain focused on the long-term goal, which is to bring our planet, decarbonize every industry sector, help clients come up with very credible pathways to decarbonize their carbon footprint every day and every year leading up to 2050.

Esther Whieldon: And picking up on that thread, at COP26, a big message we heard is that there's ample supply of financing to tackle the economic impact of climate change, and it sounds like you're seeing some of that interest or that supply. But the world currently lacks the means of getting that money where it's needed was another message. So I wonder how that aligns with your experience working to deploy this level of capital? And I guess as a follow-up, sort of what hurdles do you see in connecting available capital with solutions?

Karen Fang: When you look at the IEA, International Energy Agency, report, right, when we think about the funding gap, right, what the UN has already told us about the funding gap from emerging markets, which are, let's say, in dire needs of climate finance capital. Obviously, everywhere in the world needs more climate finance and social equity capital. But I think in emerging markets, they already had a funding gap to accomplish all the UN Sustainable Development Goals before COVID, right? Now COVID, obviously, exacerbated that situation and widened the funding gap.

Then on top of that, according to the IEA report, if they really want to transition to net zero, as you saw, even China and India have announced net zero goals, although later than 2050, but the emerging markets need to decarbonize as quickly as possible as well for the entire planet to reach net zero by 2050, right? This is not a developed to market phenomenon. But the IEA says the annual clean energy investment need really needs to go up by 7x per year, and that is roughly, call it, $850 billion a year on top of the existing widening funding gap rate.

So this is the challenge where international capital markets, developed markets have now gone the momentum, right? And we have seen a lot of evidence that both from insurers and investors and ecosystem participants, people are really getting in the groove of this, and we're starting to do better, whether it's more sizable deployment in wind and solar plants, whether it's better storage. Systems are being developed, whether it's newer innovative technologies like in hydrogen or fuel cells or geothermal, these things are really being contemplated. I think the emerging market funding gap, in addition to their existing SDG gap, is widening.

And there they don't have the same access, right, to the typical international developed capital markets that we all have the luxury of enjoying every day. So I think that is very important, which is why in COP26, at COP26, we announced our initiative to bring more climate finance dollars to the UN SIDS, i.e., the Small Island Developing States, right? And we're starting with a project that we announced -- our Chairman and CEO, Brian Moynihan, announced this on November 2 in Glasgow with InterEnergy, we're putting a lot more wind and solar and EV charging stations in the Caribbean Islands and Latin America.

And we're doing now using an innovative portfolio financing approach to include these climate-vulnerable island nations and emerging markets that on its own will probably not be able to tap these large-scale warehouse financing and potentially project green bond markets down the road. So those are the things that we're doing to be very mindful to make sure that climate finance dollars and these social financing dollars are not just concentrated or received in developed countries.

Lindsey Hall: You mentioned the SDG, that's, of course, the UN's Sustainable Development Goals. And I just wanted to follow up there because that's something I've been having multiple conversations about, this idea that on the one hand, you've got a lot of private sector finance devoted to and interested in ESG goals. And then in the public sector, you have these SDGs, and that there's sort of this divide between them. And so far, we haven't necessarily found the most successful ways to bridge that gap to tie together private and public sector financing and the ESG and the SDG goals, which are often aligned, but there still seems to be a disconnect, at least from my perspective, but would love to hear what you're seeing.

Karen Fang: Sure. So I think that gap that you're pointing out, right, is actually -- hopefully, I'm an optimist. So I definitely think that gap is potentially shrinking perception of SDGs being this ambitious goals for governments and countries and sustainable finance more focused on micro definition of climate transition or social equity, right? So I think what -- when you think about Bank of America sustainable finance mission statement, we specifically said what sustainable finance means to us at Bank of America is financing investments and advisory and capital markets activities that are in line with the 17 UN Sustainable Development Goals, okay?

So everything we do, we want to think about which SDG out of the 17 goals we are contributing to, and we want to be able to articulate the impact and the purpose of that transaction or that project, okay? So it is at least our attempt to bridge the gap on, "Okay, every time you underwrite a transaction, every time you diligent a project, we want to make sure we understand within the sustainable development goal context what type of sustainable finance we'll bring to that project or transaction. I think that forces us and our clients to think about alignment with SDGs, and hoping to bring more partners in to this collaboration to contribute to what 190-plus countries have essentially signed on and pledged during 2015.

Lindsey Hall: Where does that commitment live? Is that part of your net zero goal?

Karen Fang: Yes, that is our sustainable finance mission statement that we have essentially communicated within Bank of America on our own sustainable finance mission statement on what we define as sustainable finance and how we think about the alignment with the SDG. So that's how we bridge the gap between what we do every day versus the UN Sustainable Development framework.

Lindsey Hall: It's been about a year since Bank of America announced a goal to achieve net zero greenhouse gas emissions. What can you tell me about how the bank is working to achieve this goal?

Karen Fang: We announced our net before 2050 goal in February of 2021. And we're very mindful that in order to reach net zero, we have to think about what we do as a bank, right? We obviously take deposits, we make loans, we advise clients, we have capital markets activities. We need to align what we do every day as a bank with our overall net zero goal. And that goes into the -- for a bank -- for every company, that net zero, the emissions -- carbon emissions mean different things. But for us -- I think everyone has pretty similar Scope 1 and Scope 2 emissions. For us, our Scope 3 emissions is very different from an energy and power company, for example, or from a media company, for example, and so on and so forth.

So everyone's Scope 1 and 2, I think this kind of goes to the basics of what is net zero. It does mean different things to different companies to different industry sectors, which is why the net zero advisory work has to be very tailored and has to be very specific. I do think carbon accounting and carbon analytics companies are in big need right now where companies need to understand what they need to measure and how they can measure them precisely.

And when you think through the regulatory pressure as well, more climate risk as well as ESG disclosure requirements, I think a lot of that is going to come from the first step being, how precise is your measurement of your carbon emissions across Scope 1 and 2 and 3 emissions? So Bank of America became carbon neutral in 2019. That basically means within our operations and within what we can control in our businesses, we have reached carbon neutrality in our Scope 1 and 2 emissions, okay?

That means we have conserved a lot of resources. We have reduced our energy usage. We have changed our source energy from typical fossil fuel-based power to clean energy and power, whether it's looking at direct clean power purchase agreements, looking at on-site solar installation in our banking centers as well as looking at renewable energy certificates. We have basically reduced our carbon footprint in our Scope 1 and 2 emissions to zero as of 2019, and we'll continue to maintain that.

So for us as a bank, the biggest challenge is Scope 3 because that's our entire supply chain and value chain. And what does a bank do for a living, right? We obviously provide financings, we provide investments, and we do these advisory activities and capital markets activities, just to simplify, right? Obviously, when you think about consumer banking, corporate banking, commercial banking, we all do different things. But a large part of our Scope 3 emissions is our financing and investment emissions.

So when you think about any type of loan we make to a company, any type of mortgage we provide, right, all of that, supply chain financing included, is essentially carried on in our Scope 3 emissions. And our Scope 3 emissions dwarfs our Scope 1 and 2 emissions, which is why it would take us a while, and it really takes all of our clients that we lend money to and invest in to work with us on a credible transition plan to transition to net zero, so our financing and investment emissions, which is the biggest contributor of our Scope 3 emissions, can be neutralized over time. So our job is to work with all of our clients on the net zero transition plan, and financing their green transition. So that makes the job very interesting and exciting.

Lindsey Hall: We're having this conversation at a really interesting time, just shortly after the U.S. Securities and Exchange Commission, the SEC, has made a climate disclosure proposal. And would love to get your take on that in light of the conversation we're having about Scope 3 emissions.

Karen Fang: Sure, Lindsey. I think at Bank of America, we have been a long-term supporter of transparent ESG disclosure and stakeholder metrics disclosure. As you are aware, our Chairman and CEO, Brian Moynihan, is the Chair of the World Economic Forum's International Business Council. So in 2020, I think, Brian, the IBC and the WEF, together with the Big four global accounting firms, Deloitte, EY, KPMG and PwC, launched a set of universal stakeholder capitalism metrics, right? Those obviously include a lot of these climate and specific carbon disclosure requirements that SEC is very focused on.

All companies, over time, should be reporting Scope 1 and 2 and 3 emissions, you should report your gross emissions. You should also report any carbon offsetting activities you're doing, including renewable energy certificates. I think the overall direction of travel is definitely right. And I think we support the transparency and evolving disclosures space and obviously, with our own effort with the IBC and the WEF and the big four accounting firms, the more the merrier.

However, we have to be very cognizant of the fact, right, as we were talking earlier, Lindsey, the Scope 3 emissions for any company includes your entire value chain, right? So that's your customers you're doing business with, the suppliers you're selling your products and services. To say that a car manufacturer can effectively accurately report their Scope 3 emissions from all the suppliers that they buy products from, from all the basic material providers to those suppliers all the way down to the chain in their supply chain, it is probably too optimistic today.

The data needs to be better. The accuracy needs to improve. The assumptions need to be probably harmonized, right? There's still too many idiosyncrasies on what people assume in these calculations. So I think it's -- overall, it is a great progress, and we view that as a very necessary step for the entire planet to reach net zero so everyone can measure their emissions and report progress. But I do think we need to have some safe harbor solutions, while the data systems are not fully developed yet, and the data accuracy, for sure, for Scope 3 will be less than Scope 1 and 2, for example.

Lindsey Hall: I'd like to ask a sort of related question as we're talking about finance emissions, which is on the topic of divestment versus engagement, this is a debate we've seen heating up in the ESG world over the past year. We've done some recent podcast episodes on this topic. And I wanted to ask how Bank of America is approaching working with carbon-intensive clients on transition?

Karen Fang: Yes. I think that's a very important topic. And especially in light of recent events, right, when you think about the war between Russia and Ukraine, when you think about the energy crisis, you think about the inflationary pressure, to say that we can ignore all that, right, to basically transition on net zero and gradually reduce emissions while we're really facing some very significant threats of energy independence, energy security, right, inflation kind of driving some of our economic development into a pretty dangerous zones, I think you have to understand that practicality is important.

When we think about helping energy empower clients transition, when their energy supply is needed right now, if you want to steer away from Russian energy or Russian oil and gas, we may see developed OECD countries potentially increasing fossil fuel supply in the short term, right, while not losing the main focus of a clean energy transition and reaching net zero by 2050. How do you do that, right? You need to think through short term, but not losing the focus and decarbonizing and building up wind and solar, and bring hydrogen and other clean renewable energy supply in the meantime.

Meanwhile, obviously, providing energy to the people, right, to the countries that still need them to make sure inflationary pressures are not out of hand. These are not easy challenges for any company or any country to tackle alone. It does require a very systematic and thoughtful approach to balance the short-term crisis response versus a long-term transition goal. So when we think about engaging companies and engaging organizations in the transition, it's always about engagement, right? We have to understand what they're doing for people and for planet, and what are the limitations put on them in the short term, at least, how can we facilitate in terms of an orderly transition to clean energy?

Because ultimately, the Sustainable Development Goals, looking at the E side versus the S side, is not always at perfect harmony. Sometimes, depending on specific crisis situations like this, you just have to make sure you map out short-term needs versus medium to long-term goals, and you have to be very, very thoughtful and balanced. We don't think a disengagement is the answer in any industry sector. We have to be -- have a comprehensive conversation with our clients. We have to understand their determination to reach carbon neutrality, net zero. We have to encourage and help them establish a concrete and incredible glide path plan. And we have to really be all-in, in terms of offering them advice and offering them financing investments. They can upgrade their energy usage to more efficient devices or approaches, right? We have to be always in terms of working with them for the short, medium and long term.

Lindsey Hall: So as you can hear, Bank of America deployed approximately $250 billion in sustainable finance capital in 2021 on the path toward its broader goal of deploying $1.5 trillion by 2030. At the same time, financial institutions like Bank of America are grappling with the question of how to consistently measure and then reduce emissions across their supply chains, which can be especially difficult when it comes to measuring Scope 3 emissions that occur up and down a company's supply chain as well as when customers use the company's products. This is a topic we covered in our recent episode on the SEC's new climate disclosure proposal, and we'll include a link to that episode in our show notes.

Esther Whieldon: Also in our show notes, we'll include a link for an upcoming series of events we'll be covering on this podcast. We're taking the ESG insider podcast on the road in May to bring you interviews and key highlights from the S&P Global Sustainable1 Summit. The summit will be held in Paris on May 10, in New York on May 17 and in Sydney on June 9. We'll include a link in our show notes in case you want to sign up to attend any of those events in person. And we'll be digging into topics like net zero and nature positive, advancing social equity and measuring progress. So stay tuned.

Lindsey Hall: Thanks so much for listening to this episode of ESG Insider, and a special thanks to our producer, Kyle Cangialosi. Please be sure to subscribe to our podcast and sign up for our weekly newsletter, ESG Insider. See you next time. Copyright © 2022 by S&P Global.