Hello everyone. My name is Mark Shackleton, and I'm very pleased to be giving this talk to the M&A Review Spring Week Summit, and I'd like to talk about how climate change impact will come across the M&A segment that you all know and work in so actively.

Okay, so here's a picture of the planet. And, broadly speaking, the levels of carbon dioxide concentration in the atmosphere determine the absorption reflection balance of the sun's rays. And more carbon dioxide in the atmosphere, the warmer the planet will get. This we all know, and of course we've been tracking this since pre-industrial periods.

And, broadly speaking, since industrial records began temperatures have risen about a degree centigrade, as the concentration - on the right in red - of parts per million carbon dioxide has gone from about 300 to now over 400 parts per million.

So, how is this very tricky international issue tackled? Well, the United Nations have established Sustainability Development Goals, 17 of them. And items 7 - energy, 12 - responsible consumption and 13 - directly in climate action are framed by the UN, and increasingly companies will find it difficult to maintain their social licence to operate with customers and banks and the finance community unless they manage to meet the Sustainability Development Goals.

And the world is emitting about 33 billion tons of carbon dioxide annually. This could rise to almost double if no action is taken, under business as usual it might double. This is increasing the stock of carbon dioxide in the atmosphere by about three parts per million each year, and that's about 0.03 degrees centigrade going back across the historical averages.

Now there are, fortunately, better plans looking forward to get to lower emissions, either by mitigating with conventional abatement technologies our emissions, that's the green reduction and also tackling other aspects in order to get to so-called Net Zero in different economies.

Now beyond that it may even be possible to reduce the carbon dioxide in the atmosphere in the future through removal technologies, these are still unproven. But of course many economies have discussed getting to a zero point and that's occurring in different economies in different times.

Now the Conference of Parties in Glasgow in December was very difficult, but at least India, for the first time, to their credit, did actually put a date on their Net Zero pledge. They've not done this before. It split from 2060 but it's now currently 2070, and likely it may advance in the future.

The UN General Assembly September 2020, China had agreed to 2060 and that'll be written into one of their government plans. The Biden administration in December of 2020 committed to 2050. The EU and other countries, including the UK, had committed to 2050 earlier. They did that in 2019 through the [inaudible] deal.

And, in parallel to this many public stock exchanges in developed countries, but maybe not in countries like Australia, will be aiming for their stock exchange indices to be low carbon or no carbon well ahead of these dates.

And, amazingly, some pension funds are trying to decarbonise their investment portfolios by, say, 2035 which is a very ambitious target. And I've even heard of one which is 2030, which is now only eight years away.

So this is going to be difficult. But the Environmental and Social Governance measures, which I'll discuss briefly, are the means by which companies are engaging in these activities. The big question is how will the measures be implemented, and how will we track them and actually measure them?

How will we determine what proportion of businesses are carbon darkside free? How will monitoring occur, particularly in portfolios for the finance community, which is um how we typically think about diversifying investments.

So the Greenhouse Gas Protocol, Protocols, admit for measuring carbon dioxide emissions under so-called Scopes 1, 2 and 3. Scope 2 on the left here are indirect these are the emissions that are embedded in your purchased product, including energy.

Your direct emissions are what you directly admit in your manufacturing process and then there's another category of indirect called 'third', which are up and down the value chain, and they're indirect, they're quite hard to measure but under Greenhouse Gas Protocol, Protocols, we are trying to measure companies' emissions, and these will be reported under so-called TCFD. And in the appendix of this pack, which I hope will be available to you, there's an example of so-called TCFD reporting for Scope 1, Scope 2 and Scope 3 emissions, which I'll refer to again.

So how is the finance social activity, and the accounting activity, adapting to the concept of climate change and embracing um the green movement. Well it's been very difficult for any one economy to tax carbon dioxide emissions within its economic sphere. The pollutants are felt by all, across the whole planet, and it's very difficult to get all economies to coordinate on that.

However, finance has moved from a fiduciary freedom perspective to a so-called freeman perspective, where finance now recognises there are many stakeholders, not just the shareholder stakeholders, involved in a company's operations, and of course we are all stakeholders in the climate.

Finance and accounting are social activities, not purely monetary activities, and companies cannot borrow from banks and they cannot get listings on stock exchange, unless they meet their regulations, which ultimately rest on this concept of social licence, that I referred to, and trust.

And finance and accounting are mechanisms through which trust can be generated and enjoyed, or lost if, if accounting and finance performance is bad. And companies like insurance companies are mindful of this, and they want to maintain trust in their products and they already are declining to cover some investment risks, particularly if they're climate-related.

They could be too big to insure, and on top of that they may actually generate moral hazard. So you're seeing in the finance community a variety of responses. Some are people, some investors are treating climate change as a pure risk. Something they can maybe hedge, or hope to diversify, possibly, if they think they can financially limit or trade it; and others are seeing it as a risk or an opportunity, and they're seeing the climate and compliance sector and the ESG sector as a growth opportunity.

Obviously we're going to talk about M&A, but public offerings are a very good opportunity for investment practice to be up to date at the time of a new market issue. And it is increasingly difficult for firms to get new IPOs away on large exchanges unless they are up to date with their climate strategy. It's very difficult for carbon emitting firms to raise new capital through these means.

If we own some shares of a company that is maybe polluting, we can engage with that company to try and change their behaviour and lobby, and that might change the policies. If it doesn't, then shareholders are at liberty to divest and sell the company onto someone else who may be better at engagement, or ultimately potentially to drive that company off a stock exchange, if the divestment issue becomes so severe.

And finally, of course, what we're talking about today, in the Spring Summit, is mergers and acquisitions. And in particular, I would like you to focus in on the acquisitions which might be driven by green credentials, climate friendly credentials, as opposed to brown or dirty or climate unfriendly businesses, and to think about how the separation between green and brown businesses is going to affect the M&A sphere over the coming five to ten years.

Will brown businesses be divested? To who? Who will buy them and why? What will their motives be? These are going to be big drivers of deal flow in the future.

And finally, it's not just listed firms, but unlisted and unregulated firms, and government-owned firms also can adapt their behaviour, will have to adapt their behaviour, because they will still be subject to some scrutiny through their bank lending.

This is actually a concentration graph of the US stock market over more than 200 years. You can see that a long time ago the us markets were dominated by banking first, and then transport now they're very, very diverse. And the US stock market, and other Western stock markets are resilient. They have winning and losing segments, and they can cope with change, and they are coping with climate change and change of investment practice very well right now.

Oil and gas sectors are falling, obviously they've had a recent blip back up with increasing commodity prices, but the general trend has been down. Brown businesses are consolidating. And energy sectors such as solar power and green hydrogen are emerging, and they are attracting investment capital
because it is understood that these are the growth sectors.

And the M&A business will play a part in this restructuring. So the activities that you engage with with your day-to-day business will become part of this transformation process in the future.

Here's Keynes, 1936, in one of his books he used the analogy for stock markets that everyone is trying to determine which company is most beautiful in order to invest in it. Not just your opinion, but others' opinion of others' opinion and then a third degree etc, but effectively now, as well as pure monetary considerations, investors are considering which companies they think, from their perception, are the 'greenest'. And those, increasingly, are becoming the attractive ones because those are where the growth opportunities and the future seem to be lying.

So, basically, in front of this large, charging, raging capitalist bull which represents um prosperity and innovation and dynamic markets, we have uh this figure here which is the four-foot girl. This is a picture from Wall Street which is actually sponsored, the statue's sponsored by state street.

It was actually put up in 2017, before Greta Thunberg became very well known, but you can view this as a very good analogy for somebody like that, standing in the front of the way of pure capitalism and saying, hang on a minute, there are other considerations here, including the climate.

And investment firms are adapting what they consider to be beautiful. They are incorporating sustainable investment into their criteria, and they are renegotiating what they consider to be green. It's happening all the time, there's no one definition ,we're not going to get to agreement on that.

But the capital markets, because of investor demand, are rapidly revising what they consider to be attractive businesses, with green credentials. We've got some examples here from Truecost, Sustainabalytics, Asset4, MSCI.

These implementations will rest upon standardised measures for CO2, so we need to know how we're going to measure and monitor emissions, I agree with that. But, how is this discussion spilling over into the mergers and acquisitions world?

Okay, so I'm not using these examples of either good or bad practice, and I'm not endorsing them, but i did have a quick look around as to how the M&A process works at different firms. I found Smartsheet, Fostec, Corporatie Finance Institute and Bain.

I'm not going to go into those in detail, but they typically start at the top of the clock with some strategy definitions, and then they move around towards targeting and acquisition strategies, and then they have financing in them, and they have implementation and measurement.

So let's think about how those activities will impact the financial world where we are measuring green greenness, and let's look at back at a historical example from 2008 where that didn't work well, so we can see what measures we should maybe think to use moving forward.

In 2008, credit rating agencies were putting ratings on structured products. And their goal was to produce certain elements of the structured projects which met regulatory credit rating framework approval. They put elements, investment elements, through this process again and again, in order to pump out more
um highly, um high credit securities.

But the consequence was that they mis-estimated risk. They were trying to separate the prime from the toxic, but too much was labelled as prime. You can see it in the language, it just came through in the banking language very, very unfortunately. And the systemic risk was underestimated as a result of this process. And, of course, when the credit crunch hit hundreds of billions of dollars of AAA securities were downgraded to junk by 2010.

So this is not a good story. The finance industry did not come out of this well. And, there is a future possible history which will say that finance industry will not come out well from this process because of greenwashing. Will we see financial structures created and driven purely to try and transform brown assets into green assets without changing any business fundamentals or emission strategies?

There is a significant risk of greenwashing if this process is not properly implemented and if the so-called TCFD - Task Force on Climate-related Financial Disclosures does not have any real effect or teeth.

So obviously in investment, particularly for pensions, we diversify and investors invest across a range of different investments, which you can think of as to having different colours, that's one analogy on this slide. but the portfolio characteristics, overall, are a weighted average of the components.

This is true for market risk through stock market beta, it's true for dividend yield. The dividend yield of the market risk is a weighted average of the combinations of the components. And it is very, very important that when we start measuring the aggregate green credentials of an investment or an investment portfolio, that we have a methodology which is robust to this additive portfolio construction method.

Here we've got some green, this is light, not paint, so light works additively, not by subtraction, not like pigments. And if you have green light plus brown light you get yellow light, and you get a portfolio which is 50 percent green plus 50 percent red or brown here, you get yellow, and that is not green.

So, ESG ratings should work to correctly average parts entity wide. It should not be possible for risky, or brown elements to be hidden. It can be diluted, but not hidden. And therefore we need to be very careful and clear about what will be driving restructuring transactions in the future.

So finally, very quickly, before I run out of time, here are my questions for you, and for discussion in the panel, which I'm really looking forward to.

ESG strategies can add value by promoting emissions reductions. Capital is flowing into ESG compliant activities, and those are the growth sectors, particularly in the stock markets, and there will probably be growth sectors in the SMEs too, is my
guess.

Brown assets are going to be divested, maybe to the best in class, or maybe we'll see clean-up firms who are the best at handling emissions reductions, and they'll specialise in clean-up activities, and that could be a big driver of divestment.

And whether or not you're going for a listed company or not, bank financing is going to be a key part of the process. And banks, because of their Scope 2 and Scope 3 emissions, will have to report on the emissions of the companies to who they lend. So finally, here are the questions.

Can ESG driven M&A strategies reduce overall emissions metrics, as measured by TCFD? We would hope so, but that's my question to the M&A community.

Or, are we going to re-experience the 2008 episode with poor credit rating, and is there a risk that greenwashing activities will try M&A and we'll see a lot of deal flow without emissions being reduced? How are we going to distinguish between the two?

Thank you for listening. There is a graph of the increase parts per million as measured in Hawaii, and it's been going up about three parts per million every year for decades and decades, and it's just really very, very difficult, without concerted international effort across all investors around the planet to knock this graph off its trend. But we're trying.

Thank you, and over to the panel session. Thanks very much for listening.