Olivier Desmarais: How Canada Can Win in A Net Zero World

Speaker 1 [00:00:01] Hi, it’s John here. We’re coming to the end of season six of Disruptors and want to thank you, our listeners, for a remarkable journey this season and for helping make us the number one Business and Entrepreneurship podcast in Canada. We’ve got a lot more ahead, but it’s kind of exciting how far we’ve come this season.

We’ve talked about some remarkable disruptions from chat to the tech rack, and we wanted to wrap up the season with a conversation about the biggest disruption out there, which is climate and how Canada can play an even greater role in the world’s progress towards net zero. It’s going to take a lot of capital, a lot of ideas and a lot of technology. And we’ll be joined today by a Canadian leader who thinks this is Canada’s opportunity to win. We’re seeing historic amounts of capital, whether it’s in the US Inflation Reduction Act or with China’s bold moves on decarbonization that are transforming every sector of the economy. And we’ve also heard through this season remarkable innovations in Canada, from construction to agriculture to energy systems. We’ve called it the $2 trillion transition. That’s the amount of capital Canada is going to need to mobilize over the next 25 years to get to net zero. And when you think about all the technology and all the people that’s going to be required to put that capital to work, it’s hard not to see the coming years and decades as a remarkable period of positive disruption.

This is Disruptors, an RBC podcast. I’m John Stackhouse. When it comes to the energy transition and the enormous innovation and technologies, we’re going to need to literally rewire our economy. There are few Canadians with a better viewpoint than Olivier Desmarais. He’s the chairman and CEO of Power Sustainable, a sustainable investment manager that invests in companies and projects that contribute to decarbonization, social progress and growth while also delivering returns. And if you’re not familiar with the power group of companies, it’s one of Canada’s most significant and global enterprises. Founded by Olivier’s late grandfather, the legendary Paul Desmarais, who started with a single business, a bass company. So it’s kind of fitting that two generations later, Olivier and the team at Power are looking to new ways to pardon the expression power, our lives and economy. Olivier, welcome to Disruptors.

Speaker 2 [00:02:42] Hello, John. Glad to be here.

Speaker 1 [00:02:44] It’s great to have you on the podcast and I think it may be your first podcast. So all the more special. You’ve been blessed with a lot of things in life, but to remarkable grandfathers as well as remarkable grandmothers. I mentioned Paul Desmarais in the introduction and of course Jean Cretien is the other. What did they teach you about business from a young age?

Speaker 2 [00:03:04] There’s actually a lot that they taught me, and a lot of it was through osmosis of just being allowed to be there while they were negotiating certain deals, just being around the dinner table during conversations when they were talking about business. Both of them imbued sort of foundational values. You know, what our principles that you just want to hold true, especially when taking over the long term.

Speaker 1 [00:03:29] What a great lesson for life. Whatever you do, make sure it’s values rooted. Tell us a bit about power sustainable. What’s the origin?

Speaker 2 [00:03:37] Power sustainable got created, I guess, in 2019 when I joined Power Corp. roughly nine years ago, when Power Corp. merged with Power Financial, there was a will to be much more financially focused as a firm, really get to all the correct conversations at all the correct tables so that we can be forward thinking in where we want to go. And instead of just catching up, how to try to leapfrog our competitors in order to go there. And so the angle that we took it was building a climate First alternative asset manager. And by climate, it’s really about decarbonization. That’s the one kind of KPI that cuts across all of our strategies that we bring to market. Got to be.

Speaker 1 [00:04:18] A decarbonization KPI, whatever you do.

Speaker 2 [00:04:21] Fully, that’s the big one. Net zero is all about decarbonization. It’s more of a broad sword tool, but it’s a great place to get all corporations focused in order to have everybody working together. If we’re going to keep ourselves below 1.5 degrees Celsius, which we’re already not going to do.

Speaker 1 [00:04:38] Olivier, what were you doing before this that prepared you?

Speaker 2 [00:04:43] Well, I’m a lawyer by background. You know, went to law school that studied political science and sociology because at first I wanted to go into politics. I then learned that politics is a very ugly business. And so therefore, I chose the environment as a place to where I wish to lean in and work with governments. And by that I mean all governments are trying to push their economies forward in a clean way. And so that’s where I decide to push forward.

Speaker 1 [00:05:06] It’s remarkable how few politicians in Canada spend time in business. Unfortunately, it’s a bit of a gap for the country. You mentioned starting power sustainable in 2019. What gives you confidence to continue to be investing in sustainability in 2023?

Speaker 2 [00:05:23] Oh my God. This is not even the beginning of where we have to go as a society. We’re going to be seeing much more, shall we call it climate impact within our own lives, which will drive the public to becoming much more serious. But more than this, I think governments are competing. You know, the United States with the IRA, China, that’s already a leader across so many sectors and sustainability. The Middle East wants to change. Europe wants their say. And the reason is it’s because it’s about the economy of the future. And will your companies be up for that challenge? And to me, just seeing the big actors on planet Earth going at it full tilt just doubles down my intuition and my theory that all Canadians should be focused much more on that. And we will need a lot more capital to help grow this sector.

Speaker 1 [00:06:14] Where are the most exciting opportunities you’re seeing in the world today? You mentioned the U.S., China, Europe, the Middle East. What areas excite you most anywhere?

Speaker 2 [00:06:23] Just pick where you want to play in sustainability. It’s all incredibly exciting. I mean, energy is the main focus right now. We want to electrify everything as long as we can make clean energy, which we have solar that’s continuing to improve, wind that continues to improve, and those resources are free. Batteries continue to get worked on in order to levels how the grid works. People are coming out with small modular reactions. We got hydrogen coming on board. So energy is sort of the starting point. But every single other sector will also be all about electrification. So we’re really at the beginning of this. We have a lot of the technologies today that can decarbonize us, but we’re still missing a good 20 to 30% of them. And people who do come up with those solutions will have beautiful businesses in the future. But more than that, people that also focus on how to put all the technologies together and make them even more efficient and effective will have a wonderful future in this transition that will be taking place over the next 20 to 30 years. Easy.

Speaker 1 [00:07:30] I want to get deeper into some of those opportunities and where Canada sits. How are we today in 2023 in terms of the attraction to Canada for investment, for the transition versus all those other dynamic markets that you mentioned?

Speaker 2 [00:07:48] Yes. Look, Canada is endowed with resources. We have huge oil reserves, natural gas reserves. We have huge hydro reserves which really help to electrify our grid in a intelligent and clean way. We have metals and mining critical minerals all over China that have yet to be extracted. But lastly, and most importantly, we have entrepreneurs and we have business leaders. There are going to be the people who really help shape the rest of Canada through the clean tech start ups that we’re creating and where Power sustainable comes in play, which is how do we think more intelligently about the energy and the resources that we have? How do we work with our First Nations to build more pipelines to the West Coast so we can sell to Asia? That’s building tons of coal fired power plants? You know how to. We help them. Do not get switching. I get that it’s not the end solution. But if considering how good we are at extraction, how clean we can be in extraction because of the quality of the labor that we have, but also the regulations that we have. We can be a real solution to help India, China and the rest of all of Asia really go off of coal and onto that gas, which is and most likely can be cleaner.

Speaker 1 [00:09:04] It’s such an important point, and that’s why we call it a transition, not a switch. But it’s going to take a different kind of approach to business, I would argue more public private cooperation, a lot more collaboration with indigenous communities, as you said. And that’s one of the fundamental differences between the clean tech revolution, if I can put it that way, and the digital revolution of 20, 30 years ago, which the private sector was able to do, VC’s were able to do kind of on their own. Among the fundamental differences this time is it’s going to take a lot more public capital and a lot more public engagement because of regulations and other policies that are critical to accelerating innovation. How do you think we can go about that differently, we as Canadians?

Speaker 2 [00:09:47] Well, first of all, as Canadians, we can’t be everything to everyone, right? So we have to pick where we want to win and focus in on it. There are a lot of advantages that we have in Canada or natural resources being one, and how do we add value throughout that supply chain to the world as it’s transitioning, but also leave us in a strong position after the change that we have good companies that can continue to add value. So how do we help support our clean tech entrepreneurs that are really sort of straddling this fire between private and public investments? One of the things that everybody’s investing in infrastructure, this will clearly have a private public dimension to it. I think there’s loads of opportunity for people in there, but to your point, it will require them understanding and partnering up with bigger partners that know how to work in a more public, private way.

Speaker 1 [00:10:42] Olivier, tell us a bit more about power sustainable and where you see things going. You’ve launched a number of new funds in recent years and hoping we can discuss maybe a couple of them briefly. And what excites you most, beginning with the billion dollar Renewable Energy Infrastructure Fund. What’s the priority there?

Speaker 2 [00:11:00] So we have four main strategies that power sustainable and a few products inside those strategies. The first one is an energy strategy, as I mentioned, electrification. This is more of a traditional product offering solar, wind, batteries. We’re looking into renewable natural gas. And so it’s really changing our grid from what it was to what we want it to be, so more sustainable, renewable focus. So right here we have about $1.6 billion of committed a um, we’ve deployed about a billion or 800 million of it as we speak right now. This will continue to be a focus because as I mentioned, the grid needs to grow rapidly and that’s how this strategy of renewables really helps power sustainable, make a difference.

Speaker 1 [00:11:48] Getting projects going is not the easiest thing in this country, including in the energy sector. How can we go about that differently to meet the fairly pressing deadlines that we know are coming at us?

Speaker 2 [00:12:02] Well, I think the government has taken steps already by mimicking a lot of the IRA in the U.S. That means a lot of projects that might have been put on pause will be shovel ready and moving forward. This is fantastic because we need to virtually double the size of our grid and make it clean if we really want to be competitive. And 20 to 30 years from now with our peers that are focused on doing this also, the quicker we can get there in a cost effective way, the more competitive we will be as a society and all businesses within Canada will be on a go forward basis.

Speaker 1 [00:12:43] A lot of people might wonder how we’re going to pay for this. How are you thinking through the long term impact of these transitions on the economy and on individual Canadians who will have to be along for the journey?

Speaker 2 [00:12:57] Yeah, well, these are infrastructure projects that have 20 to 30 year lives to them if we do them correctly, maybe even longer. So therefore, my quick one is you mortgage your country, right? You put on debt and this is to me is the correct decision. This is a part that I believe is very strategic for Canada to make sure that we win, which is being the cheapest and most effective and cleanest form of energy possible, but not over 5 to 10 years. That could lead you to doing more coal fired power plants. But over 20 to 30 years, which will lead you into taking a little bit of technology risk. But we should start thinking, well, where does. Clear fit into all of this for us as a baseload. Where can we develop even more hydro because it’s a natural born batteries set? These are the real questions that we have to ask ourselves and these are our long term focus. So as we figure out how are we going to pay for this? I think definitely some more long term capital from the government side, but also some more long term players from the private market should be building this out as much as they can in partnership with government indications of how they would like our grid to look like in the future.

Speaker 1 [00:14:08] The mortgage is a great reference because none of us could afford the homes we live in if we had to pay for it all at once. So it’s a great to get a long term view. You’re right, Olivia, that governments are now taking a longer term view. You deal with a lot of private investors as well when you’re raising capital and when you’re working with partners, what do they need to have confidence to make those long term 2025 year investments, particularly in an investing world that over the last quarter century has become very short term oriented? How do you kind of compete with a mindset.

Speaker 2 [00:14:43] Like the private markets are the best at really telling you where the most? Effective capital allocation is. So for us, you have the energy side, which is more infrastructure related, which I think people should be investing in that because there’s such a shortness of supply. But then you can go to agri foods where we have companies that want to shift and be more sustainable. But the impacts of how we get there are complicated. We have lots of people that would love to take a business. Risk and investing are sustainable because they see where it is in the future. But unfortunately the capital is more than they could bear and that’s where people like us come in place. We would like to partner up with mid-sized mid-cap companies that we think can be leaders in the North American market, but also the global market and sort of write significant checks that helps them achieve the goal of what they’re going for. And we will help them measure it. We will help them accomplish that transition with the managers and the private equity people that we hire, such that we can create winners in that sphere that can help to catalyze capital faster as they win. And more people want to build businesses like them.

Speaker 1 [00:15:54] That’s a great description of the flywheel impact and what we can see emerging in this country in all sectors. Stay with us. In just a moment, we’ll talk more with Olivier Marais about the climate transition, about exciting technologies, and about the emerging trends in agrifood. Welcome back. I’m talking with Olivier Desmarais about the climate transition and power sustainable. In the previous segment, you were describing four strategies you’ve got for power sustainable, and we talked largely about energy, which is the dominant theme. So appropriate. Maybe you can expand on the other strategies.

Speaker 2 [00:16:41] Yeah. So as I mentioned, we have four strategies. One is in energy, one is our agrifood strategy under the US name. And basically what it is is a mid-cap private equity strategy. So $200 million of revenue and less across the supply chain. And it’s how do we take hopefully the company private. But as you can imagine, some of the companies might be too big for our fund size, which is 300 million. So we would take small positions where we would really lean in and have impact from the board on helping the company really get all of its measurements up to speed, but also continue down the path of truly decarbonizing its footprint or having a good source of social impact. So, for example, the first kind of company that we bought is a company called Goodlife. And so basically Goodlife is a company that pretty much makes a salad in a vertical farming kind of way. And so it’s lots of technology, very energy intensive, which is very useful that we’re here in Canada because our energy tends to be a little bit cheaper. But not only that, our energy tends to be a lot cleaner. So therefore the carbon footprint that you can have is wonderful.

Speaker 1 [00:17:56] And so glad you’re focused on agrifood. We’ve done a lot of work on that. As our listeners know, it’s such a great opportunity for candidates. 10% roughly of our emissions, maybe more, depending on how far up or down in the value chain you go. But it’s also something we can export to the world, not just the food, but all these technologies that can transform agrifood here in Canada, but ten acts the impact by being implemented elsewhere.

Speaker 2 [00:18:21] Yeah, but there’s also another benefit, John, which is medicine. Some medicines are only in different places in the world here. Can we grow them at home. But when you think about sort of vertical farming and where it could go, food security across the globe could become a reality where everybody sort of is producing their own food and getting a higher quality food because of it.

Speaker 1 [00:18:45] How do we do that efficiently? Because we have a food system, for better or worse, and it’s both that is incredibly efficient. So those tomatoes or strawberries that come from California. There’s a downside to that, including a climate downside. But the upside is it’s cheaper. How do we ensure that food is accessible as well as nutritious and more sustainable as we go through this transition?

Speaker 2 [00:19:07] Well, I think that’s exactly what the point of the transition is and the technologies that are coming out and that will be coming out and even the vertical farming technology, you know, it’s on the cusp of becoming really economic. It’s economic in some regions, but not in all regions. And so it’s how do we get people to really hone in to that technology, but from a point of strength, from a point of profitability, and then really grow globally to allow all the markets to get more nutritious food, but hopefully also greener because of the nature of how the electric grid has been green-ified.

Speaker 1 [00:19:41] It’s really interesting and often misunderstood by consumers how much energy goes into food production. It’s eye popping, how much energy. But fossil fuel energy particularly goes into the production and delivery of that tomato. So pick up a tomato and think it’s got a low carbon footprint. It actually might have a fairly significant carbon footprint. And the agtech that you’re talking about can really help transform that, while also improving food security and nutrition, other benefits.

Speaker 2 [00:20:11] And it’s going to go slowly but surely. But you will reach a tipping point to where, you know, the big food companies will start to see that A, there’s more supply to be sustainable because their big problem is they’d love everything to be sustainable. It’s just hard to make that shift all at once. And where do you focus? So that’s where we can help. But with these technologies that I think will just enhance the yield and also the nutritional value for populations around the world. And this will be a phenomenal, phenomenal outcome if done correctly. And I think we have a place to where we can lead here in Canada by continue to invest inside these technologies and by being supported by government subsidies to make sure that we can be extremely competitive and at the forefront of this massive change that will be happening in our Food Network.

Speaker 1 [00:21:02] Olivier, you’ve talked about energy and agrifood. What else are you looking to take on?

Speaker 2 [00:21:07] Another mandate that we’re coming out with is industrial decarbonization, but also infrastructure debt investing, Because, John, one of the goals of Paris is. Attainable is to catalyze capital in this sector in order to make us go faster. Because when you think about sustainability, right, there’s two camps. You have the technologists and the put steel in the ground, the technologists. If you think about it, we don’t have the technology to get to zero. So there’s a lot of capital being put in there in order to figure it out. And then we have the other side, which is, well, we have enough of the technology to make a significant dent into the climate story and to shape the curve of how quickly we decarbonize. And within that, we need more people to start putting steel in the ground, right. Deploying the technology that we have. Messing around with how you combine the technology that we have in order to make it more effective. And the only way we’re going to do this is by showing people that not only can you be sustainable, truly sustainable, but that you can make market or market better returns.

Speaker 1 [00:22:06] When you talk about putting steel in the ground, can you give us an illustration?

Speaker 2 [00:22:10] Well, literally building out the energy grid of the future, right, Putting windmills all over the place, building new vertical farms, coming up with industrial companies that are making the shift to sustainability in their processes or are starting a whole new way of attacking a system like Carbon Cure, which is helping construction companies decarbonize, which helps make cement stronger and also helps suck up carbon from the atmosphere. These kinds of companies across the three pillars that we mentioned will be winners as they continue to rethink how we can decarbonize the future.

Speaker 1 [00:22:45] Glad you mentioned Carbon cure. We’ve had them on the podcast and it’s a really interesting company. You also mentioned the challenge of market returns, war for infrastructure, and I’m curious about what gives you more than a hunch confidence that this space is going to outperform the market.

Speaker 2 [00:23:01] So look, just to kind of macro trends, China and the U.S. are really going at it over sustainability. The Europeans want and people want this thing to happen. So a lot of money is being deployed by governments towards electrifying our grid. It’s almost reached a form of national security. And so therefore, there’s a lot of will from government actors and people see that it could be the future of businesses, period. And so therefore, that’s one is a big micro trend that even government actors are buying into now. The second one is every financial firm that I know of has signed up to U.N., PRI, which means they have to hit their net zero targets. There is a lot of balance sheet money out there, like trillions that will be chasing less amount of good products. That means yield compression in the market. This will happen over time, naturally. But I think that as 2030 comes around and we realize that we haven’t quite decarbonized 50%, which is our goal for 2030, we will start to focus in more from a government perspective, but also from a people perspective on what we can do, which will create a sort of gold rush effect towards the sector. And so I think from where governments and people want to deploy their capital is creating all the conditions to win for people that take it seriously and for people that really focus solely on this, which is what we do at power sustainable, We are solely climate focused. Climate first, right?

Speaker 1 [00:24:39] Climate first. And you’ve taken us through energy agrifood infrastructure. You touched briefly on industrial decarbonization. But before we wrap up, Olivier, I wonder if you can tell us a bit more about industrial decarbonization and what catches your interest there.

Speaker 2 [00:24:53] So this is a broader category, right? What really catches the interest here is the US kind of has $25 for every $1 that we put inside that growth opportunity. We Canadians know how to build interesting companies that can help decarbonize our industrial base. But what they really need, if we want to keep them in Canada and if we want them to really go bigger, is we need that kind of capital that can come in and help them grow. And so that’s really where we power sustainable, come into play. This fund that we’re going to be launching comes into play, which is how do we really target these companies that really want to win and give them that growth capital? Now, we will have a Canadian contingent inside this fund because it is North America focused, but this will help Canadian companies that I think are really good access to this kind of growth capital such that they can win and we can have real Canadian winners in our marketplace going forward.

Speaker 1 [00:25:53] Olivier, you’ve laid out so many great opportunities from the energy sector to agrifood to infrastructure and to heavy industry and decarbonizing it. And it’s a global opportunity, but also a global race, as you said at the beginning. What does Canada need to come to grips with in order to be a winner in that race to net zero?

Speaker 2 [00:26:12] I think we have to realize it’s a transition. Even if we produce ten carbon more in Canada, as long as we’re eliminating 100 carbon somewhere else, we’re a net contributor to -90. Let’s dare to think big. Let’s dare to take risk and not be afraid so much a failure which we are in Canada, but take risks in order to grow and to be winners in sectors. And dare I say case, we can’t get over that challenge. There are lots of sectors that will pride themselves on the Canadian sort of slow but steady and methodical way in order to win. So let’s not put all our eggs on the fact that we’re going to be super aggressive. Let’s put some of it towards the less sexy parts of the value chain, but where you can really decarbonize and really have good long term business, that creates good long term employment here in Canada.

Speaker 1 [00:27:02] You mentioned an interesting point earlier about a realization that we may have in the coming years that we’re not going to hit our 2030 targets and that that could be a powerful catalyst. I suppose there’s another side of that coin where people may just shrug or give up and say, We can’t do it. As we come to that crossroads. What do we need to keep in mind?

Speaker 2 [00:27:23] Look, first of all, we can’t quit. It’s really it’s not an option because of the power of compounding. So right now, by 2050, we’re trying to keep it to below 1.5 degrees. What does 1.5 degrees mean? Well, minus two degrees was the ice Age. Now, I’m not saying that two degrees will be a literal hell on Earth, but it will disrupt lots of states. People will start to emigrate all over the place in order to have a lifestyle or just a chance to live. And that will cause huge global problems. And so therefore, it’s not about can we get there? We have to get there because if we don’t, it will just get worse and worse in our own countries also. So we will get there. It’s just the speed at which we get there makes a difference.

Speaker 1 [00:28:07] But it’s not just a threat. As you’ve laid out through this conversation, the power of compounding as an opportunity is extraordinary, perhaps unprecedented.

Speaker 2 [00:28:16] Well, yes, we have to get there. And so therefore, we will get there. And so, therefore, it’s about more people coming to the realization that you can actually be profitable and be thoughtful and get there. And that’s one of the things that we have Paris Sustainable are trying to do, which is catalyze capital by really truly being sustainable, being forward thinking, and then teaming up with great investment teams in order to get market or market better returns. And so if you partner up with the best and you are thinking forward on sustainability, there’s no reason you’re not going to win. Period.

Speaker 1 [00:28:49] What a great note to wrap up on. We have to get there, so we will get there. Olivier, thank you for being on disruptors.

Speaker 2 [00:28:57] Well, thank you, John.

Speaker 1 [00:29:01] That was Olivier Desmarais, chairman and CEO of Power Sustainable. There was so much that Olivier talked about, and it’s hard not to feel confident about that. QUESTION Can Canada win? When you hear him lay out the opportunities? But it’s also clear that we’re not going to win if all Canadians are engaged in this transition, whether it’s entrepreneurs or investors and certainly governments, but all of us as consumers and voters, to leaning into these enormous opportunities that are right before us. I took away from Olivier’s comments that we’ll need even more government commitment, whether it’s federal or provincial or local, to the climate transition. We’re going to need even more leadership from the private sector, from large companies and small companies laying out pathways for their own transition to net zero. And we’ll need even more commitments from investors who are going to finance this transition. At the end of the day, we can win this, but it’s on all of us to get there. That’s a wrap for season six of Disruptors. We’ll be taking a break over the summer months, but we’ll still be releasing episodes featuring our conversations from this past season. And we’ll be back with a fresh lineup for September. Have a great summer and we’ll look forward to joining you with Season seven in September. Until then, I’m John Stackhouse and this is Disruptors, an RBC podcast. Talk to you soon.

Speaker 3 [00:30:26] Disruptors, an RBC Podcast is created by the RBC Thought Leadership Group and does not constitute a recommendation for any organization, product or service. For more Disruptors content, visit RBC dot com slash disruptors and leave us a five star rating if you like our show.

This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.