Speaker 1: Welcome to Carpool, a podcast brought to you by the Fuels Institute.
John Eichberger: Hey everybody. Welcome back to Carpool Chats, I am John Eichberger with the Fuels Institute. Today, we are joined by John Veith, Director of Investment banking at Raymond James and Associates, and my colleague Jeff Hove, the Vice President at the Fuels Institute. gentlemen, thank you very much for joining us today in Carpool Chats!
John Veith: Thank you John.
Jeff Hove: Good to be here, John.
John Eichberger: John, let's start with you. So we talk about the transportation sector all the time on this program, but your portfolio from Raymond James and Associates is much broader than that. So, you guys are looking on a big [swath 00:00:37] what's going on in the market. When I say ESG, what does that mean to you? And what do we need to be thinking about when we are trying to get our arms wrapped around this concept?
John Veith: Yeah, absolutely. So my particular role is in the Investment banking group and we're primarily focused on mergers and acquisitions. So, there's also an element what we do tied to capital raising in the public capital markets. So, as I think about ESD, when we're pursuing a sale of a company, or helping on the buy side for a major consolidator, looking to go after a target, ESG really means, how more or less a company is aligned from a value perspective around some of these key social consciousness guidelines. So environmental, social, and governance. Does the company report adequately on how carbon intensive its operations are from a social standpoint? Are there diversity and inclusion initiatives at the highest levels of the company that folks are paying attention to? And governance standpoint, is there proper protocols at the highest echelons of a company that are in line with best of class operations and standards today?
John Veith: So, it's a very broad reaching concept, and it's nothing new of course. It's been around for a very long time and it's a major component of the public capital markets. Just yesterday, there was an activist shareholder third point, which is run by Daniel Loebe who took a $500 million position in Shell and is lobbying for its breakup. So, you see it front and center on the front page of the Wall Street journal, it's out there, folks taking positions in companies looking to advance goals that are more in line with either the investments organizational values or realigning the capital allocation priorities of these companies to align with investors and so forth. So, it's out there and it started at the top with major large cap companies. And ultimately, we view it as something here to stay that should make its way all the way to the smaller folks.
John Eichberger: And Jeff, maybe some of the people watching have heard corporate social responsibility. This is kind of CSR and steroids the way I look at it. But I mean, there are consequences to this. So you hear what John just said, you think, okay, sounds good. Sounds like social movement sounds like the other things we see in society happening, but there's some teeth behind it. It's not regulated yet. I don't believe, but there are teeth being brought to this for publicly traded companies, as John mentioned, but also privately traded, privately held companies are needing to pay attention to. So, where is the momentum coming from? Where is the pressure kind of being applied to companies to take this seriously?
Jeff Hove: Yeah, that's a really good point John because it's such a unique situation. Normally, industry is used to policy driven scenarios or schemas, and this is something that's really void of what's going on in DC or other policy at the state level. It's really being driven by the financial institutions. So, if you are anywhere in the supply chain, so you can be a privately held company, for example, and if you're doing business with a publicly traded company, that's directly impacted by investors and other things, that publicly traded company is going to be asking for your ESG because they want to roll in your metrics. And if you're doing something that is positive, especially on the emission side of things, the green house gas, CO2 emission side of things, they want to bring that into their ESG report as well.
Jeff Hove: So, you have that relationship in that supply chain relationship that is growing, and all the way to the point where we're seeing folks that are trying to bid on a fuel supply contract, and one of the prerequisites to even put your bid into the hat is an ESG plan. And we're seeing that with some of the large data centers, whether it's Facebook, Microsoft, Amazon. Some of these other larger tech groups are demanding fuel suppliers have an ESG plan.
Jeff Hove: The other areas that we're seeing it is with lending institutions, preferred lending terms and conditions for those that have an ESG plan versus those that do not. And it's just really crazy to look at that, but what the lenders and the financial institutions are ultimately saying is, what is your risk? So, ESG turns into this risk assessment tool, and it's no longer looking at the immediate risks posed by, that could potentially occur in your company, but they want to start bringing in the long term risks of climate change and all of, everything that goes out beyond that. So, a lot of pressure's coming on industry from areas we're not used to seeing those pressures come and it's a very unique situation.
John Eichberger: So your comment about supply chain, you see these [inaudible 00:07:08], these big 500 fortune, five companies, whatever, saying our pledge is net zero carbon by X date and you read that in the journal, you read that in papers and hear on the news. You go, okay, that's great for them, good job. The trickle down impact of that, you don't really think about because if you're a massive corporation like that, you're making a pledge, you're looking upstream and downstream, not only at your own operations, and that's going to have residual effects on everybody, you do business with. Right?
Jeff Hove: That's exactly how it's panning out. That's exactly the way it's going right now.
John Eichberger: Yeah. John, you mentioned you guys deal a lot with [M&A 00:07:46], and with ESG kind of popping up in almost all iterations of business. Are we starting to see some deals, possibly be jeopardized if one of the parties doesn't have an ESG plan? Are we getting into that level? I mean, Jeff mentioned that some terms of financing and loan terms may be skewed depending on your ESG plan program and reporting metrics, but is that starting to really have an effect on the whole [M&A 00:08:14] and what's viable, what's not?
John Veith: Yeah. I think deals that are on the fringe that aren't necessarily lay ups, more on the cusp of being a great opportunity, if the ESG components not lining up, that's going to be tougher to get through an investment committee, for instance, at a major private equity fund as [M&A 00:08:45] practitioners. I mean, as part of our DNA, we believe that that competition drives the best outcomes, and in order to widen the net as wide as it possibly can, a good thought process around not just what you're doing now, but some of the things that Jeff was talking about. Being cognizant of the longer term risk, being cognizant of your ability to attract at the end of the day. Young folks are more and more attuned to this umbrella of corporate responsibility, and they want to work for companies that align with their own values. And if you're not in a place where you can articulate your values, it's tougher and tougher to attract the right types.
John Eichberger: [crosstalk 00:09:39] that's a great point. I was having a conversation with a couple companies a couple months ago, and we were talking about ESG and they said are the new generation of employees, they were convinced [inaudible 00:09:48] that they want to work for a company that they're proud of. They want to work for a company that shares or values and today given the tight labor market, man, attracting people is so much more challenging. I mean, is this really a tool that could be used to kind of recruit? I mean, when we were growing up and we're probably all in the same general demographics and generational, you're going to hire me, great, awesome! I don't really don't care what you do in the backyard, just pay me, and let me do my job. But the new workers, the whole mentality's changed, hasn't it?
John Veith: Yeah. We keep talking about the great resignation about all the churn, and the labor pool, and the more closer people are to hit the eject button. I mean, it's really something. This massive vaccination debate that's kind of taken hold at every board level, worked its way into Raymond James recently and I had some insight, and there was a sub segment of the employee population when we went back and interviewed folks about the vaccine mandate in particular, if we force that upon folks that there's a large percentage of our workforce that may not work for Raymond James the day that that's announced. And I think, while it's not perfectly within the ESG umbrella, that just shows you that people were willing to move if prompted in that type of way. I mean, to your point, when I took my first job, got my first paycheck, I was loyal, committed, soldier and it's not necessarily the same paradigm these days.
John Eichberger: Yeah. I mean, when I got my first job, I said thank you, sir. Now, what do I need to do to make sure I get my second one? It wasn't now, what are you going to do for me next? It was just, what do I have to do to make sure I don't lose that second paycheck coming my way? Jeff, one of the challenges I keep getting lost in is there are no regulations. So, there really is no guidebook of definitive terms, definitive metrics that somebody needs to follow. I mean, you can talk about social. What does that mean? Governance? Okay. Governance, maybe that's a little bit easier to get earned around. Environmental, I mean, right now everybody's talking about carbon and it seems to be that's the drum beat. I was speaking with a company a couple weeks ago and said, look, the only thing my investors want to hear about is our carbon emissions and our diversity.
John Eichberger: That's all they care about everything else they couldn't care less about. But Jeff, if I'm a business guy and I'm trying to figure out how to develop an ESG plan and how to put forth what I'm doing, and kind of take credit for the good stuff I'm doing, where do I start? I mean, I wouldn't have a clue where to start. Governance I can figure out, the rest of it, man, it seems the social stuff seems so political, and the environmental stuff seems very challenging to really get your arms around.
Jeff Hove: Yeah. I mean, our approach was to sit down with the industry, number one, go through the existing frameworks that are out there. So, there are frameworks, and it really starts with the GHG protocols developed by WRI and then that leads into SASB GRI. I mean, there's frameworks everybody seems to have a new and improved framework that we can follow and we can pick from. So, as we the Fuels Institute built out ESG integrity as an application, we pulled what the feedback we were getting from industry, as far as determining what's material, where do we have hard data that we can track and collect? And then more importantly, how are we processing that data, right? Because we start to, people can start to work in black boxes. And suddenly, you're putting data into an ESG report that people are going to question, this is an industry that's going to always be accused of greenwashing, for example.
Jeff Hove: So how do you transparently, for example, calculate your CO2 emissions? And so, we work with Argonne National Labs and we use the Greek model. For example, we update the Greek model. We look at the grid in the [NERC 00:14:28] regions and in the EG grid regions to determine how can we transparently say honestly, openly look at our appendix, it's all in there. How can we crunch all of those numbers? So that it's unquestionable. So yes, there's really no regulatory framework right now. We know that [SEC 00:14:56] is working on some proposed rules that should be coming out in quarter one.
Jeff Hove: And so, we're probably going to have some rules to follow, but in this voluntary period, it's really an opportunity. It's an opportunity for the company to go back and look at their corporate sustainability reports or historic reports, and really kind of refresh that. And let's be honest, a lot of that is fluff. A lot of that is PR, but there's still good stuff in there, so how do we take that and morph it into an ESG plan when we've got some fantastic messages? For example, if you have 500 store clerks and each one of those store clerks are trained in recognizing criminal activity and human trafficking, you've now got a whole army out there facing the public that is doing a lot of good. So, there's good messages in there.
Jeff Hove: And there's metrics in there, 500 employees. This is what they're doing in their communities. I mean, that's just one example. There's multiple examples in there, but really it's finding somebody in your organization saying, okay, this is you're designated, the ESG contact person, and then starting to collect that data. And that's what we're here for. We're trying to help industry fair it out what's material, what's not, what aligns with the SASB framework. So the GRI frameworks, so that we can build a good report that ultimately gets a good ESG score, which is a whole another topic. I mean, the ESG scoring protocols really do need some rules applied to them.
John Eichberger: So, John, I mean, you just mentioned how do we [crosstalk 00:16:52] parse through the fluff, and how do we cut through the green washing? And so when you're looking at an organization, and they go, "here's our ESG plan" I mean, how do you go from yeah right to this is really credible. I mean, what are you looking for in terms of those tell tell signs, I'll let you know that this is something that is legit, that it's verifiable, it's credible, it's transparent compared to oh yeah look over here, pay no attention to the man behind the curtain.
John Veith: Yeah. I think may not be perfectly qualified to be ESG diligence expert, but I do know that there's certain pockets of the ESG umbrella that are really important for this industry. That are good to highlight that if you're thinking about it in M&A context, the combination of two organizations, making sure those aligned is very important. Organizations that advance your progression towards the goals that you've outlined, publicly, internally, I think it's a meaningful way to think about it that there are rating agencies out there when you seek larger forms of debt financing that have their own scoring matrices that come into the process of securing capital for companies. Lender presentations, when you seek debt that's outside of your just local banking relationship, you're looking for a more syndicated offering that can be parceled out to other banks.
John Veith: As part of that marketing package, ESG is big component of what sits in those documents. There's always a page or two dedicated to what they're doing. So I think, to the broader point that Jeff is articulating, there's lots of data and green washing that's put out there for PR purposes. It will become standardized one day.
John Veith: I think right now, the more important focus for operators that I touch, and that we speak to and advise is to have a strategy, start at the top, figure out what the committee needs to look like, figure out what the policies need to look like, figure out what the organization's DNA is. What its values are and how you not just articulate those, but ensure that they get instituted at the operational level. And maybe executive compensational aligns with those aspirations as an organization, but, all these things eventually need to be really woven into the operations of a business.
Jeff Hove: [crosstalk 00:20:13] I would add to that, John, some of the midstream folks that we've been speaking with, as they're doing their mergers and acquisitions, what they want to know is, if I purchase this organization, what's that going to do to basically my CO2 footprint, what's that going to do to my overall organization's footprint. And it's just like doing a phase two environmental site assessment. You want to make sure that you know what the risk is in the ground when you're just purchasing a single C store.
Jeff Hove: This is another risk assessment that it has to be accurate because otherwise, you could possibly purchase an organization, and if it's not truthful, and you're not getting the full picture of the admissions that you're essentially buying and folding into your ESG report. Now, all of a sudden, here's a new risk that you weren't ready for. So, that's why we really lean on the transparency of the great model in the ESG integrity application because it's easy to see most and everybody understands how that model works and what goes into it. And that transparency is really important when you're talking about mergers and acquisitions and that's where we're seeing people use it in an industry right now.
John Eichberger: I saw an article a while back talking about a very large company with a very big market cap value, and two different ESG evaluating agencies scored the company, [inaudible 00:22:00] opposites. One gave them the worst score possible, one gave them the highest score possible, and it was all about the assumptions. So, about the data they were analyzing, and the perspective they brought to it. And I think, we're still kind of in the wild west until there's a little more standardization in terms of what constitutes a valuable ESG metric.
John Eichberger: But I mean, what I'm hearing is, you have to take it seriously because it's not a fad. This is not going to go away, and it's going to be around for a long time. It's been around a long time in different iterations, but it seems to be coalescing and getting a little more momentum in different venues, not just government, but financial institutions, social pressures, all these things are all kind of coming together, making this a higher priority for companies. And until we have a clear rule book, the best option, what I'm hearing from you Jeff is be transparent, use credible data, put forth everything you're doing, and be honest about it. And then start tailoring how you present it as the rules come together. Is that a pretty good summary of where if I'm a business operator, I need to be thinking about?
Jeff Hove: Yeah. Absolutely because if you don't do it for your own company, somebody will do it for your company for you. And we already know that that's happening. There are groups out there that are using AI to assess your organization and they will provide a score for you, which is not in most people's best interest.
John Eichberger: I saw an article, and I think you probably referring the same article. I mean, where AI can analyze somebody's speech and determine the tone they use, the facial expression they use when saying certain words to determine how sincere they are, and how credible it was. I'm thinking I am going, are you kidding me? This is [big brother 00:23:48], just completely blown up out of proportion.
Jeff Hove: Yeah, yeah, yeah. It's crazy. The other piece too is that it's really important for industry to stay ahead of it because we know that those that are, we'll call them early adopters say during this voluntary phase are going to have a seat at the table.
John Eichberger: Right.
Jeff Hove: When we start, when we sit down and start engaging in proposed rule makings and building out a regulatory framework, we know that the United States is already behind, compared to the EU and other countries. So, there's going to be a period of time here coming up shortly, where we're going to be faced with, we need to be able to jump into these rule makings. We need to make sure that our voice is heard, and the only way you can do that is by showing policy makers that this is what we've done. We have got skin in the game, we are being proactive, and make sure we got a seat at the table during those processes.
John Veith: Yeah, that's right. Jeff. I think it's for folks looking to access capital to secure the best cap rule, to enter the M&A market in particular. I mean, it's a differentiator, it's a differentiator for sure, and it evidences a more thoughtful approach to the risk landscape that surrounds business. It evidences more foresight, it evidences your ability to think through energy transition and in a very thoughtful way, and be prepared for it. And those companies show much better than the folks that say this is something that big companies are dealing with. That's not something that I need to get concerned with until my local banker tells me my rates are going up a couple hundreds. I don't necessarily think that's the right takeaway.
John Eichberger: Gentlemen, thank you very much for joining us today and talking to us in Carpool Chats. This is a huge issue that we need to be diving into it. I know we're going to be diving into a lot more. If you guys back home watching us today, Fuels [inaudible 00:26:13] has launched a new application called ESG integrity, you might want to check that out if you have questions about the financial perspective on ESG, John at Raymond James is available. So, thank you guys for tuning in, and we'll see you on the next episode of Carpool Chats.