Transcript
Speaker: Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends and opportunities.
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Speaker: Thanks for listening.
Speaker: And now onto today's show.
Speaker: Welcome to our podcast, ESG in 2023, from midlife crisis to new horizons, where during the next 20 minutes, we will be covering a range of sustainability themes, starting with a look back on key topics, the challenges in the space, and future insights.
Speaker: During the session, you will hear from our speakers, Dr. Daniel Clear, Chief Executive of ESG Book, a leading ESG data and technology company, and Patrick Condrejan, a Global Head of Sustainability for HSBC Markets and Security Services.
Speaker: Patrick, over to you.
Speaker: Thank you, Gabriella.
Speaker: I think the first topic we wanted to touch base upon was how sustainability has progressed over the last few years and what are the things that have really moved the sustainability dialogue and action.
Speaker: On my end, I would like to mention a few things.
Speaker: The first is obviously the most important one is the real economy and how things are shifting.
Speaker: how the pace is accelerating.
Speaker: And there I will go to one number, which I think is quite striking, which is the investments in the energy transition, which are keeping growing and setting new record levels.
Speaker: In 2022, there was 1.1 trillion
Speaker: of global energy transition investments.
Speaker: And this is the double of what was in 2020, according to BNEF, so Bloomberg.
Speaker: This is far from where we need to be, but this is tremendous progress and is growing at a very fast pace.
Speaker: So that was 31% growth compared to 2021.
Speaker: And about half of this is renewable energy and broadly the other half is electrified transport.
Speaker: The second part is, because we are people in finance, is sustainable finance and how this is moving along to support financing this economic shift in the real economy.
Speaker: And two examples here.
Speaker: The first is on the bond market, so green, social, sustainable, and sustainable-linked bonds, and how this is mobilizing finance.
Speaker: We've seen this market reaching 1 trillion-plus of issuance a year, which is huge.
Speaker: Remember back in 2013, that number was around 5 billion.
Speaker: And this keeps growing and becoming a big share, actually, or a
Speaker: significant share of the overall issuance market.
Speaker: The other one in the investing space is ETFs.
Speaker: And one impressive number last year is the open market, 65% of all ETF inflows in Europe were ESG related.
Speaker: And the last one is how companies and how banks are embedding sustainability into their DNA and decision-making process, which is extremely important.
Speaker: And here we'll talk about
Speaker: the changing role or evolving role of chief sustainability officers, which now are part of the boards and the executive committees, influencing the core of the companies and the bank strategies and how capital are allocated.
Speaker: Patrick, I completely agree with you.
Speaker: I think if you want to change systems, I think that's what we're talking about here.
Speaker: You need a combination of three things.
Speaker: You need
Speaker: The real economy moving, you need financial markets or the flow of capital moving, and you need regulation to change.
Speaker: And I think we see all three of them at the moment.
Speaker: As you said, the real economy certainly is moving fast.
Speaker: Larry thinks that the next 1,000 unicorns, the companies with a billion-dollar-plus valuation, will be climate tech unicorns.
Speaker: And that mobilizes investor appetite fantasies.
Speaker: Investors have pledged more than $120 trillion now to align with the principles of responsible investing.
Speaker: $130 trillion stood up in Glasgow and pledged alignment to net zero.
Speaker: The flow of capital certainly has set its target on this.
Speaker: And then regulation builds the muscle around all of this.
Speaker: And obviously, we've seen in the last few years a lot happening.
Speaker: 730 new policies came out in the G20s that essentially embed sustainability into the way companies report, into the way investors allocate capital.
Speaker: And I think only at that point are you in a place where sustainability really becomes part of the mainstream.
Speaker: And I certainly think we've reached that point.
Speaker: That's clear.
Speaker: And maybe a way to summarize this is to say that society has now a seat at the table.
Speaker: I completely agree.
Speaker: Five years ago, it was still sitting at the corner.
Speaker: It was still sometimes a lonely topic.
Speaker: It is now absolutely mainstream.
Speaker: If you like it and you want to lead with this, and even if you don't like it, regulation just forces you to do it.
Speaker: And so I think regulation is so critical to set the level playing field, but the leaders are still racing ahead.
Speaker: Thanks so much, Daniel.
Speaker: I think that's a very interesting point.
Speaker: You say now regulation has a seat at the table, but I'm wondering now as well, where are the key challenges for sustainability in 2023?
Speaker: You did mention a lot of advantages, both you and Patrick did, but where are the key challenges?
Speaker: From my perspective, there are three main challenges.
Speaker: The first one certainly is there is a level of confusion at the moment in the market.
Speaker: The confusion comes from almost a risk of overregulation.
Speaker: There are a lot of different standards hitting investors at the same time.
Speaker: And I would say a level of confusion because people are using terms in different ways, right?
Speaker: Sustainability, ESG, climate.
Speaker: We're not very good in how we label different products and therefore investors, the end investor is confused.
Speaker: The second area I would pull out is the pace of change.
Speaker: Yes, we have fantastic momentum, but also if you look at the numbers, the pace of change of really moving capital to the areas that need it is too slow.
Speaker: If you look at our numbers, about 71% of companies in the world
Speaker: are not aligned with a transition pathway that is aligned with net zero.
Speaker: That's only one indicator of a much bigger sustainability discussion.
Speaker: But if we want to deliver the climate commitments that sit in the sustainability topic, 71% of companies are currently not allocating capital at the right pace.
Speaker: And then the third piece is we're dealing still with very incomplete data.
Speaker: And many of us here live in financial markets.
Speaker: I think we all believe that signals are important to allocate capital.
Speaker: Essentially, good data is necessary if you want to achieve your commitments.
Speaker: And at the moment, if you look at emerging markets, if you look at private markets, we are dealing with very, very incomplete data sets, which makes it much harder for people to really deliver on their commitments.
Speaker: Yeah, thanks to Daniel.
Speaker: I think, yeah, data is the core of everything.
Speaker: What you can't measure, you can't fix really.
Speaker: That shouldn't prevent action.
Speaker: I think you said something that's quite interesting about regulation or over-regulation and confusion.
Speaker: And I think sometimes this uncertainty
Speaker: in the way we can all operate in this ecosystem leads to uncharted territory and the challenge of perfection getting in the way of action.
Speaker: I think that's a point where that shouldn't, but clearly it is a challenge for us in the ecosystem to know how we operate and especially where not everything is yet set in stone and definitions vary and the words vary.
Speaker: And, you know, back to the question, you know, what are the challenges?
Speaker: The way I always think about it is a midlife crisis of sustainability in a way.
Speaker: We've had ESG and sustainability haven't changed over the years in many ways.
Speaker: Going from ethical considerations very long time ago, moving to SRI and then to ESG, which is more incorporating things.
Speaker: And now we're talking about impact and we're talking about outcomes and we're talking about thematics.
Speaker: So there is a challenge here that is how do we adapt this to the new context and make sure that we continue to act as things are moving very fast in certain environments.
Speaker: There's also the cost of living and inflation.
Speaker: So short term consideration versus medium term.
Speaker: Also, it could be a tailwind and energy security clearly and searching for better energy security will help also pushing on the climate side.
Speaker: And also the regional, I think, discrepancy is quite important.
Speaker: And you've seen the approaches can vary quite a lot.
Speaker: Europe, you know, regulating a lot, trying to give more clarity, taxonomies, et cetera.
Speaker: In the U.S., even the word ESG is controversial.
Speaker: Although with the IRA, there are hundreds of billions being mobilized or, you know, facilitating the transition.
Speaker: So ultimately, I think one of the, and I'm interested in your thoughts, I think that we probably be moving away from acronyms, three letters, like ESG.
Speaker: And we've seen that in the new funds being launched this year, 56% were labeled thematically rather than using a label.
Speaker: So I think we'd be probably moving away from that and getting more into specific themes, specific outcomes.
Speaker: Yeah, 100% agree.
Speaker: I think ESG was initially, ESG ratings essentially modeled after credit ratings.
Speaker: And credit ratings had a very simple purpose, right?
Speaker: A credit rating tells you how likely it is that you will ever get your money back.
Speaker: That doesn't exist with ESG, right?
Speaker: What does the number tell you how likely it is that you will have a human rights violation or your climate alignment?
Speaker: And so I think people are realizing that we lived in a world where the notion of ESG was a bit too simplistic.
Speaker: In the end, ESG sustainability comes down also to a very large degree on what does an investor actually want to achieve?
Speaker: What impact, what outcome?
Speaker: And therefore, I think the emergence of a much more thematic approach to it is quite natural because suddenly you relate it to an actual deliverable, an actual outcome, an actual climate alignment, rather than I'm 57.8 on your ESG scale.
Speaker: We certainly see this in our business.
Speaker: People are moving away from simplistic scores to understanding real raw data.
Speaker: And what's exciting at the moment is with the emergence of much more powerful AI tools, you can actually integrate much larger amounts of data than ever before.
Speaker: You're no longer reliant just on company reporting, which is quite backward looking.
Speaker: You can look into news information,
Speaker: You can do some social media information.
Speaker: You can start to integrate satellite data and suddenly you are actually looking forward and you're trying to predict where certain developments are going.
Speaker: So I think we live in quite an exciting time where ESG certainly is moving on and growing up from a world where essentially we model credit ratings.
Speaker: Yes, we have a bit of a midlife crisis, but often crises are good.
Speaker: And crises make you better.
Speaker: Crises make you realize what's working, what isn't working.
Speaker: And you see a bit of a shakeup in the market every time that people actually get accused of greenwashing.
Speaker: They're suddenly putting a lot more rigor into getting the right processes in place, getting the right data into place.
Speaker: So I think what happens at the moment is only helping us to get more professional.
Speaker: In both of you, and I think this is quite interesting, both of you mentioned this midlife crisis moment of ESG.
Speaker: And Daniel, you briefly alluded to some of these new aspects of where sustainability could lead to.
Speaker: I'd be more interested to understand about the new frontiers or the next frontiers for sustainability, if you could go more into detail about that.
Speaker: I think we started to talk about this a little bit here.
Speaker: While in the beginning of ESG, we were quite backward looking, right?
Speaker: We used data that companies reported.
Speaker: 12 months later, we were creating a score out of it and then put that into an index, an ETF, a fund, essentially to manage risk.
Speaker: to make sure that we exclude the bottom 10%, the worst performers.
Speaker: That's a good start.
Speaker: But what people are doing now is that they're essentially looking at ESG information as a much richer data source to really allocate capital in a better way.
Speaker: If you think about this, if you are investing money, why would you ignore a very, very rich set of information that essentially characterize the non-financial performance of a company?
Speaker: How well is a company positioned along big environmental trends, big social trends?
Speaker: How good is the governance of a company?
Speaker: But if you do that, you need a very different approach to it.
Speaker: You need to really integrate it into your decision-making process.
Speaker: Patrick called it, you need a real seat at the table rather than an afterthought.
Speaker: And for us, that's the exciting piece at the moment.
Speaker: It's moving into the core allocation of assets rather than an afterthought that is excluding the bottom 10%.
Speaker: You clearly now have investors moving, as Patrick said, to a much more thematic world.
Speaker: So people are now looking at ESG as a way to allocate capital to nature, to climate, to circularity, to diversity and inclusion, and therefore also start to manage a real impact on the real economy.
Speaker: And I think that's a super interesting shift and a really interesting new frontier and also part of the collaboration, obviously, Patrick and I are having at the moment.
Speaker: Yeah, thank you, Daniel.
Speaker: And indeed, we're talking about moving into something that is more detailed.
Speaker: I mean, you spoke about data being backward looking and also the cycles, right?
Speaker: You need to wait for annual reports and there is a lag and it's once a year that you.
Speaker: Now we're talking about data that is, and you as your company, you integrate AI into this, which gives you a more live type of data, right?
Speaker: And information and being able to act upon it quite quickly, which can unlock opportunities.
Speaker: I remember two years ago, over lunch, we were discussing where can we collaborate together?
Speaker: And we discussed this idea of looking at ESG improvers, right?
Speaker: So who are the companies that are improving at the fastest pace, right?
Speaker: Without ignoring who are good already, but combining this approach, not only looking at who is good, who has been good, but who is good and improving, or who is bad and improving very fast.
Speaker: And as an investor,
Speaker: Well, probably that's something I'm interested in, right, to get involved to.
Speaker: And this is really giving access to investors and, you know, that we've worked together on an index, right, which we just launched, is giving investor access to more options, to access more type of themes and more investment thesis as part of it.
Speaker: So I think on the thematic, it's pretty clear that's the opportunity side.
Speaker: We talked a lot about the risk side.
Speaker: which is still not well understood, but everyone understands there are risks related to the transition.
Speaker: There are also opportunities, obviously, and that's something that you would see a lot more of.
Speaker: I hear a lot more investors talk about unlocking and finding those pockets of opportunities to benefit from this change in the economy.
Speaker: The other one I'm very keen on, and I think we started making strides throughout that direction, is double materiality.
Speaker: And CSRD is going into that direction.
Speaker: ISSB not really for now.
Speaker: So there is again this variety in the global standards and regulations.
Speaker: But again, if we look at the impact of companies, because as you said, the ESG scores are the financial risk aspect to companies and sometimes misunderstood and criticized because people misunderstand them.
Speaker: But there's another missing element is how do companies
Speaker: you know, with the actions that are taking affect the environment, affect nature.
Speaker: That leads also to the other topic, which is nature.
Speaker: You mentioned as well.
Speaker: I think again, a few years ago, our research called this the next frontier.
Speaker: I think that's such an important topic and biodiversity and such an interlock with climate and other topics like land use, ocean acidification and so on and so forth.
Speaker: And I see a lot of people in the ecosystem now getting involved in TNFTs.
Speaker: And you'll tell me on the data where we are at, but it feels like the data is obviously much younger and much more complicated to get given the complexity of nature and ecosystems, right, to measure this.
Speaker: But maybe I want to hear from you on using new technologies, basically, to measure ecosystems and biodiversity.
Speaker: And how can this help, finally, investors and the finance industry to really take into account nature and biodiversity?
Speaker: Yeah, I think nature is a super, super interesting topic.
Speaker: It comes up in probably every investor discussion that I'm in.
Speaker: The good thing about nature is there is an incredible amount of data available.
Speaker: You talk especially satellite data, very rich satellite data.
Speaker: The challenge with nature is that it's local.
Speaker: And so the big difference from
Speaker: company reporting, climate, that is a fairly global picture, you suddenly are very, very local.
Speaker: And I think that's the hard bit.
Speaker: How do you connect the impact of a mangrove in the Indian Ocean to the impact a company has on those actions
Speaker: the supply chains that run through it.
Speaker: But I see an incredible appetite to move a lot more capital into nature-related activities, either through carbon offsetting activities, as long as they're done well, or directly really as nature as an asset class.
Speaker: TNFD, the task force for nature-related financial disclosure, the little sister of TCFD, is expected to give us a lot more transparency in numbers.
Speaker: But the real action, I think, is on the ground.
Speaker: It's specific projects where nature becomes an asset class.
Speaker: And this is for the real asset side of things, right?
Speaker: Buying lands, for example.
Speaker: But I think even in the listed kind of assets world,
Speaker: where you don't access nature necessarily as an asset class, but taking into account the risks related to nature, depleting nature, polluting, changing the use of the lands, et cetera, is something that is starting to move as well.
Speaker: And that's very pleasing.
Speaker: Maybe another point I want to get your opinion on is emerging market.
Speaker: And I think you mentioned that previously in that conversation.
Speaker: We all know that emerging market is so important, so critical to the transition.
Speaker: And that's where big things will happen ultimately.
Speaker: But data there is also a challenge.
Speaker: And given core business is data and the interaction you have with regulators, with policymakers and customers, where do you see the state of the data in the emerging market space?
Speaker: And what's the timeline you think to get to a space where it becomes as mainstream as for developed markets and to be able to make the same decisions and analysis in EM?
Speaker: Yeah, super question.
Speaker: I do think we face a bit of a dilemma here and a bit of a problem.
Speaker: I think we all know that 90% of a company's footprint, emissions, human rights, most of the ESG topics really sit in supply chains.
Speaker: Many of these supply chains sit in emerging markets.
Speaker: But if you look at emerging market companies today, the quality of ESG reporting is very limited.
Speaker: And also, if you look at the correlations of an ESG performance and the geographies a company is from, you will not be surprised that the best performing companies are in Europe and then to a degree in the North American region, just because they have built more muscle over time, not because they're inherently better companies, but it's just been at the forefront for a much longer time, investors pushing, regulators pushing.
Speaker: And so it is very, very clear that we need better information from companies in emerging markets.
Speaker: And there are a few things happening now.
Speaker: One, these companies are certainly realizing that with regulation rising in Europe and to a degree in the US, they will indirectly become subject to this.
Speaker: The European Union just published a sustainability law for supply chains, a due diligence requirement to go into supply chains.
Speaker: Obviously, with CSRD, everybody who wants to sell into Europe essentially needs to be equipped for this.
Speaker: And clearly, large companies are putting pressure on them.
Speaker: And so, for example, we're working with the World Bank at the moment to help companies in emerging markets improve their ESG disclosure because it's so vital that you get better data from the companies where essentially the majority of global footprint sits.
Speaker: Thanks, Daniel.
Speaker: I mean, that was a great session.
Speaker: And I think there are two or three things we can take away from this.
Speaker: The first we talked a lot about is that, you know, sustainability has now a seat on the table, on the decision making.
Speaker: The second one is...
Speaker: We do have a midlife crisis, but this also creates a lot of opportunities to fine tune, improve,
Speaker: what is already happening.
Speaker: And the third part is probably and gradually, you know, the more generic, the more high-level umbrella, such as EIG, we will move on from that to more specifics, more outcome-oriented, more impact type of things.
Speaker: And that's with the help of more granular data, the help of AI, and the help of all the expertise that has been built in the ecosystem and regulators going into much more granular in the way they operate and regulate companies and financial institutions.
Speaker: Oh, this has been extremely interesting.
Speaker: Thanks so much, Daniel and Patrick.
Speaker: There's been a lot of really interesting insight, specifically in the sustainability space.
Speaker: I would like to thank all of you for listening today.
Speaker: We hope that you were able to gain insights from our session.
Speaker: Please tune into our other podcasts on sustainability on the HSBC Global Viewpoint channel.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
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