Transcript by Kensho.

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

Esther Whieldon: And I'm Esther Whieldon, a senior writer on the Sustainable1 Thought Leadership team.

Lindsey Hall: Welcome to ESG Insider, a podcast hosted by S&P Global, where we explore environmental, social and governance issues that are shaping investor activity and company strategy. 

Esther Whieldon: Lindsey, it's hard to believe we're halfway through our fourth season of this podcast. This morning, I was looking at our plans for the rest of the year, and we have a packed agenda that I'm super excited about. And that includes some episode ideas I got while at the GreenFin conference in Boston in late June. The GreenFin conference convenes stakeholders from across the green finance ecosystem. Green Biz Group hosts the event and S&P Global Sustainable1 was a sponsor.

Lindsey Hall: Yes. I'm also really excited about the months ahead. In addition to planning for Climate Week in New York City, we're also teeing up for COP28 later in the year. And we also have a bunch of episodes plans on topics ranging from evolution of the workforce to sustainable agriculture and nature and biodiversity. But one of the big topics I've been hearing discussed in the sustainability world is how we're going to finance the energy transition. So I'm really curious to know what you heard at GreenFin Esther.

Esther Whieldon: Big themes that we'll cover today include how transition planning is evolving, options for closing the finance gap for low-income communities, and how financial institutions are responding to pressure from multiple stakeholders regarding their fossil fuel holdings. 

I also heard a lot of discussion at the conference about how to translate environmental, social and governance issues for an audience that has not deep in the weeds on ESG or sustainability. 

And of course, I heard the often recurring theme of how data challenges remain and the implications of the evolving disclosure standards and regulatory landscape. Now the conference happened the same week as a big development in the sustainability standards world. The International Sustainability Standards Board or ISSB, on June 26 issued its first 2 disclosure standards. So that meant there was a lot of discussion at GreenFin around the implications of those newly released standards. 

To understand how financial institutions are navigating pressure around their investment decisions, we'll be talking with Aeisha Mastagni. She's a portfolio manager in the sustainable investment and Stewardship Strategies Unit of the California State Teachers' Retirement System, or CalSTRS. CalSTRS is the second largest pension fund in the U.S. with about $309 billion in assets under management. And we'll also speak with Tobi Petrocelli. She's Head of Sustainability and Transition finance strategy for MUFG Americas -- that's the Americas division of MUFG, or Mitsubishi UFJ Financial Group. MUFG is Japan's largest bank and also one of the largest banks in the world. 

And we'll be hearing from Rob Bradley, who is Managing Director of Climate Change and Sustainability Services at Ernst & Young, or EY, the big consulting and advisory firm. And we'll hear from Matthew Sekol, sustainability industry advocate at Microsoft, serving as an ESG adviser to companies. Plus, we'll speak with Catherine Berman, CEO and Co-Founder of CNote, an impact investment platform that's helping large companies move capital into community investments through community development financial institutions or CDFIs and mission-driven credit unions. 

Esther Whieldon: First up, though, let's hear from Lizzy Harnett, who is a research and impact expert RMI's Center for Climate-Aligned finance. RMI is a U.S.-based think tank focused on the clean energy transition. I sat down with Lisa on the last day of the conference, and here she is showing her key takeaways from the event. 

By the way, she mentions the TNFD. That's the Task Force on Nature-related Financial Disclosures, which is finalizing a set of voluntary disclosure recommendations to help companies understand their nature-related risks and opportunities. In last week's episode of the podcast, we talked with TNFD Executive Director, Tony Goldner, and will include a link to that episode in our show notes in case you want to learn more. 

She also mentions GFANZ fans. That's the Glasgow Financial Alliance for Net Zero. It's a global coalition of financial institutions that formed during the UN COP26 Climate Conference in Glasgow in 2021. And you'll hear her mention CapEx. That's capital expenditure, and it typically refers to money a company spends on physical assets or technologies that it uses to produce products or provide services. Okay, here's Lizzy.

Elizabeth Harnett: So I think 2 main themes came out at the conference. One was transition planning and the importance for both companies and financial institutions to create transition plans and GFANZ has announced that this is the year of the transition plan. And so we're seeing a lot of discussion as to what credibility means for our transition plan, how will companies be assessed on their transition plans and how will those be used. And I think that, that's really important because from an RMI perspective, transition plans is a really unique way of getting forward-looking information about a company and a financial institution and how they're going to translate a net zero target into action and strategy and new governance systems and that kind of thing. 

And the second area of focus, I think, has been one that's been discussed for probably a decade now, but it's still really important is ESG data. ISSB has come out with its latest guidance this week. So there's been a lot of discussion on what does that mean? What are some of the benefits? What are some of the risks? What's been exciting about that? What's maybe a bit disappointing? So that's been a really interesting discussion. 

I think, again, from our point of view, we think transition plans and ESG data go hand in hand. But what we are really interested in is how ESG data can be narrowed, particularly for the energy transition because ESG data was so broad. Actually, what -- for the transition we're really interested in is what we call transition relevant data. That's one small subset of ESG data. Transition relevant data is more forward-looking, more focused on specific energy transition. So that might be what data, maybe CapEx data for example, in a certain high mitten sector, saying what percentage of your company is focused on green steel, for example, or how are you investing in new hydrogen rather than just saying how many people are on your board or what's your water consumption, that's broadly ESG data.

But for -- when an investor is thinking about transition, you really want to be thinking about what is decision useful? What is forward-looking, What's going to help me actually understand where a company stands in the transition today? And where might they go in the future? What kind of plans do they have in place, what targets do they have in place? What technologies are they exposed to or exploring in terms of R&D, that kind of thing?

Esther Whieldon: What have you found so far? What is your sense so far f how CapEx is being spent?

Elizabeth Harnett: It's a really great question. I think it's not as far along as we would like. I think there was a stat that came out yesterday in the conference that were saying we're currently at a 1:1 comparison between investment in fossil fuels and investment in clean technology. And that's actually great compared to where we were a couple of years ago. But what we need to get to is a 4:1 ratio. And a lot of CapEx investment is needed to get there. 

And I think we'll start to see banks and other financial institutions being held accountable for their ratio as well as a system-wide ratio. And CapEx accounting will be and transition plans and target set will be really key metrics to start assessing how far different actors are in that kind of transition of their capital mobilization.

Esther Whieldon: So how has the discussion around the transition changed compared to past years and also outside of the conference?

Elizabeth Harnett: Yes. So I think in this conference, there's been a lot of focus on emerging markets in a way that wasn't necessarily a big consideration in previous conferences. 

I also think that relatedly, this idea of how do we get public private or public finance to mobilize private finance and whether that's through blended finance or whether that's through reform of multilateral development banks. So I think that's been a really interesting kind of shift in narrative, recognizing that a lot of the money that needs to flow into emerging markets, and that's not traditionally where large financial institutions have felt comfortable. So derisking some of that opportunity has been a really key theme. 

I also think biodiversity and nature risk is a bigger theme at this conference than it has been in previous years. and more detail has been added in terms of, I think, in previous conferences, I've attended at Greenfin and similar the conversation has been. Nature is an issue. We should pay attention by diversity risk is related to financial risk. And now we're starting to see some discussion of tools and approaches and frameworks, particularly related to the TNFD and that has added a lot of momentum and interest in that topic, I think.

Esther Whieldon: Lizzy said implementing transition plans was a key theme of the conference. That's something I also heard from Rob Bradley of EY. Rob said, many companies are still figuring out how to translate their plans into action.

Rob Bradley: The question is, okay, once we get through the disclosure, what do the real transition plans look like? And there, it's a combination of evolving thinking within the financial sector itself, but fundamentally, of course, so much of what matters is actually going on outside the financial sector and how things are financed will reflect that as legislation, technology changes, material questions, people and skills, all sort of play out in the market. 

I don't think anybody has necessarily cracked the question of what does a total transition vision look like. But we are starting to see serious transition plans emerge from some players. The implementation of those is really challenging. And for many institutions, of course, it's a governance question. A really genuine transformation plan is something that is intrinsic to everything to do with the business. At that point, it is your business plan. 

So what we're seeing is this has been the Chief Sustainability Officers job once as disclosure becomes more important, the CFOs get involved. But once you get to the transition plan, it's your Chief Strategy Officers and for that matter, is the CEO, because this is the vision of where the company is going. And so there's a lot to do there in terms of education, in terms of socialization, in terms of also just thinking through the core mechanics of it, how are you actually going to go about that. 

And many companies have really wrestled with that over the last couple of years. We've seen announcements made and then maybe walked back a little bit as companies think through the implications. Many have fundamental questions about to what extent they continue to invest in fossil fuel infrastructure for instance. And those are questions that for many companies have no easy answers. And so these are genuinely top-level strategic questions.

Esther Whieldon: Earlier in this episode, we heard Lizzy note how the ratio of banking finance for low carbon technologies compared to financing for fossil fuels should increase from 1:1 to 4:1. But while additional financing is needed, Rob of EY points out a number of challenges remain to putting that money to use in the real economy. That term the real economy, by the way, refers to the production, purchase and flow of goods and services within an economy. Rob also mentions the Inflation Reduction Act, or the IRA, which is a comprehensive energy and climate law the U.S. passed in 2022. Here's Rob.

Rob Bradley: A lot of the action that's going to be important for the financial sector is not happening in the financial sector. So of course, the background in the United States is that over the past year, we've seen an array of legislation emerging that is pumping hundreds of billions of dollars into the real economy to drive clean energy solutions. That means that, first of all, there's a huge array of opportunities out there that companies are beginning to seize. We've actually seen the responses and the take-up of the incentives and for instance, the inflation Reduction Act, far exceeding the projections initially. That's a very exciting space. 

At the same time, there are real barriers. 550,000 trained workers short of what we need in order to implement all the activities under the IRA, potentially constraints over materials like rare earth metals and the graphite that goes into lithium-ion batteries for instance, where geopolitical tensions or retrenchment in supply chains, offer real risks as to supply. 

A lot of challenges over just the permitting and the local regulation around things like carbon capture and storage or siting transmission lines or wind farms. So there's a lot to watch out there in the real world. that I think will, in turn, drive what's going on in the financial world. 

So here, and in a lot of discussions, we think of the finance industry as being the kind of movers and shakers. -- but in many cases, they're going to be the ones who are going to have to try and understand and respond to what's going on out there in the real economy.

Esther Whieldon: We heard Rob mention how implementing a transition plan requires embedding it into every aspect of a business. But how does the company accomplish that objective? To get a sense of what socializing the transition across the company it takes, let's turn to my interview with Tobi of MUFG Americas. You'll hear her mention KPIs that's key performance indicators. Okay, here's Tobi.

Tobi Petrocelli: We don't have the bandwidth to go speak to 1,300 clients in the Americas. We just don't -- it's just not possible. Maybe there's a handful, but it's fairly reactionary -- in order to truly do this well, the bankers need to be trained on ESG whether they want to or not. 

I mean it's -- so you've been a banker for 30 years, you've banked all the big oil majors, but guess what? You need to start talking to them about transition. And what does that mean? And how do you prime those bankers with the right information, the resources and the know-how on really developing a dialogue that will initiate a sustainability linked loan, maybe tied to a decarbonization KPI. In order to do that, we ultimately want to get through -- we want to get in the door with those corporates through that banking relationship. 

Now, they speak to the treasurers of these corporations. That's who you're structuring these deals with, not the sustainability officers. So the next phase of this is to highly train our individual bankers and relationship managers to ask not just of the treasury, what are they doing in terms of their transition planning, but bring the sustainability officers of those corporates into the same room, so we could more holistically speak about what that looks like over the time horizon. 

Our typical loans range between a 3- to 5-year tenure. How do we talk to them about even more long-term strategies. Even though as a bank, we're fairly condensed to that time period, climate change is not going to shift over just a 3-year period. We really need to know what they're doing over 30 years. And so to have that conversation, it can't just be the treasurer looking for the best interest rate with best consortium of lenders, but rather how do we bridge the entire transition planning team of that corporation with the treasurers with us as lenders and then, convertly, measure their progress over time and then be able to narrate the impact of our lending as well. So it kind of works hand in hand. 

The same idea, we want to look not just at the value creation opportunities with our bankers, but then bring in the risk personnel to say, okay, what's the value protection. What is that asset going to look like over time? And how do we make sure we're right? And then looking at the fiscal and transition risks that are coming. We need to make sure we're looking at it from that angle. So building that scenario analysis and stress testing capability is something else that's on. 

So sustainability is very hybrid. I say this all the time, we sit in the global corporate investment bank. We're in the first line. But what we do is also very reactionary and very much based on risk, climate risk inherently. We need to be able to understand both and properly price that risk and then in time, look over the $1 trillion opportunity mark that we're seeing in clean energy today.

Esther Whieldon: As I said earlier in this episode, one theme coming from the conference was around how to translate ESG issues to a broader audience. And as we'll hear from Tobi, that theme included the importance of reaching across the divide.

Tobi Petrocelli: So probably some of the takeaways from the last 1.5 days or so. One thing I do find interesting is people don't want to continue to repeat each other. All of us are the converted here. We speak this language and we have for most of us many years. The space has evolved dramatically. 

I would love to take these same points, these same references and key issues and bring them into rooms of the non-converted -- and I always try to prompt a lot of the people here that are building these amazing consortiums and forums for us to all share our best practice. But how do we get these types of leaders speakers into the room with the hedge fund managers that are not thinking about ESG right now at all. 

How do we change their mindset to realize that this is science-based, this is necessary and there's a massive business opportunity ahead of us on this topic? How do we get in front of the rooms that are not? Because I think that's where the wave needs to come from. And in order to really see the policy changes, the advocacy necessary. We need to be in the room with those people as well.

Esther Whieldon: Yes. And I think that is definitely something I've heard as a theme throughout the conference is getting out of the silos.

Tobi Petrocelli: We all agree with each other. And of course, there's a common theme here, and we want to do better, and we want to do well but tell the hedge fund manager that, that just made $150 million this year, investing in everything but clean energy. And how can we convert him to understand the opportunities that lie ahead in this transition. I think those are the guys we want to get in front of as often as possible and get opportunities with groups that can give way to that and distribute to that sector.

Esther Whieldon: In addition to having discussions with people from different perspectives, Lizzy of RMI points out the importance of translating ESG to the average person.

Elizabeth Harnett: I think that narrative a communication piece is really important because we're starting to see particularly coming out of the pandemic, for example, there's a lot more focus on health issues and social issues and good governance when we've seen kind of questionable governance practices that the world is paying attention to. 

And so recognizing that this is a great opportunity to bring everyone else along and especially relating to Make My Money Matter campaigns and bringing people awareness of personal finances and how that fits into the Board ESG and sustainable finance narrative I think, is really interesting. 

People aren't confident when it comes to their personal finances often. And so adding an extra layer of complexity and say, actually, you should be considering where your money is going and how much exposure you have to fossil fuels. That's actually asking a lot of individuals who don't have a background in this. 

Ensuring that we are communicating in as play and spoken and as accessible and as material to individual's daily lives is really important. And I think we don't necessarily do a good job of it, but it's going to be important going forward to ensure that we have the legitimacy and the impact that we want to have because this isn't going to happen just as a result of our industry really pushing this forward. 

This is going to take new regulation and policy support and all that relies on getting the electorate to understand why this is important for certain policymakers or certain senators, for example. And so being really good at communication is really important for that. And it's been a key focus. 

Similarly, the just transition piece is a real topic that has come through in this conference, but again, elsewhere, and it's something that we are already thinking about when we are working with individual community-based lenders, for example. The IRA is a great example of something that has really unlocked a lot of capital and a lot of interest in climate change beyond the normal echo chamber of sustainable finance. 

And so working out how we can communicate that this is a real opportunity not only for climate action, but for social development and community engagement and making sure that the client aligned future we're pushing for is also just and equitable one as well. 

Esther Whieldon: I also heard about the challenges companies face in translating ESG for their employees. I heard about this in a panel discussion that included Matt of Microsoft. I caught up with Matt on the sidelines after his panel to explain what he meant.

Matthew Sekol: There's a big challenge at corporates right now because coming out of 2020 with the social tipping points like George Floyd's merger and all of the other COVID, the extreme climate whether that's gotten the attention of the Global North now that it's happening up here, employees are filled with the sense of purpose, but they don't know what to do with it. 

So a lot of employees -- and I see this at Microsoft, we're very purpose-driven. People try to approach it with purpose first. But ESG is not quite like that. ESG, it might be material to pursue purpose for things like talent attraction, talent retention or there may be material intersections kind of accidentally when you find like we're a data center operator, we should probably look at our energy use. 

But I think employees don't fundamentally understand the business intersection. So the discussions that are happening in boardrooms and with management teams right now, I don't think they're trickling down quite to the employee base.

So to me, it represents a missed opportunity for those leaders to say, "You know what, we have a purpose-driven organization that trying to find new ways of meeting. We have to not only figure out how to capitalize on that, but capitalize on it in only the way that our company can, which is materiality."

Esther Whieldon: Okay. So now let's turn to another set of themes I heard at the conference, which was the role of finance in the low carbon transition. This includes both how to get financing to emerging markets and low-income communities as well as how institutional investors are managing their portfolios. 

I heard some really interesting examples of the conference about how a number of tools are being developed to help direct funding to communities. For one of those examples, let's turn to Katherine of CNote. 

By the way, she mentions the term DEI. That refers to diversity, equity and inclusion. She also talks about CDFIs or community development financial institutions. CDFIs can be banks, credit unions, loan funds, micro loan funds or venture capital providers and the aim to foster economic opportunity and revitalize neighborhoods. 

Here's Catherine.

Catherine Berman: So CNote is a women-led fintech platform that helps corporations and foundations deepen their DEI and ESG goals by investing in mission-driven deposit institutions and CDFIs. 

How I got started as I was working in traditional finance Managing Director at Charles Schwab, saw the rise of ESG values-based investing, got very excited. The one thing I noticed during my journey was that even though some of the largest companies I knew of or saw were putting their money to work in aligned with ESG. They were doing it mostly using the power of the public markets. And when we'd ask the question around deposits, what are you doing with cash or fixed income, it was often awkward silence. And it wasn't just me, it was oftentimes many of my peers, other large financial institutions. 

There's a real struggle to put deposits to work for good. It sounds really simple, right? Just put some deposits to work in an inspiring Black-owned bank. But how and doing that at scale is actually really challenging. 

And so I left and started CNote really to explore how do we help large institutions better invest in community finance in organizations like community development financial institutions, CDFIs, in great minority deposit institutions. What I found along that journey was that this was really a technology opportunity that the friction around why many corporations and large foundations were not doing this was -- it was hard. Hard to know who are the community finance institutions to align with that feels safe? Who are the institutions that can handle scale? 

And believe it or not, that's one of the biggest friction points is when you talk about like some of our corporate clients, our Netflix and AMD, they need to know that they can put more than $1 million to work, and they're going to do something like this. They want to do it at the scale of a public company. 

It's not intuitive that moving your deposits from your current bank into, for example, a Black-owned bank, makes a difference. So let me give you an example. We have a community mission-driven finance partner called Virginia Community Capital out of Virginia. One of our clients, Apple, moved millions of deposits into VCC specifically. And BCC use those deposits to fund an organization, a solar lending development company. So what they do is they help solar projects across the country, mostly though right now in the Washington, D.C. and Baltimore area. 

They're also aligned with an initiative called Solar For All. What it does is it allows low-income communities to save up to 50% on our utility bills for at least 15 years. So think of a savings for a low-income family, many of whom are living paycheck to paycheck. To get to save that much money on your utility bill, anybody wants that, but it specifically helps and supports those low-income families. So you see you've got this kind of momentum force of saying deposits don't have to go to work at just a large institution, right? They can actually go to work very specifically and intentionally for a community.

Esther Whieldon: So we've touched on how financing the transition on the local scale is part of the discussion. But as I mentioned earlier, I also heard how larger institutional investors respond to pressure from multiple stakeholders regarding their fossil fuel holdings. For this has turned to Aeisha from CalSTRS on how they're responding to that pressure. 

Aeisha Mastagni: There's different pressures that are coming from different parts of the marketplace, the political spectrum. And what we try to do here at CalSTRS is take the politics out of our investment decision-making. What we see in the market is that there are a myriad of issues that contribute to climate change and divestment from fossil fuels can have a lasting impact on the health of our fund while also severely limiting our ability to shape corporate behaviors and the long-term sustainable growth of our portfolio companies. 

And we think anything that really limits our ability to either manage long-term risk or limits the investable universe of where we can allocate capital really does increase the risk of our fund and therefore makes it harder to achieve the returns and pay the pensions of the hard-working teachers of California.

Esther Whieldon: In your panel, I heard you say, "We can't divest away climate risk." Can you explain what you meant by that?

Aeisha Mastagni: Sure. So we often get pressures living in California, being in California, from various groups that believe that the best way to tackle climate change is to divest from the fossil fuel industry or the extractive industry. 

And like I said a moment ago, climate change affects all of our portfolio, which means we can't just divest the way fossil wheels and think that, that risk is going away. Think about any type of logistical company, think about the mining sector, think about the airline sector, they are all various industries and sectors that are affected by climate change. And so what we really try to do at CalSTRS and especially with the team that I work with is actively engage those companies to make sure that they're appropriately managing those risks. 

Esther Whieldon: So as you can hear, Lindsey, there's a lot of discussion happening right now around disclosure, data, how to explain the business case for sustainability issues, and how the financial industry is responding to pressure from stakeholders and finding tools to help bridge the climate financing gap.

Lindsey Hall: And that topic Climate Finance is sure to be a big focus at both Climate Week NYC and then COP28 later in the fall. So please stay tuned as we continue tracking those issues.

Thanks so much for listening to this episode of ESG Insider and a special thanks to our producer, Kyle Cangialosi. Please be sure to subscribe to our podcast and sign up for our weekly newsletter, ESG Insider. See you next time.

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