Transcript by Kensho.

Lindsey Hall: 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: If you listen to this podcast regularly, you know we've been talking a lot about the evolving climate disclosure landscape, how new standards and regulations are rolling out around the world, and how companies are responding to these changes. And if you tuned in to last week's episode, we just hosted an ESG Insider Live event, where we brought together 4 guests to share 4 very different perspectives on this topic in front of a live audience in New York City.

Lindsey Hall: You can hear highlights from all those interviews in last week's episode, will include a link in our show notes. Today, we're focusing on my interview with Val Smith, the Chief Sustainability Officer at Citigroup. Citi is one of the largest banks in the world with roughly $2.4 trillion in assets and operations on the ground in 95 countries.

In today's interview we'll hear from Val about how the bank is approaching the energy transition with clients about how investor expectations around the bank's climate disclosures are changing and also the challenges of climate data.

Esther Whieldon: Before we hear from Val, a bit of a quick review of some of the regulations and other developments you'll hear about today. One is the U.S. Securities and Exchange Commission's pending a final decision on its proposed climate disclosure rule that it issued in 2022.

Under the SEC role proposal, large companies would be required to disclose Scope 1 and 2 emissions, and they would have to estimate and disclose Scope 3 emissions if they have either set a decarbonization target that includes Scope 3 emissions, or if they have found Scope 3 emissions are material to their operations and financial performance.

Quick primer, on this podcast, we try to avoid jargon and acronyms and put things in plain English. So in simple terms, Scope 1 emissions are direct emissions from a company's operations. Scope 2 emissions are indirect emissions, and those are primarily derived from purchased energy.

And lastly, there's Scope 3 emissions. Those occur up and down the company's supply chain as well as when a customer uses the product. And for financial institutions, Scope 3 emissions include finance emissions, which come from the investments they make or the loans they finance.

Lindsey Hall: We'll also be hearing mention of what's happening in California as it relates to climate disclosure. In October 2023, California's governor signed into law a rule that would require thousands of companies operating in the state to report their greenhouse gas emissions, including Scope 3.

We'll also be talking about net zero goals. In basic terms, the UN describes net zero as cutting greenhouse gas emissions to as close to zero as possible with any remaining emissions reabsorbed from the atmosphere by oceans and forests, for instance.

Until your discussion of the TCFD, that's the Task Force on Climate-Related Financial Disclosures, and this is a widely recognized framework that helps companies and other organizations disclose climate-related risks and opportunities. Okay, let's dive into my interview with Val. Here, she is explaining how Citi is approaching the topic of climate disclosure.

Val Smith: Citi was the first major U.S. bank to publish a TCFD report in 2018. And it was really an exercise -- I don't know if we have the luxury of doing this anymore, but an exercise and like, well, let's give it our best shot and publish what we know. And we've been doing climate disclosure for probably since around 2002 as when we started to report our greenhouse gas metrics from our operations.

So fast forward, we're looking at greenhouse gas emissions, metrics for our operations. We're bringing into our TCFD report now emissions associated with our financing. And so disclosure for us and specifically climate disclosure focuses on all of the pillars of the TCFD framework. We're talking about the governance and how our Board is directly engaged in this effort. We're talking about the strategy. We're talking about how risk management is really fundamental to this.

And for a bank because a net zero commitment is really oriented toward your financing -- we're working hard. The climate data is a challenge, right? We'll talk about challenges. We are able to use emissions reported by our clients, attribute them to Citi based on our total committed loan exposure and the client size enterprise value. And out of that, understand what is our greenhouse gas footprint associated with each of the loan portfolios that we've worked on. We've taken 6 through this net zero process so far.

Lindsey Hall: Quick explanatory note, because we want to keep this plain English. Citi is a global bank, which means, as a lender, it works across many different sectors of the economy. And the companies at lens, you have different kinds of environmental impacts. For a bank, those finance emissions are Scope 3 emissions.

Citi has made a commitment to reach net zero for its loan portfolio by 2050 and net zero for its sites and operations by 2030. Six sectors in Citi's loan portfolio are currently covered by its net zero plan. That's auto manufacturing, commercial real estate, energy, power, steel and thermal coal mining. I asked how the bank chose these six sectors and where it will turn its focus next?

Val Smith: So we started with the sectors that we had both heard from our investors, they were most interested in. We also leveraged the Net Zero banking alliance guidelines, which indicates that a series of different carbon-intensive sectors should be considered for net zero.

Right now, we're working on agriculture, doing some interesting work also with RMI, the Poseidon Principles for shipping, the sustainable steel principles, working on aviation, working on aluminum. So there's a whole host of sectors that we are taking through the methodology of baselining, identifying the appropriate net zero aligned pathway for that particular sector and then setting a 2030 emissions reduction targets for each of those sectors.

Lindsey Hall: You just heard Val mentioned RMI. That's a U.S.-based nonprofit focused on the clean energy transition, formerly known as Rocky Mountain Institute. She also mentioned some challenges, and I asked her to elaborate on what those are.

Val Smith: Let's talk about data first. Everybody talks about the challenge that is climate data. I think we expect to see that challenge begin to be resolved with the increased focus on regulatory requirements for disclosure. But I would say there's a disclosure challenge that not all companies are disclosing and not all companies are disclosing Scope 3, where it's relevant.

Something that we don't talk about as much is as a climate data lag. We purchased very large climate data set. But right now, for example, in 2023, we are working with the most recent climate data set, which is from 2021 data. So how will we know if we've hit our 2030 emissions reduction targets? Like we can't wait until 2032 to know.

I think that, that challenge, it's very real. It means that progress, like demonstrated progress is going to be delayed. There's a challenge we can get back to. But I think what our posture has been, well, we know it's a challenge. We're just going to get on with it, and we will learn as we go, and I think the market will improve as it goes.

And the other challenge is that notwithstanding the fact that we have seen a lot of progress in the public policy space I think we have to remember that we're talking about not just decarbonizing emissions from financial sector portfolios or individual company portfolios. We need to decarbonize and help the global economy to transition. That really does require public policy to create that enabling environment.

And I think when you look around the world, you see a lot of bright spots, the Inflation Reduction Act in the United States being one example. We're starting to see a lot more activity because of that. But we need so much more in terms of the enabling policy environment as well as the enabling regulatory environment.

Lindsey Hall: As we've covered in the past on this podcast, the Inflation Reduction Act, or IRA, is a comprehensive energy and climate law, the US passed in 2022, allocating nearly $370 billion in federal spending and tax incentives to decarbonization efforts over the next decade. So in addition to those challenges we just heard Val mentioned, she also talked about the opportunities the transition presents.

Val Smith: In order to achieve net zero by 2050, Citi has estimated that it's going to require at least $125 trillion in investment. So right there is a pretty significant number. And Citi as a global bank, we have operations on the ground in 95 countries. We do business in 160 countries. There is a huge opportunity to support our clients in their transition through financing, through facilitation, through advisory.

And I mentioned earlier, we're starting to see like interesting new transactions happen over the summer, we had 2 different transactions in the hydrogen space, 2 advisories in the hydrogen space. One was with a mainstream energy company that was acquiring a large energy storage or hydrogen storage hub, another was with a hydrogen company, hydrogen technology company that did a public offering.

So you do see the opportunities across the entire spectrum of the economy, I think that's really exciting. And as Citi thinks about the transition and supporting our clients in the transition, we're looking for that opportunity space, but we're also doing a lot of analysis and engagement with our clients to understand their transition plans where they are today, where they intend to go.

Lindsey Hall: We just heard Val talking about how the bank is working with its clients, but I also wanted to understand how investors are thinking about the energy transition and specifically about climate disclosure. If you listen to last week's episode of the podcast, you heard Val talking about how she's been with Citi for nearly 20 years and how the attitudes around sustainability have changed over that time. Here's that clip again.

Val Smith: I mean I think when you've been at this for a long time, the change feels gradual, but I think we can look back and see a couple of key tipping points. I remember when I was like in the hallway, ran into a colleague sort of talking about what was happening in the sustainability space, maybe it was around 2017 or 2018.

And I remember that we said when investors start to focus on this space, that's when everything will change. And it feels now prescient to have talked about that because that's, in fact, exactly what happened. When I started at Citi in 2004, one of my responsibilities was to engage with stakeholders and investors.

And I remember on my first day, I had lunch with a group of interested investors. Who were the interested investors that wanted to talk to sustainability people? Socially responsible investors and religious investors. Grateful for that, right, because they really created this space for mainstream investors to really come in and start to not just talk about socially responsible investing, but investing according to environmental, social and governance issues.

And so we've really seen, I think, this pivot with obviously, banks and financial institutions getting very involved in this space, our investors getting involved and now, of course, regulators getting involved. 

The water cooler discussion around 2017, 2018, that was around the time that we began our full ESG investor roadshow. So we reached out to our top institutional investors in the off-season as it was called in the fall before annual meeting season. And we said, "Would you like to have a conversation with us about our environmental and social and governance activities?" And most of them said yes, and showed up for the calls, and we talked about what we were doing. We talked about what we're learning.

And that fall, ESG investor roadshow has become a year-round investor roadshow. Investors are interested in the metrics that they're disclosing because this is such like a technical nerdy space, they're interested in the methodology for how we allocate emissions from our clients to Citi based on the loans. They're interested in our transition plan. And I think they're increasingly interested in understanding all of the activity that's sort of happening underneath the water. 

You have this still surface. You have metrics that are being published. Underneath these metrics is an incredible amount of activity around understanding where our clients are, identifying those transition finance opportunities, understanding the climate risk. And I think increasingly, what we are really challenging ourselves to do is as we are building up this net zero plan as we are improving the climate data, how can we demonstrate the action that's happening underneath the surface?

And I think there's a lot of great guidance out there in terms of transition plans and the different elements that can be included in those, GFANZ has published some, for example. And so increasingly, I think it's just like layering on those building blocks. That's what our investors want to see from us in our disclosures.

Lindsey Hall: You just heard Val mention GFANZ. That's the Glasgow Financial Alliance for Net Zero, a global coalition of financial institutions committed to reaching net zero by 2050. In my interview, I also wanted to understand how Citi is approaching Scope 3 emissions in light of the current regulatory and standards landscape that we laid out at the start of the episode. Because we've heard from many financial institutions on this podcast about the challenges that measuring and managing Scope 3 can present. 

Now heads up on some more acronyms you're about to hear. ISSP, that's the International Sustainability Standards Board, and it's been in the headlines after issuing its first 2 sustainability disclosure standards in summer 2023. Val also mentioned CSRD. That's the EU's Corporate Sustainability Reporting Directive, a set of sustainability reporting roles for companies. Okay. Here's Val one last time.

Val Smith: Just thinking about the regulatory landscape, whether it's the SEC proposed rule, what just happened in California, the CSRD, the ISSB and all of the different ways that will be taken up around the world. I can tell you that even before these rules have been finalized and released, like they had us at hello.

The process of developing our comment letter to the SEC to state our overall support for the objectives and to ask for clarification on certain points, sort of provided this forced marriage between the sustainability team, the finance team, the legal team that we are now formalizing, that we are building upon. 

Because as much experience as many of us have in the disclosure space in the mandatory disclosure space, it's like exam week every week. It's an incredibly active moving space with a lot of expectations, and it really does require that like top of the house, front of the office, collaboration between lots of different teams with different cultures to be able to execute and meet the expectations.

Lindsey Hall: So we heard a couple of key takeaways from Val today about how the bank is responding to evolving regulatory and investor expectations around climate disclosure. And I love that she quoted the movie Jerry Maguire in there. She also talked about how Citi is working with many different sectors in its loan portfolio towards net zero goals. How the bank approaches Scope 3 emissions, and she shared some of the challenges that lags in the data can present. That idea that it's like exam week every week really stuck out to me.

Esther Whieldon: We hope you'll stay tuned as we continue tracking the evolving climate disclosure landscape, and we hope you'll be able to join us in person for our next live event.

Lindsey Hall: 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.

Copyright ©2023 by S&P Global  


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