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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 Sustainable One 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.

In the last couple of weeks, we've been hearing about the role the investment community plays in combating climate change with our episodes on the ground during Climate Week in New York City. We discussed the urgency of addressing climate change risks and also some of the challenges facing ESG investing. And these are topics that are sure to be a focus at COP27, the big UN Climate Change Conference taking place in Egypt in November. This is a real opportunity for the investment community to come together with the public sector to figure out solutions for financing the transition.

Esther Whieldon: This week, we hop over the Atlantic Ocean to London to hear about the sustainability landscape there. Our colleague, Jennifer Laidlaw, recently attended an S&P Global Sustainable1 conference entitled the Journey to Sustainability. Jennifer is a senior writer on S&P Global Sustainable1's Thought Leadership Team, and we asked her to join us this week to tell us more. So Jen, what did you hear?

Jennifer Laidlaw: So the conference carried on some of the major themes discussed at Climate Week. Speakers debated a whole range of subjects from net-zero strategies for investors to data challenges to managing climate risks.

One topic that stood out for me was what investment firms are doing to understand climate risk, and I wanted to find out more. How exactly does an investment firm go about understanding what risks climate might bring to its portfolio? To answer that question, I spoke to Cathrine de Coninck-Lopez, Global Head of ESG at investment firm Invesco. You'll hear her talking about the IIGCC, that's the Institutional Investors Group on Climate Change.

Cathrine de Coninck-Lopez: Well, I think the first point we're doing is we're talking to the industries. So we're part of, for example, the IIGCC, and that's really helpful to come up with new ideas, trends. Obviously, the IIGCC set out the net zero framework. And so that's -- I think having that kind of guide and standard is really their first point in terms of thinking about what does this look like for an investment firm because that definition varies within the industry and can be quite a complex question.

But then what we do -- so that's the industry discussion. And then what we do is obviously translate that into our own processes. And at Invesco, we have -- we're working with 11 different investment centers. So it's real assets, it's passive, it's active, fixed income, equities, et cetera. And so the way it actually implements in those various asset classes can vary and should vary because for it to be really investment relevant, it needs to be aligned to the investment process. So that's how we are thinking about including climate risk, it's really including it as part of the investment process.

Jennifer Laidlaw: And what would you say maybe are the main differences between the different asset classes when it comes to climate?

Cathrine de Coninck-Lopez: Well, I mean, I think for real assets, it's very physical, right? It's physical risk that's happening now. And it's things like Miami being hit by hurricanes or droughts and floods and things like that. So that's a very real, immediate impact. And it's also then the regulations coming, right, to how do you adapt to some of these risks.

Within equity is I think the -- it's a more immediate risk in terms of the voting and the active ownership and so on that you can have. And then in fixed income, it's very much about risk protection. So the downside risk. But obviously, you also then have the opportunity of green bonds and climate-aligned bonds within that asset class.

Jennifer Laidlaw: The idea of ESG running across an investment firm's entire business was something I heard from other investors. So does that mean that every investment manager needs to take into account ESG criteria when designing a product? To find out more, here's Gustave Loriot-Boserup, Responsible Investment Manager at London LGPS CIV, which manages the assets of London's Local Government Pension Scheme.

Gustave Loriot-Boserup: So from our perspective, we view ESG and climate risk as a systemic risk. So regardless of the investment product that we launch on our platform, we will expect all of our investment managers to have developed an appropriate set of resources to identify, to measure and to integrate ESG issues into their investment decision- making processes.

So what I mean by that is, have they developed appropriate systems? Do they have the right people in place? And are all of these components symbiotically integrated into investment decision-making? That's the key question that we're asking ourselves as investors. For instance, what this can mean is, have the fund manager integrated forward-looking expectations of how climate risk will evolve over the long term?

And I think that the real edge, at least from our perspective, will be whether they have this ability to predict and to capture the opportunities associated with structural changes associated with ESG, such as the net-zero transition. So are they able to identify which are the companies, which are the assets that are going to be the winners and the losers of the transition to net zero?

Jennifer Laidlaw: Right. And do you have any idea at the moment? Like who are the winners and losers would you say?

Gustave Loriot-Boserup: So it's certainly a question that we try to have conversations with our investment managers on. I think everyone is going to have different opinions on this topic. But from our perspective, the companies who are certainly putting themselves at the forefront of the net-zero transition are the ones who are declaring net-zero targets and who are prepared to shift their business models, particularly when they're coming from carbon-intensive industries, and shift their business models towards more low-carbon modes of producing or low-carbon modes of producing their products and services.

So the winners will be the ones who are resilient in the face of transition risk, which is what I've just mentioned, but also the ones who are resilient in the face of physical risks. So these are 2 completely different aspects of the risks associated with climate change, and integrating both components is certainly the way to ensure that you're hedging yourself to the range of risks.

Lindsey Hall: We heard a lot about net zero at Climate Week NYC, and it sounds like that was a big topic of conversation in London. Both Cathrine and Gustave mentioned it. So tell me, Jen, how does an investor account for net zero when deciding what investments to make?

Jennifer Laidlaw: Yes. So just to backtrack for our listeners, net zero is when companies or countries aim to cut their greenhouse gas emissions as close to 0 as possible and offset the remainder. During the conference, Cathrine mentioned Invesco's net-zero solution. What was that, I wondered.

Cathrine de Coninck-Lopez: So our net-zero solution is an investment-grade corporate fixed income solution. And so what it does is it uses our proprietary net-zero rating to only invest in companies that we believe are committed to net zero or on the trajectory for aligning or alignment to net zero and ultimately achieving net zero, though there are very few companies today that are actually achieving net zero. And so that's what the kind of ultimate -- the sort of starting universe is, and then it couples that with a very targeted dialogue and engagement with those companies for understanding the net-zero journey.

Jennifer Laidlaw: She also mentioned a bottom-up net-zero approach to investing. So she has again to explain that term.

Cathrine de Coninck-Lopez: So basically, what we've done for our net-zero analysis is we've looked into portfolios, and we've looked at where all the portfolios we have in our net-zero commitment are today in terms of emissions, but also in terms of net-zero alignment so -- based on our net-zero rating. So we have done that data analysis, which is not many people have -- I think, have actually done that and have made some more of an educated, wider vision where we've been pretty specific about that kind of calculation.

Jennifer Laidlaw: Getting to net zero is not just about reducing carbon emissions across a portfolio. Investors also need to look at the impact of their investments on the wider economy, Gustave explained. You'll hear him mention Scope 3 emissions. That's the emissions that occur up and down a company's supply chain as well as when customers use the company's products.

Gustave Loriot-Boserup: There's net zero that can be approached at the investor portfolio manager level, and then there's net zero which we need to achieve as a global community in order to maintain temperatures below 1.5 degrees. So from our perspective, when trying to design products to get to net zero, we really think about as investors, what's our role? Is it strictly to reduce the carbon intensity of our portfolios? Or is it also driving carbon emissions reductions in the real economy.

And from our perspective, it's really both of these aspects, finding the balance between the decarbonization of funds in line with what science requires for 1.5, but also generating these real-world outcomes. So it's really a question of creating a suite of products on our platform, which can achieve all of these objectives simultaneously.

Jennifer Laidlaw: One thing that we've been looking at, at this podcast is the idea of engagement versus divestment. So what is your investment strategy when you're working with the company? Do you engage with them? Or do you divest?

Gustave Loriot-Boserup: So from our perspective, engagements and divestment aren’t necessarily mutually exclusive approaches. In fact, they should actually be mutually reinforcing. So the design of your investment products should be aligned with the way in which we engage with companies. And both these levers -- stewardship, the design of investment products -- should be powered by ESG data analytics because with ESG data analytics, from a product design perspective, you're able to identify which are the companies which have high- or low-carbon intensity and which are the companies that will decarbonize or increase their carbon intensity over time if you think about forward-looking data.

And from a stewardship perspective, utilizing data analytics enables you to actually target your engagements on those companies and those sectors that actually contribute the most to the carbon emissions within your portfolio. So leveraging data analytics, both in stewardship and the design of investment products, is crucial.

And then, of course, you can start implementing red lines in terms of divestment if after having a dialogue with companies, after having engaged with them, you see over time that they're not making improvements. But that all links back to this ecosystem of engagement, design of investment products and data analytics.

Jennifer Laidlaw: Okay. Interesting. Yes, because data is a big subject of conversation when we come to ESG. Are we seeing improvements in data collection? Some people say to me, oh, there's plenty of data out there. Just a matter of measuring it. I mean, what's your kind of take on that?

Gustave Loriot-Boserup: I mean to be completely honest with you, I have been very frustrated by some of the conversations I've had with some investment managers who are really always giving the excuse of not integrating climate considerations due to limitations associated with data, particularly when it comes to more advanced data like Scope 3 data.

But from our perspective, at the London CIV, we strongly believe that we cannot wait for the data to get drastically better to start integrating it into the analysis, and to -- and into decision-making processes. So it's really a question of doing with what we have now rather than waiting for the data to drastically improve.

Jennifer Laidlaw: Cathrine mentioned during her panel discussion that just relying on data by itself is a risky approach to building an investment portfolio. Why is that, I asked her.

Cathrine de Coninck-Lopez: So just looking at the data, if you think about even just emissions, you look at the data that is direct from reports, sustainability reports, that's not the majority. A lot of the data that you have to deal with is model data or sensor data in some shape or form. So you're, first of all, dealing with data that's -- and it's not always audited. So that's really the starting point. So that quality of the input is already incomplete and not necessarily -- not consistent methodologies necessarily and usually not audited.

So that's sort of the 3 kind of gaps you're starting with, right? And so if you just rely on that data for any portfolio constructions or assessment of a company, that could be very flawed as a result. So that's why it's very important to also have a dialogue with the company if you can, right? I mean, obviously, in some strategies like passives, that's slightly different because it's obviously following an index and it has to follow data, et cetera. But again then, it's important that the sort of quality of that underlying data is as good as it possibly can be.

Jennifer Laidlaw: The role of ESG regulation also came up quite a bit during the event. There were discussions over whether there should just be voluntary frameworks to encourage sustainable investing or whether we need stricter regulation. I asked Gustave what he felt. He talks about the EU Climate Benchmark Regulation. Those rules set standards for low carbon indices in the EU.

Gustave Loriot-Boserup: So I think that the regulation is an essential step in harmonizing the different sustainability and ESG products which we see on the market, particularly as historically, some investment managers or even some service providers have designed ESG products which weren't necessarily geared towards actually improving environmental, social and governance outcomes. So regulation is really important in terms of bringing that stamp of approval, if you will, that at least, it's compliant with this criteria, that criteria and that criteria as well. So that's really key.

However, I do think that the EU Climate Benchmark Regulation does have some limitations. Most importantly, it doesn't mandate the use of forward-looking data and metrics, which in the context of a net-zero strategy, is crucially important to help deliver our targets and objectives.

Jennifer Laidlaw: I ask Cathrine whether ESG regulation made the job of an investment firm harder or easier. You'll hear her at the end talk about NDCs. Those are nationally determined contributions or emission reduction pledges made by governments to achieve the goals of the Paris Agreement on climate change.

Cathrine de Coninck-Lopez: So overall, we're very supportive of this regulation and greater transparency as kind of being the founding pillar of any regulatory initiative, be in Europe, here, or U.S. or even in Asia. We've seen regulation -- and the sort of the common theme running all -- through all of those is transparency. And I think broadly, we're very supportive of that.

I think where we get concerned is some of the -- there's been some very prescriptive developments coming out in terms of how exactly you define things and thresholds and so on. And it's driving, I think, in many -- well, in the industry overall, activities that may or may not be beneficiary to the actual end client. And that's a concern, obviously, because you need to -- we want to be very client focused. We want to be very client centric. And so the minute regulation becomes too restrictive, you limit innovation, you limit a range, you potentially divert attention from some of the more meaningful activity.

So that would be the concern. But I think overall, is more regulation or this kind of driver regulation that the sort of various regions are coming to the conclusion that the industry needs, is that -- are we behind that? Yes, I think that's the right way to go.

Jennifer Laidlaw: And in terms of some of the things that are -- at the moment, the International Sustainability Standards Board -- I mean, how is having these kind of international standards -- although it's not prescriptive regulation, is that actually going to help? Like because there are complaints, there are a lot of frameworks out there. Is that going to help sort of people have a more kind of concise, consistent view of standards?

Cathrine de Coninck-Lopez: I think we are a long way from having consistent global view. Honestly, even with the ISSB, that needs to then be translated into local standards for it to really bite for the various companies, et cetera, and stock exchanges listing. But I do think that drive overall is helpful. It's helpful to have a baseline commonality that everyone can rely on.

And I also think the big benefit with ISSB is that it's drawing in regions that haven't really previously been involved. So emerging markets, for example. Previously, many emerging markets haven't had a standard. But now the big, big markets like China, like India, are taking notice, right, on this kind of need for corporate disclosure. And that, I think, is really helpful.

Standards are helpful because it's sort of -- it drives some sort of commonality. It drives some sort of goal, right? This is -- well, this is the minimum. Like there's no question now whether you do something or not. You have to do at least the minimum according to the standard. And then I think it's -- so it raises the bar. It raises the minimum bar, right?

And then I think what's helpful is different asset managers can then innovate and go on top of that and so on. And that's where, I think, it's very important that the regulations don't limit that innovation, right? That would be my only concern.

But overall, I think the regulations, obviously, it's been a lot of work, and it's been a lot of effort for the whole firm, not just for us who are in the ESG team. But overall, do I think it's helpful that the industry is raising the bar? Yes, I think that's helpful for everybody, for consumers, for the planet, for everybody.

Jennifer Laidlaw: I'm just wondering, at the conference today, have you -- have there been any surprises in the things that you've heard? Or is there anything that you hadn't heard before maybe?

Cathrine de Coninck-Lopez: I do think the big thing that came out today and, I think, is kind of going to be the theme we want to be watching for, say, COP27, but also beyond is adaptation. So the fact that a very small percentage of current bond issuance is actually related to adaptation. The fact that there isn't a framework for how you define adaptation.

Issuers don't really understand it. And the financing right now is not there for it is obviously a huge problem in the context where the world is changing today. And so that would be my biggest sort of takeaway. That's the big thing we need to watch.

Jennifer Laidlaw: Right. Good. And adaptation in terms of financing, is that like more public-private partnerships? Is it more investment firms getting involved? Or how do you see that?

Cathrine de Coninck-Lopez: I think it's all of the above. Yes, it's investment firms getting involved. It's companies being more focused on it. It's -- definitely, there is the public side of it too, kind of countries really making not just mitigation, but also adaptation a key goal for their NDCs.

Lindsey Hall: The urgency around securing financing for adaptation is something that was very much a subject of conversation at Climate Week. So it's going to be interesting to hear what happens during discussions at COP27, as Cathrine noted.

Jennifer Laidlaw: Yes, indeed, the financing is just not there, and it's going to have to be a joint effort from investment firms, governments and civil society to get it where it needs to be.

Esther Whieldon: So Jen, you obviously covered a lot of sustainability issues at the conference. But was there anything else of interest?

Jennifer Laidlaw: There were discussions on climate risk modeling and what improvements need to be made, but I'll bring you more on that next time.

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.

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