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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 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: In last week's episode of this podcast, we explored one key theme coming out of Climate Week NYC in late September, which was how to move from lofty goals to meaningful action on climate change. Well, in this week's episode, Lindsey and I are bringing you more on-the-ground reporting from Climate Week. This time, we're focused on another key theme we heard.

That's the idea that while meaningful action is needed on climate change, it cannot occur in a vacuum. We heard experts from across the sustainability space put forward that any plans to tackle climate change will require systemic changes to the way we do business, operate as a society and consume natural resources. Moreover, those changes must be done in an equitable and just manner.

Lindsey Hall: We heard that theme come up with some of our panelists at the September 21 event hosted by S&P Global Sustainable1 during Climate Week NYC. For example, Kara Mangone, Global Head of Climate Strategy at Goldman Sachs, talked about the importance of working collaboratively across the business if you're going to create a successful sustainability strategy.

She said, you can't work in silos if you're going to really weave sustainability into the fabric of your business. A cohesive strategy is necessary. And that idea that you can't take an overly simplistic approach to climate change played out in other ways, too. Specifically, during Climate Week, we heard that lower emissions globally can't be the only priority when it comes to addressing climate change.

What I mean by that is the world must also invest in adapting to and recovering from the physical impacts of climate change, things like hurricanes, wildfires, flooding, heat waves and droughts.

Esther Whieldon: In this episode, we'll bring you some snippets from our Climate Week event and we'll hear from Matt Ellis, who is CEO of Measurabl. That's a company that tracks the physical and transition risks of climate change for some of the largest commercial real estate companies in that sector.

We'll also hear from Martin Whittaker, who is CEO of JUST Capital. That's a nonprofit that tracks the extent to which large publicly traded companies are turning the concept of stakeholder capitalism into reality. In simple terms, stakeholder capitalism is this idea that companies are responsible to a wide range of stakeholders in addition to shareholders.

One thing we heard during the conference is how implementing systemic, environmental and social change will require a delicate balancing act. Here's Richard Mattison, President of S&P Global Sustainable1, speaking at the September 21 event about the balancing act required for what he calls the energy trilemma.

Richard Mattison: Energy transition, energy security, energy affordability, how do you balance those 3 things? Without the right balance, we're not going to make progress.

Esther Whieldon: This idea of taking a holistic approach to sustainability issues also came up in an interview with Martin Whittaker of JUST Capital. I caught up with him on the sidelines of a climate week event, so you'll hear some background noise. Here he is explaining how environmental and social issues cannot be considered in isolation and how having a diverse group of employees that are solving for those interconnected issues can be valuable to companies.

Martin Whittaker: I don't see climate as separate from social or health or economic, socioeconomic concerns. Way back 20 years ago when I was involved in the climate space initially, I was at Swiss Re. And really, the issue there was about an economic liability. How do we think about changing disease vectors, how do we think about forced migration, things like that.

So I think different perspectives on what climate change, the climate crisis is really bringing to different communities is crucial. And in order to get that -- to really understand that, you have to have a diverse sense of perspectives on what that even means. Who is being affected most immediately and most urgently by shifting climate conditions.

Like how are companies responding and what are the sort of the social implications of that, including job creation. In our survey this year, creating jobs is the #2 issue, just behind pay a fair and living wage. Well, there's a tremendous amount of job creation opportunity in the transition to a low and no carbon economy. So you can't really separate these 2 things.

If you have a company where those making decisions around what those programs look like are more diverse. And when you start to see where is the business case really strong, how can we really forge stronger ties with the local communities where we operate, then I think...

Esther Whieldon: And reflect it more, too, right?

Martin Whittaker: Exactly. Or enter new markets or cater to a new customer base. I mean those are the, I think, where you start to see the real business benefits and then companies can be sort of emboldened to do more of that.

Esther Whieldon: At the same time, says Martin, companies need to be able to see the business case behind implementing these interconnected environmental and social issues if we are to move from talk to action.

Martin Whittaker: There has to be a very strong business and financial argument. And I think there is one. I think if you don't see the investor implications of climate change or building a diverse, engaged workforce or paying your people fairly, then I think you probably need to reimagine what running a business, a successful business really looks like or means.

So that does have to be a very strong business relevance. It's not to say company shouldn't be pursuing nonbusiness issues in a philanthropic way. And that's fine, too. But I do think that the ESG space overall has done -- I would give it a B+ overall on making the business case. There hasn't been an emergent set of clear standards. It hasn't been communicated particularly well.

I think it's very confusing to most people, including businesses. There's been companies that are inundated with requests for all sorts of information, some business relevant, some not perhaps. So I would say the ESG community has sort of manufactured a lot of its own challenges. And so a real focus now on meaning, and I said this for many years, there's no shortage of data, but there is a shortage of real meaning.

And are companies actually making progress? It's very hard to tell. So there are various ways you can do that, direct hit or benefit to the bottom line. There's also more enlightened self-interest. A company that gives back to the community might do -- not necessarily do so because they think it's going to boost earnings that quarter, but they might do it because it makes them more welcome in the community.

It strengthens ties to the community. Maybe it increases the flow of talent to the company. Maybe people want to go work at the company if they see that happening. So there's lots of indirect, you might say, business benefits, which I see written down and talked about but not captured in a framework. And I think if we can get a clear framework for that, then the data you need becomes more obvious.

Esther Whieldon: What Martin said about the challenges in connecting the dots on environmental and social factors to company's bottom lines, I heard a similar point made on the biodiversity panel at the Sustainable1 event on the 21st. This was from Dr. Jane Carter Ingram. Dr. Ingram is Executive Director of the Pollination Group.

Pollination is a climate change investment and advisory firm focused on accelerating the transition to a net zero nature positive future. Here's Dr. Ingram's explanation of why investors and companies are not doing more on nature.

Jane Carter Ingram: I think one of the biggest barriers is for companies to understand what nature is. If you use the Convention on Biological Diversity’s definition of biodiversity, you lose people. They don't know what biodiversity or even ecosystems are. So I think breaking down what nature means to companies, what aspects of nature are material to them, whether it be land, water, wild pollinators for agriculture, or coastal ecosystems for risk reduction, I think really understanding what nature means to them is barrier #1.

I just hear companies all the time, not understanding what biodiversity is and what nature is to them. And then secondly, I think it's supply chains because as we know, a lot of companies don't understand the full impacts of their supply chains, period, whether it be for social or environmental issues. And the majority of nature-based impacts are embedded within supply chains. And so understanding, one, your supply chains, mapping your supply chains, understanding your supply chains and then understanding the nature impacts within your supply chain and looking at those issues related to nature that are important to your company are another big challenge. So I would say those are the 2 biggest ones I see.

And data, I think. I'll just add a third one. Data is another challenge because a lot of companies are not collecting or tracking data on nature or biodiversity and may not even have great proxy data for that, the way they might for climate change.

A lot of times, the data that's been collected on species and ecosystems has been collected at spatial scales and at temporal frequencies that don't align with the scales at which companies make decisions and the time frames at which they need to make decisions. So there's a lot of data out there, but sometimes it doesn't align to decision-making.

And then the next piece is, yes, we need to understand how changes in the condition and extent of ecosystems translate into financial loss or financial gain as well. As an example, there's been a lot of work done recently to quantify physically how coastal ecosystems provide risk reduction benefits and how that compares to grey infrastructure, for example.

And to understand financially how do those systems -- economically, what are the benefits of using mangroves or coral reefs compared to sea walls or breakwaters. And that research has demonstrated that actually ecosystems can be as cost efficient, if not more cost effective than grey infrastructure and are as physically effective under certain conditions.

And in addition, you get all of these co-benefits from coastal ecosystems like from mangroves. You also -- you not only get the storm surge protection, but you also get the fisheries, you get carbon sequestration. And you don't get that from grey infrastructure. So there's a lot of work that's been done to quantify benefits like that. And there's also been a lot of work to quantify the benefits of wild pollinators, for example, on agricultural supply chains.

About 35% of crops are dependent on animal pollination. And there's been a lot of work to quantify what those losses are. But there's a lot of aspects of biodiversity and ecosystems that we still don't quite understand from an economic perspective or financial perspective. So there's a lot of work -- a decent amount of work to fill those gaps. But there has been a lot of progress in trying to quantify and translate that.

Esther Whieldon: Okay. Now let's turn to that other idea we mentioned at the top of this episode. I'm referring to the need to reduce global emissions, which is commonly referred to as mitigation and also to invest in adaptation, the physical impacts of climate change.

Lindsey Hall: We heard about this from U.S. special presidential Envoy for Climate, John Kerry, at a New York Times event during Climate Week. He said that the impacts of climate change will be much worse if we don't reduce emissions. Here's the quote.

"We have to adapt. We also have to build resilience, but I've got news for people who are sort of putting their hopes in the adaptation. If we don't mitigate enough, if we do not cut the emissions significantly, it will be beyond the capacity of any country to be able to adapt to what is coming at us."

We're seeing the physical impacts of climate change on a regular basis. Take, for example, the recent extreme flooding in Pakistan. We have another example of a real-time extreme weather event impacting infrastructure, business and households in the U.S. I'm referring here to Hurricane Ian. And that's a category 4 storm that made landfall in Florida in late September.

The hurricane had winds of 155 miles per hour and reached record storm surge levels. The hurricane caused about 2.5 million power outages. It also took the roof off a hospital above its intensive care unit and destroyed a section of a major Florida bridge. That's just a couple of the impacts that we're seeing.

Esther Whieldon: I sat down during Climate Week with Matt Ellis, Founder and CEO of Measurabl, which serves major businesses representing more than $2 trillion of real estate assets. Specifically, Measurabl tracks 13 billion square feet of commercial real estate across 90 countries. S&P Global is an investor in the company as well as a provider of some of the physical risk data that Measurabl integrates into its product.

Matt started off by talking about how the commercial real estate sector has evolved its thinking on climate risks in recent years. By the way, you'll hear him mention the term REITs, that stands for Real Estate Investment Trusts and refers to publicly traded companies that own and finance income-producing real estate.

He also mentions CBRE. Here, he is referring to the CBRE Group, which is the world's largest commercial real estate services and investment firm. Prior to forming Measurabl, Matt was the Director of Sustainability Solutions at CBRE. Okay, here's my interview.

Matt Ellis: It's been an enormous transformation because -- well, let's wind back just pre-pandemic and post, okay? That's a frame of reference that, I think, everyone can appreciate at this point. And pre-pandemic, the real estate business was booming. We were doing great, and it was all the traditional ways that we went about that were serving us well.

The pandemic emptied out buildings of all types around the world. It brought a heightened sensitivity to social impact and other types of adjacent risk, like climate risk that you're referring to. So there was a tuning of the industry to these phenomena that were massively impactful but rare, scarce or difficult to predict.

And coming out of that pandemic today, we now have, our business is a good proxy, $2 trillion -- or more than $2 trillion in real estate using our technologies around the world in 90 countries. Zero of those customers used physical climate risk services, like you guys provide and we integrate with pre-pandemic.

Post-pandemic, we're probably talking a couple of hundred billion has come online and begin to consume these types of tools and bring them into their underwriting, the risk assessment, their acquisition preinvestment and buy/sell. And certainly at the investor level with LPs talking about what the exposure of the portfolio or the REIT is to these hazards. So that's a huge shift in just a couple of years.

Esther Whieldon: Yes. Sounds like it. So I think some of -- as a former climate reporter, I probably have a pretty good sense of the initial things you're going to talk about here, but what are some of the biggest physical risks for real estate today?

Matt Ellis: It's the obvious ones, right?

Esther Whieldon: Like flooding.

Matt Ellis: Flooding, hurricanes. I've come originally -- now I'm in Colorado, but I was in California for most of my life. Clearly, we have wildfire considerations. The places that I've seen that really hit home are in industrial and logistics facilities in particular. We saw down in Houston, I forget the name of that particular hurricane, but tremendous flooding. Was it Harvey, I think?

Esther Whieldon: I think Harvey, yes.

Matt Ellis: And I remember that watching the weather and looking at my laptop and seeing e-mails from customers come in and saying, we've -- yes, this asset is going to be stranded or there will be a massive rehabilitation and bring it back online and all sorts of -- hairs rose on the back of my neck to think about well, what would that mean across multiple asset classes, like multifamily assets in the East Coast of Florida or New York? So your question on what types of risk. I think they're the obvious ones. It is absolutely flood risk that is terribly deleterious to the asset and it's an operating ability.

But that can be recovered from. It's a little bit harder when a fire just burns the building to the ground. So I think we need to think about the insurance and the resilience of the assets. What will ownership do to protect the building from these adverse impacts because the building cannot move.

Esther Whieldon: Right, right. Yes, you can't just -- yes, the people but not the building itself. Are there technologies, and this may be a little far field from what you do, but are there technologies in development to help buildings be more resilient to these physical risks?

Matt Ellis: I'm sure that there are. I think one of them is the fundamental awareness of the risk and the capacity to make capital investments that help mitigate that risk. So if you think of a brand leader like a Boston Properties with tremendously valuable portfolio of real estate, the world's largest publicly traded office REITs.

They've done a lot of work on insulating those properties that are exposed to things like flooding in Boston. And the retaining walls and other mechanisms, physical mechanisms to protect the building. So those are -- I don't know that they're necessarily Avant Garde or new technology. I think it's a thought process that bothers to put them there in the first place that's changed.

Esther Whieldon: Just even thinking about or having that as a checkpoint in planning for...

Matt Ellis: It's a capital expenditure. That's not an inconsequential amount of cash that has to go out the door to protect a $0.5 billion office tower.

Esther Whieldon: Yes. And then the permitting, too. Like if it's something that's going to be substantial, right, more than just putting up sandbags. It's a whole process.

Matt Ellis: I think you see some of this stuff in design build, too, or retrofitting. So after the hurricane that passed through New York, another one whose name, I forget. Sandy.

Esther Whieldon: Sandy.

Matt Ellis: Sandy. There it is. Okay. I'm 2 for 2 now with some help. So one of the things the real estate community did was we moved our mechanical systems from basement to roof, right, and elevated them and the property.

Esther Whieldon: Like the backup generators?

Matt Ellis: Yes. And boilers, chillers and another heavy equipment. So I think that there's -- these are somewhat prosaic examples of changes to buildings that are significant, rethinking the space allocation and use of space because of climate hazard, right? And we have abundant examples from New York to Houston now and certainly around the world of a change in the way we invest in and operate real estate.

Esther Whieldon: Now to what extent do you also deal with the emission side for them, helping them reduce their carbon footprint?

Matt Ellis: Yes, that's a huge part of our business. So carbon, my old mentor at CBRE, who is a fellow named Dave, was the Global Head of Sustainability there. And it was the first time I had heard this, but Dave said carbon is the coin of the realm. And I think he was early, but right about that.

Dave was saying that 15 years ago, and I think today, he's absolutely correct that within the broader ESG discussion, one thing, one signal sticks out to that noise: carbon, carbon, carbon. While real estate being some 40% of carbon emissions is a major power consumer, gas consumer is clearly going to have a heavy toll to pay there.

And so our software is in the business of fundamentally calculating the energy consumptions from all utilities, converting that into a carbon metric that is investment grade, it's verifiable, the primary source documentation. So we've built all the technologies to capture the utility build data, warehouse that, do quality assurance using machine learning to bulletproof those carbon calculations.

And in real estate, importantly, it's not just getting a build. It's actually understanding what spaces and types of spaces that bill is associated with. Is that a common area, is that a commercial kitchen, is that interior of a baseball stadium? And yes, we serve Major League Baseball is one of our customers. So you have to really know that.

Esther Whieldon: And why does that matter? Is it the technology your suggestions to them to change would differ or...

Matt Ellis: Yes. And it's importantly about whose carbon it is, right? So who is paying for controlling that space, occupying that space. And then when it comes to the interventions that you might make, you have to ask yourself the question, well, if that's a data center operation, obviously, it's going to be carbon intense and energy intense.

That didn't make it wrong, not a personal judgment, just a business statement that, that's a high consuming building or space. There may be no interventions to be done there. So just looking at, hey, we're using a lot of energy there, doesn't do anything for you. You have to know what is the use of that space and is that appropriate by use, among other concerns like weather and occupancy and age of building. So we have to be in the business of all of that.

Esther Whieldon: And that makes sense because I know that companies like Google and others that have these huge data centers, they're doing a lot of building renewables, direct contracts for renewables as well as renewable energy credits to offset those emissions, right? So they're not doing it directly at their facilities necessarily, but they're finding a way to balance those out.

Matt Ellis: It's going to be an all of the above approach to decarbonization. Clearly, we need the massive investment in the building stock. This is where the power is consumed, the people go to work. So we're going to need to change those systems and technologies. And by the way, it's not really pushing the envelope, wild new technologies. This is about building envelopes, basic commissioning and otherwise good habits, literally changing the light bulbs. It can get us a long way down this curve. And the other mechanisms that we'll use then to decarbonize are absolutely off-site renewables, power purchase agreements and other decarbonization techniques that are more financial instruments. Every building does have a practical and a theoretical limit.

So a practical limit is I've just came back from a trip in Europe. For those who have been through Europe, you see a lot of very old buildings. They've been there for hundreds of years. You're not going to knock that thing down and rebuild it into a gleaming office tower, right, to make it “carbon neutral.” So you've got to work with...

Esther Whieldon: So it has inefficiencies that you just can't get around.

Matt Ellis: You've got to work with what it is, right, and take it to its practical limits in terms of carbon performance. That's the task. It's not to make every building brand new again and net zero.

Esther Whieldon: So as you can hear, Lindsey, the commercial real estate sector has had an awakening to the physical risks of climate change and also has a number of existing options to reduce the carbon footprints of buildings.

Lindsey Hall: We also heard in this episode how we cannot treat climate issues as separate from social and other environmental issues like biodiversity. Creating the kind of systemic change needed for the low carbon transition is going to require more holistic thinking as well as making some difficult choices along the way.

These are themes we'll continue tracking as we bring new coverage from Climate Week. And also as we look ahead to the conference of the parties known as COP27, that's, of course, the big UN Climate Change Conference scheduled for November 2022.

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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