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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, an S&P Global podcast, where Esther and I take you inside the environmental, social and governance issues that are shaping the rapidly evolving sustainability landscape.

In this week's episode of ESG Insider, we're bringing you coverage of the summit that S&P Global Sustainable1 hosted in London last week, and I was on the ground as conference emcee.

Esther Whieldon: In today's episode, we'll be hearing from several of the summit speakers, including the finance lead for the UN's Climate Change Champions, the Head of Systematic Research at Lombard Odier Investment Managers, and a partner from management consultant Oliver Wyman. 

We'll be covering some of the conference's key themes, including the role of technology and innovation in the transition, the importance of data and the challenge of sustaining economic growth, particularly in emerging markets, while accelerating the transition.

Lindsey Hall: We're joined in today's episode by our regular contributor, Jennifer Laidlaw. Now Jennifer is a senior writer on the S&P Global Sustainable1 Thought Leadership Team, and she was at the conference in London, too. Welcome back, Jennifer. It was great to actually sit down with you in person in London last week.

Jennifer Laidlaw: Yes. It was amazing to see you, too. It was so nice to work together in person for a change.

Lindsey Hall: So it was a packed agenda. We heard quite a bit throughout the day about the role of standards and regulations. In the morning, the keynote address was from Sue Lloyd, the Vice-Chair of the International Sustainability Standards Board, or ISSB. Jennifer, you spoke to Sue for our podcast episode last week.

Jennifer Laidlaw: Yes, indeed, I did, and we discussed the global uptake of the ISSB's first 2 disclosure standards, which were launched in June 2023. And what to expect from the organization in 2024. We'll include a link in our show notes.

Her speech really hit a nerve with some of the conference participants I spoke to. They told me the ISSB standards will result in more comparability between jurisdictions and give the market the data it really needs to make sustainability-related decisions. We'll hear more about that later.

Lindsey Hall: What else, Jen, anything else that stood out for you from the conference?

Jennifer Laidlaw: Well, yes, the conference was pretty novel in that it just wasn't speakers or panel discussions. There were also discussion groups. So we had really a lot of fun with diverse participants. Topics included net zero, sustainable supply chains, quantifying their financial impact of climate risks. Mine ended up being quite animated with divergent opinions. And it was great to see how much people are taking sustainability to heart in their business or investment decisions.

Lindsey Hall: So what stood out to me in the roundtable that I attended was the challenge of data. I know we'll be hearing more about this today, but I went to a session about common challenges and pitfalls in reporting finance emissions, and that was geared towards banks and investors.

I can't tell you how many people reiterated the idea that measuring and managing Scope 3 emissions is difficult and that data is the main challenge they face. Even for some of the world's largest asset managers, this is a struggle.

Data availability is part of that challenge, I heard. With the exception of companies that are very proactive, I heard one attendee say that people are being dragged kicking and screaming into looking at some of these metrics to report. Jen, I saw you running around all day up and down the stairs, the basement, to interview conference participants. Tell me how did this jive with what you heard in your interviews.

Jennifer Laidlaw: So I had the chance of speaking to quite a few people about this. And first up, I spoke to Sagarika Chatterjee, who is Climate Finance Director, Finance Lead for the UN High-Level Climate Champions. Her work involves sharing the work of the private sector and financial institutions on climate with the parties to The Paris Agreement on climate change. She sat on a panel about the risks and opportunities in the transition and shared some of her takeaways from the panel and the conference with me.

You'll hear her mention a few acronyms. So for our listeners who are not familiar with them, here's what they stand for. She mentions IOSCO, that's the International Organization of Securities Commissions; COP 28, that's the UN's big climate conference, which was held in Dubai last December; MDB, so that's Multilateral Development Banks; and TNFD, that's the Taskforce on Nature-related Financial Disclosures. Here's our interview. We were on a panel that was talking about industrial transformation. For our listeners that weren't actually at the conference today, what would you say the main takeaways from the panel were?

Sagarika Chatterjee: Yes. So the main takeaway for me was actually from a previous session, which was the ISSB highlighting how they are moving forward and advancing global baseline for sustainability disclosure and climate disclosure now at a jurisdiction-specific level and now going into industry guidance and nature guidance.

And that is an incredibly important signal. IOSCO, obviously, is supporting this work, very important because it will give us, firstly, the data we need; and secondly, it's going to give us a degree of harmonization and it should enable better investment decisions.

But the second thing, I think, really, for me, that remains an outstanding massive channel, and I hope this came through in the panel, was that we don't have enough actual innovation. We don't actually have enough quantum of finance going into developing countries. This is absolutely critical because this is where a lot of the emissions is going to come from. We can't change the past and the energy system in the past, but we can try to change the carbon that we have in the future.

Jennifer Laidlaw: What kind of practical things do we need to do to actually get that innovation in place in countries that are going to be more affected by rising emissions?

Sagarika Chatterjee: Yes, excellent question. So on a very practical level, if I have the data in which I'm not an expert but it came up a lot during the conference today, we know that artificial intelligence can help us enormously in terms of efficiency and providing comparability that we'll need. Obviously, there are many drawbacks to it as well. It's never going to be enough and has to be used very smartly even with data. So that's, I think, one very practical way we can try and accelerate what we do so that we have better data available for investment decisions.

And then the second thing that's key for developing countries is how are we going to get down the cost of capital and how are we going to have more derisking solutions that will really help developing countries access finance so that they can have their small- to medium-sized enterprises growing, and local renewable energy businesses that then become the companies of the future; and same for e-mobility, how will they get the capital so that the passenger vehicles they have will, in time, turn to being more electric.

And this doesn't have to be a fantasy. If we take forward some of the key recommendations that Nick Stern and Vera Songwe have made in their climate finance framework that was published at COP28, and that sets out what exactly is needed to unlock finance for developing countries ex China, particularly in clean energy.

It looks at capital mobilization. It looks at MDBs, how they need to change. It looks at how we advance the project pipelines. It sets out very clear priority actions. So we now need the partners and actors who are going to take this forward and really put the recommendations into action, so we can scale up financing developing countries at the pace that is needed to tackle the climate challenge.

Jennifer Laidlaw: When you say scale-up financing, this is probably like a hard question. How much money do you actually need?

Sagarika Chatterjee: A lot. So just for developing countries ex China, we need $2.6 trillion each year going to 2030. Massive, right? If we look at climate finance overall, now to 2030, we need about $9 trillion each year, so absolutely massive. And the way that we are going to ramp that up is by boosting all sources of finance and that close collaboration that is now needed between the private sectors and the public sectors.

Jennifer Laidlaw: And these are massive, massive figures. Where are we at the moment in getting there?

Sagarika Chatterjee: So the latest figures for 2021 and 2022 are that we're about $1.3 trillion in terms of climate finance that is being raised. That is double what we saw in 2019 and 2020. But obviously, it is way off what the economists say is needed towards 2030.

Jennifer Laidlaw: You talked about the private sector playing a very big role. How in your work are you trying to develop, maybe like private-public partnerships?

Sagarika Chatterjee: Yes, I'll give you a few examples. So specifically on NatureFinance, we tried to break it down because it would seem extremely overwhelming. Obviously, TNFD is doing great work. That's all going to be really important, is already having an impact.

But specifically, we decided to look at mangrove finance. Unusual, but mangroves actually have enormous amount of solutions that we need for mitigation, adaptation, and obviously, all of the nature benefits, too.

And so we worked specifically with an industry group to create a mangrove finance road map. It's an 80-page document. I know, it's long. However, the point is we actually had some of the key players working together on what is needed, nature experts together with financial institutions, specifically commercial banks. So that work is now continuing this year, and it's going to look at how could we try and enable the financial instruments that are needed.

I'll give you another example. So specifically, we've been working on adaptation finance, and we've convened a group together of parties to The Paris Agreement, so governments working with finance partners and specific financial institutions on two areas of adaptation finance.

So they are looking at, again, how do we scale up financial instruments for adaptation finance? Are there any examples today on what exactly would be needed for enabling policy environment? And the second area that we're working on is an adaptation data on taxonomies, all of the architecture that is needed.

So we do believe that these collaborations where you bring together governments and the private finance sector are really key not just for the dialogue but actually trying to get some of the changes that we need because those that get behind the recommendations or the outputs or the guidance are the actors that they need to carry things through.

Jennifer Laidlaw: As we heard from Sagarika, the private sector and finance are both key to providing solutions for the transition.

Lindsey Hall: Jen, I mentioned during my opening remarks at the conference that we just published research about the topic of net zero commitments. And this found that less than half of the leading U.S. companies in our analysis have a net zero target. I wonder how does that fit into the broader picture?

Jennifer Laidlaw: Sagarika was on a panel with Budha Bhattacharya, who's Head of Systematic Research, at Lombard Odier Investment Managers. And during the panel, Budha mentioned the role of the finance sector and some of the steps this company is taking to work with clients on managing climate and nature risks. So I asked him how Lombard Odier works with companies to encourage them to set net zero targets.

Budha Bhattacharya: We are not alone in this journey, right? So we have a huge number of asset managers who are also worried about the same thing, grappling with the same challenges. But I would say that, more or less, the investor sentiment today is driving us towards those commitments, has a huge say in some of these companies' shareholding and, therefore, the direction they take towards sustainability.

So what we do is, of course, active stewardship and engagement with a lot of these companies. We help them. We advise them. It's not a dichotomous approach that you're here or you're not. It's a long process of engagement, and it depends on the maturities of the companies and their awareness and the jurisdictions they're operating in as well and the global geopolitics.

So we must be sympathetic towards each of these companies and the multitude of stakeholders they have to appease. So it's one way. I would not criticize them, but I would take them through the journey. And I think it's incumbent upon us, the financial community, the asset managers and the shareholders effectively, to make that call to guide them towards the right thing because it's a zero-sum game, ultimately.

Jennifer Laidlaw: And in terms of accelerating this transition, because obviously, we're in a situation of kind of a difficult geopolitical situation, also we have a climate crisis but we also have to think about economic development, how do we deal with all these dilemmas that are going on and try and bring them together to try and achieve these climate goals?

Budha Bhattacharya: That's the biggest challenge. Actually, that's a multimillion-dollar question, I would imagine, because I find that the biggest challenge, quite frankly, in general, when we deal with emerging markets, I mean, that are not Paris aligned.

India has a separate date. China has a different date. I think Saudi Arabia has a different date. So all of these countries, they have their own different dates when they want to align, when they think realistically they can align, if that makes sense. 

So the biggest problem I face for emerging markets and developing countries, so to say, which are included in some of those groups effectively. I would say the lack of data is the biggest problem, lack of awareness of these companies. The opportunities of sustainability are unknown to a lot of them.

So if I am a company I'm running very well, and I'm doing quite well in one of these developing countries, do they know that if I just literally report some of my sustainability, if I have a commitment that is aligned to this and that, if I have a remuneration policy that needs to change, if I have a couple of policies that I put together, equal opportunities, then if then put out a CSR, a corporate sustainability report, so on and so forth, and have some of these goals publicized and believe in it and start working towards it, a huge amount of capital unlocks. I'm not so sure if the awareness is there, the information is out there.

I think in developing countries, perhaps the priorities are different. But as these developing countries face more and more climate catastrophes, I think some of these awareness are coming to the fore. And as they come to the fore, I think it's incumbent on us, the international community, working on several different and disparate markets, to bring that awareness down to the grassroot levels. I know that there's some great things happening for agriculture and great things happening within renewable energy.

But I think the osmosis needs to happen all the way to some of the corporate boardrooms, as well in some of these developing countries and emerging markets. Not as an ambassador of sustainability but also to show them the opportunity that lies behind how can these set of actions, which are not easy, which are quite difficult and challenging, especially for developing countries and those companies operating there, but also how it can help them, make them more sustainable not just environment-wise but also from a governance, from investability and so on and so forth.

Lindsey Hall: What we just heard from Budha is a recurring theme on this podcast. The challenge of a multidimensional transition that balances the needs and priorities of many different markets. Another recurring theme on ESG Insider that came out throughout this conference was how investors are incorporating climate as well as biodiversity and nature into their portfolio decision-making.

Jennifer Laidlaw: Yes. So Budha and I had a chat about that. He described how Lombard Odier is trying to make nature investable and also told me about the company's decision to hire a Chief Nature Officer.

Budha Bhattacharya: I must confess that I can only do this because I'm in Lombard Odier. Our management and all the way down, we are completely converted towards sustainability and nature. We have a big announcement upcoming on Naturefund and so on and so forth. I think you can look us up. And the buy-in is all the way, number one.

Number two is we want to look at nature very similar to how we've looked at carbon, if that makes sense. So we have created an implied temperature rise metric. And similar to that, we're going to create an implied nature content metric, if that makes sense. Forward-looking, we're going to transform the 5 drivers of nature as defined by TNFD: climate change, land use, water use, so on and so forth. All those 5 drivers towards a unified metric, which is very simple for investors to understand.

And transitioning that needs a lot of quantitative modeling, which is why we're in Europe working with certain universities such as University of Cambridge, I've talked to University of Exeter as well the Global Systems Institute.

So effectively working with those climate scientists in nature, biologists and so on and so forth, who are at the top of the field, to the connoisseurs, the pioneers, to understand whether our analysis and how we transition these are in the right direction and the thresholds are right as well. So that's one aspect. That's a systematic way of dealing with nature, creating nature and effectively quantifying nature to make it investable.

The other strand that we also have, and again, I must confess Lombard Odier has been the model for this, we have now our first Chief Nature Officer. Marc Palahi, who was the Head of European Forest Institute, he's joined us. And we have a whole nature strategy. So what that means is from nature-based commodities to bringing in permaculture from monoculture. We are looking at nature in a very different way. We are actively going out there and looking at biodiversity hotspots. We are working with several governments, several organizations.

Jennifer Laidlaw: And one of the things that we've looked at a lot in this podcast is the interconnectedness of climate and biodiversity. You have a strong focus on nature. How are you approaching this interconnection between climate and biodiversity?

Budha Bhattacharya: First of all, I'm a quant, right? So I wouldn't beat my drums about my knowledge about nature. So we take a framework such as TNFD and we look at the 5 drivers of nature as defined in TNFD. So climate change is one of the drivers there. So that makes our life very easy, and this is where we depend on the global coalitions, major sustainability coalitions. We're working with SBTN, we are working with GFANZ, so on and so forth, to understand the paradigm of nature as an investment class.

So we're educating ourselves every day. And without that, it would be quite arrogant to say we understand it. We then therefore now. We know it. We don't. We're relearning every day. We are bringing the right people. We're working with the right folks, right organizations, right coalitions, to get to learn every day to work with the right universities, like I mentioned, right? So yes, so it's a joint effort, I would say. We have the vision. I think we have the expertise in asset management and the finance to build some of those products, which are optimized, which are risk managed, so on and so forth. Whereas the insight has to come from experts and standard setting agencies.

So we look at the intricacies. When you ask me climate versus nature, I think climate is probably a subset of nature and maybe vice-versa, in many ways. To look at it, we literally take the TNFD definition of it at the moment, and we are waiting for other ways. So for example, ISSB, if that comes out, that would be great to look at. And I just hope that they're not too different from each other, effectively. I just hope they're speaking the same language and hopefully, the metrics are the same. Otherwise, people like us, the number monkeys are going to have a nightmare.

Jennifer Laidlaw: How important are these standards basically in directing companies and guiding them on their sustainability journey?

Budha Bhattacharya: It's hugely important, in my opinion, because in my previous life, I have worked with quite a few corporates and sometimes these corporates have a tiny little sustainability reporting team, maybe four people, and they might have 40 different rating agencies and data vendors that they have to report to. And internally, they might have 80 different systems and stakeholders to collect the data from, if that makes sense. They're overtly stretched. Some of these numbers, they need guidance, they need standards, they need unified standards to make their work more efficient, more accurate.

So for us, it's very important, so we can quantify things with enough framework. Otherwise, without a framework, it's very difficult. Everyone will have their own qualitative view of sustainability. I often give this example that even within the United States, the way California might look at nature and the way a Texan might look at nature is very different. I'm not going to say who's right or wrong. But effectively, there's a different way of looking at it within the same region, not the same jurisdiction, so to say. So there are these sort of many ways of this. Like, the blind man and the elephant is a great method for it. So a good standard, a unified, recognized standard is absolutely better to quantify our view on standards and to effectively measure how we are moving towards the Paris goals.

Jennifer Laidlaw: So we had both Sagarika and Budha talk about data. Now the need for specific data on assets to understand the risks of nature and climate to business was a big topic of discussion on one panel at the conference.

I sat down with one of the panelists, Christopher Johnstone, a partner at management consultant Oliver Wyman. He explained how AI will play a key role in mapping asset locations. You'll hear him mention the NGFS at one point, that's the Network for Greening the Financial System, a group of central banks and supervisors working to manage and measure the risks climate change poses to financial stability. Here's Christopher.

Christopher Johnstone: So the panel I was on was focusing on sustainability risk. And the core focus to begin with is all around climate risk, the journey that financial institutions have gone on from sort of vision setting and taking their first steps with respect to understanding those risks really through to measurement and then through to embedding. And then the conversation really pivoted to the nature risk topic and what can firms learn from the work they've done on climate risk. And then sort of finally, thinking around what are the new emerging themes in the space.

So nature risk is sort of the obvious one that we've just touched on, adaptation risk and how firms begin to prepare in case of the transition, the acceleration in terms of decarbonization that's required doesn't happen at required pace. And then thirdly, supply chain was a big topic. And across all three of those, I think one thing that will sort of tie them all together is the need for more asset-specific data and really needing to drill down into and understand for corporates where those assets sit, how they're all interlinked and then the risk exposure at the asset level.

Jennifer Laidlaw: All right. Okay. And I mean, in terms of supply chains, in your work with financial institutions, I mean, how much are they actually looking or drilling down, like maybe using data to drill down and see where their different emissions are in the supply chains with the clients they're working with.

Christopher Johnstone: So at the FI level, they're really having to rely on the counterparties to disclose their Scope 3 emissions, those both be sort of the upstream supply chain and then also their downstream emissions. They will use proxies to fill in the gaps, looking at benchmarks based on what other companies in those sectors are disclosing. But at the moment, there are limited tools for financial institutions really to drill into that counterparty's supply chain.

We are actually, though, we are seeing tools come to market. One of those Oliver Wyman have just developed ... using bill of lading data is able to map out corporate supply chain down to the asset level. And then once you've got that network, you can then sort of build on top of it the emissions data or the supply chain risk or the physical risk and the nature risk on top of it. I think the 2 core building blocks that you need to do that are the location of the assets and then how the assets from different corporates are linked by those trade flows.

Jennifer Laidlaw: Yes, I think that's the thing. How do you locate these assets? How do you find them? And that's the big challenge. Are there any other tools that financial institutions are going to be using to get into that location asset data?

Christopher Johnstone: So financial institutions are starting to ask their corporates where their assets are with limited success. In terms of the sort of the large listed corporates in the sort of the heavy hard-to-abate sectors, there are databases out there. So understanding where our mining company's mines are or where an oil company's rigs and drills are, the data exist. But there aren't that many data sources that for, let's say, Nestle can tell you where every single one of Nestle's factories are. 

But I think this is one area where there is a solid use case for AI, and we're seeing a number of startups in this space using AI to basically map out the asset locations and then map those into the legal entity structure of these corporates.

Jennifer Laidlaw: So AI is going to be something that's transformative for this kind of data?

Christopher Johnstone: I believe so. I think there's a lot of different sources for this sort of information out there. But pulling it all together, going through it, cleaning it up and then doing the mapping to do that at scale would require an army of people to do manually, whereas I think there is a use case here for AI to make that significantly more efficient.

If I look at some of the data firms and the analytics firms out there, those specialist firms are starting to use AI. So I think other areas that they're using them are sentiment analysis and looking for early warning indicators, even from a credit risk perspective or from an ESG risk perspective. And then also we sort of talked about earlier identifying the assets that are sort of sitting underneath corporate also using AI to actually look at sort of mapping data and actually say is the asset where it says it is, and then using AI to then identify what type of asset that is based on the image.

Jennifer Laidlaw: You were talking about climate and nature. What steps, for companies and financial institutions, what are they taking to incorporate climate and biodiversity risks in tandem and really looking at biodiversity that is a risk related to climate?

Christopher Johnstone: I think at the moment, most firms are looking at them separately. And the reason for that is they're both highly complex topics. And if you try and look at them in an integrated manner from day 1, it's quite challenging to unpick what are the drivers. But I think the pathway that most are looking to take is start off looking at them both in sort of parallel, identify what the key drivers are from the climate side and then within the nature space, one of the key drivers there, and then over time, look to integrate them and understand where the interdependencies sit between the two of them. But I think I think we're a few years off looking at it in that fully integrated manner.

One thing that may accelerate that is if some of the scenario setting groups, let's say, NGFS, developed, fully integrated climate and nature scenarios. But I think it's a learning journey for everyone at the moment.

Jennifer Laidlaw: Is there anything else particularly that maybe you've heard today on your panel or throughout like different panels at the conference that you think is particularly important in terms of sustainability that you would like to share?

Christopher Johnstone: So this came up on one of the panels earlier but also something that I'm observing, historically, people have seen the climate sustainability or the ESG agenda as being a very sort of Western agenda. I think what I am more and more seeing is this is a core topic across lots of different emerging market economies, even a large number of economies that would traditionally be seen as sort of oil-based. They see the energy transition as actually being a key economic enabler and a growth lever as they look to sort of move away from oil over time. And the amount of sort of effort and work that is going on in a lot of these different jurisdictions, focusing on the energy transition, I think it gives me hope that we're going to be able to sort of accelerate and move at the sort of pace that we need to.

Lindsey Hall: What we heard from Christopher about the need to map out where assets are located to understand the risks associated with climate change and biodiversity risk, that's something we've been doing at S&P Global Sustainable1. For example, assessing the financial impact of physical climate risks at the asset level, and also assessing nature-related impacts and dependencies across the company's direct operations at the asset, company and portfolio level. We'll include a link in our show notes to research we've published on these topics, if you'd like to learn more.

Esther Whieldon: Yes. And this idea that technology and innovation will play a role in the transition is something we're increasingly hearing in events we cover, especially around the buzzy topic of AI. So Jennifer, thank you so much for sharing your interviews with us.

Jennifer Laidlaw: No problem at all. I'll be back next time with an interview with another speaker from the conference, Steve Howard, Vice-Chair of Sustainability for Singapore-based global investment from Temasek.

Lindsey Hall: Thanks so much for listening to this episode of ESG Insider. If you like what you heard today, please subscribe, share and leave us a review wherever you get your podcast.

Esther Whieldon: And a special thanks to our agency partner, The 199. See you next time.

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