Navigating environmental, social, and governance (ESG) requirements can be a challenge. At a recent webinar in our Expand Your Perspective series, thought leaders from across S&P Global gave their opinions on the biggest challenges facing financial and non-financial corporations today. In this part of our recap series, the panel tackles questions surrounding sustainability data and climate risk.
Q: What sustainability data do firms need to factor into their investment decisions?
Kevin Bourne, Managing Director, Head of Investment Research, S&P Global Sustainable1
All of it, is the obvious answer. You should take all the sustainability data you can get. You also need to consider obtaining data at the most granular level. This can be a slight challenge today in parts of the ESG industry, as some companies designing the scoring mechanisms for ESG metrics are not making the data transparent. I’m very glad to say that we are not one of those. We take a diametrically opposed position.
We believe that information transparency at the most granular level is essential. Information that’s in the public domain must be used and leveraged both in the industry and in the investment community. I think it’s important for businesses to look at what other companies are doing in terms of ESG reporting. There’s a lot you can learn.
And interestingly, in my experience, I’m finding that companies are very willing to help each other in this domain. It is becoming a shared problem in ways you would not necessarily expect to see in a usually highly-competitive world.
Q: Can you provide some examples of the type of climate risk data that ties into investment decisions and how firms should interpret them?
Megan Pillsbury, Vice President of Business Development for The Climate Service, S&P Global Sustainable1
I will hone in on are those in the ‘E’ part of ESG, and there are two parts. The first part looks a the impact that a company is having on the environment. This is where lots of transition risk lies, as governments start limiting activities or holding firms responsible for damage done. There is also an increase in litigation risk as public looks to hold firms accountable for externalizing costs. Those transition risks are material to how a business operates and, for certain companies, could impact their financial performance in the future.
The second part looks at the impact of nature on the business. Humanity’s footprint has become so big that we are stepping on ourselves. Climate change is introducing material impacts on us and our businesses as well. And so that’s the other side of the coin that needs to be measured: understanding what kind of physical nature risks will also impact the business going forward.
I’m going to give a case study example of a current Climanomics customer in the agriculture sector, a global firm with a global sourcing footrpint. Their business is highly dependent on crops that they buy, process, and sell. If they can’t access those crops anymore, or the price of crops becomes very unaffordable, it changes their business dynamic entirely. And some crops take decades to mature, so they can’t just pick them up from one year to the next and move them if, for example, flooding or temperature rise becomes a problem.
So the company, from a risk management perspective, needs to understand their physical and transition risks around climate. Investors also want to understand these risks, and how firms are managing them, and investors will get this data from whatever sources are available, if not from the company directly.
Climate physical risk is very geographically specific, so it’s important to look at individual assets rather than take a top down approach. And for crops it is important to take a long-term view, both for the business, and because many investors take a long term view.