Speaker 1: This is Dana Perkins and you're listening to Switched on
Speaker 1: the B and EF podcast. The first quarter of twenty
Speaker 1: twenty four has seen a flurry of sustainable finance policy activity,
Speaker 1: with a wave of new mandatory reporting rules and no
Speaker 1: let up an anti ESG sentiment in the United States.
Speaker 1: It's such a rapidly changing environment, so keeping abreast of
Speaker 1: all of the global policy updates can be a tough task.
Speaker 1: But to help, BNF recently released its inaugural Sustainable Finance
Speaker 1: Policy Quarterly Report, and this gives an overview of the
Speaker 1: most significant policy developments in Q one for twenty twenty four.
Speaker 1: This is across G twenty markets and a few other regions.
Speaker 1: And to discuss this report and its findings today, I'm
Speaker 1: joined by the author, Maya Goonomer, who is a Senior
Speaker 1: Associate for the Green and Sustainable Finance Team at BNF.
Speaker 1: We review the climate policy environment since the beginning of
Speaker 1: the year and talk about the introduction of the Corporate
Speaker 1: Sustainability Reporting Directive in the European Union and we go
Speaker 1: through the potential impact of wider reporting standards. We then
Speaker 1: turned to the US and we review the anti ESG
Speaker 1: movement and the ramifications for green and ESG aligned investments.
Speaker 1: B and EF subscribers can find Maya's Sustainable Finance Policy
Speaker 1: quarterly at BNF dot com or at BNF go on
Speaker 1: the Bloomberg terminal. Make sure to subscribe to switched on
Speaker 1: on Apple Podcasts, Spotify or wherever you get your podcasts,
Speaker 1: and if you give us a review on any of those,
Speaker 1: that will help share us with others. But right now,
Speaker 1: let's talk to Maya about sustainable finance policy. Maya, thank
Speaker 1: you for coming on the show again today.
Speaker 2: Hello Dana, thank you for having me.
Speaker 1: We're going to talk about some emerging policies that have
Speaker 1: actually well, well we've seen a wave of policies that
Speaker 1: have really come through fairly recently, and we're going to
Speaker 1: get into this policy discussion as well as a new
Speaker 1: tracker that we've made at BNF which is a US
Speaker 1: anti ESG tracker. But before we get to the ANTIESG parright,
Speaker 1: let's talk about these policies. What would you say have
Speaker 1: been some of the developments or you know, really when
Speaker 1: you're speaking to people who are looking closely at ESG,
Speaker 1: what are some of the frameworks and potentially conflicting parts
Speaker 1: of frameworks that people are discussing at the moment.
Speaker 2: I think we're reaching that point where we have so
Speaker 2: many of them. So what's keeping sustainability professionals up at
Speaker 2: night is trying to basically reconcile everything that they are seeing.
Speaker 2: Most companies and firms are global firms. So one of
Speaker 2: the key developments we've seen in the past quarter is
Speaker 2: the USSEC, the Security and Exchange Commission passing finally its
Speaker 2: climate role or reporting for companies. But that has been passed,
Speaker 2: and then straightaway has been posed because of so many
Speaker 2: legal issues and potential lawsuits to prevent it to see
Speaker 2: the light. And then in the EU there were again
Speaker 2: more policy development targeting companies around disclosure, around integration of
Speaker 2: sustainable matters. They are conflicting reporting standards that are basically
Speaker 2: popping up around the world. The International Sustainability Standards Board
Speaker 2: built a framework called the IFRSs one and S two.
Speaker 2: I'm so sorry, but these are the names. Actually there
Speaker 2: is not a longer name than that, and it's basically
Speaker 2: a sustainability reporting standard that is looking at sustainability risk
Speaker 2: and climate risk. That is a key standard where the
Speaker 2: same way we build the IFRS, accounting we're building that new,
Speaker 2: big global standard, so that after countries are implementing.
Speaker 3: It, but everyone is implementing it a tiny bit that
Speaker 3: like differently than the other, you know, and you add
Speaker 3: all these layers of complexity, and you're like, when I
Speaker 3: took to sustainability professionals, whether they are in a bank
Speaker 3: or they're in a company, they just are.
Speaker 2: Like, where should I start from? Like which one should
Speaker 2: I report against the first? Which one is the most important,
Speaker 2: which one is the most complicated? And I think the
Speaker 2: key ones are, Yeah, these ISSB developments, the us SEC,
Speaker 2: everyone had all their eyes on it. And in the
Speaker 2: you there were two key policies, the Corporate Sustainability Reporting
Speaker 2: Directives CSRD and the CS three D, the Corporate Sustainability
Speaker 2: Due Diligence Directive, which this one is about sustainability, integration
Speaker 2: and really actionable stuff. But then people are basically asking
Speaker 2: us what's the most important and how do they interact
Speaker 2: with one another?
Speaker 1: So for we're thinking about the fact that these are
Speaker 1: mandatory that are coming through more often that is essentially
Speaker 1: calling people's hand when they're thinking, well what do I
Speaker 1: start with? It's the governments are defining what is the
Speaker 1: imperative most immediately. But why do you think that is.
Speaker 1: Is it showing a sign of sophistication within this market
Speaker 1: or is it showing more a sign of what you
Speaker 1: were just actually talking about, which was that there is
Speaker 1: so many different frameworks that someone has to essentially say
Speaker 1: this is what matters and this is what's optional.
Speaker 2: There is sophistication arriving in this market. There is a
Speaker 2: need for standardization. We've talked about it so much, but
Speaker 2: up until now it was like, oh, we're going to
Speaker 2: create a standard and then people can abide with it
Speaker 2: or not, but you need to impose it effectively. We
Speaker 2: used to have so many different for instance, on the
Speaker 2: corporate level, so many different reporting standard I'm going to
Speaker 2: name abbreviation, but it's just to give an idea to people.
Speaker 2: It's like you had the TCFD task for some client
Speaker 2: related financial disclosure, you had CDP, you had gr I,
Speaker 2: you had says by like, so many to choose from,
Speaker 2: and effectively, if no one says okay, that's the one,
Speaker 2: everyone is going to follow, well you just get a
Speaker 2: range of reporting that are all different from one another.
Speaker 2: And then if I'm an investor or a bank and
Speaker 2: I want to make action on the back of this,
Speaker 2: then you need to spend an extra amount of time
Speaker 2: to standardize all these data and compare it to one another.
Speaker 2: And then because at the end of the day, you
Speaker 2: just want to compare one company to another on the
Speaker 2: back of their environmental, social and governance factors and performance.
Speaker 1: But presumably wouldn't these different reporting frameworks being speaking to
Speaker 1: from the company standpoint to different parts of the financial
Speaker 1: services community and designing that reporting in a way that
Speaker 1: is most digestible to different and financial end players which
Speaker 1: do have different strategies and are looking at things differently.
Speaker 1: So what equities are going to need to be able
Speaker 1: to ascertain, you know, what, compare one company to another.
Speaker 1: It's going to be different than what the credit market
Speaker 1: actually needs in order to be able to make those comparisons.
Speaker 2: It could be it could be something like that. I
Speaker 2: think it was more like appealing to different companies depending
Speaker 2: on their type of service or the thing they wanted.
Speaker 1: To report on.
Speaker 2: They would choose TCFD, if they wanted to report on
Speaker 2: their exposure to climate risk, they would choose SISB, or
Speaker 2: to report on their overall sustainability performance, or they would
Speaker 2: use CDP to report on their climate performance. Now what's happening,
Speaker 2: and in particular in you with the Corporate Sustainability Reporting
Speaker 2: Directives ESORD, so they're like, you need to report on everything.
Speaker 2: You need to report on social you need to report
Speaker 2: on governmance, you need to report on the environmental side.
Speaker 2: It's a double materiality framework there there it is the
Speaker 2: big word have been said, which is like looking at
Speaker 2: both how much climate how much social factors are affecting
Speaker 2: the profitability of a company, the profitability in good or bad.
Speaker 2: So that's the financial materiality, but it's also looking at
Speaker 2: how much the company's operation are affecting the environment or
Speaker 2: effecting society. So that's CSRD, but that means more than
Speaker 2: one thousand and two hundred data points. On the other side,
Speaker 2: you have ISSB, which also tried to encompasses all these
Speaker 2: like metrics. So the ISSB framework is looking at both
Speaker 2: sustainability risk. So that's the IRSs one and the IRSs
Speaker 2: two looks at climate risk disclosure and the IRSs two.
Speaker 2: I keep on saying this to client and makes them laugh.
Speaker 2: When I saw it, I thought it was TCFD, Like
Speaker 2: I was just like, can't be that everyone is talking
Speaker 2: about this thing, and I just don't understand, like it
Speaker 2: seems like it's like, you know, like when you feel
Speaker 2: like a groundhout day, Like you know, it's like I've
Speaker 2: seen this before and it's effectively TCFD, But then looking
Speaker 2: at climate and looking at sustainability matters.
Speaker 1: It was an evolution of it.
Speaker 2: It's an evolution of it. It's building on this framework
Speaker 2: that has been like widely use. A lot of work
Speaker 2: has been done by the TCFD team to promote the
Speaker 2: use of that framework across the globe. And actually TCFD
Speaker 2: retired because it's incorporated in ISSB now, so it doesn't
Speaker 2: exist anymore. But the only difference is that, however, ISSB
Speaker 2: is like free form. It's not structured, it doesn't have
Speaker 2: key metrics you need to report on.
Speaker 1: So in many respects, the voluntary frameworks existed as a
Speaker 1: form of carrot. You got to pick the one that
Speaker 1: was best for you, and it was a really more
Speaker 1: positive way of going about the reporting. And that now
Speaker 1: these mandatory frameworks are a little bit more of a stick,
Speaker 1: so you're going to have to comply. And what you're
Speaker 1: pointing out is that in some cases they're actually an evolution.
Speaker 1: They built on these voluntary frameworks to then create these
Speaker 1: mandatory frameworks. But we haven't necessarily retired all of the
Speaker 1: voluntary frameworks in order to create space for the mandatory ones.
Speaker 1: And that may be something that we do end up
Speaker 1: seeing over time. The future will let us know whether
Speaker 1: or not that ends up being the case. But let's
Speaker 1: go back to this conversation around the CSRD and the ISSB,
Speaker 1: one being mandatory and one being voluntary. Yeah, where is
Speaker 1: the friction between the two and why is their friction?
Speaker 1: Why would you choose one over the other. Well, I
Speaker 1: guess you're not choosing the CSRD. The CSRD is an
Speaker 1: imperative in certain parts of the world.
Speaker 2: Yeah, So, I think one thing that is really important
Speaker 2: to understand between at this shift between voluntary and mandatory
Speaker 2: is also the state of the market. The more advanced
Speaker 2: to get into that sustainable finance market, the more you
Speaker 2: want to force your banks, your investors, your insurance to
Speaker 2: take into account sustainability risk and climate risk in the
Speaker 2: investment processes and the decision making processes, the more you'll
Speaker 2: have to make it mondatory because they'll need the data
Speaker 2: to do this. You can force a climate risk stress
Speaker 2: test onto a bank and say, you know what, you
Speaker 2: figure out with the data you've got, we're not going
Speaker 2: to mandate reporting from companies, So that that's the ground.
Speaker 2: And then for ISSB versus CSRD. So ISSB is a
Speaker 2: voluntary framework, just because the IFRS foundation the same way
Speaker 2: for those of you who have studied a accounting just
Speaker 2: like me, as just an accounting standard, and then countries
Speaker 2: can choose to opt on it or not. So DA
Speaker 2: first was like, okay, we're going to build that standard,
Speaker 2: and then after every single jurisdiction will adopt it or not.
Speaker 2: So certain jurisdiction are making iss be a reporting mondatory.
Speaker 2: So that's the case of Turkey, that's the case of
Speaker 2: BRAZILA is thinking about it, that's the case of the UK.
Speaker 2: Like there are tons of jurisdiction across the globe that
Speaker 2: are making it mandatory. Progressively, some of them are starting
Speaker 2: and being like okay, to start with, we're going to
Speaker 2: make it voluntary, and then it's going to become mandatory eventually.
Speaker 2: The friction comes from the fact that okay, we have
Speaker 2: all these different jurisdiction adopting it, tweaking it a tiny
Speaker 2: bit so that it meets their local requirement. And then
Speaker 2: you have this mammoth of CSRD, which is an EU
Speaker 2: legislation that is affecting fifty thousand companies globally EU and
Speaker 2: non EU company public and private company SMEs because the
Speaker 2: EU has said, okay, we're going to build this new
Speaker 2: reporting standard, and basically any company that is domiciled in
Speaker 2: the EU but also trades in the EU, that has
Speaker 2: a certain amount of revenue in the EU, that is
Speaker 2: listed in the U, all these companies are falling in
Speaker 2: scope first years or if you're doing business in the EU,
Speaker 2: you're most likely going to be in Yeah, exactly. So
Speaker 2: it's phased in the implementation from now like the first
Speaker 2: reporting or starting next year publication of reporting, but it's
Speaker 2: starting this year, but publication next year up until twenty
Speaker 2: twenty nine. There's going to be time. There are these
Speaker 2: like that thousand of metrics, but for each metric you
Speaker 2: have the right to say, actually that metric is not
Speaker 2: material to my business, I'm not going to report on it.
Speaker 2: So there is that flexibility around that. But it's still
Speaker 2: a bloody mammoth, like it's massive. Some companies I'm talking
Speaker 2: to their like we have to capture data we've never
Speaker 2: captured before.
Speaker 1: I mean, how many people have they had to put
Speaker 1: on to these projects that they had to add We're
Speaker 1: taking double digit people to actually work on this reporting
Speaker 1: or is it single digits?
Speaker 2: It really depends on companies, but I think, yeah, I
Speaker 2: think there are all building teams to do that. And
Speaker 2: when I took to companies, some of them are like,
Speaker 2: you know what, I fall in scope for iss B
Speaker 2: reporting n CSRD. CSRD is so stringent that I'm just
Speaker 2: going to do CSRD and then de facto I'm going
Speaker 2: to do my iss BE reporting.
Speaker 1: Do you lose anything by just doing CSRD.
Speaker 2: I don't think so. It's so complicated and thorough that
Speaker 2: you don't. And actually, last week the two authors of
Speaker 2: CSRD and ISSB and I'm not going to go into
Speaker 2: the abbreviation again, but there are two author groups, some
Speaker 2: that built CSRD and some that build ISSB. I've published
Speaker 2: what we call an interoperability guidance, which basically allows company
Speaker 2: to efficiently do the two at the same time and
Speaker 2: be like, these are all the areas where the two
Speaker 2: frameworks collide and where you can gain some time by
Speaker 2: doing one and the other at the same time.
Speaker 1: One of the things that's really interesting about the is
Speaker 1: this is it is truly global. It is not just
Speaker 1: European or just North American. You're finding it in Brazil,
Speaker 1: Costa Rica, Singapore, Turkey, and then recent markets that have
Speaker 1: announced that they will be reporting you in using the
Speaker 1: ISSB framework Pakistan, Kenya. I mean, this is a truly
Speaker 1: diverse set of countries representing different continents. Do you think
Speaker 1: that those outside of Europe will continue to say, well,
Speaker 1: not all of the business of all of the companies
Speaker 1: that we are actually working with need to embrace the
Speaker 1: CSRD because that's not necessarily where their business is. And
Speaker 1: the ISSB will continue to remain dominant in other parts
Speaker 1: of the world.
Speaker 2: For many reasons. ISSB is an easylyft. It's much easier
Speaker 2: when like from a diplomatic standpoint and a political standpoint,
Speaker 2: when you're like a government leader to impose ISSB than
Speaker 2: to impose something like CSRD. CSRD has been in the
Speaker 2: work for a very long time, but ISSB is like
Speaker 2: you know, free for much more qualitative. It leaves much
Speaker 2: more or room for interpretation. You don't have like exact
Speaker 2: metric you need to report on it. It's not like, oh,
Speaker 2: you're a cement manufacturer, you need to report the amount
Speaker 2: of Scope one, two and three emissions that you emit,
Speaker 2: while CSADY has CO three emission. And so depending on
Speaker 2: which stage you are at the development of the sustainable
Speaker 2: findance market, how much the rest of the institutions within
Speaker 2: the country want to integrate sustainability within their own requirements,
Speaker 2: you know, like the financial regulators and whatnot, then they
Speaker 2: probably will be more inclined to mandate ISSB reporting. Also,
Speaker 2: if they have never mandated anything before, they are very
Speaker 2: likely to be undating ISSB. Also, as I said, ISSB
Speaker 2: draws a lot of inspiration from TCFD, and TCFD has
Speaker 2: been very popular, so it's easy to say, you know what,
Speaker 2: you've been doing TCFD for such a long time, move
Speaker 2: on to ISSB. There are some tweaks here and there.
Speaker 2: They are a bit different. You need to first do
Speaker 2: climate risk reporting and then you need to do that
Speaker 2: sustainability reporting. So just expand to other areas. I think
Speaker 2: that's what we're going to see. But what we might
Speaker 2: see is companies themselves saying I'm going to report voluntarily
Speaker 2: against CSRD. So there was like a survey published last
Speaker 2: week on Bloomberg that says seventy percent of the companies
Speaker 2: that we're not in school for CSRD, but answered that
Speaker 2: survey we're planning to at least partially report against CSRD.
Speaker 2: Seventy percent. That's massive, and that's across the globe.
Speaker 1: So I may have oversimplified the ISSB is voluntary versus
Speaker 1: the CSRD is mandatory, because we know the CSRD is
Speaker 1: being implemented in the U and pretty much any company
Speaker 1: that's touching the EUS The way we're framing it with
Speaker 1: ISSB as it being voluntary in theory when countries adopt
Speaker 1: it and say that they're going to phase it in,
Speaker 1: and there actually have been a number of countries that
Speaker 1: have actually announced it that they will be implementing it
Speaker 1: in the future. I think across thirteen markets that are
Speaker 1: in the process of implementing this, it's no longer voluntary
Speaker 1: in those specific countries. So can you kind of clarify
Speaker 1: what voluntary even really means if ultimately the destiny for
Speaker 1: some of these reporting frameworks like the ISSB is getting
Speaker 1: adopted and becoming mandatory in certain jurisdictions.
Speaker 2: Yeah, CSRD has been built straight away to be a
Speaker 2: mandatory framework and being implemented is been built, so there
Speaker 2: is a standard behind it that's been built to be
Speaker 2: the reporting framework that is mundated by the EU ISSB.
Speaker 2: At the beginning, it's a bit like how TCFD worked
Speaker 2: back in the day, Like it's that framework that has
Speaker 2: been built by a third party association, the IFRS foundation.
Speaker 2: That was like, we're building the standard. Whoever wants to
Speaker 2: use it uses it. And when I say whoever, countries
Speaker 2: who wants to.
Speaker 1: Use it, say, we've done the work for you.
Speaker 2: We've done the work for you. The standard has been built.
Speaker 2: Instead of all of you creating your own standard because
Speaker 2: we know you're going to be willing to mundate sustainability reporting,
Speaker 2: instead of choosing a different standard to mum d that reporting,
Speaker 2: we're going to build one standard and then after you're
Speaker 2: going to build laws in your own jurisdiction that moundate
Speaker 2: reporting against the same standard, which is ISSB. So the
Speaker 2: same way back in the day, we had countries saying
Speaker 2: TCFD exists, we ask you to report against TCFD. That's
Speaker 2: the law. The law is to say you need to report,
Speaker 2: and the standard you need to choose to report is TCFD.
Speaker 2: This is what is happening right now.
Speaker 1: So it just has to do with the organization that
Speaker 1: created it, having a lack of authority over countries, but
Speaker 1: ultimately wanting it to become exactory in a number of ocations.
Speaker 2: And then that foundation that was built to develop the
Speaker 2: ISSB was endorsed by many different countries, including the EU,
Speaker 2: saying okay, we need a global standard so that instead
Speaker 2: of going all in our little corner and asking companies
Speaker 2: to do a reporting that is a tiny bit different
Speaker 2: from one another or completely different, then we're going to
Speaker 2: have a standard we can all abide with. On the
Speaker 2: other side, the CSRD relies on its own standard that
Speaker 2: has been built by the EU themselves. It's called the
Speaker 2: European Sustainability Reporting Standard. So effectively, when I took about CSRDVERSSSB,
Speaker 2: it's effectively the European Sustainability Reporting Standard ESRs against ISSB.
Speaker 2: These are the two different reporting standard. One is going
Speaker 2: to tell you need to build that table. The other
Speaker 2: one will tell you you need to be that other table.
Speaker 2: That's what is different. So then in itself ISSB does
Speaker 2: not mandate anything to anyone, but then it's being endorsed
Speaker 2: by government and put into law in different jurisdictions.
Speaker 1: Well, and among this list of governments that have adopted this,
Speaker 1: there seem to be a number of emerging markets who
Speaker 1: have actually signed up for it. And do you think
Speaker 1: there's any particular reason that it has been popular in
Speaker 1: emerging markets.
Speaker 2: I think it's because the ISSB standard is an easy
Speaker 2: lift when you're at the beginning, in the early stage
Speaker 2: of developing a sustainable finance market. It means that if
Speaker 2: you want companies to start assessing their exposure to sustainability
Speaker 2: and climate risk, the ISSB is not that difficult to
Speaker 2: get a political approval on because it's just single materiality,
Speaker 2: so it's just looking at the financial impact of sustainability
Speaker 2: matters compared to the CSRD that I explained earlier, So
Speaker 2: that makes it easier. And it's also an easy lift
Speaker 2: because it's very much like as I said, it's super
Speaker 2: similar to TCFD, so you had already a lot of
Speaker 2: companies that had endorsed that framework, and it's just like
Speaker 2: expending a tiny bit the perimeter of TCFD. So that
Speaker 2: might be the reason why. The main thing we might see, however,
Speaker 2: is that with CSRD ISSB, all these different like reporting
Speaker 2: framework popping up is that what I hear from companies
Speaker 2: is companies are saying, we're happy to do all these exercise.
Speaker 2: We know we have to report on new stuff, on
Speaker 2: new factors. We're happy to devote the teams to do that,
Speaker 2: to put the means towards building this. We think it's
Speaker 2: actually representing our business a bit better. However, if investors
Speaker 2: that have like a good sustainability performance, I'm talking on
Speaker 2: the companies that are training, like, look, we're actually making
Speaker 2: an effort. What they're telling us is that if this
Speaker 2: doesn't lead in investors to invest more in us to
Speaker 2: decrease our cost eff equity, to decrease our cost of debt, Basically,
Speaker 2: that like not reward us on the back of the
Speaker 2: all these efforts that we do just going to end
Speaker 2: up doing it as a compliance stickboxing exercise.
Speaker 1: And it's not going to drive the same level of
Speaker 1: change that it potentially exactly, which then leads us. So
Speaker 1: I want to make sure that we have enough time
Speaker 1: to talk about this new tracker that we've made focused
Speaker 1: on anti ESG legislation, specifically in the US, which is
Speaker 1: the other side of it. So as we end up
Speaker 1: seeing more legislation mandating reporting and trying to you know,
Speaker 1: really rally people around, coming up with a common set
Speaker 1: of metrics and the ability to make decisions based on
Speaker 1: better quality data. When it comes to sustainability, there's been
Speaker 1: this movement, if you will, across a number of US
Speaker 1: states that have essentially said that, well, maybe that reward
Speaker 1: in terms of performance doesn't necessarily exist and it could
Speaker 1: be at conflict with fudiciary duty. Therefore ESG is not
Speaker 1: allowed in our state. And even if you're not on
Speaker 1: Walls Street in New York and the amount of money
Speaker 1: moving there, pension funds are a big deal and states
Speaker 1: control a lot of pension money. So can you talk
Speaker 1: a little bit about, well, first of all, how many
Speaker 1: of these anti ESG bills have passed? Where they are
Speaker 1: you know, really what's happening in the US with that.
Speaker 2: We've seen more than fifteen ANTIESG policy being passed in
Speaker 2: the US. And when I say ANTIESG policy, there are
Speaker 2: two kinds. Anti ESG is like the main title, but
Speaker 2: there is one that is truly anti ISGU, which is,
Speaker 2: as you said, it's been questioned whether undamental social and
Speaker 2: governance factor are actually financially material.
Speaker 1: And there is data suggesting one or the other. So
Speaker 1: it depends on I mean, it's almost a philosophical view,
Speaker 1: depending upon what data you're going to adopt and what
Speaker 1: studies you actually want to evaluate. Because certainly on the
Speaker 1: other side, there are plenty of studies that do say
Speaker 1: that it improves financial performance, especially over the longer term.
Speaker 2: Exactly on the medium to long term. And so a
Speaker 2: certain state have said, you're breaching your fuduciary duty, which
Speaker 2: to explain to our od and so if you're like
Speaker 2: not from financial markets the future duties to duty an
Speaker 2: investor has towards its clients, which is to make the
Speaker 2: most profitable financial decision for them, taking into account their
Speaker 2: preferences in terms of risk and return. And so they say, okay,
Speaker 2: we don't want any state pension to take into account onunrontal,
Speaker 2: social or governance factors. So that's an entire year, is
Speaker 2: you know. The other type of flow is like much
Speaker 2: more straightforward, which is like it's called the boycott law,
Speaker 2: So it's basically boycotting any financial institution and sometimes even
Speaker 2: companies that take into account sustainability and that the state
Speaker 2: deems to support. Sustainability matters. So certain state have completely
Speaker 2: banned numerous financial institutions in the likes of black Rock, BNP, PARBA,
Speaker 2: a lot of European financial institutions as well, because they
Speaker 2: deem them to be pushing a sustainability agenda. We're talking
Speaker 2: about more than fifteen states, and.
Speaker 1: They're boycotting the entire organization or just the funds that
Speaker 1: actually use the SG criteria because these different desks do
Speaker 1: operate separately from each other and have different standards that
Speaker 1: they hold themselves to.
Speaker 2: No the entire financial institutions, which leads them in certain cases.
Speaker 2: There was one of the state that it led them
Speaker 2: to basically not being able to raise their state level debt.
Speaker 2: For financial institutions, it's actually it's beyond investors. It's like
Speaker 2: you have a smaller list of banks that will be
Speaker 2: able to underwrite your debt and get you the best
Speaker 2: deal for your debt. So you end up having to
Speaker 2: raise your debt through an auction process, which is much
Speaker 2: less financially interesting and paying higher interest rate because you
Speaker 2: don't have the same ability to go through an underwriter
Speaker 2: aka a bank. Because you've banned bnppre Aby, you've banned HSBC,
Speaker 2: you've banned Barclays and Therefore you reach a lower investor pool,
Speaker 2: and you have less people to sell your bones to,
Speaker 2: and you pay a higher interest because there is less
Speaker 2: a bidding wharf for your debt.
Speaker 1: So there are negative, arguably unintended consequences of this legislation
Speaker 1: for the states that have passed it. But how about
Speaker 1: on the other side, So the companies that actually want
Speaker 1: to attract this pension fund money, are they changing and
Speaker 1: are they essentially abandoning their ESG rules in order to
Speaker 1: attract it.
Speaker 2: So what we found very interestingly, and some of you
Speaker 2: who are familiar with the market have seen this as well,
Speaker 2: is that companies, investors' state level institutions as well sometimes
Speaker 2: continue with these strategies. They continue to integrate environmental, social,
Speaker 2: and governance matters, They continue to have a sustainability strategy,
Speaker 2: they just don't talk about it or like they switch
Speaker 2: on and off who they talk about it too. The
Speaker 2: companies of these states, they'll still have to attract international investors,
Speaker 2: and for that they can't negate the need to have, like,
Speaker 2: for instance, a sustainability strategy. It's just that they might
Speaker 2: not like present it to everyone. A key example, like
Speaker 2: from a data perspective, we have like a concrete example.
Speaker 2: For instance, in the state of Florida, there was a
Speaker 2: law being passed where Florida Institution could not raise any
Speaker 2: sustainable bond, so they were not allowed to raise a green,
Speaker 2: social or sustainability bond whatsoever. And what we've seen is
Speaker 2: that there is a county within the state of Florida
Speaker 2: that issue the bond after this law was passed, and
Speaker 2: it's technically a green bond because it was done for
Speaker 2: biodiversity protection and land protection purposes. But the county, which
Speaker 2: is Hillsboro County, has decided to not label that bond,
Speaker 2: which was twenty seven tranches, as green, so it shows
Speaker 2: that it's being done. The money is raised for green
Speaker 2: purposes because this is going for land and biodiversity protection,
Speaker 2: but it's just not being labeled as green anymore.
Speaker 1: Well, because presumably it's a good investment and they're focusing
Speaker 1: on it anyway. And maybe that's the argument, is that
Speaker 1: the investments will still happen, yes, if they are good investments,
Speaker 1: but they won't be under the guise of ESG. It'll
Speaker 1: just be an investment like any other.
Speaker 2: Yeah, exactly. So we're going like ten years back.
Speaker 1: So how about the states that have a commitment to
Speaker 1: ESG frameworks and making sure that sustainability is taken into
Speaker 1: consideration for their pension funds, because all of these financial
Speaker 1: institutions want to attract that money as well, so they're
Speaker 1: kind of caught between the two. Are there the same
Speaker 1: number more less of the pro ESG side of things,
Speaker 1: So there are.
Speaker 2: Less pro ESG laws being passed in the US, but
Speaker 2: there are still a substantial amount. So what we call
Speaker 2: a pro ESG look can be either a disclosure lad
Speaker 2: that we've seen in California or a divestment law basically
Speaker 2: asking pension funds in the state to divest from certain sectors.
Speaker 2: And these are being passed in state, and there are
Speaker 2: more in the pipeline, and maybe the presidential election is
Speaker 2: also going to have an impact on that. So these
Speaker 2: are being passed and effectively there's still like an unstoppable
Speaker 2: trend that will continue.
Speaker 1: So do you think we've seen an end of these laws,
Speaker 1: whether pro or anti in the US? Specifically those states
Speaker 1: that are kind of straddling the middle of the line
Speaker 1: and not taking a stance, do you expect more of
Speaker 1: them to essentially make a decision as to what side
Speaker 1: of this they fall on.
Speaker 2: No, we are seeing more in the pipeline. We're seeing
Speaker 2: the state that have already passed pro and anti ESG
Speaker 2: LO continue to push more lows, and we're seeing new
Speaker 2: states having lows in the pipeline as well.
Speaker 1: So we're seeing some of the pro ESG states being Massachusetts, Washington,
Speaker 1: and some of the anti states being like Florida Texas.
Speaker 1: Are they following the typical voting red and blue state
Speaker 1: lines so largely.
Speaker 2: Yes, with some exceptions to it, but important like red
Speaker 2: state have passed these kind of floats such as Florida, Texas, Alabama,
Speaker 2: which we're not surprising, and California has passed one of
Speaker 2: the first pro ESG LOO. Indeed, there is a correlation there.
Speaker 2: The reason why there is this trend of pro versus
Speaker 2: anti ESG lows in the US at the state level
Speaker 2: is that, compared to other parts of the world, in
Speaker 2: the US, promoting sustainable finance and promoting ESG investment is
Speaker 2: seen as a politic agenda, and that's very, very very important.
Speaker 2: It's a big distinction compared to other parts of the
Speaker 2: world where we're seen in the EU and in the
Speaker 2: UK for instance, or even in Singapore and Hong Kong.
Speaker 2: It's been seen from a prudential regulation vision first, as
Speaker 2: in the goal and it was the work of the Carnes,
Speaker 2: it was the work of the Christiane la Guard back
Speaker 2: in the day to say sustainability risk and climate risk
Speaker 2: or real risk, they pose risk to financial stability. The
Speaker 2: financial regulators are really pushing towards like trying to prove
Speaker 2: this out. And the way to prove this out is
Speaker 2: seeing central banks publishing reports to say, hey, we've assessed
Speaker 2: the reliance of our economy onto climate and how much
Speaker 2: climate change is going to impact the profitability of companies
Speaker 2: and stuff like that. Last week in the UK there
Speaker 2: is the Green Fightens Institute that's just published a report
Speaker 2: to show, oh, there is big reliance of our corporations
Speaker 2: on ecosystem services on nature and therefore if we don't
Speaker 2: force financial institutions to take into account nature risk, then
Speaker 2: is going to cause like a big financial stability problem.
Speaker 2: Same in the you. So the first stage is always
Speaker 2: that research stage to prove that it's not a political agenda.
Speaker 2: And in the US I think that we're still struggling
Speaker 2: with that. And therefore if you promote ESG, you're promoting
Speaker 2: a political agenda, so.
Speaker 1: It really transcends policy. And the fact that I even
Speaker 1: asked that question despite living in the UK for eighteen
Speaker 1: years shows just how American I am.
Speaker 2: Yeah, but I think that's what is really really interesting
Speaker 2: about this situation.
Speaker 1: Are we seeing anti ESG legislation outside of the US.
Speaker 2: No, absolutely nowhere, So.
Speaker 1: Everywhere else it's either your adopting a policy or actually
Speaker 1: just getting on with regular business and not really thinking
Speaker 1: about it exactly.
Speaker 2: That it's really an outlier. And actually, when we published
Speaker 2: a report, there was this chart that I was hesitating
Speaker 2: into including because it shows the US as the largest
Speaker 2: number of sustainable finance policy in the world. But that's
Speaker 2: only because they have all these anti ESG barriers and
Speaker 2: they account for more than half of the sustainable finance
Speaker 2: policy in the US. But it's also because of them.
Speaker 2: We need to bear in mind that certain countries have
Speaker 2: expanded the bund dates of financial regulators, so for instance,
Speaker 2: in the EU, it's much easier for certain regulators to
Speaker 2: pass policies to promote sustainable finance, while in the US
Speaker 2: it's much more complicated.
Speaker 1: So my last question is just really who do policies
Speaker 1: And we're going to talk about them globally in this context,
Speaker 1: who do they impact most? Are they targeted towards the investors?
Speaker 1: The corporations credit agencies I know also have some policies
Speaker 1: focused on them. What is the breakdown of who needs
Speaker 1: to care the most about this?
Speaker 2: I'd say up until now it was mostly corporations, And
Speaker 2: I usually take this example for me. Sustainability data from
Speaker 2: corporation is basically the main commodity for a healthy sustainable
Speaker 2: finance market, the same way that we need data for
Speaker 2: a healthy financial market. You know, corporations where the largest
Speaker 2: impacted target group, but that's shifting away to really target
Speaker 2: investors and banks. Now investors are the most targeted group
Speaker 2: as of like this this quatter, but that's also because
Speaker 2: they are not being asked just to report on ESG reporting,
Speaker 2: you know, like to do ESG disclosure. They are asked
Speaker 2: to then integrate ESG into their investment processes. They are
Speaker 2: asked to do climate risk management, they are asked to
Speaker 2: do reporting, They are asked to take into account new
Speaker 2: sustainability preferences from their clients. Like there is a wide
Speaker 2: range of the men that are done for them. And
Speaker 2: then banks are also being targeted a lot banks are
Speaker 2: very targeted on the risk side, like climate risk stress testing,
Speaker 2: climate risk management, climate risk disclosure, which is necessity to
Speaker 2: prevent that economic meltdown if they don't take into account
Speaker 2: these risks. But it can also have a great impact
Speaker 2: on the energy transition, and that's like one of the
Speaker 2: goal at BNF. The way we see that research is
Speaker 2: how are all these policies eventually supporting the energy transition,
Speaker 2: how are they driving new investment and effectively asking to
Speaker 2: take into account climate risk and sustainability to risk in
Speaker 2: our view is to say, okay, then there's probably going
Speaker 2: to be a shift in investment. If you start taking
Speaker 2: into account climate risk, then you will probably shift your
Speaker 2: portfolio towards more climate resilience, energy solutions, and solutions for
Speaker 2: the future. So to answer your question, corporations, investors and
Speaker 2: banks with now a few posts looking at credit rating agencies, exchanges,
Speaker 2: data providers, all these kind of intermediaries that make a
Speaker 2: healthy financial market.
Speaker 1: But that's a much smaller so much more diction. Indeed, Well,
Speaker 1: maya thank you for clearing things up for me on
Speaker 1: this recent wave of policy that has come through and
Speaker 1: kind of some of the things that we need to
Speaker 1: know we didn't even get into the taxonomy changes that
Speaker 1: have gone through, so there's always a need to have
Speaker 1: you back to clear things up for us. And thank
Speaker 1: you for joining today to talk us through.
Speaker 2: Thank you so much.
Speaker 1: Today's episode of Switched On was produced by Cam Gray
Speaker 1: with production assistance from Kamala Shelling. Bloomberg NEF is a
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