Speaker 1: This is Dana Perkins and you're listening to Switched on
Speaker 1: the BNEF podcast. The ESG label is a term you've
Speaker 1: likely heard used before, and it's one that's designed to
Speaker 1: easily identify investments and companies that prioritize good environmental, social,
Speaker 1: and governance practices. However, recently, ESG investment strategies have come
Speaker 1: under fire from the right and the left of the
Speaker 1: political spectrum. On one side, some US states have started
Speaker 1: passing anti ESG legislation citing fudiciary duty is the reason,
Speaker 1: and on the left there have been concerns over greenwashing.
Speaker 1: So do we need to rethink ESG the term because
Speaker 1: it's being used so ubiquitously and perhaps erroneously well. Senior
Speaker 1: associate on BNF's Sustainable Finance Team, Maya Godomer returned to
Speaker 1: the podcast today to dig into the ESG investment space
Speaker 1: and assess the claims levels at it. Together, we discuss
Speaker 1: a range of topics. At the beginning, we go through
Speaker 1: some of the terminology for those new in the space.
Speaker 1: Then we go into the history of ESG, where it's
Speaker 1: come from, and then where it is now. What ESG
Speaker 1: means for different investment strategies and the green washing risks,
Speaker 1: followed by looking at these anti ESG bills and where
Speaker 1: they sit within the turbulent political landscape in the United States.
Speaker 1: As always, if you like this podcast, make sure you
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Speaker 1: Switched On and other Bloomberg podcasts. Now note that B
Speaker 1: and EF does not provide investment or strategy advice, and
Speaker 1: we have a more complete disclaimer that can be found
Speaker 1: at the very end of the show. But now let's
Speaker 1: hear from Maya and let's talk about ESG.
Speaker 2: Hi.
Speaker 1: Maya, Hi, Dana, thank you for joining the show again today.
Speaker 1: I'm ready to have you to be back on today's show.
Speaker 1: We're going to get into a bit around greenwashing and
Speaker 1: also a better around policy. So where there has been
Speaker 1: a bit of a backlash in terms of greenwashing, I
Speaker 1: think many of us would often actually associate that term
Speaker 1: with consumer goods, So you think about green washing and
Speaker 1: marketing and things that aren't actually that environmentally friendly. But
Speaker 1: this most certainly applies to the financial services industry, and
Speaker 1: so we have a lot to discuss today. So again,
Speaker 1: maybe not everybody's gone through our back catalog and heard
Speaker 1: every show you've done with me. So let's start on
Speaker 1: ESG and defining really what it is in terms of
Speaker 1: who's actually thinking about it, because ESG can take many
Speaker 1: forms and is being used as a term synonymously in
Speaker 1: some circumstances with corporate sustainability or in other circumstances with
Speaker 1: certain types of funds. So Maya, as the expert, please
Speaker 1: define ESG for us.
Speaker 2: Thanks for this question, because it's a question we don't
Speaker 2: ask anymore. We just take it for granted and it's
Speaker 2: used everywhere. It's used as a word, and that's maybe
Speaker 2: my literature background, but it's three adjectives put together, so
Speaker 2: it's not a word. ESG is not a thing. ESG
Speaker 2: basically means unvironmental, social and governance, as you just said,
Speaker 2: but environmental social and governance what you know, like it
Speaker 2: can be used as ESG investing, ESG factors, ESG strategy
Speaker 2: when we talk about a company. So it's really important
Speaker 2: to take a step back, and I think actually it's
Speaker 2: what the financial community is doing right now. So ESG
Speaker 2: is effectively these three words, and it usually was used
Speaker 2: to say ESG factors, So any kind of indicators that
Speaker 2: would when you look at a company, you're trying to
Speaker 2: assess their environmental, social, and governance practices. And then more recently,
Speaker 2: I would say, I mean it was a longer time ago,
Speaker 2: but when it comes to investment practices, ESG investing really
Speaker 2: dates back from early nineteen hundreds, but it's been really
Speaker 2: booming ESG investing in the second half of the century,
Speaker 2: and more recently we've seen ESG investing really grow. And
Speaker 2: what does it mean. It means for asset managers to
Speaker 2: take into account these environmental, social, and governance factor when
Speaker 2: they assess companies or any financial instrument in their investment process.
Speaker 2: So it means instead of looking just at the financial
Speaker 2: performance of a bond, of a loan, of any kind
Speaker 2: of investment they have, they also take into account environmental, social,
Speaker 2: and governance factors. Then ESG I think took a different
Speaker 2: meaning whether you're a retail investor, So what is a
Speaker 2: retail investor? For my mom in the background, a retail
Speaker 2: investor is just someone that has a part of money
Speaker 2: like you and me, because we're putting money aside for
Speaker 2: our pensions or for our first mortgage and decide to
Speaker 2: put that money into a fund. And I think for
Speaker 2: retail investors, so it means people with that money, ESG
Speaker 2: meant Okay, I'm going to put my money into a
Speaker 2: fund where I'm going to maximize my positive impact on
Speaker 2: the planet, on the society, or on the way a
Speaker 2: company is run, which is the governance issue, like I
Speaker 2: want more women in the company I invest in, like
Speaker 2: on the board of the companies. But I think for
Speaker 2: asset managers it means actually something different. Black Rock is
Speaker 2: one of the largest asset manager in the world, and
Speaker 2: since they've started talking about ESG, it really boomed almost
Speaker 2: because if the first asset manager in the world dedicates
Speaker 2: part of its strategies to ESG, what does it mean. Well,
Speaker 2: for them, it meant Okay, when I'm gonna do ESG investing,
Speaker 2: I'm gonna look on top now of the pure financial
Speaker 2: risk of a company, I'm also gonna look at mitigating
Speaker 2: and reducing my exposure to unvironmental, social, and governance risk.
Speaker 2: That's where the big difference is. It means that I'm
Speaker 2: not trying to maximize my positive impact on the world.
Speaker 2: I'm just gonna try to minimize the potential environmental, social,
Speaker 2: and governance risk of my investments.
Speaker 1: So you brought up some of this history of the
Speaker 1: ESG space and the fact that it's been with us
Speaker 1: for quite some time now. At the turn of the century,
Speaker 1: there was less emphasis on climate change, and so I
Speaker 1: imagined that that wasn't fully integrated into anyone's ESG strategy,
Speaker 1: but actually quite a bit of emphasis on the social part,
Speaker 1: so that the s in ESG, what would you say,
Speaker 1: the focuses now? And does one seem to show up
Speaker 1: more often in an asset manager's investment strategy than some
Speaker 1: of the others.
Speaker 2: So asset managers have customers, so they had to be
Speaker 2: aligned with effectively the customer's demand. At the beginning of
Speaker 2: the twentieth century, the focus was really on the social
Speaker 2: component of ESG when you're talking about customers. It started
Speaker 2: with the religious movement putting money in funds where you
Speaker 2: had no exposure to gambling, no exposure to tobacco. Then
Speaker 2: in the nineteen sixties there was a whole movement about
Speaker 2: having non exposure to companies that were involving the apparthaid
Speaker 2: in South Africa. So there were all this vision that
Speaker 2: stayed in some of the ESG funds today, which is
Speaker 2: like a basic ESG funds will just have an exclusionary
Speaker 2: list of like gambling, tobacco, alcohol. Sometimes another topic that
Speaker 2: came up is also porn, like reducing exposure to these
Speaker 2: kind of companies, So that was the social element to it,
Speaker 2: and then progressively again from their retail investors' communities, so
Speaker 2: us the vision was to be like, okay, actually I
Speaker 2: also don't want to invest in companies that have a
Speaker 2: big role to play in climate change, and that came
Speaker 2: with the two thousands. It was saying I don't want
Speaker 2: to invest in the big island gas companies, or I
Speaker 2: want at least to mitigate my exposures to this company.
Speaker 2: That's from the retail investor side. From the asset manager side,
Speaker 2: they're and good at the end of the day is
Speaker 2: to keep their clients happy, so ensure that these components
Speaker 2: are taken into account, but also maximize the profit for
Speaker 2: their retail investors. And to maximize this profit, they were
Speaker 2: also like, you know what, actually social and environmental and
Speaker 2: governance matters actually represent a risk to our financial performance.
Speaker 2: Some investors are convinced that actually, if they want to
Speaker 2: respect their return duty that we call the fiduciary duty
Speaker 2: towards their end investors, they need to make sure that
Speaker 2: they're not investing in companies or any kind of investments
Speaker 2: that bear too much climate risk. That means that in
Speaker 2: ten years time they won't return as much, or they're
Speaker 2: facing too much physical risk and stuff like that. So
Speaker 2: the social risk is tougher to prove. Governance risk is
Speaker 2: actually not that tough. Like when you hear all the
Speaker 2: story about Tesla or Nissan with Carlos gone, you can
Speaker 2: see that bad governance actually lead to lower profits. But
Speaker 2: for the social side it became more okay, we're going
Speaker 2: to have the gambling aspect, the weapon aspect, you know,
Speaker 2: like all these kinds of things. But effectively it's more
Speaker 2: the environmental side now there is distilled because the demand
Speaker 2: from the retail investor and the driver of investment from
Speaker 2: the investor community are actually like meeting and are becoming
Speaker 2: compatible reducing exposure to environmental risk and lowering the exposure
Speaker 2: to heavier meeting sectors or like companies that have a
Speaker 2: big role to play in climate change.
Speaker 1: Reducing exposure seems to be at the center of it
Speaker 1: because earlier on you made the definition between any SG
Speaker 1: screening process as opposed to impact investing, and one more
Speaker 1: definition really comes down to debt versus equities. So how
Speaker 1: does ESG investing strategies, how do they take different shape
Speaker 1: in both of those and also where is there the
Speaker 1: most tension as we get into the screenwashing part.
Speaker 2: So I think the dead versus equity discussion is really
Speaker 2: interesting because you have two vision. You either have well
Speaker 2: a company that basically is bearing additional environmental risk and
Speaker 2: social risk or has a positive unronmental impact or social
Speaker 2: impact that's going to be analyzed at the equity level
Speaker 2: at the company level. So that's something that's going to
Speaker 2: be done by ESG analysts the same way that we
Speaker 2: used to have like financial analyst. They go instead of
Speaker 2: looking at the cash flow and the debt to equity ratio,
Speaker 2: they're also going to look at like how many environmental
Speaker 2: controversies are they facing, how many of their plants are
Speaker 2: on areas of the world that are of high flood
Speaker 2: risk or extreme weather risk. So that's the company level.
Speaker 2: The equitticide is totally related to the debt side, because
Speaker 2: the same way when you invest in a certain bond,
Speaker 2: you want to look at the debt to equity ratio
Speaker 2: of a company, how much cash flow they have available
Speaker 2: to do their payment. That's going to impact I would
Speaker 2: say the plane venuelea debt market, So any kind of bond,
Speaker 2: any kind of loan will also be in an ideal
Speaker 2: world analyzed through that lens of unvironmental, social, and governance issues.
Speaker 2: Then there is a second part, which is a sustainable
Speaker 2: debt market, which is something we talked about in the
Speaker 2: past podcast, So if anyone wants to listen, there's going
Speaker 2: to be past podcast about that. But it's basically saying, okay,
Speaker 2: what if we were creating a market that signals that
Speaker 2: actually these funds are going to social projects green project
Speaker 2: Like as an investor, I know that my money is
Speaker 2: going to go toward actually financing the solution that's going
Speaker 2: to mitigate climate change or mitigate social inequalities. And that's
Speaker 2: just sustainable debt mark, which we refer to as like
Speaker 2: labeled debt. And that's the second part. You still have
Speaker 2: that company and owsis hovering everything, but you also have
Speaker 2: the vision of what we call green bones social bondes,
Speaker 2: green loans, social loans that are going to go and
Speaker 2: finance specific social or green projects like solar power capacity
Speaker 2: or hydro power capacity for instance. Greenwashing is everywhere there. Like,
Speaker 2: I mean, I've studied in business school not so long ago,
Speaker 2: we're talking seven eight years ago. I was never taught ESG,
Speaker 2: like how do you assess the environmental or social performance
Speaker 2: of an investment of an instrument? Like I wasn't told
Speaker 2: environmental studies.
Speaker 1: What are you studying?
Speaker 2: I studied my undergrad in philosophy and my master's in finance.
Speaker 1: So you're studying masters in finance. You would expect that
Speaker 1: it would start coming up now.
Speaker 2: Yeah, exactly. But I think it's just the new generation
Speaker 2: that is effectively educated in understanding those risks, assessing those risks,
Speaker 2: and it's two worlds meeting, right. It's like the science world.
Speaker 2: That's why I work for BNF because I can turn
Speaker 2: around and ask my colleague, what is a fuel cell technology?
Speaker 2: What is the added value in the transition? You know,
Speaker 2: like these kind of background that you need to have
Speaker 2: from an engineer. But I studied finance. I was never
Speaker 2: taught what a good metals and mining strategy is. So
Speaker 2: when you have an investments product, you now need to
Speaker 2: add this second layer, which is the environmental and social
Speaker 2: and governance analysis of a given company. Governance's taught because
Speaker 2: I think the way a company is led has always
Speaker 2: been a matter for the financial community, but the social
Speaker 2: and environmental aspect, it's really hard to pinpoint what is
Speaker 2: actually material to the risk of a certain company.
Speaker 1: Well, so then let's get into this definition of greenwashing.
Speaker 1: You've written a research note that's titled to stop greenwashing.
Speaker 1: We first need to agree on what it is and
Speaker 1: spoiler alert everyone, we don't end up defining it by
Speaker 1: the end of the research note because there isn't a
Speaker 1: definition right now, but you do highlight a number of
Speaker 1: the different areas where this friction does exist and where
Speaker 1: there are attempts to make definitions. So let's say the
Speaker 1: taxonomy here in the you where they're actually trying to
Speaker 1: figure out, you know, what is in, what is out,
Speaker 1: and give it some borders. Let's start with what is
Speaker 1: your definition of greenwashing, and then let's go into what
Speaker 1: different organizations, multinational organizations and countries are looking at in
Speaker 1: their definition.
Speaker 2: So basically, you're telling me that I didn't define grain
Speaker 2: washing in the note and you're now forcing me, putting
Speaker 2: me on the spot in a podcast to give a definition.
Speaker 1: Okay, maybe that's not fair, so it's.
Speaker 2: Okay, I can I can give it a temp. I
Speaker 2: think the definition around grainwashing is like polymorphic, it has
Speaker 2: like multifaceted. I think it can be. Also, the very
Speaker 2: important thing is that some companies and some asset managers
Speaker 2: and bank can actively greenwash, so pretend that something has
Speaker 2: like better environmental and social attribute than what they actually have,
Speaker 2: but they can also have like is it green washing.
Speaker 2: There can also be something where there is a miscommunication
Speaker 2: about what are the actual attribute of a certain instruments,
Speaker 2: so we actually need to build that definition of green washing.
Speaker 2: There is the mislabeling of certain instruments pretending that a
Speaker 2: bond is green while actually it's going to find like
Speaker 2: natural gas, but effectively, depending on the region you're in,
Speaker 2: natural gas is actually a green alternative to heavy emitting.
Speaker 1: Power and facilitates the transition to clean energy or maybe
Speaker 1: considered more of a transition bond. So there's a degree
Speaker 1: of perhaps that language around this space hasn't caught up
Speaker 1: to how many different layers of nuance that we ultimately
Speaker 1: really need and that we need more terms. And I
Speaker 1: know that complexity is something we are not lacking within
Speaker 1: financial services or an ESG. So I am not suggesting that,
Speaker 1: but I am suggesting perhaps that putting the name on
Speaker 1: the tin as the term would say maybe is where
Speaker 1: we're falling down here.
Speaker 2: I think so, and I think there is a problem
Speaker 2: of education. I think there is mislabeling and misleading around
Speaker 2: sustainability claims and sustainability risk. There is misunderstanding about Okay,
Speaker 2: if you invest in natural gas, these are the pros
Speaker 2: and cons of it. This is what your investment has
Speaker 2: in terms of environmental attribute. It allowed to move away
Speaker 2: from cold, but it's still not renewable, but it's also okay.
Speaker 2: There is then the risk of maybe your stranded assets,
Speaker 2: like the financial community has not been completely transparent. I
Speaker 2: think there are two needs. There is a need for
Speaker 2: education both at the institutional investor level, the bank level
Speaker 2: as well so the fincial community level, but also the
Speaker 2: retail investor level. It means that when we're choosing our pension,
Speaker 2: we should get access to all that data, all that
Speaker 2: information the same way we get access to the level
Speaker 2: of risk that we are exposing ourselves to when we're
Speaker 2: choosing one investment over another, we should have that level
Speaker 2: of transparency when it comes to the environmental attributes and
Speaker 2: social attributes of a given investment. So it means when
Speaker 2: I choose my pension, I need to know, okay, what
Speaker 2: level of greenness is effectively my asset manager choosing for me.
Speaker 2: Are we going for dark green funds where we invest
Speaker 2: only in renewable energy projects or are we going to
Speaker 2: a fund that is actually betting on the transition? And
Speaker 2: it's up to then the final investor to get access
Speaker 2: to that transparency which we didn't have in the past.
Speaker 2: It's getting there now, but for a very long time
Speaker 2: investors because there is also that mismatch that we talked
Speaker 2: at the beginning, you know about what the retail investor
Speaker 2: is expecting and what their institutional investor are giving them
Speaker 2: or asset manager or giving them. There was no transparency,
Speaker 2: But we're getting there.
Speaker 1: This is ultimately a way of assessing companies. So how
Speaker 1: about the communication with the companies themselves who are ultimately
Speaker 1: putting together the reporting and trying to represent a lot
Speaker 1: of the things that they're doing in the best possible
Speaker 1: light as you would and the activities that they are
Speaker 1: involved in that are involved in the energy transition, let's say,
Speaker 1: or any sort of decarbonization or sustainability focused measure. Is
Speaker 1: that communication between the finance communit and how they are
Speaker 1: assessing these companies really translating into how the companies themselves
Speaker 1: are thinking about their strategy or is it really just
Speaker 1: their way of assessing. But it's not impacting business in
Speaker 1: a direct way.
Speaker 2: No, I think it's definitely having an impact on companies.
Speaker 2: I think that companies are much more aware that they
Speaker 2: need to communicate about their unvironmental and social performance on
Speaker 2: top of their financial performance. So through framework like TCFD,
Speaker 2: the Task Force on Climate Related Financial Disclosure or ISSB,
Speaker 2: the newly born ISSB which is the International Sustainability Standard Board,
Speaker 2: which comes from the IFORS Foundation. Like, it's really interesting
Speaker 2: to see that relationship. We go from an accounting standard,
Speaker 2: pure financial accounting standard, to then thinking should actually sustainability
Speaker 2: also should have its own framework and reporting framework that
Speaker 2: is global. So the companies are now driven by that
Speaker 2: and also regulations. So I have a good story actually
Speaker 2: of a company in France that the taxonomy, the green taxonomy,
Speaker 2: even before it was born. I reached out to that
Speaker 2: company that had done reporting and I was like, why
Speaker 2: are you doing a taxonomy reporting while it's not compulsory yet,
Speaker 2: And they were like, well, we think that actually the
Speaker 2: investor community and the financial community doesn't really understand our
Speaker 2: business model and they don't understand how green we are
Speaker 2: and actually what we do and our sustainability a tribute.
Speaker 2: So we were discussing with them and engaging with them
Speaker 2: about how we could report on that, how we can
Speaker 2: report on our sustainability performance. And then when they reach
Speaker 2: out to their investors in particular sort of impact investors,
Speaker 2: they were like, well, you could use your own but
Speaker 2: the problem is that then it's not going to be
Speaker 2: comparable with other companies. So the best way for you
Speaker 2: to do this is why don't you use that standard
Speaker 2: that's going to be used by thousands of company in
Speaker 2: Europe and potentially across the globe. And then for the
Speaker 2: investor community, it's going to be so much more transparent
Speaker 2: to see through your business model and to compare you
Speaker 2: against your peers. And even at the beginning, your taxonomy
Speaker 2: alignment is going to be quite poor, or it's not
Speaker 2: going to be as high as you imagined what you
Speaker 2: will have made that step. You know, taxonomy forces you
Speaker 2: in basically splitting your revenue generation, your capex and up
Speaker 2: expending by business activities. So it allows you to go
Speaker 2: through your business and took the same language as your investors,
Speaker 2: the bank that are lending to you, the wider community,
Speaker 2: and it really helped them clarify what their business model
Speaker 2: is about, clarify what is their environmental value. You could
Speaker 2: do the same on the social side. It's a bit
Speaker 2: more complicated. We don't have as strong of a framework
Speaker 2: to talk about that. But I think companies are realizing
Speaker 2: that actually they need to communicate on that they need
Speaker 2: to communicate on a standardized manner because otherwise they won't
Speaker 2: be understood. I think we're pasted, at least in Europe
Speaker 2: and probably in Asia. We're past this decade or two
Speaker 2: decades of like this super fluffy dr corporate sustainability reporting
Speaker 2: framework is g reporting, you know, where you have like
Speaker 2: a thousand pictures and not much data and not much content.
Speaker 2: I think companies are really wanting to get it right.
Speaker 2: And I read a lot of reporting from companies and
Speaker 2: it's much more quantifiable. It's like, okay, maybe we're not
Speaker 2: doing this so right, but this is what we're doing,
Speaker 2: and these are the quantities about it, and this is
Speaker 2: how you can assess us. And that's actually really good
Speaker 2: to see because that's the beginning of then a trickle
Speaker 2: down effect to actually have more transparency when we invest,
Speaker 2: when we put our money.
Speaker 1: So of the players that are actually trying to create
Speaker 1: definitions and give companies and those in the financial community
Speaker 1: rules by which to play, what would you say are
Speaker 1: the largest ones? We've already referenced the EU taxonomy. You
Speaker 1: also referenced ISSB.
Speaker 2: Also can you taxonomy ISSBN, TCD Are there others? At
Speaker 2: the moment, we have so many frameworks it's almost complicated.
Speaker 2: We start like at the beginning with like there is TCFD,
Speaker 2: you have GRI, you have sas B, and bear with
Speaker 2: me because these are all abbreviation and I don't always
Speaker 2: remember what they mean, but these are all different reporting framework.
Speaker 2: You also have CDP the Climate Disclosure Program, So there
Speaker 2: are many reporting framework. I think what the market needs
Speaker 2: right now is consensus. We need overarching frameworks. So the
Speaker 2: EU Taxonomy was the first green taxonomy that was really
Speaker 2: launched and became a mandatory reporting framework. Right now, it's
Speaker 2: impacting about five thousand companies or ten thousand companies. It's
Speaker 2: quite small, and it's restrained to European companies. But there
Speaker 2: is a new regulation that we're awaiting called the Corporate
Speaker 2: Sustainability Reporting Directive in Europe, and that one will basically
Speaker 2: impact any company that has any listing in the European Union,
Speaker 2: whether you list a bond on a European exchange or
Speaker 2: in equity on the European Exchange, whether it's a primary
Speaker 2: or secondary listing you're in school. The figure that is
Speaker 2: given by the European Union is to be about fifty
Speaker 2: thousand companies. Honestly, I don't know how they came up
Speaker 2: with this number, but we know it's going to be
Speaker 2: much larger. They are big unknown in the implementation of
Speaker 2: that directive because effectively there is a bit of questions
Speaker 2: around how the European Union can actually regulate companies that
Speaker 2: are not European, but if it happens, it's going to
Speaker 2: have a big impact. The other framework that I think
Speaker 2: is everyone is waiting for is the ISSB Framework, the
Speaker 2: one we've mentioned before. The ISSB Framework is effectively supposed
Speaker 2: to become the International gold standard for sustainability reporting. And
Speaker 2: I think the CSRD, the framework we've just talked about
Speaker 2: in the European Union, has been put a bit on pose.
Speaker 2: We haven't heard too much about it, and maybe the
Speaker 2: reason we haven't heard too much about it is that
Speaker 2: they are waiting for the development of ISSB so that
Speaker 2: they can put the two and two together. So I
Speaker 2: think these are going to be the main global standard.
Speaker 2: And then you have all a plectora of corporate sustainability
Speaker 2: reporting coming across the globe. India came up with one,
Speaker 2: Japan came up with one. TCFD has been one that
Speaker 2: has really been imposing itself globally, even if it's been
Speaker 2: mostly voluntary at the beginning, but now it's becoming mondatory
Speaker 2: in certain jurisdiction. So I think these are the different
Speaker 2: grainwashing like I would say tools, perhaps, yeah, there are
Speaker 2: being counter tools, yeah, to to really like mitigate that
Speaker 2: risk at least when it comes to corporate sustainability reporting.
Speaker 1: And you reference this very much as something that's globally
Speaker 1: being looked at, and you know, I think about Church
Speaker 1: Commissioners of England and I think about some of the
Speaker 1: different funds that you end up seeing being very early
Speaker 1: to the game here in Europe, and we had talked
Speaker 1: about the EU taxonomy, but increasingly this is a global discussion.
Speaker 1: Are you seeing this focus on ESG strategies and investing
Speaker 1: strategies on ASAMA management side, but also on being more
Speaker 1: critical from a green washing standpoint really happening in Asia?
Speaker 1: Is it the same or significantly advanced in the last
Speaker 1: five years, last ten years? Has there been a tipping point?
Speaker 2: Yes, totally. I think ESMA has made the tackling green
Speaker 2: washing one of their priorities of their upcoming regulatory developments,
Speaker 2: which is crazy. Like ESMA is a financial regulator, so
Speaker 2: that that means a lot, so we can brush the EU.
Speaker 2: You know, it's the UK is the same, Like there
Speaker 2: has been like a big development of ESG regulation in
Speaker 2: the UK through the FCN and the Central Bank, but
Speaker 2: it's spread across the globe Asia. Secondly, like so many
Speaker 2: different countries are actively trying to tackle green washing. India
Speaker 2: has been really at the forefront of that, Japan, the
Speaker 2: Singapore Authority, Hong Kong Minitary Authority. There has been a
Speaker 2: development of numerous taxonomies, some of them really using what
Speaker 2: the EU has been developing. We've seen an Asian taxonomy
Speaker 2: being developed as well and pushed out. For now, the
Speaker 2: only taxonomy that is mondatory is the EU one. All
Speaker 2: the others are a voluntary framework that you can abide with.
Speaker 2: China has developed their own. China even went to step further,
Speaker 2: which was like they developed the taxonomy and then after
Speaker 2: they worked with the EU to create what we call
Speaker 2: a common ground taxonomy, which is effectively a piece of
Speaker 2: work that shows what are the similarities and discrepancies between
Speaker 2: the EU and China taxonomies, which allow investors to really
Speaker 2: navigate these two. Yeah, Americas are behind. Actually Asia follows
Speaker 2: the EU differently. I discovered while covering I cover a
Speaker 2: lot policy for BNEF sustainable finance regulations, and actually Asia
Speaker 2: has a way to do which is like a lot voluntary,
Speaker 2: but that is very followed by the market, which is
Speaker 2: very different from the European way of doing things, which
Speaker 2: is like regulation, regulation regulations. Asia is like, you know what,
Speaker 2: We're gonna put all these guidances and voluntary framework out there,
Speaker 2: and then the market is like, hmm. If actually the
Speaker 2: government has put that guidance out there, it means they
Speaker 2: want us to follow it. So we're going to try
Speaker 2: to follow it. Japan has never made TCFD mondatory, yet
Speaker 2: it has the largest number of TCFD supporter in the
Speaker 2: world by far, like far, far far, we're taking hundreds
Speaker 2: of TCFD followers.
Speaker 1: So high degrees of voluntary adoption.
Speaker 2: Exactly and voluntary guidances coming from the government actually mean
Speaker 2: a lot for the region the Americas South America. Quite interestingly,
Speaker 2: a lot has happened, in particular in Brazil because actually
Speaker 2: under the Bols in our government, the central bank has
Speaker 2: got its independence back, and therefore the Central Bank of
Speaker 2: Brazil has pushed a lot of mandatory disclosure. But the
Speaker 2: North America everything is still on the pipeline. When it
Speaker 2: comes to ESGG disclosure, bring clarity about what is an
Speaker 2: ESG fund. We're waiting for the sec proposals, which are
Speaker 2: both on the corporate sustainability side, but also on defining
Speaker 2: what is an impact phone, what is an ESG phone,
Speaker 2: what are the different shades of grain when it comes
Speaker 2: to funds and investment strategies. By still in the pipeline
Speaker 2: and its future is very uncertain actually, So.
Speaker 1: You reference that there is a lower degree of compliance
Speaker 1: with frameworks in the United States. But let's go there
Speaker 1: in our conversation right now. When thinking about the United
Speaker 1: States and adoption at VSG, it has certainly been something
Speaker 1: that's been talked about in the policy sphere more recently,
Speaker 1: and that low level of adoption doesn't seem like it's
Speaker 1: going to be ending anytime soon, because there appears to
Speaker 1: have been number of different states who have pushed back
Speaker 1: on ESG frameworks. What seemed to be the reasons and
Speaker 1: what would you say the future of ESG investing really
Speaker 1: looks like in the US in the near term.
Speaker 2: That's almost the main question we're wondering ourselves. I just
Speaker 2: come back from the beneficumit in New York, and that
Speaker 2: was the question about the future of ESG there whatever
Speaker 2: the type of passage class we're talking about, and so
Speaker 2: where did it stay? There is this big like we're
Speaker 2: talking decades of discussion in the US about what is
Speaker 2: the role of an asset manager? And we're going back
Speaker 2: to Milton Friedman's theory of shareholder capitalism, right It's going
Speaker 2: back to this, which is like the role of a
Speaker 2: company is to maximize their return for shareholders. It's not
Speaker 2: to have an environmental impact. It's not to have a
Speaker 2: social impact. That's the role of government. Moving on from there,
Speaker 2: we have this whole concept of what we call fiduciary duty,
Speaker 2: which is the duty of asset manager towards their customer,
Speaker 2: which is us putting our money into a fund, and
Speaker 2: their duty is to maximize the profit that we're making
Speaker 2: through our investment. This being said, then when policymakers are
Speaker 2: looking at ESG, they're thinking, okay, it actually is ESG
Speaker 2: derailing asset managers from their fiduciary duty, from their main role,
Speaker 2: which is to maximize return for customers. So during the
Speaker 2: Trump administration, there has been this big bill that he
Speaker 2: wanted to pass which through the Department of Labor, where
Speaker 2: he wanted to basically prevents pension fund from taking into
Speaker 2: consideration non pecuniary factors in their investment strategies. What are
Speaker 2: non pecuniary factors? And that was like, that's the legal term,
Speaker 2: but eff actually what he said out loud is like,
Speaker 2: I don't want pension fund to take into consideration ESG
Speaker 2: factors when they're having an investment strategy. The main goal
Speaker 2: should be financial return. And it was even if it
Speaker 2: looked like a financial legislation because also Let's not forget
Speaker 2: that the SEC their main role is to protect the
Speaker 2: fiduciary duty of asset managers and regulate it. Even if
Speaker 2: it looked like a political and financial regulation, it was
Speaker 2: a Trump regulation and anti regulation antiesg regulation. It's not
Speaker 2: me saying it. We now have statement from Ron des
Speaker 2: centers from Donald Trump saying that actually they want to
Speaker 2: stop this ESD trend. So that was the Trump situation
Speaker 2: that happened right before he lost his power. Biden came back,
Speaker 2: that law was overturned, it got overturned again, so came back,
Speaker 2: and then the first veto of the whole Biden presidency
Speaker 2: was to overturn again that bill and to allow pension
Speaker 2: funds to take into account non picking your refactor under
Speaker 2: the fiduciary duty because a retail investors can decide that
Speaker 2: actually unfru mental and social and governance factors are important
Speaker 2: for them.
Speaker 1: So this is definitely drawing upon presidential powers. But at
Speaker 1: this point we've not seen anything really substantial come through
Speaker 1: and actually be ratified into law. That's why there's been
Speaker 1: so much discussion lately around the Inflation Reduction Act because
Speaker 1: it does have this kind of lasting asurety to it.
Speaker 1: One might think, so there is the presidential and then
Speaker 1: the federal rules, but then there's the state level. What
Speaker 1: are we seeing in NSG space on a state by
Speaker 1: state basis, given that states can differ quite dramatically in
Speaker 1: terms of how they're viewing not only for the shary
Speaker 1: duty but also the role of importance of different environmental, social,
Speaker 1: or governance factors.
Speaker 2: Yeah, like that's exactly what's at stake at the moment. Effectively,
Speaker 2: stuff is opening at the state level. We're seeing when
Speaker 2: we looked at it at the end of March twenty
Speaker 2: twenty three, and we're going to do this analysis again.
Speaker 2: At the end of March twenty twenty three, more than
Speaker 2: half of all US state had either passed or proposed
Speaker 2: an anti ESG bill at the state level. What is
Speaker 2: an anti ESG bill? So there are two types of
Speaker 2: anti ESG bills. It's either a bill that prevents the
Speaker 2: state pension funds to be invested in funds that take
Speaker 2: into account non pecuniary factor so ESG factors. So that's
Speaker 2: the same as the doll attempt. That's what we're seeing
Speaker 2: for instance in Florida, And you have a second type
Speaker 2: of anti ESG bill, which is a boycott bill which
Speaker 2: effectively blacklists the local government from working with any bank
Speaker 2: or asset manager that has been supporting the ESG movement.
Speaker 2: So that's what we've seen in Texas.
Speaker 1: So what if you are a retail investor actively looking
Speaker 1: for these sorts of funds, are they not going to
Speaker 1: be allowed to be invested in in these specific states.
Speaker 2: If they work for the state and their pension fund
Speaker 2: is managed by the state, they won't be able to
Speaker 2: have access to ESG funds. However, if they go on
Speaker 2: their own and they go with their own pot of money,
Speaker 2: and I don't know, they work for a private company,
Speaker 2: then they'll be able to have access to these funds.
Speaker 1: So it's essentially reducing choice from those who are working
Speaker 1: in the public sector. Yes, you mentioned one more thing
Speaker 1: that's kind of this overarching space, which it has to
Speaker 1: do with regulation and the role of regulatory bodies. So
Speaker 1: the SEC had previously proposed some different things associated with
Speaker 1: climate that have the potential to really change the way
Speaker 1: that ESG is employed in the United States. But that's
Speaker 1: kind of sitting in a holding pattern at the moment.
Speaker 1: Where would you say that currently sits and what's the
Speaker 1: future of the SEC proposals.
Speaker 2: So yes, indeed the SEC proposal could be a really
Speaker 2: good framework. There was a consultation period and we were
Speaker 2: awaiting the comeback of the SEC in April twenty twenty
Speaker 2: three with a final proposal that would go through vote.
Speaker 2: But actually it seems that they've been postponing the publication
Speaker 2: of the proposal to this autumn. That's what we're hearing,
Speaker 2: and the main reason is that there are a big
Speaker 2: disagreement about what should be in that proposal. So there
Speaker 2: are two side. There is the Corporate Sustainability Reporting site
Speaker 2: that would include also Scope three reporting emission, so indirect
Speaker 2: emission reporting, which is the source of a lot of pushback.
Speaker 2: And then there is the part that is really on
Speaker 2: the investment management clarification and what is an ESD fund
Speaker 2: and a bit similar to the Sustainable Finance Disclosure regulation
Speaker 2: in Europe and the Sustainable Disclosure Regulation in the UK,
Speaker 2: trying to recreate that in the US. So we're waiting
Speaker 2: for that if it comes in autumn, if the Scope
Speaker 2: three are included in the mondatory reporting. There's already several
Speaker 2: companies and Republican lawmakers that have announced that they would
Speaker 2: sue the SEC over the inclusion of Scope three emission.
Speaker 2: But then a month ago, then a bunch of NGOs,
Speaker 2: including WWF or the Sierra Club, I said, okay, if
Speaker 2: actually Scope three emissions are not included, we're also going
Speaker 2: to sue the SEC, so that in the year. I
Speaker 2: think all of this just brings uncertainty to the market.
Speaker 2: I think that's the main problem. I think this polarization
Speaker 2: of the debate is really not moving the agenda forward.
Speaker 2: And I think what investors, companies and lenders currently need
Speaker 2: is clarity. So actually that's the problem wor.
Speaker 1: Seeing staying in the United States and some of the
Speaker 1: trends are observing, because I think it's important to call
Speaker 1: out trends. There are these specific areas where there's butting
Speaker 1: of heads and different philosophical views on how one should
Speaker 1: be approaching these issues. But then there are things that
Speaker 1: we observe happening in the market, and so one is
Speaker 1: around sustainable debt. There's been a decrease in the amount
Speaker 1: of investment actually going into sustainable debt, and in particular
Speaker 1: in the US. And my question actually really comes down
Speaker 1: to why do you think that there has been a
Speaker 1: decrease given that the number of green bonds coming out
Speaker 1: there typically are over subscribed, and you would think that
Speaker 1: that would then lead to more supply. These supply and
Speaker 1: demand dynamics seem to hold true across many parts of economics.
Speaker 1: So if they're oversubscribed yet there's less sustainable debt out
Speaker 1: there actually happening right now? Why is that happening in
Speaker 1: let's use the US as the case study.
Speaker 2: Yeah, the US is a very interesting case study because
Speaker 2: they needed a lot of financing for the decarbonization. And
Speaker 2: it's true, sustainable debt issuance has been down as year
Speaker 2: across the board, apart from APEC, which is another good
Speaker 2: story about the trends that are happening across the globe.
Speaker 2: And that's the APACK issues were mostly driven by China.
Speaker 2: The reason why it's happening like that, and in the
Speaker 2: US in particular, let's not forget high interest rate fertility
Speaker 2: bump into the FED rates. This has been making all
Speaker 2: financial markets, all capital markets postponing their issuance too. Later,
Speaker 2: we saw also like okay, sustainable that issues have been
Speaker 2: down in twenty twenty two compared to twenty twenty one,
Speaker 2: But twenty twenty one was a massive record here that
Speaker 2: was actually the outlier. And the reason why twenty twenty
Speaker 2: one was so high is because in twenty twenty, I
Speaker 2: don't know if you remember, there is something that happened.
Speaker 2: It's called the pandemic.
Speaker 1: Yeah, maybe I was around for it, and we tend
Speaker 1: to forget.
Speaker 2: But a lot of issues have postponed their sustainable that
Speaker 2: issues for any issuance from twenty twenty to twenty twenty
Speaker 2: one because we weren't too much uncertainty and therefore twenty
Speaker 2: twenty one was super high. Twenty twenty two massive decrease.
Speaker 2: So these are the main macroeconomic reason. But the other
Speaker 2: reason is that in the US in particular, and the
Speaker 2: reason why I'm not so sure it's gonna go back
Speaker 2: to the twenty twenty levels and the growth that we
Speaker 2: saw in the past, is that anti ESG movement is
Speaker 2: really making companies fearful to be vocal about their commitment
Speaker 2: to the carbonization, to their commitments of the transition, at
Speaker 2: least on my part of the market. I know that
Speaker 2: some of my colleagues covering the power market or power
Speaker 2: sector may have a different vision because and thanks to
Speaker 2: the IRA. But in the sustainable debt market, it's a
Speaker 2: bit more complicated. You don't want to end up on
Speaker 2: this blacklist, you know, like you don't want to be
Speaker 2: scrutinized by investors and other policy maker, So I think
Speaker 2: that's the reason. However, that was an optimistic view that
Speaker 2: I had from the New York summit, and that panel
Speaker 2: people can rewatch if they want on demand. But some
Speaker 2: of the capital market participants at my panels mentioned that
Speaker 2: while they think that labeled debts, so these green social
Speaker 2: sustainability bonds and loans, may decrease in the future in
Speaker 2: the Americas and in the US in particular, they actually
Speaker 2: think that finance will become more sustainable, meaning that or
Speaker 2: any lending decision that is made, any bone that is
Speaker 2: underwritten environmental, social, and governance factor will be embedded in
Speaker 2: the decision making process, and that for me would be
Speaker 2: a win. It means that, yeah, okay, we may not
Speaker 2: have as many green bones in the US as we
Speaker 2: had in the past. So it means that labeled market,
Speaker 2: where you know exactly where your funds are going, it
Speaker 2: may die, it may decrease, it may be only for
Speaker 2: a specific part of the market. However, when any company
Speaker 2: will come to the market and be like, I want
Speaker 2: to raise that. Then on top of looking at its
Speaker 2: cash flow statement, on top of looking up if dead
Speaker 2: to equity ratio, environmental, social and governance factors will be
Speaker 2: enquired and there will be assessed. Okay, what are your
Speaker 2: like wate to water ratio, like how many environmental controversy
Speaker 2: are you into or did you face and how did
Speaker 2: you resolve them? You know, like, then maybe the paradigm
Speaker 2: will change. That's the optimistic vision that I want to
Speaker 2: hold on to, because effectively, the labeled is just like
Speaker 2: signaling debt instrument ensuring that all your pot of money
Speaker 2: are going to something. But we may instead of having
Speaker 2: sustainable finance, we may have finance becoming more sustainable.
Speaker 1: So you essentially are on a personal level very much
Speaker 1: rooting for finance becoming more sustainable, but finding its feet
Speaker 1: in this and trying to read greenwashing from the process,
Speaker 1: create transparency, provide education both to retail investors and to
Speaker 1: the asset management community and to the companies themselves that
Speaker 1: are actually putting out all of these different pieces of
Speaker 1: information regarding their activities. So my question then comes back
Speaker 1: to the role of politics in all of this, And
Speaker 1: you brought this up very early on in the podcast
Speaker 1: around risk. Is risk being considered in these anti ESG
Speaker 1: bills that are going through different states, and the fact
Speaker 1: that the fudiciary duty in some respects actually does involve
Speaker 1: the integration of ESG factors because there are credible risks
Speaker 1: for the future of some of these investments.
Speaker 2: That's a great question. The role of politician is central.
Speaker 2: Like I'm often asked why HESG has grown so much
Speaker 2: in a recent year in Europe, Why have we seen
Speaker 2: all these regulations. I mean, it never boils down to individuals, right,
Speaker 2: but I think there were some very strong signals sent
Speaker 2: by the central bankers in Europe. People like Mark Carney
Speaker 2: at the Bank of England and Christine Lagarde at the
Speaker 2: European Central Bank have made it clear that actually environmental
Speaker 2: risk pose a question and they put economic stability at
Speaker 2: risk and that link was made very early on, and
Speaker 2: effectively that empowered them to then create some policy climate
Speaker 2: regulation at the central bank level. So because here they're
Speaker 2: convinced that environmental risk are real, then there is this
Speaker 2: trickle down effect on the mandate of central banks, and
Speaker 2: then there is a trickle down effect on how much
Speaker 2: they can force the market to take into consideration these risk.
Speaker 2: In other part of the world, in Asia, some central
Speaker 2: bankers are convinced about that. We talked about Brazil, the
Speaker 2: central Bank also has made actions to basically take into
Speaker 2: consideration on environmental risk and climate risk into their mandate.
Speaker 2: In the US, this is still being debated. It's still
Speaker 2: being debated if actually environmental factors are financially material, and
Speaker 2: when you look in between states, even at the proposal
Speaker 2: of that these anti ESG low When you look at Florida,
Speaker 2: Florida cannot say that environmental risk are not real. They
Speaker 2: are facing floods, they are facing extreme weather, and actually,
Speaker 2: in the way the anti ESG bill is written, it
Speaker 2: doesn't prevent a set manager from taking into account financial
Speaker 2: environmental risk because they can't afford to. They have to
Speaker 2: mitigate these risks. However, if you if you look at
Speaker 2: another state like Alaska that proposed an anti ESG bill,
Speaker 2: they consider any factors that is related to greenhouse gas
Speaker 2: emission to be a political or social factor, not a
Speaker 2: pecuniary factor. So there is this discrepancy even in between
Speaker 2: states that are not resolved at the government level, the
Speaker 2: federal level.
Speaker 1: So clearly there's a lot of complexity here and friction
Speaker 1: within the SG space and how states, countries, companies, financial
Speaker 1: services players, investors are all thinking about this. So the
Speaker 1: question is do you think and surely sherely your opinion.
Speaker 1: Do you think that ultimately there's going to be a
Speaker 1: radical rethink in this space and that the future of
Speaker 1: investing in ESG factors is going to look fundamentally different
Speaker 1: in let's say ten years, or are we going to
Speaker 1: continue to hobble along with different tweaks and tension.
Speaker 2: So yes, I think ESG investing is really going to change.
Speaker 2: I think for now it was just adding a layer
Speaker 2: of unvironmental, social, and governance analysis on top of the
Speaker 2: real analysis. But I think the key component will be
Speaker 2: to find what we call the financial materiality, meaning a
Speaker 2: company that has lower climate risk will have a better
Speaker 2: financial performance. And if this doesn't come from free markets,
Speaker 2: which is what the US and Canada and Northern America
Speaker 2: is convinced of, which is like, there's going to be
Speaker 2: a market based incentive, I think different actors will loby
Speaker 2: government to create that incentives. The IRA is a great
Speaker 2: example of a North American way of creating that incentives. Okay,
Speaker 2: we're going to incentivize certain sectors that we think are
Speaker 2: key for the transition, and by incentivizing them through an
Speaker 2: industrial policy development, that's going to trickle down onto the
Speaker 2: financial performance. The other way to do that is to
Speaker 2: have financial regulation or like carbon regulation, finding other ways
Speaker 2: to incentivize, either at the central bank level or the
Speaker 2: carbon level, to incentivize and create a financial materiality to
Speaker 2: a good environmental performance. Saying if you put a price
Speaker 2: on pollution, put a price on carbon, put a price
Speaker 2: on biodiversity loss. If we put a price on these things,
Speaker 2: then companies that are doing better or are doing good
Speaker 2: for the environment will also do better financially. But these
Speaker 2: incentives need to be created from one way or another,
Speaker 2: and that's going to be the main task in the
Speaker 2: coming years.
Speaker 1: Well, maya thank you very much for joining and explaining
Speaker 1: all of this complexity to us. Will certainly have you
Speaker 1: back to actually see the different things that are coming
Speaker 1: to pass and the changes that are impacting the way
Speaker 1: this market functions. Thank you for joining today.
Speaker 2: Thank you so much, Dana.
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