Nathan Hunt: It's been a strange year for ESG. Prior to the global pandemic, environmental, social, and governance metrics were enjoying a cultural moment as more companies and investors committed to including these so-called externalities in their goals and decisions. When the coronavirus spread and lockdowns began, no one would have been surprised if ESG faded into the background, but instead of being overpowered by the immediate concerns of the pandemic, the events of the year brought the need to focus on ESG metrics to the fore. Whether, because of the wildfires out West, the protests that followed incidents of police brutality, or the obvious racial disparities in health outcomes from the disease, the year of the pandemic also became the year of ESG. This is The Essential Podcast from S&P Global. My name is Nathan Hunt. I am joined by a guest whose commitment to environmental, social, and governance factors long predate the current vogue for all things ESG.

Martina Chung: My name is Martina Chung. I'm the President of S&P Global Market Intelligence and the Head of ESG at S&P Global.

Nathan Hunt: Martina. Welcome to the podcast.

Martina Chung: Thanks, Nathan.

Nathan Hunt: Martina, you recently authored an article called "Seven ESG Trends to Watch in 2021." I'd like to start my questions with trend number one, in which you wrote in response to demand and regulatory drivers, the quality and quantity of ESG data will continue improving. I agree with you that ESG data has improved over time, but it seems to me like the highest value ESG data is precisely the information that companies are most interested in hiding. How can we overcome the natural human impulse to hide the bad news?

Martina Chung: Well Nathan, I think it's important to start with the question of why would a company disclose? There are so many benefits to disclosure and bear in mind that many companies who are disclosing today are doing so on a voluntary basis. And by doing that, they're actually embracing what they're scoring highly on and areas where they have to develop as well. But to go back to the reasons for disclosure, first and foremost, disclosure is going to be very important in terms of getting access to the capital markets going forward. We've seen the push from the investor side and the asset owner side over the last several years and that's really, what's driven quite a lot of this voluntary activity for example, but we also are seeing companies disclose for other reasons. Certainly, when it comes to managing the risk from the real-world impacts such as climate risks, extreme weather, and the implications that might have for a company, its physical assets, as well as its supply chains and we also see companies disposing of because their own very close to home stakeholders, whether they be employees, the communities in which they operate on their customers are asking them to do it. So, disclosure of data in this respect in and of itself is not the end goal. The end goal is to meet the needs of the company itself, in terms of how it manages its own operations and performance, as well as to meet the expectations of external stakeholders. Now, the point that we were making and have seen a lot of other providers in the market making is that we certainly expect to see more mandates around disclosure and we've seen, for example, in the past 12 months, the UK, New Zealand, Canada, and a number of other countries have actually announced mandates around TCFD disclosures, some giving some timeframes around it, others looking for more rapid adoption and there's certainly some questions and expectations around whether in the U.S., whether the Biden administration would also announce some sort of mandates around TCFD as an open question. I would say that companies who have jumped on this early and have been very proactive in creating their first rounds of disclosures, whether they be various types of sustainability reports or TCFD reports will be the ones that are most prepared for some of the additional mandates that we do anticipate might come out over the next year or two.

Nathan Hunt: So that point, trend number two reads 'the new Biden administration will reinvigorate ESG policies and climate urgency in the U.S.' That feels undeniable, but I wonder what can really be done from the policy side to move the needle in the United States. 

Martina Chung: The agenda around the climate that's been announced by the white house is very broad-reaching and comprehensive, and I think it takes into consideration a lot of the pieces that need to come together so that we can actually really move the needle around how the U.S. Is tackling climate risk and incentivizing the right activity to support resilience and transition. So, to me, signing up to the Paris accord again was clearly a massive first step. There are a number of other things that are being contemplated right now around investments in renewable energy that have been well-publicized since the new administration came in. I will say that from a policy standpoint, what will be needed is consistency in the broad application. If you like policy tools around climate. We at S&P were part of the CFTC subcommittee on climate risk last year and it was very clear with the broad coalition that participated in the creation of the recommendations around climate risk that we're going to need to see consistency between the feds, the sec, the CFTC, to really move the needle on a number of these areas be it how to think about the carbon markets, how to think about company disclosures, how to make sure that climate stresses are taken into consideration and the financial system, et cetera. And so, I would say there's a lot to be done across all of this policymaking and the private sector within the U.S. Has already made quite a bit of progress around this, not just in companies doing voluntary disclosures, but also financial institutions, asset managers, asset owners, committing to net zero and actually embracing this in advance of any kind of policymaking and so the benefit there is that there's a private sector that is very ready and willing to participate and contribute to the creation of these policies working hand in hand. So that public-private partnership is going to be very important I think in creating this policy ecosystem, that's going to be required to really move the needle.

Nathan Hunt: In trend number three, you stated that the threats to nature and biodiversity will take center stage in environmental discussions. One of the challenges that come with biodiversity discussions is that there isn't an immediate potential impact on physical assets, as there is with climate change. Do you get the sense that businesses are interested in addressing biodiversity, despite the lack of immediate bottom-line impact?

Martina Chung: 2021 might be the year for nature where 2020 was the year for ESG. The environment goes beyond climate and the importance of biodiversity and nature is really coming to the fore in particular, as we can actually observe on television and in the media every day, the implications of some of these hazards from a biodiversity standpoint. There are no CO2-equivalents for nature or for biodiversity there, a vast range of metrics and measures depends and what you're talking about is it before a station, is it the security of drinking water and things of that nature? And so, I think the biggest challenge here is to bring the right parties to the table, similar to how to let's say the task force on climate-related financial disclosures took off to actually really give some thought to nature. And indeed, there is a task force on nature-related disclosures that has been kicked off and I think we'll see a lot more thinking around how to approach that, how to tackle that from a metrics and measurement standpoint, we do have quite a durable framework in existence today with the sustainable development goals. Our own research within S&P has shown that the vast majority of companies who do actually have sustainability reports do not have specific policies targeting for example, the STG life below water, or for example, the STG life on land. So, I would say early days on biodiversity on nature, there's still a lot of analytical work, a lot of data gathering, and discussions around how to frame this so that it can be as successful in terms of adoption as something like a TCFD framework or SASB framework

Nathan Hunt: In trend number four, you wrote with this growing global urgency around climate, conversations about the energy transition will become increasingly nuanced. It feels like we are moving towards increasing knowledge of sources, raw materials, and bridge fuels. Do you think investors are starting to price in the costs associated with this transition?

Martina Chung: Certainly, where the data is available, which is an imperfect answer. But it does connect back to some of the remarks that I made earlier around disclosure and the benefit of actually disclosing unless investors can really understand what a price on carbon for example would mean for a company's financial statements can be difficult to price it in. Certainly, they can make outside in assumptions. But the more information they can get through actual company disclosures, the more accurate and assessment, you know, they can make from a planning standpoint, I would say that the importance of this extends beyond transitioned to take into consideration adaptation and remediation. Also, these are all parts or components of the overall cost to transition to low carbon or net-zero economy, and every sector and every company is impacted. So, this will be, I think, a major focus going forward, you know, from the growth in green bonds and sustainability linked bonds. We're now beginning to see the use of funds in a number of these issuances directly tied to remediation, adaptation, and resilience. For example, the airports in Roma recently issued a 300 million Euro bond, the proceeds of which would go to retrofitting airport buildings and creating new airport buildings that are actually sustainable and green. We've seen the San Francisco MTA raise funds recently through a green issuance, which was targeted at a partially funding communication system that would actually increase efficiency within the organization. And so, we do think we're going to see more and more of this. We also believe that we might see more bonds coming to market, sort of under a specific transition label, which kind of goes one level or one-click lower than the broader green label. Certainly, investors are looking at this. You know, interested in it and you know, that sort of innovation in the financial markets will be incredibly important for ensuring that companies have access to the funding that they need to really transition in timelines that they're committing to.

Nathan Hunt: That leads me to trends number six and seven in your article, specifically, 'Social issues will gain traction in global policy discussions.' Europe has been a leader in policies related to social issues. Do you feel like 2021 is the year that the U.S. Seriously commits itself to critically reexamining social policies like family leave? And if so, to what extent do you think that's a product of the American experience during the pandemic?

Martina Chung: Well, for a long time, the U.S. has been the only OECD country that doesn't mandate paid parental leave. And we at S&P has done quite a bit of work highlighting the trade-off to that in terms of lower GDP growth. For example, we did quite a bit of analysis over the last several years that has demonstrated that bringing more women into the workforce could actually create quite a bit of additional growth within the United States, for example. The pandemic was unusual in that we saw a massive voluntary push from the private sector to add to policies or to actually announce for the first time paid parental leave policies or paid policies for elder care, for example, and probably in excess of a third of companies in 2020, announced that they would have flexible working hours. We also saw about 25% of companies with less than a billion dollars in revenues that we surveyed had actually provided subsidized eldercare and childcare. So, this was actually, I would say unprecedented in that the private sector in and of itself actually began to function as if there almost was policy or regulation around this already in response to the pandemic. So, to the extent that the new administration focuses on this more with explicit policy frameworks, there's already a lot of momentum and traction and the private sector within the United States around this. So, I feel very optimistic about the possibilities there.

Nathan Hunt: There are so many challenges and an illimited amount of time to make the necessary changes. Looking forward to the next five years. Are you personally an optimist or a pessimist on ESG issues?

Martina Chung: I am cautiously optimistic, and I think it's framed by what will be new in this overall landscape public sector, private sector, five years from now. So, we've seen the IFRS, IASCO, FASBI a number of these organizations are pulling together and addressing what they need to do to incorporate ESG into expectations for financial disclosures, sustainability disclosures, and the, like, we also see obviously increasing number of countries, sectors policymakers actually mandating and or endorsing some of these approaches as well. Today we have 70%. of the global economy now with the inclusion of the U.S. committed to either net-zero carbon neutrality by 2060. What I would hope to see five years from now is that companies, sectors and governments have made meaningful progress in actually incorporating all of this into planning and decision-making. I was on a call recently where somebody said, I hope that five years from now, we're not talking about sustainable finance. We're just talking about finance because this really is table stakes for a successful transition and so anything that we can do to prepare to support the companies that need to disclose, to support the formation of capital markets around sustainable finance to incorporate sustainability so heavily into how the financial system operates so that it becomes just part of the fabric, I think will be very important. And I do believe that we have a lot of the right pieces in place to help with that. Some of them will take a few more years to come to fruition. And in the meantime, it will be very important for all companies, [inaudible] every company is impacted. All companies, all sectors, you know, Bill Gates has done a very good job of painting the impact of transition and climate risk for all sectors. It's very important for all of us to think and become more prepared to take decisions and make investments to move to that carbon neutrality or net-zero goal. But I feel very, very comfortable that there are an understanding and awareness of this that is getting to critical mass. Nobody could look back on 2020 and not see the implications of the pandemic, social inequities through the Black Lives Matter movement, or the disproportionate impact of the pandemic on different minority groups, the real climate issues that we see every day on the television. And I think for the average person on the street, or it could be just as easy to look at all of that and acknowledge that these things are very real and need to be tackled. So, we're building that awareness. Building that preparedness and overall, you know, hopefully, we'll see a very different complexion around this five years from now.

Nathan Hunt: Martina. It is a pleasure to speak to a fellow cautious optimist. Thank you for joining me on the podcast.

Martina Chung: Thank you, Nathan.

Nathan Hunt: The Essential Podcast is produced by Molly Mintz with assistance from Kurt Burger and Lundon Lafci. At S&P Global, we accelerate progress in the world by providing intelligence that is essential for companies, governments, and individuals to make decisions with conviction. I am Nathan Hunt from my home studio, high above Manhattan's Greenwich Village. Thank you for listening.

The Essential Podcast is edited and produced by Molly Mintz.