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Investors weigh short-, long-term climate risk as ESG criteria matures

As companies make progress factoring climate risk into their business strategies, the specifics of environmental, social and corporate governance policies are taking shape. However, continuing to educate institutions remains important, and many questions remain, including how to best assess investments in private companies not subject to reporting requirements and to the commodities space, according to experts at S&P Global Market Intelligence's "Accelerating Progress on Climate Risk" event at the New York Stock Exchange on March 2.

"The work we have to do is to bring confidence around data, knowledge, building education," said Nathalie Wallace, global head of ESG investment strategy at State Street Global Advisors. "How can we look at dual objectives and framework to transition to a low carbon economy?"

S&P Global Inc., parent company of S&P Global Market Intelligence and S&P Global Ratings, recently completed its acquisition of an ESG ratings business from RobecoSAM AG, part of a broader expansion into better analyzing ESG, according to Pamela Snyder, managing director and head of market outreach Americas at S&P Global Ratings.

"This is an opportunity for our analysts who engage with companies, both our industry expert analysts and our sustainable finance analysts, to talk about not only what does the ESG profile look like today, but what is their preparedness for the future," Snyder said. "Are they looking at regulations? Are they looking at disruption?"

"On the sell side, the way that we look at the world is that our job is to help our clients raise and allocate capital," including sustainable investments, said Harun Dogo, executive director in the global sustainable finance group at Morgan Stanley. "On one hand, on the trading side, the job is to help clients express their sustainability thesis through the capital markets. So a lot of traditional industry data, and traditional climate data in general, really, is focused around risk."

A key role of financial institutions remains identifying worthwhile green investments for their customers, with one of the persistent questions being, "How do you identify the investments that have that upside opportunity, given what is likely to be one of the largest changes in the allocation of capital that we will have seen in our lifetimes?" Dogo said.

"We have to get this right," said Gerold Koch, head of ESG product development at DWS Group GmbH & Co. KGaA, who stressed the importance of factoring ESG considerations into companies' long-term strategies rather than weighing the costs and benefits of an environmentally friendly strategy quarter by quarter. "It can't be that we just think about this very short-term because, otherwise, you might be wrong. You might be right a few quarters, but then wrong quarter by quarter by quarter down the road."

However, beyond public companies, ambiguity still remains in investing, especially in the commodities space.

"The nature of climate risk data is actually tremendous," Dogo said. "However, the coverage starts to drop off as you get into private companies, as you're getting into the leveraged loan space." Perhaps most difficult is separating which industries, companies or products are more sustainable than others in commoditized industries, according to Dogo.

"How do you separate what barrel of oil has the lowest carbon footprint from another, what BCF of gas has the lowest carbon footprint?" Dogo said. "Same thing with metals, where are they coming from? What has been associated with their production? What is going into that [Tesla Inc.] battery?"