ESG in Conversation
 

ESG in Conversation

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Join us for a digest of the latest research, analysis and insights on the relationships between environmental social and corporate governance issues and global business, finance and society. In each episode, hear from experts sharing their insights on how institutional investors can identify and mitigate risks related to ESG factors, but also leverage opportunities in sustainable investment and debt capital markets. This is ESG in Conversation.

Episodes

ESG In Conversation | How Do Businesses, Governments and Investors Fit Into the Circular Economy?

Thursday Jun 29, 2023

Thursday Jun 29, 2023

Host:

  • Curtis File, Editorial Manager, ESG and Sustainable Finance

Featuring:

As global leaders gain a more nuanced understanding of climate change, they are looking at the circular economy as a potential solution to mitigate their impact. In a circular economy, organizations aim to prevent waste throughout the value chain instead of relying solely on recycling. This approach involves sharing, leasing, reusing, repairing, and recycling materials and products for as long as possible. Proponents say the approach comes with huge potential upside. The Ellen MacArthur Foundation, for example, projects that a circular economy could reduce greenhouse gas emissions by 25%, create 700,000 jobs, and save $200 billion per year by 2040. But the path to achieving those goals is far from clear, and it will require an all-hands-on-deck effort.

In this episode of ESG in Conversation, we’re exploring the question: how do businesses, governments and investors fit into the circular economy? You’ll hear from Juliette Goulet, a seasoned sustainability practitioner from the Ellen MacArthur Foundation, about the challenges of implementing a circular economy. You’ll also hear from Wayne Hubbard, CEO of ReLondon, about putting the circular economy into practice in London, England. Joris Laseur and Jonathan Kellar from Morningstar Sustainaltyics’ stewardship team also join to discuss the role investors play in helping businesses reduce their waste and implement circular business practices.

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What’s Happening in Sustainable Finance: Green Bond Standards on the Horizon and Much More

Thursday Jun 22, 2023

Thursday Jun 22, 2023

Episode Summary

Hosts

  • Nicholas Gandolfo, Vice President, Corporate Solutions
  • Aditi Bhatia, Senior Regional Manager, Corporate Solutions

What Will the EU Green Bond Standard Mean for the Market? 

With the European Union’s Green Bond Standard set to come into effect sometime next year, we look at what it could mean for the global sustainable finance market more broadly. Although the highly anticipated framework is expected to be the gold standard for what we see in the market going forward, there are ongoing concerns about its usability. Some market participants are worried about the potential difficulty in meeting all the requirements of the Green Bond Standard and whether the standard is too prescriptive in its requirements to set up a framework.  

Sustainable Finance Meets AI  

The sustainable debt market continues to see innovations in the types of projects being funded. One example is the use of green bonds to raise money for artificial intelligence (AI) projects related to green or social initiatives. The green bond issuance highlighted in this episode will finance AI projects related to improving the environmental performance of buildings through data analytics and energy management software. Using AI to support corporate sustainability improvements is not new, but funding such projects using sustainable debt instruments could be the next wave. 

Changes Coming to the Podcast!

Our sustainable finance insights show will be taking a break for the summer. We’ll be back this fall with some exciting changes to bring you more ESG, sustainable finance and responsible investing insights. In the meantime, please subscribe to ESG in Conversation on your favorite podcast platform and enjoy new episodes each month! 

Key Moments

0:00:49 
Market overview 
0:01:36 
CBI Q1 highlights report 
0:03:04 
LMA sustainability linked loan drafting model 
0:03:28 
Sustainable bond market risks 
0:04:44 
Gender-focused social bonds  
0:05:37 
Transition plan guidelines 
0:05:58 
Debt for nature swaps 
0:06:23 
IRENA report on the cost of energy transition 
0:07:00 
New CBI reports 
0:07:42 
SLB and SLL overview 
0:11:35 
Audience questions 
0:16:08 
Green bonds and loans overview 
0:19:25 
Labeled products, transition bonds and regulatory updates 

 

Links to Select Resources

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What’s Happening in Sustainable Finance: GSSS Market Rebounds, Sovereign Sustainable Debt, and Much More

Tuesday Jun 06, 2023

Tuesday Jun 06, 2023

Episode Summary

Hosts:

  • Sabrina Tang Sales Associate, Sustainable Finance Solutions
  • Nicholas Gandolfo, Vice President, Corporate Solutions

 

Is the Sustainable Finance Market Rebounding in 2023?

In this month’s episode, Nick and Sabrina dig into the sustainable finance market’s rebound in Q1. Despite the market pressures caused by inflation and the banking shake-ups at UBS and Credit Suisse, sustainable finance activity saw an upward trend in the first part of the year. Although Nick and Sabrina stop short of making any predictions about where volumes will land by the end of the year, they do note some interesting dynamics in the market: green use of proceed bonds remain strong, social and sustainability focused bonds are down slightly, and sustainability-linked finance appears to be gaining some ground again despite continued market scrutiny.

Scrutiny Continues for Sustainability-Linked Bonds

Despite the rebound in sustainability-linked bond (SLB) activity in Q1 this year, concerns remain about this sustainable debt instrument. Several recent articles and reports discuss the credibility of SLB targets, whether coupon rates offer enough of a penalty if targets are missed, and whether the performance targets and indicators have an impact on sustainability.

There’s also some media coverage on SLB issuers missing their stated sustainability performance targets. Although not ideal, missed targets among SLB issuers could be viewed as a sign of their rather than an indication of something being fundamentally wrong. For issuers considering sustainability-linked debt instruments and seeking additional guidance, check out the latest market references from Climate Bonds Initiatives (CBI).

The Sustainable Sovereign Debt Club Continues to Grow

CBI’s 2022 market summary highlights the growth of sovereign bond issuances. This is great to see because sustainable debt from sovereigns catalyzed the market in many cases. Sabrina highlights the recent activity from Turkey, Austria, Italy, and Cyprus as well as the sovereign green bond program being considered by the Australian government. In addition to more countries seeing the opportunities in sustainable debt instruments, regulators across a growing number of jurisdictions are ramping up sustainable finance activities in their countries. Developments are ongoing in India, Indonesia, Malaysia, Sri Lanka, Japan, and Vietnam to name just a few.

 

Key Moments

0:00:59

Market overview

0:02:07

Q1 market overview

0:03:25

CBI 2022 state of the market report

0:05:22

Continuing SLB scrutiny

0:06:46

Climate transition plan transparency

0:08:34

More updates to the EU taxonomy

0:09:34

Additional articles and reports to read (see links below)

0:11:34

SLB and SLL overview

0:14:15

Audience questions

0:18:14

Green bonds overview

0:21:13

Green loans overview

0:22:30

Social bonds and loans overview

0:23:25

Labeled products, transition bonds and regulatory updates

 

 

Links to Select Resources

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ESG In Conversation | How Can Investors Address Biodiversity Loss?

Wednesday May 17, 2023

Wednesday May 17, 2023

Host:

  • Curtis File, Editorial Manager, ESG and Sustainable Finance

Featuring:

The statistics are concerning. The International Union for the Conservation of Nature (IUCN) estimates that up to 28% of all species are at risk of extinction. Given these alarming figures, it is crucial for investors to take action and ensure their investments do not further harm our vulnerable ecosystems.

Join us on the latest episode of ESG in Conversation, where we delve into the critical question: how can investors effectively address biodiversity loss? Gain valuable insights from Dr. Simon Butler, an esteemed professor specializing in acoustic ecology, whose work underscores the urgent need to tackle biodiversity issues. Additionally, hear from Morningstar Sustainaltyics' stewardship and ESG research teams, providing valuable perspectives on investor engagement on biodiversity loss and the challenges faced by corporations in disclosing nature-related risks.

 

 

 

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What’s Happening in Sustainable Finance: A Flurry of Updates in Regulations, Taxonomies, Frameworks, and Much More

Tuesday Apr 25, 2023

Tuesday Apr 25, 2023

Episode Summary 

Hosts: 

  • Nishant Bhagchandani, Sales Manager, Sustainable Finance Solutions 
  • Nicholas Gandolfo, Vice President, Corporate Solutions  

 

Regulation, Guidance and Taxonomy Updates Keep Market Participants on Their Toes  

In this episode, Nick and Nishant discuss the flurry of updates in the sustainable finance regulation and guidance space. The European Union has reached a long-awaited deal on the first set of comprehensive rules for issuing green bonds. Although voluntary, the EU Green Bond Standards will help investors identify high-quality green bonds and may set a precedent for other jurisdictions.  

The Green Loan Principles, Social Loan Principles, and Sustainability-Linked Loan Principles were also recently updated to align more closely to current market practice and provide additional guidance to borrowers (e.g., recommendations that borrowers obtain an independent external review of their green, social and sustainability-linked loan processes). Other updates include recommendations for the sustainable finance taxonomies being developed in Australia and Canada, as well as the new draft version of the Taskforce for Nature-related Financial Disclosures (TNFD) framework.        

What the Final TNFD Framework Could Mean for Sustainable Finance  

With the release of the fourth beta framework from the TNFD, market participants eagerly await the final version, due to be published this fall. This latest beta release includes a full draft reporting framework and a set of disclosure metrics, along with assessment metrics to be used by companies. The disclosure metrics will also include some core measures which are applicable to all sectors. The final framework will help to standardize the sustainability metrics companies report on, making them usable in sustainability-linked instruments and speeding up the framework’s adoption.  

 

Key Moments 

0:00:59 

Market overview 

0:02:32 

Market forecast 

0:03:22 

SVB failure and climate tech 

0:04:05 

Morningstar Sustainalytics launches Low Carbon Transition Ratings 

0:04:37 

Relinking in sustainable finance 

0:05:11 

TNFD release beta version 4 of framework 

0:05:56 

Insights from Kanga News Sustainable Debt Conference 

0:06:30 

Taxonomy developments in Australia and Canada 

0:07:24 

Agreement of EU Green Bond Standards 

0:08:33 

High Seas Treaty will boost blue bond issuance 

0:08:45 

SLBs as a hedge against sustainability policies 

0:09:00 

Transition finance standards 

0:09:12 

Updated principles for green, social and sustainability-linked loans 

0:10:58 

SLB and SLL overview 

0:13:48 

Audience questions 

0:17:43 

Green bonds overview 

0:20:56 

Social bonds and loans overview 

0:22:40 

Labeled products, transition bonds and regulatory updates 

 

 

Links to Select Resources 

 

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ESG In Conversation | How Are Sustainability Professionals Really Putting ESG into Practice?

Tuesday Mar 28, 2023

Tuesday Mar 28, 2023

With all the noise about ESG in the news, it can be hard to discern what is really going on. We know that the increased demand for companies to address ESG issues has meant that organizations have had to make significant changes to how they work. But when it comes to addressing, managing and reporting on ESG issues, what’s really going on behind corporate doors?  

In this episode of ESG in Conversation, we explore that question by examining how the roles of CSR and sustainability professionals are evolving to address material ESG issues. You’ll hear about the results of the Morningstar Sustainalytics Corporate ESG Survey, with insights about the challenges, concerns, and evolving roles of CSR and sustainability professionals around the world. 

View the show notes in full detail at the Sustainalytics Resource Centre. 

 

Read the full Morningstar Sustainalytics Corporate ESG Survey Report 2022  

Download the report to learn about the ESG challenges companies face around the world and the resources CSR and sustainability professionals are using to meet them, key steps to ESG maturity, where companies are focusing their ESG investments, and how companies are using their ESG ratings and scores. 

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What’s Happening in Sustainable Finance: Innovative Finance Instruments Breaking Ground, Use of Proceed Bonds Back in Vogue, and More

Wednesday Mar 15, 2023

Wednesday Mar 15, 2023

Episode Summary 

Hosts: 

  • Winnie Chung, Senior Associate, Corporate Solutions 
  • Nicholas Gandolfo, Vice President, Corporate Solutions  

Growing Innovation with Sustainable Finance Instruments 

In this episode, Nick and Winnie chat about the latest news and transactions in the sustainable finance space. With a focus on innovation, they discuss the new ways in which issuers are leveraging sustainable finance instruments to fund their green and social projects. For instance, the World Bank’s recent bond issuance will forgo investor coupon payments, instead using the funds to finance a project manufacturing water purifiers in Vietnam. Using purifiers will replace biomass burning (traditionally used to boil water to make it safe to drink), resulting in lower carbon emissions. The carbon emissions saved will be turned into carbon credits and sold to fund a coupon payment to bond investors. Nick also notes innovation picking up in the areas of blue bonds and the maritime economy as well as biodiversity-focused finance activities.   

Investors Swing Back to Use of Proceed Instruments 

Winnie and Nick also touch on the growing ambivalence towards sustainability-linked instruments. In 2022, sustainability-linked bonds and loans seemed to lose some of their appeal as scrutiny of targets and performance indicators intensified and accusations of greenwashing arose. Adding to the discontent – slipping targets. Analysis from Barclays finds that nine out of 12 SLBs with target measurement dates in 2023 are off track to hit those targets. Consequently, we’re seeing a swing back toward traditional use of proceed instruments. This is particularly true within the green bond market which took less of a hit compared to other types of labelled bonds in 2022. With more green bond disclosure guidance and regulations expected from more jurisdictions, such as India, Bolivia, EU and Latin America, investors will likely continue to seek security in the more structured green bond market.  

Key Moments

0:02:20 

Market overview 

0:02:37 

Expected market rebound 

0:03:15 

Innovative structure from World Bank 

0:04:03 

Swing back to use of proceeds? 

0:04:23 

Innovative structure from ENEL 

0:05:10 

Blue and biodiversity activity 

0:05:31 

Continued scrutiny of SLLs and SLBs 

0:06:40 

ASEAN developments 

0:07:34 

New CBI reports 

0:08:04 

SLB and SLL overview 

0:11:52 

Green bonds overview 

0:17:35 

Green loans overview 

0:17:57 

Audience questions 

0:21:05 

Social bonds and loans overview 

0:22:03 

Labeled products, transition bonds and regulatory updates 

 

Links to Select Resources

 

More Episodes

 

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What’s Happening in Sustainable Finance: On the Horizon for 2023, Reporting on Financed Emissions for Sovereign Debt, and More

Monday Feb 27, 2023

Monday Feb 27, 2023

Episode Summary

Hosts

  • Nicholas Gandolfo, Vice President, Corporate Solutions
  • Sabrina Tang, Sales Associate, Corporate Solutions

In this episode, Nick and Sabrina reviewed what’s new in sustainable finance and shared some notable deals and transactions that have hit the market. They discussed the overall decline of global bond markets and expressed some optimism for the year to come, as sustainability is a central issue for investors, companies and governments and is still closely tied to capital markets. They also shared research on the carbon performance of food producers and a report on how to scale credible transition finance among countries in Southeast Asian. 

Sustainable Market Hopes for 2023 

If you’ve been following sustainable finance market activities, it’s no surprise that 2022 was not a great year overall. Markets were down in volume for the first time in 11 years. According to figures from Environmental Finance, total annual sustainable bond issuance fell 19%, from US$1.05 trillion in 2021 to US$845 billion in 2022. Social, sustainability and sustainability-linked bonds were hit hardest – down about 25% compared to 2021, while green bonds fared a bit better with a more modest 14% issuance decline. 

Despite the lower issuance volumes, there is hope for a rebound in 2023 as overall markets stabilize and issuers seek financing. This year may see use of proceed instruments like green bonds continue to gain ground compared to performance based, sustainability-linked bonds. We may also see more transition deals, social and biodiversity focused activity, as well as more complicated transactions going to market. It’s still early days, so let’s see how things develop. 

Updated Standard for Reporting Financed Emissions in Sovereign Debt 

If you’re a bank trying to figure out how to report on your financed emissions, be sure to read through Partnership for Carbon Reporting Financials’ (PCAF) recently updated standard. Global GHG Accounting and Reporting Standard for Financed Emissions addresses demands from financial institutions and provides a methodology to help investors in sovereign debt account and report greenhouse gas emissions. The methodology on sovereign debt includes bonds and loans of all maturities, however, only debt issued by the central bank on behalf of the sovereign would be covered. The methodology also requires reporting of scope 1, scope 2 and scope 3 emissions and recommends getting the information from countries’ reported data via the United Nations Framework Convention on Climate Change.

Key Moments

0:01:16 Market overview
0:03:24 COP15 insights
0:04:22 Australia sustainable finance taxonomy
0:05:04 BNP Paribas social impact bond
0:05:16 TPI paper on food producers' carbon performance
0:06:53 Updated PCAF standard
0:07:31 Banks' transition planning under scrutiny from ECB
0:08:05 Activity in carbon markets
0:08:45 Austria launches green commercial paper program
0:09:14 CBI paper on transition finance in ASEAN
0:10:17 SLB and SLL overview
0:15:34 Audience questions
0:21:00 Green bonds overview
0:23:56 Green loans overview
0:25:06 Social bonds and loans overview
0:27:38 Labeled products, transition bonds and regulatory updates

 

Links to Select Resources

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What’s Happening in Sustainable Finance: Climate on the International Agenda, New Instruments to Support Emerging Markets, and Much More

Wednesday Feb 01, 2023

Wednesday Feb 01, 2023

Episode Summary

Hosts

  • Nicholas Gandolfo, Vice President, Corporate Solutions
  • Aditi Bhatia, Senior Regional Sales Manager, Corporate Solutions

In this episode, our hosts Nick and Aditi discuss the recently held COP27 and COP15 conferences and what their outcomes could mean for green and social financing globally. They also touch on the concept of blended finance and how that might be used to support climate adaptation in emerging markets. Increasing activity among sovereigns is also discussed, as countries come to market more frequently with sustainable debt. Lastly, Nick and Aditi share a rundown of other notable sustainable finance transactions. 

Climate High on the International Agenda 

Given the current climate crisis, expectations were high for COP27. From an environmental standpoint, the final agreement was seen as a disappointment by some observers. However, the conference closed with a ground-breaking agreement to set up a loss and damages fund, which aims to provide financial assistance to countries vulnerable to, or impacted by, the effects of climate change.

COP15, the United Nations Biodiversity Conference, also concluded late last year with a landmark agreement that includes measures to halt and reverse nature loss – such as putting 30% of the planet and 30% of degraded ecosystems under protection by 2030. The plan also includes a target of mobilizing at least US$200 billion per year from public and private sources for biodiversity-related funding.

Finally, the G20 conference in Bali also turned its attention to issues around climate change, low-carbon transition, and climate adaptation. 

Innovative Solutions to Fund Sustainable Development 

With an estimated US$9.2 trillion needed to meet global climate and environmental goals,1 private and public sectors are looking for more ways to funnel money to finance mitigation and conservation efforts. To address this need, market participants are discussing innovative solutions like blended finance, which is the strategic use of development finance (such as public or philanthropic capital) and private investment capital to fund sustainable development projects in developing countries.2 

A new crop of instruments is also emerging to offer potential solutions. This includes instruments like debt-for-nature swaps, a financial mechanism that allows portions of a developing country’s foreign debt to be forgiven, in exchange for commitments of investment in biodiversity conservation and environmental policy measures.3 We anticipate seeing more variety in the types of instruments being developed to support conservation and climate adaptation in countries most vulnerable to climate change. 

Check Out Our Special Episode on Sustainable Finance in the Metals and Mining Sector 

In case you missed it, we recently took a deep dive into the sustainable and transition finance opportunities within the metals, mining and commodities sector. Our panel discussed key considerations for banks, issuers and investors interested in using sustainable finance instruments to help fund improvements across the sector and mitigate potential risks. The sector is incredibly important because of its crucial role in the global transition to a low-carbon economy. However, these companies face numerous environmental and social challenges, which if not managed effectively could negatively impact their access to capital. Listen here: Sustainable Finance Insights: Special Episode on Sustainable Finance in the Metals, Mining and Commodities Sector

 

Key Moments

0:00:51 Market overview
0:01:38 COP27 insights
0:03:48 G20 Summit
0:04:35 COP 15 insights
0:05:00 State of the bond market and outlook for 2023
0:05:56 Sovereigns’ ambitions in sustainable finance
0:06:33 Social taxonomy update
0:06:52 Green bond tokenization
0:07:12 Emergence of blended finance
0:08:02 More activity in transition finance market
0:08:19 Market scrutiny of SLBs
0:10:08 ICMA paper on sustainable repos
0:10:34 Food security as social use of proceeds
0:10:54 More activity around carbon markets globally
0:11:15 PCAF publishes second version of Global GHG Account and Reporting Standard
0:11:48 CBI principles for transitioning agriculture sector
0:12:23 SLB and SLL overview
0:17:39 Audience questions
0:23:26 Green bonds overview
0:26:51 Green loans overview
0:28:50 Social bonds and loans overview
0:31:04 Labeled products, transition bonds and regulatory updates

 

Links to Select Resources

 

Sources

1Roston, E. 2022. “McKinsey Pegs the Price Tag for a Livable Climate at $9.2 Trillion a Year.” Bloomberg. January 25, 2022. https://www.bloomberg.com/news/articles/2022-01-25/mckinsey-pegs-price-tag-of-livable-climate-at-9-2-trillion-a-year

2 See OECD: https://www.oecd.org/development/financing-sustainable-development/blended-finance-principles/ and Bank of America: https://about.bankofamerica.com/en/making-an-impact/blended-finance

3 See Earth.org: https://earth.org/debt-for-nature-swaps/

 

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The Sustainalytics Podcast | Cybersecurity and Data Privacy in Focus: Cyberattacks and ESG

Wednesday Jan 25, 2023

Wednesday Jan 25, 2023

Episode Summary

Host:

  • Curtis File, Editorial Manager, ESG and Sustainable Finance

Featuring:

  • Melissa Hudson, Associate Director, Research Products
  • Liam Zerter, Associate Director, Quantitative Research Manager

In this episode of the Sustainalytics Podcast, Curtis explores cybersecurity and data privacy issues, with commentary from Melissa Hudson and Liam Zerter about the real impact of cyberattacks on businesses. You’ll learn about the 2021 United Kronos Group ransomware attack, cybersecurity trends that organizations should monitor, how cyberattacks affect the bottom line, and why companies should invest in developing robust cybersecurity and data privacy policies.

The Current Cybersecurity and Data Privacy Trends Companies Should Monitor

Within the last two years in particular, both the frequency and severity of cyberattacks against businesses have continued to climb. As companies have modernized and expanded their digital infrastructure to remain competitive, they have also increased their vulnerability. High-profile data breaches have led to increased pressure from regulators, consumers, and the insurance industry, who increasingly view such incidents as market failures.

Why Having a Strong Cybersecurity Policy is Important

Perhaps most importantly for a company’s bottom line, Morningstar Sustainalytics’ researchers found that companies that had robust data privacy and cybersecurity policies were able to recover faster from a cyberattack compared to peers with poor or weak policies. Beyond providing a boost to recovery, companies must also invest in their cybersecurity infrastructure in order to keep up with the rapidly changing regulatory landscape. Those that don’t take immediate action will be left behind.

Read Our eBook, Data Privacy, Cybersecurity and ESG: Managing Risks in a Changing Business Environment

Download the ebook to learn about the types of data privacy and cyber threats companies are facing, the potential ESG risks for companies that do not properly address data privacy and security, and how organizations can manage and mitigate data privacy and security risks.

Key Moments

 

00:00 United Kronos Group Ransomware Attack
01:54 Introduction to the Cybersecurity and Data Privacy Landscape
03:35 Five Global Events Driving Cybersecurity and Data Privacy Trends
05:18 Consequences of Under-Investment in Cybersecurity
06:40 The Increasing Frequency and Severity of Cyberattacks
08:00 How Cyberattacks Impact Stock Price
09:45 The Importance of Strong Data Privacy and Cybersecurity Policy
10:34 A Developing Regulatory Landscape
12:09 Looking Forward

Transcript

00:02

Curtis File: In December 2021, a group of cybercriminals sent panic across the United States. United Kronos Group, a payroll and HR software company, was targeted by a ransomware attack. The attack took out its Kronos Private Cloud platform, and this left major retailers and state governments scrambling to pay employees as the holidays approached.

But worse, a number of hospitals were affected.

Kronos was a mission critical provider of administrative services for hospitals across the United States. From small, remote hospitals to urban medical systems, the attack interrupted services and, in many cases resulted, in delayed health care delivery. So why was this able to happen?
00:46

John Riggi: In response to the pandemic, hospitals rapidly deployed and expanded network-connected and internet-connected technologies to accommodate a surge of COVID patients and a remote administrative workforce. So, what this did is create many more opportunities for bad guys to penetrate our networks. It's what we call an expanded attack surface.1
01:18

CF: That was a clip of John Riggi, Senior Adviser for cybersecurity and risk for the American Hospital Association. At the time of the Kronos attack, he spoke openly to media about his concern for the cybersecurity threats the health care industry is facing. He told NPR:

“As we always do, hospitals and health systems will get it done and care for patients, but under additional stress and burden they don't need right now.”

The incident highlighted the real impact of cybersecurity breaches when corporations and government systems are attacked, our coworkers, friends and family are the collateral damage.

I'm Curtis File, Editorial manager with Sustainalytics and your host for today as we look at cyberattacks and what they mean for ESG risk management.

Cybersecurity and data privacy have become hot button issues, particularly in the last two years. Consumers have become more informed about data privacy issues, demanding companies take accountability for how they process user data. At the same time, there's been a significant increase in the number and severity of cyberattacks against businesses. To better understand the concrete business impact of cyberattacks, Sustainalytics’ experts set out to create a report based on our own research and data, asking, “does a major cybersecurity incident have a meaningful impact on stock price returns?” And it turns out...
02:45

Melissa Hudson: The answer is yes.
02:47

CF: That's Melissa Hudson, Associate Director, Research Products and one of the authors of the report. You'll be hearing more from her today, along with another Sustainalytics expert, Liam Zerter, Associate Director, Quantitative Research Manager. We'll be taking a closer look at the results of the report to get a better understanding of cybersecurity and data privacy. But before we get into the data in numbers, let's take a broader look at cybersecurity as an ESG risk. Melissa Hudson explains.
03:15

MH: If I could sum up what we're seeing, it's that both data and digitization have become a double-edged sword. They are key drivers of value and efficiency, but they also create a significant new target commodity and increased corporate vulnerability. We see five recent global events as key.

First, COVID 19 and the unprecedented disruption and movement to remote work that came with it.

Second, the 2020 SolarWinds attack, a game changer that Microsoft CEO called the largest and most sophisticated attack the world has ever seen.

Then came the 2021 Colonial Pipeline hack that showed the U.S. public the real-life, real-time impact of a cyberattack on critical infrastructure.  Fourth, the Russian invasion of the Ukraine earlier this year, which led many to fear the possibility of cyber warfare.

Finally, over the course of this time-period, we've seen the emergence of ransomware and in particular its productized form known as “ransomware as a service”.

So, on the one side, disruption, sophisticated technologies, supply chains and critical infrastructure attacks are placing an increased focus on how vulnerable our integrated cyber ecosystem has become. While, on the other, ransomware is leveling the playing field in terms of risk. Companies and industries once considered immune are having to deal with business interruption and extortion as ransomware is made available to less sophisticated actors. In short, we're reckoning with a significant realignment in global cyber security risk. And the pace of corporate investment in cybersecurity has not kept up.
05:29

CF: That underinvestment in cybersecurity is a critical issue. The frequency of cyberattacks only continues to climb, and so does the severity of losses. As a result, stakeholders are being taken off guard as they're suddenly confronted with significant transition risks. And the public costs of underinvestment in cybersecurity are increasingly being viewed as market failures in much the same way as environmental issues. These costs are driving increased regulation, stronger enforcement, and pressure from the insurance industry.
05:59

MH: Marsh and McLennan see an inflection point in the market comparable to that faced by property insurers 30 years ago following Hurricane Andrew in Florida. Following Andrew, almost a million policyholders lost coverage after their insurance companies went bankrupt. In today's context, we are seeing a cyber-insurance market with increasing premiums, more exclusions, and, in a signal that mirrors our own analysis, coverage availability tightly linked to implementing industry standard cybersecurity safeguards.
06:40

CF: With regulators and insurers increasingly scrutinizing companies’ cybersecurity practices. Sustainalytics researchers wanted to know: Are cybersecurity incidents really increasing in number and severity? Do cyberattacks impact share price? And if so, how? And do strong privacy and security practices pay off? Let's start with the first question. Liam Zerter has the answers.
07:03

Liam Zerter: Let's take a look at the data privacy and security incidents that Sustainalytics tracks. If we take a look at 2013, moving to 2021, data privacy and security has been growing at a cumulative aggregate growth rate of 37%. If you compare this to the total incident growth rate, which is influenced by a coverage, that's been growing at 24%.

We have a pretty clear double-digit growth that's occurring. But the more interesting story is when you look down at the risk level from before 2018 and post 2018. So, from 2013 to 2017, those high-risk business incidents have been going for about an average of, you know, five per year. But in 2019 to 2021, now you're averaging 26. So, you're looking at what might be a 5x increase and those big write tail events occurring.
08:00

CF: To get a better understanding of what that fivefold increase in incidents means, Sustainalytics researchers put together an event study to look at the price reaction to news of a major cyberattack. They compared a portfolio of companies that had been involved in a high-risk cybersecurity incident against the S&P 500 and a global sector benchmark.
08:20

LZ: From day zero going forward, in the first four days, you have a -2.3% drop in the first four days and a partial rebound. Some companies start getting some confidence back in the market, but this is short lived. The absolute bottom that occurs is 60 trading days in. This is particularly interesting because some analysts and news anchors on BNN Bloomberg for example, will actually reference that, if a big controversy happens to a company, you know, wait three months and sometimes the market forgets about that controversy, even occurring. That's very interesting to see that this also aligns to that type of saying.
09:06

CF: But that's not the end of the story. The real surprise for researchers came when looking at the long-term impact. One year later.
09:14

LZ: The incident portfolio is actually still negative in absolute terms returns. But it's even worse off when compared to the S&P 500 and the sector benchmark. Now we have a scenario where, you know, it's clearly showing that there is a drag being placed on these companies for a longer-term period. Some studies may, that are out there, may actually say it could take up to two years for some companies that have been severely cyber attacked to start acting normal again.
09:45

CF: The reports are bleak. Malicious actors don't just deal from corporations, they damage the relationship between companies and their stakeholders. So, what can companies do to protect themselves? Liam says having robust security and data privacy policies can buffer the negative impact.
10:02

LZ: When we looked at data privacy and security policy management scores, those companies that had really strong scores, 75 to 100, 1 year after the incident actually traded pretty close in line with their relative benchmark. They actually weren't affected all too much in most cases. But those companies that had a score of zero or no score available at all because the industry that they participate in, they were down nearly -5%. So, there's a significant gap difference.
10:34

CF: Beyond providing a boost to recovery, the regulatory landscape is changing. Taking a casual approach to cybersecurity and data privacy is no longer an option. New and stricter data privacy regulations are on the horizon, with many nations looking to the EU GDPR as an example. On the cybersecurity front, laws, design requirements and reporting standards are continually evolving. Melissa says organizations must pay close attention to both data privacy and cybersecurity regulations to ensure they maintain compliance.
11:05

MH: In general, we're seeing a broad convergence towards GDPR-like regulatory regimes, at least in the developed world. California's New privacy laws have set a high bar for the U.S. and the majority of states now have their own. Canada, for example, is in the process of amending the breadth and depth of its privacy law to meet or closely aligned with GDPR standards.

While Australia has just greatly increased the fines for privacy breaches in light of at least two major incidents. On the cyber security front, we have also begun to see significant developments related to freestanding cybersecurity law, technology design requirements, and increasing attention to critical infrastructure standards and reporting. A trend that has only accelerated with the SolarWinds and Colonial Pipeline attacks.
12:09

CF: Those attacks have highlighted that as a society, we have greatly underestimated cybersecurity risk. While digitization has made it easier for businesses to scale and operate more efficiently. It's also made it easier for malicious actors to exploit vulnerabilities—as demonstrated by the Kronos attack.

Going forward, organizations are going to be facing increased pressure and scrutiny from government regulations, the insurance industry and stakeholders conducting due diligence on cybersecurity risks. As a result, companies are going to have to both increase their investment in cybersecurity, and increase their level of disclosure around risk mitigation, with particular attention to controls related to privacy and security management. Companies that failed to do so may ultimately face operational and remediation costs, financial penalties, reputational damage and lost business.

That's it for this episode of the Sustainalytics podcast. If you'd like more information about data privacy and cybersecurity threats companies are facing around the world, and how your company can better manage these risks, head over to the resource center at www.sustainalytics.com and read our e-book Data Privacy, Cybersecurity and ESG: Managing Risks in a Changing Business Environment. We'll put the link in the show notes. Alternatively, you can check out the full report, The Impact of Cyberattacks on Stock Prices authored by Melissa Hudson and Liam Zerter.

Or watch their in-depth webinar Cyber Attacks, Corporate Exposure and Material ESG Risk. If you have any questions, or suggestions for topics you'd like to learn more about, email us at podcast@sustainalytics.com. Thanks again to Melissa and Liam for providing their insight. And thank you for listening.

References

1. CyberMed Summit. “Cyberattack Preparedness and Hospital Readiness Across American Healthcare.” YouTube Video, 22:37. February 6, 2022. https://www.youtube.com/watch?v=0gfSxfHSzzI 

 

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