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

What’s Happening in Sustainable Finance: Funding Emerging Markets’ Climate Adaption, Regulatory Focus on Scope 3 Emissions, and More

Wednesday Dec 14, 2022

Wednesday Dec 14, 2022

Episode Summary

Hosts

  • Nicholas Gandolfo, Director, Corporate Solutions
  • Aditi Bhatia, Regional Sales Manager, Corporate Solutions

In this episode, Nick and Aditi highlight developments in the sustainable finance markets as 2022 winds down. They note that global cumulative green bond issuance has surpassed the US$2 trillion threshold, marking another milestone for sustainable finance. They also discuss the diversification of key performance indicators used in sustainability-linked instruments, the growing opportunities for using sustainable finance as a tool to fund climate adaptation in emerging markets, and regulators’ increasing focus on reporting for scope 3 emissions. Finally, they respond to audience questions about impact investing and sleeper sustainability-linked loans.

Cumulative Issuance of Climate-aligned Bonds Passes $2 Trillion Mark

According to the Climate Bonds Initiative, to date over US$2 trillion in greens bonds have been issued globally, marking another major milestone in sustainable finance. Despite broader market conditions resulting in lower volumes year-over-year, use of proceed bonds, such as green bonds, are rebounding slightly. 

Using Sustainable Finance to Support Funding in Emerging Markets 

When thinking about how to ensure a just transition, a recurring question is, "How can market participants initiate more financing for adaptation, resilience, and development, to help countries who most vulnerable to climate change, but that are not major contributors to it?" One answer is sustainable finance. Sustainability-labeled debt can provide opportunities to drive and scale financial flows in emerging markets. Though issuing a green bond doesn’t eliminate the liquidity, currency or country risk facing some emerging market nations, hopefully more funds can be leveraged under the sustainable finance umbrella to drive additional financing and a just climate transition for these countries.  

Growing Regulatory Focus on Scope 3 Reporting 

Regulators globally continue to push for disclosure and reporting of scope 3 emissions. In October 2022, the International Sustainability Standards Board (ISSB) voted unanimously to require companies to disclose scope 1, scope 2 and scope 3 greenhouse gas emissions, and will develop relief provisions to help companies apply the scope 3 requirements.2 This follows the U.S. Securities and Exchange Commission’s proposal for climate disclosure published earlier this year which includes reporting on Scope 3 for large U.S. companies.  

0:00:51 

Market overview 

0:01:24 

Use of proceed rebound 

0:02:15 

CBI conference outcomes 

0:03:22 

Green bond issuances pass US$2 trillion globally 

0:04:08 

FCA report on fund labeling 

0:04:58 

CBI reports and consultations 

0:05:36 

Scope 3 reporting in the news 

0:06:21 

Sustainable finance for emerging markets 

0:07:01 

Funding instruments to support conservation - blended finance and debt to nature swaps 

0:09:00 

Green and social loans tied to banks SLL pools 

0:09:46 

SLB and SLL overview 

0:14:04 

Audience questions 

0:19:47 

Green bonds and loans overview 

0:25:40 

Social bonds and loans overview 

0:29:05 

Labeled products, transition bonds and regulatory updates 

Links to Select Resources

 

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Sustainable Finance Insights: Special Episode on Sustainable Finance in the Metals, Mining and Commodities Sector

Tuesday Dec 06, 2022

Tuesday Dec 06, 2022

Episode Summary

Hosts

  • Aditi Bhatia, Regional Sales Manager, Corporate Solutions 
  • Nicholas Gandolfo, Director, Corporate Solutions  
  • Nishant Bhagchandani, Sales Manager, Corporate Solutions 
  • Vanessa Tang, Sales Associate, Corporate Solutions 
In this special episode, we focus our lens on sustainable and transition finance opportunities within the metals, mining and commodities sector, amid growing interest from companies and investors. The sector is incredibly important because of its crucial role in the global transition to a low-carbon economy. The demand for minerals used in clean energy technologies is expected to increase four-fold by 2040 to meet climate goals.1 However, mining is also resource intensive, contributing to between four and seven percent of global greenhouse gas emissions,2 and affecting water resources. The various social challenges the sector faces greatly impact local communities, even after mines are closed. As with other harder-to-abate sectors, maintaining access to capital amid a long list of environmental, social and governance risks can be a challenge. 
 
Listen to our panelists discuss key considerations for banks, issuers and investors interested in using sustainable finance instruments to help fund improvements across the metals and mining sector and mitigate potential environmental, social and regulatory risks. They share insights on the trends they’re seeing in the market, the conversations they’re having with issuers and banks, and what’s next in sustainable finance for the metals and mining sector. 

 

Key Moments

0:00:57

Introductions
0:02:44

Overview of Sustainalytics’ approach to sustainable finance 
0:04:29

Exploring the growing interest in sustainable finance for the mining sector 
0:08:42

Use of proceeds or linked finance? Considerations for mining companies and banks 
0:12:48

Applying the Climate Transition Finance Handbook 
0:15:24

External reviewer landscape – how does Sustainalytics compare? 
0:19:38

The benefits of labeling transactions from the mining sector
0:26:13

How Sustainalytics supports banks’ sustainable finance activities 
0:29:45

Sustainable finance questions from banks 
0:37:08

A look at transaction trends and market developments  
0:45:03

Green Bond Impact Reporting – The next frontier in sustainable finance 
0:53:17

Outlook for sustainable finance in the metals and mining sector 

 

Links to Select Resources

Sources

1 IEA. 2021. “The Role of Critical Minerals in Clean Energy Transitions.” May 2021. https://www.iea.org/reports/the-role-of-critical-minerals-in-clean-energy-transitions. 

2 Delevingne, L., Glazener, W., Gregoir, L., and Henderson, K. 2020. “Climate Risk and Decarbonization: What Every Mining CEO Needs to Know.” McKinsey Sustainability. January 28, 2020. https://www.mckinsey.com/capabilities/sustainability/our-insights/climate-risk-and-decarbonization-what-every-mining-ceo-needs-to-know. 

 

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What’s Happening in Sustainable Finance: Sovereigns Focus on Biodiversity, Use of Proceed Instruments Gaining Ground as Sustainability-Linked Instruments Face Scrutiny, and More

Monday Nov 28, 2022

Monday Nov 28, 2022

Episode Summary 

Hosts 

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

Despite continued pressure on global financial markets, our hosts Nick and Sabrina highlight some bright spots within sustainable finance. From the array of green bond transactions coming to market in recent months, to sovereigns exploring sustainable finance opportunities to fund biodiversity, marine conservation and social programs, the sustainable finance market continues to push against market headwinds.  

Biodiversity Rising on Sustainable Finance and Corporate Agendas 

With COP27 ending and the UN Conference on Biodiversity (COP15) coming up in December, the issue of biodiversity continues to resonate among sustainable finance market participants. Companies are starting to focus more on biodiversity issues and their impact, and the Taskforce on Nature-related Financial Disclosures has also updated its beta framework. Sovereigns, such as Uruguay, are also joining the movement by funding efforts around biodiversity using sustainability-linked bonds.  

Use of Proceed Instruments Increase as Sustainability-Linked Instruments Faces Scrutiny

Contracting global financial markets has put pressure on the bond market. However, Nick does note a slight uptick in the number and variety of labeled use of proceed bond issuances in recent months relative to sustainability-linked bond issuances. This could be due, in part, to the growing scrutiny of linked bond instruments. Should they be more nuanced? Do the benefits of the pricing dynamics outweigh the penalties for not meeting targets? These are all valid questions being raised about these financing instruments that have seen tremendous growth over the last few years. It remains to be seen whether these questions translate into new norms for the market.  

Key Moments

0:00:57

Market overview

0:01:29

GSSS market pressures

0:02:40

Biodiversity and sovereign SLBs

0:03:51

Continuing scrutiny of SLBs

0:04:25

FCA consultation paper

0:05:15

Banks explore funding pools of SLLs

0:05:45

Singapore banks commitments to Net Zero

0:06:32

New reports from Climate Bonds Initiative

0:07:55

SLB and SLL overview

0:13:39

Audience questions

0:17:56

Green bonds overview

0:20:47

Green loans overview

0:22:25

Social bonds and loans overview

0:23:46

Labeled products overview

0:24:50

Transition bonds overview

0:26:41

Regulatory and country updates

List of Select Resources

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What’s Happening in Sustainable Finance: Blue Bonds Make Waves, ‘Sleeping’ Sustainability-Linked Loans Raise Eyebrows, and More

Wednesday Sep 28, 2022

Wednesday Sep 28, 2022

Episode Summary

Hosts

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

In this episode, Nick and Sabrina examine some of the interesting transactions and developments in the global sustainable finance market. Despite a general slowdown in the volume of issuances, there are still innovative transaction structures being proposed and sustainability-linked instruments (i.e., bonds and loans) continue to perform well. Green bonds continue to anchor the sustainable debt market, with several notable transactions in the blue bond space. Finally, audience questions are addressed, regarding clarity on whether sustainability-linked instruments can be structured in a program and the difference between social bonds and social impact bonds.

Blue Bonds Making Waves in Sustainable Finance

More corporate and sovereign issuers are exploring blue bonds to help finance their environmental conservation efforts. A blue bond is a debt instrument similar to a green bond, but with a focus on marine and ocean-based projects. In their market overview, Nick and Sabrina highlight blue bond proposals from the Securities and Exchange Board of India, the issuance of the first blue bond in Japan, and blue bond-related activities in Indonesia. The protection and conservation of oceans, waterways, and the life within them is essential for both business and society.

“Sleeping” Sustainability-Linked Loans: A Concern for the Sustainable Finance Market?

Nick notes the emergence of “sleeping” sustainability-linked loans, in which companies seek to build into their conventional loan documentation the ability to convert to an SLL at a later date. The key performance indicators (KPIs) and sustainability performance targets (SPTs) are also set at a later date. These types of loans are raising concerns among market participants around transparency, as its important to make sure that SLLs are not labelled as such until they have KPI and SPTs in place. The credibility of sustainability-linked instruments and sustainability washing is an area of evolving interest and scrutiny in the market.

As defined by the Sustainability-Linked Loan Principles, SLLs “incentivize the borrower’s achievement of ambitious, predetermined sustainability performance objectives.” Sustainability performance is measured using predefined sustainability performance targets (SPTs), as measured by predefined key performance indicators (KPIs). It is also recommended that borrowers and lenders have the appropriateness of the SPTs, and the methodology applied to assess them, reviewed by an external party as a condition preceding the loan.

Details of U.S. Inflation Reduction Act Show Promise for Renewables 

The recently passed Inflation Reduction Act in the United States aims to control inflation by reducing the deficit, lowering prescription drug prices and investing in domestic energy. A key component of this last goal is the promotion of clean energy. This legislation will result in the biggest infrastructure spend on renewables in recent history, hopefully setting the tone for the future. Government stimulus like this could be significant in paving the way for more rapid acceleration towards net zero.

Key Moments

0:01:29

Market overview

0:01:29

CBI half-year market review

0:02:44

Major issuance locations - China, Germany, Netherlands, U.S., France

0:03:58

U.S. Infrastructure Reduction Act good sign for renewables

0:04:58

Nuclear popping up

0:05:10

ESG increasingly being linked to remuneration

0:05:32

More green taxonomies being developed

0:05:56

Sustainability being integrated into leveraged loan market

0:06:19

China Green Bond Standard

0:06:36

Diversifying nature of sustainable bonds across Asia

0:06:55

"Sleeping” sustainability-linked loans on the market

0:07:58

SLB overview

0:11:28

SLL overview

0:15:52

Audience questions

0:22:03

Green bonds overview

0:28:20

Green loans overview

0:29:25

Social bonds and loans overview

0:31:17

Labeled products overview

0:33:27

Transition bonds overview

0:33:36

Regulatory and country updates

 

List of Select Resources

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What’s Happening in Sustainable Finance: Market Headwinds, GHG Targets in Sustainability-Linked Instruments, the Focus on Supply Chain, and More

Wednesday Aug 24, 2022

Wednesday Aug 24, 2022

Episode Summary 

Hosts 

  • Nicholas Gandolfo, Director, Corporate Solutions  
  • Aditi Bhatia, Regional Sales Manager, Corporate Solutions  

In this episode, Nick and Aditi share recent developments in the global sustainable finance market. They touch on the cooling bond market and the shifting geographic split in green bond issuance, noting that EU dominance is waning as other jurisdictions close the gap. Nick gives his thoughts on the impact of the forthcoming EU green bond standard on what future bond frameworks will include, what will be reported, and the level of external review required.  

In her update on sustainability-linked loans and bonds, Aditi highlights a couple of transactions, notable for their use of gender-based KPIs aiming to increase the number of women in management positions. Finally, Nick applauds Sustainalytics’ Corporate Solutions business for providing the most second-party opinions in the first half of the year, as cited by Environmental Finance.  

Study of Greenhouse Gas Targets Used in Linked Finance   

Environmental Finance recently published a report analyzing the types of key performance indicators being used in sustainability-linked bonds and loans. Across sustainability-linked instruments, carbon and greenhouse gas emission reduction KPIs accounted for about 75% of KPIs used, with other environmental issues, such as water, making up 10%, social issues another 10% and less than 5% related to governance issues. This makes sense, given the quantitative nature of GHG and carbon emission metrics. The report also noted the emergence of KPIs tied to scope 3 emissions, which is a promising trend given the high impact of scope 3 emissions for some industries.  

Focus on Supply Chain Sustainability Improvements 

For organizations looking to support ESG and sustainability improvements in their supply chain, it’s important to understand suppliers’ needs and motivations. Some large players in food and agriculture are offering financial incentives to farmers to implement sustainable practices. Others are supporting programs to pilot and scale innovative sustainability solutions. Still others are working to advance social goals, such as furthering opportunities for minority and female entrepreneurs. Sustainalytics’ Corporate Solutions is working more and more with clients to support their evaluation of suppliers – from KPIs connected to suppliers to ESG assessments of their suppliers.     

Key Moments 

0:00:48 

Market overview 

0:02:01 

Changing geographic in green bond market 

0:02:25 

Sustainalytics leads SPOs in H1 2022 

0:02:55 

Green/social split tranche instead of sustainability issuance 

0:03:40 

Nuclear back on the radar 

0:04:33 

Malaysia Islamic financing 

0:04:45 

EU Green Bond Standards coming soon 

0:05:29 

Guidance for finance sector decarbonization 

0:06:05 

Updated Climate Bonds Initiative methodology 

0:06:41 

Securitization and structured deals 

0:06:45 

Sustainable finance and supply chain 

0:07:21 

New NNIP social bond fund 

0:07:39 

More articles on biodiversity 

0:08:00 

KPIs used is sustainability-linked instruments 

0:09:52 

SLB and SLL overview 

0:13:54 

Audience questions 

0:18:32 

Green bonds overview 

0:22:52 

Green loans overview  

0:24:28 

Social bonds and loans overview 

0:26:15 

Labeled products overview 

0:27:40 

Transition bonds overview 

0:28:25 

Regulatory and country updates 

 

List of Select Resources 

 

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What’s Happening in Sustainable Finance: The Shifting Regulatory Landscape, Reporting on Impact, Focus on Biodiversity, and More

Thursday Aug 04, 2022

Thursday Aug 04, 2022

Episode Summary

Hosts

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

In this episode, Nick and Sabrina recap recent developments in the global green, social, sustainability, and sustainability-linked market. They highlight a major milestone for Morningstar Sustainalytics’ sustainable finance team, which delivered its 1,000th second-party opinion in the spring. They also discuss the ever-evolving regulatory environment around ESG disclosures and reporting, the prevalence of measuring impact in the green, social, sustainability and sustainability-linked (GSSS) bond market, and share some of the updated GSSS guidance coming from International Capital Markets Association (ICMA).      

ESG and Sustainable Finance Regulations Continue to Roll Out Globally  

As noted in previous episodes, the regulatory train continues to roll along for issuers, investors, and service providers in the sustainable finance space. In the U.S., the Securities and Exchange Commission is proposing greater corporate disclosures related to climate and scope 1, 2, and 3 emissions. Also, in Europe, negotiations for the EU Green Bond Standard continue. Finally, there are continued calls for regulation of ESG data and ratings providers as this information is increasingly integrated into global investment decisions. Companies and investors should continue to monitor the shifting regulatory landscape and be prepared to disclose more when it comes to climate and other ESG-related issues.

Reporting on Impact: The Next Big Thing in the GSSS Market

It’s a promising sign that a growing number of issuers are funding green and social projects with labeled bonds, but investors also want to know that proceeds from their GSSS bonds are having a positive impact. So, more and more issuers are crunching the numbers on the impact of their sustainable bonds and loans. During its annual conference, the ICMA released new and updated guidance for GSSS bonds, which includes new metrics for impact reporting for green and social projects. Sustainalytics’ Corporate Solutions offers Impact Reporting for Bonds and Loans providing issuers with analysis of the expected and achieved impacts of their financed projects.

Growing Focus on Biodiversity

The Taskforce for Nature-based Financial Disclosures has published the next iteration of its reporting framework, which is looking at issues related to biodiversity and metrics. The International Finance Corporation and World Benchmark Alliance are also working to help advance the biodiversity finance market. Nick anticipates that we’ll start to see and hear more about companies being “nature positive,” how that can be measured, which KPIs should be targeted and tracked, and which use of proceeds are eligible. With over half of the world’s GDP at risk due to biodiversity loss, it’s great to see a growing spotlight on biodiversity.

Key Moments

0:01:25

Market overview

0:01:36

Sustainalytics’ 1,000th SPO

0:02:07

Bond market headwinds

0:03:12

Mainstreaming of sustainable finance

0:03:35

Blue carbon credits

0:03:40

Scrutiny over greenwashing continues

0:04:41

EU Green Bond Standard

0:05:11

Measuring impact in the GSSS bond market

0:06:13

Nuclear, gas and the Green Taxonomy

0:06:41

SEC proposal for scope 1, 2, and 3 disclosures

0:07:02

TNFD published next draft framework

0:07:36

GFANZ released guidance for decarbonizing portfolios

0:07:59

ICMA guidance updates 

0:10:14

Australian Sustainable Finance Initiative taxonomy

0:10:51

FIFA World Cup going carbon neutral?

0:11:09

New reports from CBI

0:11:51

SLB overview

0:15:14

SLL overview

0:19:40

Audience questions

0:25:00

Green bonds overview

0:31:45

Green loans overview

0:34:09

Social bonds and loans overview

0:35:33

Labeled products overview

0:36:35

Transition bonds overview

0:38:07

Regulatory and country updates

List of Select Resources

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The Sustainalytics Podcast | Aligning Executive Action to Strategy With Sustainability-Linked Compensation

Thursday Jul 21, 2022

Thursday Jul 21, 2022

Episode Summary

Host:

  • Adam Gorley, Marketing Manager, Corporate Solutions

Featuring:

  • Upasna Handa, Senior Associate, Product Commercialization
  • Henry Hofman, Associate Director, Corporate Governance Research

In this episode of the Sustainalytics Podcast, Adam talks with Upasna and Henry to explore what it means to link executive compensation to ESG metrics and how to meet some of the key challenges. You’ll learn about how tying ESG performance to compensation can enhance a company’s accountability and transparency, the types of metrics firms use, industries and regions with high pay-link adoption, existing and proposed regulations, steps to make your company’s program credible and transparent, and more.

What ESG Metrics Are Companies Using To Assess Executive Compensation?

The metrics a company will use in its ESG-linked compensation program will depend on the nature of the business, but there are common themes. Perhaps it’s no surprise that there is a particular focus on environmental issues, such as emission levels, sustainable production, energy efficiency, and waste management. But companies are increasingly using metrics to focus executives’ attention on social and governance issues like diversity and inclusion, culture, employee engagement, shareholder relations, and board composition.

Challenges To Adopting ESG-Linked Compensation

If your organization is tracking ESG metrics, you may have already dealt with some of the main challenges: determining the most material ESG issues for your company, setting targets and KPIs, and measuring your efforts. Nonetheless, this remains new territory for many, and any organization planning to set up an ESG-based executive incentive program should take a step back to understand what is required in order to make the program credible, transparent, and effective.

Read Our eBook, Real ESG Accountability: Tying Your Company’s ESG Performance to Leadership Compensation

Download our ebook, Real ESG Accountability: Tying Your Company's ESG Performance to Executive Compensation

 

 

Download the ebook to discover how linking executive compensation to ESG metrics can support corporate goals, the current state of ESG-based incentives from Sustainalytics’ research, why ESG-linked compensation is a practical step forward on accountability, details on what any firm can do to execute a credible and transparent ESG pay-link.

 

 

Key Moments

00:20 Episode overview
01:50 Intro to sustainability-linked compensation
02:11 Commonly used metrics in ESG pay-links
03:15 Key challenges and questions
04:10 Long-term and short-term incentives
05:30 Accountability and transparency
06:30 Regional overview
07:54 Industry overview
08:40 Regulatory outlook
09:08 UK Investment Association “Principles of Remuneration”
09:22 EU Shareholders Rights Directive II
09:48 U.S. Tax Code amendments and SEC comments
10:18 Meeting the challenges of ESG pay-links
11:34 Setting up credible and transparent pay-links
12:44 Looking to the future

 

Transcript

00:07

Adam Gorley: Hello and thanks for tuning into the latest episode of the Sustainalytics Podcast! I’m Adam Gorley, Producer with Sustainalytics, and I’ll be your host today as we look at sustainability-linked compensation.

 

Many companies around the world are introducing programs and practices to improve their sustainability with respect to the environment, social issues, and corporate governance. These organizations are examining the ESG issues that are most material to them, setting goals and targets to address those issues, and developing methods to measure the results so they can understand their progress.

 

But despite all that valuable effort, it’s also essential to put in place a process to align action with those goals. To effectively meet this challenge, many organizations are starting to incentivize executives by linking a portion of their compensation to the company’s performance on specific ESG metrics. Is this something your organization has introduced or considered implementing? We’d love to hear your thoughts. You can get in touch at podcast@sustainalytics.com.com.

 

In this episode, you’ll hear about ESG-linked compensation from two of Sustainalytics’ in-house experts on the topic: Upasna Handa, Senior Associate, Product Commercialization, and Henry Hofman, Associate Director, Corporate Governance Research. We’ll be looking at how tying executive compensation to ESG performance can enhance a company’s accountability and transparency and the challenges organizations are facing. We’ll also talk about the types of metrics firms use for ESG-linked compensation programs, how you can ensure your company’s ESG-based incentive program is credible and transparent, and much more.

 

But first, let’s take a closer look at what sustainability-linked compensation means. In essence, it’s a variation on the standard practice of linking executive compensation to financial and operational metrics, such as profit, growth, employee turnover, customer churn, and so on. The key difference is that sustainability-linked compensation is tied to non-financial ESG metrics. Upasna outlines some of them:
02:11

Upasna Handa: While the details of ESG-linked executive compensation vary from company to company, and also from sector to sector, there are some common issues or common metrics that performance is measured against. For example, across the environment pillar, we often see emission levels, sustainable production, energy efficiency, and waste management. Across social and governance, we see diversity and inclusion, culture, employee engagement, and community. And across the governance pillar, we see corporate governance, shareholder relations, and board composition pretty often across industries.
02:45

AG: Companies may be choosing these particular ESG issues to respond to stakeholder pressure, meet or prepare for regulations, enhance their reputation, reach new markets, and other reasons. But, as Upasna notes, the specifics will depend on the individual firm. Henry adds:
03:02

Henry Hofman: Ultimately, we expect the firms to be able to identify which metrics are most important to them and most relevant to their business model to ensure that executives are being incentivized in the correct way to achieve meaningful change.
03:15

AG: Unfortunately, while ESG pay-links are based on a tried-and-tested business practice, they come with several unique and important challenges. While most companies understand clearly the strategic financial and operational risks they face, their targets and key performance indicators (KPIs), and how to measure them, the same cannot be said for the material ESG issues (or MEIs) companies face. Basically, this is unfamiliar territory for many organizations. Upasna explains some of the core challenges facing companies when it comes to tying executive compensation to ESG metrics:
03:49

UH: The major challenges in incorporating ESG metrics into executive pay includes structuring the ESG-linked pay. So, clearly articulating material ESG issues, ensuring the board understands them, deciding on appropriate KPIs, and also measuring the success of these ESG programs based on those.

 

Another important component would be the time period that we're looking at when it comes to structuring to effect meaningful changes. An important question here would be: will a short-term or a long-term timeframe be the most effective for our company? Is it better to set ambitious well-calibrated one-year targets rather than vague long-term ones? And also, because companies looking to progress on core strategic priorities need to incentivize top leadership to think more long-term, so are we going to have those KPIs as more long-term incentive plans? Environmental goals sit comfortably within long-term incentive plans as of now because of the long-term orientation, but some ESG targets, such as health, safety, gender pay targets, and even diversity and inclusion targets, can be calibrated over a single year.

 

So, for example, BP uses ESG metrics in both its annual bonuses and its long-term incentive plans. Starting in 2020, the bonus has a 15% weightage on safety, which was a well-established metric, and on the environment, which relates to short-term emission reduction targets. The long-term incentive plan now has a 40% weighting to strategic goals including input measures around renewables, energy transition, etc.
05:24

AG: We’ll come back to how companies are meeting the challenges in a few minutes. Before that, I want to explore the important question of value. Specifically, how can linking executive pay to ESG metrics enhance a company’s accountability and transparency?
05:38

UH: When we talk about accountability, tying variable compensation to ESG performance provides an additional tool for firms and boards to hold their executives accountable, while they're communicating their principles and objectives with employees, investors, regulators, and other important stakeholders. This is especially important when it comes to companies in high ESG risk industries, which may have more difficult material ESG issues to address.

 

And coming to transparency, when companies incorporate ESG into incentive plans, their boards, investors, employees, communities, and other stakeholders have a valuable tool to track their progress on ESG issues.
06:21

AG: So, ESG pay-links are growing in popularity due to increased demand for accountability and transparency, but how is this trend affecting different regions and industries? Not surprisingly, some places and types of business are seeing more activity than others when it comes to linking compensation to sustainability metrics. Here’s Henry Hofman:
06:40

HH: Looking at the data, I think there's some interesting patterns that emerge. It’s probably important to note as well though that our research is obviously based on publicly disclosed information, so there is a bit of a correlation between those regions that tend to have just generally good governance disclosures and where we see stronger examples of ESG being related to pay.

 

But having said that, the European companies and U.S. companies based on our data are the highest adopters with 17% and 13% of our universe incorporating ESG metrics into their executive remuneration, either as a part of their long-term compensation plans or their short-term programs. There are some other countries outside of Europe and the U.S. that have particularly strong practices: Australia and South Africa both stand out as having a high adoption rate.
07:34

AG: As Henry suggests, the likely reasons for these numbers are fairly clear. Where there are strong corporate governance regimes, active stakeholders, investor pressure, effective say-on-pay mechanisms, and so on, those are the regions where you’ll find more companies implementing ESG pay-links.

 

But what about industries? Are organizations in some sectors more likely to adopt ESG pay-links?
07:58

HH: So, I think that's really interesting, and the data suggests that those industries that are most often in the public eye, I would say, for perhaps having ESG practices that are less than ideal — there's no hard and fast rule — but those industries do tend to have a reasonable uptake. So, we're talking about precious metals and diversified metals, oil and gas producers, refiners and pipelines, and utilities. These are the industries that we are seeing that actually have the higher takeup in terms of setting ESG metrics and linking it to executive compensation.

 

I would say though that, even within these industries, there's still at most only about a 30% takeup. So, there's certainly a long way still to go.
08:42

AG: This leads us to the issue of regulations. While it is common to hear about broad ESG and sustainability-related regulations — particularly with respect to reporting — the development of requirements specifically related to compensation is still in the early stages. I’ll let Upasna fill us in.
09:00

UH: There are multiple efforts from government, industry, and professional bodies around the world to establish more ESG reporting standards for disclosure, measurement, remuneration, and so on.

 

Starting off with The Investment Association in the UK, this body has released a document titled, “The Principles of Remuneration,” which includes guidance on how to develop ESG bonuses and compensation schemes.

 

We have the Shareholder Rights Directive II from the EU. These are actually say-on-pay provisions that provide shareholders with the right to vote on remuneration policies and reports. And the updated directive requires numerous additional European countries to regulate shareholders’ right to vote on executive board pay. Many more companies that have ESG pay-links must now disclose their own plans.

 

Coming to the U.S., we have the U.S. Tax Code. Amendments now enable firms to increase bonuses with their assessment of a company's commitment to ESG principles. Another very important change that has taken place in the U.S. is a push for ESG-linked compensation from the SEC. The SEC Commissioner Allison Herren Lee is urging corporate boards to make changes in line with the agency's push for more ESG disclosures and also tying executive compensation to ESG metrics.
10:18

AG: And this brings us back to the challenges companies face when it comes to implementing an ESG-linked compensation program — and how they can overcome the obstacles. Recall, the key challenges include: uncovering the ESG issues that are material to your organization; clearly articulating the MEIs so that the board understands their importance; determining appropriate goals and KPIs; and measuring progress.

 

Regulations also pose a challenge, but the good news is that the same steps an organization takes to tackle the broader challenges will also help them prepare to meet regulations. Moreover, by investing the time and effort to get it right, organizations will help ensure they are setting up their ESG pay-links in a credible and transparent way.
11:00

UH: So, companies can actually prepare by ensuring the relevance and the materiality of their key performance indicators or KPIs and the level of ambition demonstrated by the sustainable performance targets or the SPTs to ensure transparency. This is important when we look at any ESG metrics, so we need to make sure the KPIs and the SPTs are in place.

 

It is, of course, important to understand also what your peers are doing as well as the investor perspective. But more than that it is crucial to understand your own ESG agenda and how you want to measure the success.

 

To have a credible and effective ESG compensation program, that would involve multiple elements including a clear articulation of material ESG issues, solid board engagement and buy-in from senior leadership, selection of appropriate metrics supported by operational data, and the means for measuring that success.

 

Selecting the right ESG metrics is not an easy task, so for most board members, they find it challenging to narrow down the discussion on suitable ESG metrics out of the hundreds of options presented. The consensus is not to consider this as a “check the box” kind of exercise, but to identify metrics that are linked to more of the company's purpose and the ones that truly drive long-term sustainable value creation for the firm.
12:19

AG: While it might not be an easy task, companies that do not take meaningful steps toward “sustainable value creation” will likely have trouble growing their business over the long term. That’s essentially why practices that align executive action to strategic priorities — like ESG-based compensation — are so important: it’s one thing to set goals, but taking the necessary steps to achieve those goals is where change and growth happens.

 

Looking to the future, we can expect to see more companies around the world adopt ESG pay-links as good corporate governance practices advance, stakeholders take a more active role in calling for accountability, and regulators step in to guide the process and prevent greenwashing.

 

That’s it for this episode of the Sustainalytics Podcast! If you want more details on ESG-linked executive compensation, please visit Sustainalytics Resource Center and download our recent ebook, “Real ESG Accountability: Tying Executive Compensation to ESG Performance” or see the link in the show notes. Have a question or a suggestion on what we should talk about next? You can email us at podcast@sustainalytics.com.com.

 

Thanks again to our guests, Upasna Handa and Henry Hofman, and thank you for listening. Until next time!

 

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What’s Happening in Sustainable Finance: Whether War Could Spur Adoption of Renewables, Thoughts on Just Adaptation, and More.

Wednesday Jun 22, 2022

Wednesday Jun 22, 2022

Episode Summary

Hosts

  • Nicholas Gandolfo, Director, Corporate Solutions
  • Marika Stocker, Senior Manager, Corporate Solutions 

In this episode, Nick and Marika highlight recent developments in the sustainable finance market. They note that the market is coming off a banner year — over US$1 trillion in volumes overall in 2021 —and shed light on the deals and transactions contributing to market growth. They also answer audience questions, sharing Sustainalytics’ take on where nuclear energy and mining could fit in sustainable finance. Be sure to submit your questions to podcast@sustainalytics.com.

Could Geopolitical Conflict Spur Adoption of Renewables?

Discussion around the adoption of renewable energy is growing given the impact of Russia’s war in Ukraine and other global conflicts on oil and gas exports and imports. These geopolitical conflicts have exposed the risks of overreliance on producers and certain types of energy. One possible reaction to the disrupted and restricted energy supply from Russia is an acceleration of renewables deployment across Europe. This would hopefully spur broader adoption within the region and beyond. 

Just Adaptation: Helping Nations Build Resilience to Climate Change

As governments consider what it takes to transition to a low-carbon economy, the concept of just adaptation is also being discussed. Stakeholders are looking beyond a just transition and examining the inequity between developed and developing countries in their abilities to adapt to climate change. Developing nations are more likely to be affected and have fewer resources to adequately prepare their populations and natural environments despite contributing less to the drivers of climate change compared to developed nations. Nick notes that there is potential to use sustainable finance to balance this inequity. Hopefully, we will see an evolution in sustainable finance issuances from sovereigns and corporates, with use of proceeds and KPIs that tap into some of these issues.

Real ESG Accountability: Tying Your Company’s ESG Performance to Leadership Compensation

Stakeholders are increasing pressure on companies to tie executive compensation to ESG performance for enhanced accountability and transparency. Download our latest ebook to discover how ESG incentive plans can align executive action with strategic priorities.

Download the eBook

 

 

Key Moments

0:00:52 Market overview
0:01:22 CBI report 2021 review
0:02:21 EF Article — GB market growth 100-fold in 10 years
0:02:50 IPCC reports
0:03:35 IFC — Guide to issuing green bonds
0:03:40 Ukraine conflict and social bonds
0:04:41 Fintech and climate tech
0:05:11 Just transition and just adaptation
0:06:13 Social taxonomy
0:06:41 EU Green Bond Standards
0:07:02 Financed emissions
0:07:36 ESG and derivatives
0:07:59 From CBI — webinar on China and new criteria for chemicals sector 
0:08:36 SLB overview
0:14:14 SLL overview
0:18:10 Audience questions
0:26:09 Green bonds overview
0:30:47 Green loans overview
0:32:02 Social bonds and loans overview
0:33:42 Labeled products overview
0:34:27 Transition bonds overview
0:35:37 Regulatory and country updates

 

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Addressing Material ESG Issues: Practical Insights from our Expert Webinar Panel

Monday Jun 06, 2022

Monday Jun 06, 2022

Episode Summary

On this episode:

  • Melissa Chase, Content Marketing Manager, Corporate Solutions
  • Toshi Batbuyan, ESG Research Senior Analyst, Oil and Gas Sector Research
  • Frances Fairhead, ESG Research Senior Analyst, Mining Sector Research
  • Shilpi Singh, Corporate Solutions Director

With rising demand from investors and other key stakeholders to address the environmental, social and governance issues they face, companies are considering how they can effectively manage their most material ESG issues. In this episode, featuring insights from our recent webinar on the topic, we examine some of the key ESG issues facing companies in industries with the highest average ESG risk and explore how companies can manage those issues effectively.

Companies with lower ESG risk can also learn important lessons in ESG risk management from those in high ESG risk industries. Many of these issues are common across industries, giving companies an opportunity to learn more about managing ESG risk exposure from their peers. 

For more, watch the on-demand webinar or download the ebook that inspired the session, Understanding Materiality: Lessons from Industries With High ESG Risk.

Key Moments

0:01:38

Episode overview

0:03:04

Explanation of how the ESG Risk Ratings are assessed

0:05:18

Overview of the industrial conglomerates industry

0:06:20

Overview of the steel industry

0:07:10

Overview of the diversified metals and precious metals industries

0:08:55

Overview of the oil and gas producers industry

0:10:53

Insights on how to manage material ESG issues

0:11:27

Environmental issues

0:12:45

Business ethics

0:13:47

Community relations

0:15:01

Occupational health and safety

0:15:33

Industry and international standards and guidance

0:17:00

The importance of ESG target setting, reporting and transparency

0:20:03

Importance of having a corporate ESG strategy

0:20:49

Takeaways from the webinar

 

To read the full transcript, please visit our website.

 

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What’s Happening in Sustainable Finance: Rhino Bonds Support Conservation, Spotlight on Social Bonds, and More

Thursday May 19, 2022

Thursday May 19, 2022

Episode Summary

Hosts

  • Nicholas Gandolfo, Director, Corporate Solutions
  • Aditi Bhatia, Regional Sales Manager, Corporate Solutions

In our latest episode, we have a round-up of recent developments in the global sustainable finance market. From innovative instruments for financing conservation efforts to growing ESG activity in the private equity space, to a new taxonomy for social bonds, our hosts Nick and Aditi have you covered. Check out the highlights below or listen to the full episode wherever you stream your podcasts.

Social Bonds in the Spotlight

There have been some key market developments in recent months. The Platform on Sustainable Finance published its report on the EU’s Social Taxonomy providing clarification on the types of investments that would be considered socially sustainable and proposing a structure for a social taxonomy. Overall activity in social bonds issuance appears to be declining compared to recent years. This is partly due to market stabilization following a surge of issuance during the height of the pandemic and social use of proceeds frequently being included in sustainability bonds frameworks which cover both green and social projects. However, there is growing diversity in the types of social factors being addressed as more issuances come to market related to matters around gender, race, and LGBTQ issues. 

Rhino Bonds: Market Innovation Support Conservation Efforts

This new form of social impact bond was recently issued by the World Bank. The USD 150 million “rhino bond” or Wildlife Conservation Bond will help to fund conservation efforts for the black rhino population in South Africa. The Rhino Bond channels investments to achieve specific conservation outcomes with proceeds being used to help staff in national parks battle poachers and improve conditions for the animals. This bond offers a new model to finance conservation efforts by directly linking the outcome of rhino conservation to investor payouts, and investment success. You can read more about the bond issuance here.

Recommended Reading

Nick once again provides a list of his recommendations for reports on ESG, sustainable finance, climate change, and transition issues.

Gain Insight on the Material ESG Issues Companies Face and Approaches for Effective Management

Are you aware of the material ESG issues facing your company? Do you know how to effectively address them? Watch our recent webinar, Addressing Key Corporate ESG Issues: Lessons From Industries With High ESG Risk. Our panel of ESG sector analysts provide insight on the material ESG issues facing five high risk sectors. Learn how companies with high exposure to ESG risk manage their most material issues and how you can too.

Watch the Webinar 

 

Key Moments

0:00:46

Market overview

0:01:11

Ongoing market growth

0:01:14

Sustainable bonds in emerging markets

0:01:24

ESG performance and bond premiums

0:01:49

Social bond market under threat?

0:02:46

ESG activity in private equity

0:03:07

Implications for Ukraine conflict on green transition

0:03:49

Prevalence of sovereigns in ESG transactions

0:04:05

Sustainable securitization

0:04:44

Just transition

0:05:23

Gender-themed social bonds

0:05:56

Continuing conversation around greenwashing

0:06:31

Big pharma going green

0:07:06

Rhino bond

0:08:32

SBTi – public consultation on cement

0:08:48

Social Taxonomy Report

0:10:00

ACT Transition Methodologies

0:10:07

CBI bond pricing report

0:10:13

CBI report on taxonomies

0:10:29

TNFD beta report

0:10:57

GRI sector standard for coal

0:11:15

IPCC assessment report

0:11:33

Environmental Finance SLL/ SLB metrics report

0:12:00

SLB overview

0:15:52

SLL overview

0:18:02

Audience questions

0:22:05

Green bonds overview

0:28:16

Green loans overview

0:29:33

Social bonds overview

0:31:45

Labeled products, transition, and regulatory overview

 

Links to Select Resources

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