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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

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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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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