Apollo Global Management, Inc. (APO) Earnings Call Transcript & Summary

Greetings, and thank you for joining us today for this exciting webinar. My name is Mike Ferguson, and I lead the Sustainable finance team in the Americas for S&P Global Ratings. And today, I'm joined with a couple of esteemed guests for this webinar. Among them are Michael Kashani of Apollo, Jie Liang of S&P Global, who's a sector lead in our structured finance team; and Tom McDermott of Cambridge Wilkinson. Welcome, everybody. And we have a bunch of questions we're going to get to today, and we obviously want to leave a lot of time for your questions as well. But before we do all that, it's important to state the stakes of what we're dealing with today. We see a lot of capital flowing into the private credit space. It's certainly been very exciting. We expect this trend to continue going forward. And we know as people who cover this at S&P as a provider of information for these markets that the needs are sometimes different and that we want to be able to respond to that. And we're also seeing a lot of creative solutions that are coming out of the private space. And today is the time for us to talk a little bit about that. And as all that is happening, the risk of climate transition has never been greater than it is right now. And that's true on the transition side. It's also true on the physical side, and we're attempting to make sure that we can focus on the issues that are most salient for private market participants. And one key example we've been seeing a lot about recently is in the data center space and how that's been impacted and what that means for the transition going forward. It's very topical in the U.S. and elsewhere, and we'll have some questions about that today. And we're not going to have a formal slide deck here. We're mostly just going to address questions. And as you have them, just keep them coming in here.

But before we get into some of the audience questions, the first thing I wanted to ask everyone on the panel today, maybe starting with Mr. Kashani here, is how has the world changed for you in the last 6 or so months? I know there's been quite a bit of upheaval, political, climate, financial markets, of course. How is the world different today? And what does it mean going forward?

Thanks, Mike, and I appreciate S&P Global Ratings hosting this webinar. So I might say something a bit surprising in that in many ways, nothing's changed. And that's because here at Apollo, we're driven by our core two tenets, which is we integrate sustainability into our investment decision-making process to drive value creation that can be on the risk mitigation side or identifying opportunities and to meet a broad set of stakeholder needs. And when those are your two key areas, it doesn't matter who's in office. It doesn't matter what a new directive is being brought at you. And it actually doesn't even matter what market you're looking at, whether you're thinking about climate transition, whether you're looking at social risks or whether you're looking at the governance side, they keep you on your -- set on what areas are most relevant. Now there is a lot of noise out there today. I'd say the biggest area of change right now is being able to not back away, be vocal, clear and concise on where sustainability is integrated into the process, how it impacts valuation and how we communicate that in a transparent way.

Thank you. Thank you for that. Tom, do you want to go next?

Sure. And again, Mike, thanks for setting up and for S&P Global for having this session, and thanks for inviting me. So in the last 6 months, sure, I mean, I'm definitely going to say there's some uncertainty out there. I'm seeing a little bit of a tougher environment just because in some cases, there's that lack of certainty may delay some types of decisions. But to Michael Kashani's point, the big picture here is we're in a very long-term investment period in sustainable projects. And sure, there's going to be hiccups along the way, and we may be seeing one right now. But I think we also need to take a step back and look at this as a global issue, not just U.S.A. one. And therefore, I think the larger asset managers and groups are looking at this as a global situation. So at the end of the day, we're seeing a tremendous amount of pipeline deals that are around sustainable finance still coming in. And we also see on the other side of the coin, a very, very, very strong appetite to invest. I mean we've had conversations with very, very large asset managers and investors in the last 9 months we're all saying, how can we get better deal flow, particularly ones that have strong returns. So I think that's the way kind of I would think about it.

Okay. And, Jie, do you have anything to add to this?

Yes, it's interesting. Sitting in my seat, the Esoteric ABS team at structured finance ratings, we cover multiple asset types, including data center, utility rate reduction bonds, transportation, such as aircraft container rail, solar and among many other sectors. So this year, the tariff and the market choppiness has affected many of our sectors that we cover. We've been covering data center ABS since 2018 when the first ABS transaction came out. We were the first rating agency to cover the market. And since then, the volume has been unstoppable. Even in today's market, given the volatility, we are still seeing very strong issuance volume and there's a strong pipeline for the rest of the year.

Okay. Fantastic. With that overview in mind, we can move on to our next question here. Now again, I'm open to anyone answering this one, but Mike, Michael Kashani, I think this one might be relevant for you. What would you say is driving the demand for the integration of sustainability-related factors in private investments? What stakeholders are kind of pushing that?

Sure. Well, I think we all want to do well on our investment side. So there is a view of doing well. I don't think we should ever look at doing well from a context other than what -- how can this impact my returns, particularly when you're talking about asset classes that may not have as much liquidity. I'd say they don't have liquidity, but may not have as much liquidity in the public market. So thinking through those key factors, Mike, one of the points we've been very clear on, and we've published on this now three consecutive years, every asset class, he was mentioning asset-backed finance, corporate credit, you have all of these different asset classes, maybe a little bit more unique to the private markets, a little less vanilla, Mike, maybe a little bit more chopped and strawberry in the private markets where asset owners, buyers can be a little bit more creative with what they can own because they don't -- doesn't need to fit in the box that usually public markets need to. So one of the main points that we see is the same risk/return considerations. What are those areas that can impact my long-term view? I'll get into some boring credit areas. if only 50% of my deal is amortizing, what's going to happen in 6, 7 years? Is that business going to be still viable? Am I investing in a technology that's no longer leading edge? So those areas are just, I would say, fundamental investment questions. On the client demand side, the big area of change in innovation is a broader openness, maybe we'll stick with climate and transition to not everything needs to be clean energy. there is the decarbonization of industry. We call it the gray to green. It's going to be messy. It's not neat. It's complex, and we see a broader acceptance of that being a critical part of the energy transition is decarbonizing every industry, what are interim solutions. And I think that, that's been an area where much of the market has evolved into rather than thinking that it's a yes, no, there's a spectrum of where the transition will lie.

Okay. That's interesting. Not a lot of binary solutions here, and that's kind of what transition means. Tom, Jie, do you have anything you'd like to add to that?

Sure. I'll jump in here. I do think in terms of driving demand, there is enormous amount of capital that's acing to be put to work in this sector and writing large checks. And we all know that many of these transition and renewable projects require large checks. So I think that's one thing we're seeing in -- it's an opportunity within sustainable finance. The other thing I'd mention is these projects, to Mike Kashani's point, these projects are producing strong returns in terms of historically and/or from a projection standpoint and having a long-term duration for some of these investors is of great importance. So I think that's another factor that's driving things. And generally speaking, this digital infrastructure wave, I think we're in the very, very early innings of development, and therefore, we're going to see a lot more interest on behalf of investors.

Okay. So digital infrastructure, you brought it up, Tom. And with that, I'm going to kick this over to Jie. Knowing that I think digital infrastructure is something we hear a lot about. I know I'm probably guilty of using ChatGPT and running up the emissions count in my household doing that. But, Jie, for the people who aren't as familiar, can you tell us a little bit about the capital cycle for data center financings before we talk about the environmental and financial impacts of that?

Sure. So when we think about digital infrastructure, I think data center is a big part of it. The life cycle of data center development typically starts with land banking and the permitting, zoning, construction and then operations, right? Historically, early stages of the development typically were funded by banks, construction loans, public private equity, senior unsecured debt issuance, et cetera. But as the properties become more stabilized and operational with cash flows from sticky tenants, many of those property financing moved into the ABS or CMBS market. But given today's data center boom, it has opened up a lot of opportunities for not just the public market, but also the private market to step in what Michael Kashani mentioned earlier, some innovative financing solutions to cover the data center exposure. And one of the McKinsey report that I read recently projects that the global annual spending on data center construction will reach $49 billion a year by 2030. This is not -- cannot be just covered by the ABS market, and then we need all financing solutions and then we are here to help.

Okay. Fantastic. So now that we've gotten a little primer on how capital is raised around data centers and digital infrastructure more generally, let's talk about the environmental impacts of this a little bit. I think that, that's something that is potentially problematic and potentially a challenge to overcome. We've done some research recently and about -- we believe that about 60% of the increased power demand in the U.S. over the next couple of years through 2030 will be attributable to the change in digital infrastructure. And we already admit about 75 million metric tons of CO2 from data centers powering already. So there's a lot to do here. Now for those folks involved in the financing of these are asset owners getting comfortable with the idea of using conventional gas? I know at first, there was a lot of VPPAs, there was a lot of desire for renewable energy. But has that attitude shifted at all? Michael, Tom, any thoughts on that?

I'll make one comment and maybe just taking a step back, I think we're seeing -- Mike, we touched on it, this growing intersection between the digital revolution and the energy transition. And that means we have to answer some pretty challenging questions. So first of all, what energy sources are going to help power that revolution. It's going to be a mix. If you look at the data, there is no one solution here. renewables do not have the capacity and/or the reliability to be the only energy source. You're seeing this, I would call, embrace of nuclear in the past few years that wasn't there before as we all realize another low-carbon source of energy that can be part of the solution. Mike, you're touching on LNG being also part of there. It's going to be everything. We use this term energy accretion, and that means all types of energy is needed. But then we get to, well, if that's the case, is there enough energy? And so I always like to bring the side of not just focusing on the environmental side, you're seeing governments, localities grapple with who gets power and at what price. That's a core area of our view before we even look at the efficiency, water usage, what's the transparency on the information. And I think, Mike, that goes back to something I think S&P does really well and many of our peers, which is before we look at is this data center, what energy usage, what's the project plan? Who is funding it? What's the capital cost? What's the container of this facility and who has a long-term purchasing plan? It's those fundamental questions that get to, is this new technology? Is this technology just to meet an immediate demand? Or is this something that's going to be marketable? I would say, Mike, we are getting questions from our LPs on data centers because it's -- Tom, to your point, it's a fantastic investment opportunity if done right, done wrong, you could be left with something that's, I would call it, aging infrastructure in just a few years by looking at yesterday's technology.

Yes. Tom, do you want to jump in on this one?

Well, just to add to Michael's point, it is complex, and there are challenges. And when you look at some of these large projects, there's lots of different phases around the data center itself, the energy and the connectivity between those two elements, the data and the power, and they take different time horizons. And so the complexity around that is not easy to solve for, particularly when you -- if you're in a data guy and you're counting on the energy coming in at a certain point and then looking at that holistically. So I think there are some real challenges here. But frankly, I'm excited about seeing some of these solutions being put up to manage against these challenges.

Yes. Certainly, I think that it's appealing looking at nuclear as a solution. I'd say that there are limits to how that can be scaled at least for the moment. But to your point, Michael, it's really an all of the above solution. And I particularly like the point around the kind of rival use of power between communities and these data facilities. It is something that we've seen with water in the past as well around power plants and the use of water versus the use of water in communities. So we'll see how that plays out here. And going forward, of course, we'll also have to be clear about how much of the data center boom is hype and how much of it actually comes to fruition. Obviously, there are very grand estimates for what this could look like in years to come here. So with all that being said, we're at an interesting time right now. And I think those of you who follow the space understand that the kind of sustainable debt market in the U.S. has gotten very quiet over the last couple of months here. The one exception is actually probably data centers in the corporate space. But nevertheless, it kind of harkens this point about how it is that data -- sustainability data is used in the private market space. How -- as decision-makers in the private space, how do you all kind of take sustainability and transition data specifically into account when you're looking at financings? Again, anyone is free to answer this one.

Yes. So, Mike, you know, because S&P has been a supporter of initiative, a few of us have started called the Integrated Disclosure Project, really try to bring some level of standardization for sustainability disclosure. And I say disclosure, not data in the private markets because a qualitative question in many cases, is as important, if not more insightful than a strict quantitative response. And especially when we're dealing with projects that may be an SPV of a larger entity. So I'll just say in short, not very straightforward. We might be dealing with entities that don't have sustainability teams or may lack the sophistication that we have, let's say, with larger corporates. We're in education phase. So the very least, I think what many of us agreed upon is we don't need to fight over questionnaires. We don't need three dozen of them that nobody fills out. Let's see if we can be consistent. And what we've been really encouraged is we've started to have great feedback on the consistency. And even if a corporate or a sponsor can't fill out, I'd say, the key elements, we're not looking for data just to fill out a question. We're looking at to do three things very simply. Help us with diligence, help us with managing certain products; and then three, the transparency and reporting back to our stakeholders, whether that's an LP or a regulator, we manage portfolios globally. And we do, in many cases, have to show that attempt to obtain material data, having a consistent way of doing that, evolving that to different asset classes, Mike, as you know, we want to move to real estate very soon outside of corporates and then into infrastructure. It helps so that we're not debating over five different ways to measure the same emissions method.

That makes sense. Tom, Jie, would you like to jump in on this?

Sure. I'll try and then, Jie, jump in after me. Look, we deal mainly with very, very large institutional investors, mainly credit. And there's a very wide, broad range of types of investors. Increasingly, we're seeing interest in the sustainable side for the reasons we've already spoken about. But there's really no consistency that I've seen so far on how companies are judging and scoring, if you will, sustainable finance projects. Now some of the groups out there will look at it and say, well, anything I can get as long as I'm getting my returns, if I'm getting a good "sustainable story here", that will add another checkmark, which will give a heads up and maybe a better view in front of the investment committee. But really, when you talk to more sophisticated investors in this space like at Apollo, they will want to have some of their own, if you will, they're scoring the way they rate things. And I think as an investment banker, I'm looking forward to a point where there's a lot more consistency about how investors will underwrite a sustainable project just to make it easier for the sponsor, the borrower, if you will, as well as for the broader investor community.

Yes. And, Jie, maybe to rephrase it a little bit for you. When we're looking at the credit analysis of the securitization of product that we're working on here, how would you take some of these transition risks into account?

Yes. So from the credit rating standpoint, we're more focused on physical risk than our transition risk. So we -- in general, we've tried to quantify the asset quality by the location, age of the facility, lease rate occupancy, market trends, et cetera. Sustainability is part of the consideration, but it's not typically the primary exercise. And then we do look at metrics such as PUE, water usage, energy mix in order to assess the obsolescence risk, which is one of the most asked questions, how we look at facilities, data centers obsolescence in the very long-term time financing horizon in ABS that is 25 to 30 years.

And maybe just to follow up on that point. Do you find that in recent years, some of the sponsors have gotten more savvy about how it is they articulate the risks when they're coming -- these risks when they're coming in for a rating?

Data availability is definitely a challenge for us, and I think for the rest of the market. Transparency is not always there, but it is getting a little better. I think as investors and rating agencies look further into the facilities and educate the market what we need to -- what metrics we need to assess the quality of the facilities and to assess the obsolescence risk. In the past, PUE is not reported. Now it's getting better. And we introduced, for example, PUE as one of the -- what we call utility scoring system in our rating analysis. But many other metrics are still pretty sporadic in the market, and we're hoping that it's becoming a little better. And just want to block our sister company Market Intelligence for fulfillment research. It does have a database of more than 9,000 property level data center information for us, and then we use that to kind of gauge the size of the market and some of the metrics that we need.

And you actually provided a good segue to the next question I wanted to ask of Tom and Michael here. Jie kind of alluded to the limits, the challenges associated with fully integrating sustainability risks. What do you all think is preventing further sustainability integration and investment by private market participants? Any thoughts on that, Tom or Mike?

Well, I'll just go back to maybe a little more optimistic to what Jie and Tom pointed out, which is why are we sometimes now or more often getting some of the data. It's still not perfect, [indiscernible] right. It still can be a challenge. It's still an education factor. Well, if you can credibly, I think Tom put it, assign and many other asset managers, obviously, S&P and other entities do second-party opinions and assessments. But if there's a credible way to identify a project, whether you use the term green climate transition sustainable, what you're doing fundamentally is opening additional pools of capital, whether that be a climate fund, a transition fund, maybe a vehicle that has some target to a certain percent, that's just more pools of capital. So you've broadened your potential investor base, which brings more buyers. We can debate whether that has pricing improvement, but it definitely broadens the area of demand. And so if you just always bring these areas back, well, that data helps us make that determination. In the absence of data, we may not be able to get there. And that's part of the communication that we've had. It's very much here is the benefit to you, the borrower or the sponsor because if you go back where maybe sustainability sometimes hasn't been as successful, it's a lot of asks with not a lot of reasons why there's a benefit for the entities we're engaging with. I think that's an area that has evolved where that benefit is becoming clearer. And the private markets is, I would say, newer to that game, but it's starting to be a little bit more open with where the benefits lie for that borrower or sponsor. If they can, I would say, engage with us, again, not just hard data, but also that story where they're going over the next few years.

Okay. Tom, are you as optimistic as Michael is here or what?

Well, I think we're still in that education phase, but Michael makes a very good point around the fact that if you can make a strong story about sustainability, you're opening up more pools of capital, and we all know the math. We've got more options. You're going to have -- that should be beneficial to you in the form of your cost of capital and there are other conditions that come with the capital. And therefore, we're in an education phase. Some of our investors are still learning, and they would like to be, I'm going to say, smarter around what to ask and what to -- how to evaluate, but we're still in this phase. Now I think the other thing I would add, there are specific investors and Michael being a very good example here, who spend most of their time in this space and can quickly ascertain whether this is whether this is something worth pursuing. But I think taking the broader question that you had, Mike, what is sustainable propositions, how does it do for a sponsor? It does open up more pools of capital. They just need to be smart about how they make that presentation and make it a compelling argument for all types of investors.

Mike, and I'll go back and I'll be present. So challenges. I think like any area of analysis, we have to be able to say, we may have looked at things one way, and we're going to evolve and update. And that's okay. That's actually healthy analysis. It's a healthy way to look at research. And that's one area where I believe sustainability is starting to evolve. We can have different views. We can evolve our targets. We can look at areas that we might have thought as not necessarily transition might be brought that early up. It's going to be an all of the above scenario, not a binary one. That's part of what may have been a challenge or maybe in some circles still is a challenge. It's tough -- it's difficult to leave a view that you've had or maybe held for a period of years. I think that's also an area of education for the sustainability side of the industry to know that they can evolve their views. They can update. They can adjust based on the new realities of policy. the technology, the actual -- what's possible and in what time frame. And you're seeing that, Mike, in all areas, including sustainable aviation fuel, which we've been involved in. But I would say some of the initial targets that some of the airlines put in place or some of the producers or prospective producers put in place, this has shown itself not to be realistic given where technology and policy. But the investor demand, that's only increased for being able to invest in those types of projects.

I would like to add that there's certainly asymmetry of information between the operator versus the investor base. at this stage, we are seeing increasing renewable energy, renewable power in the mix of data center operation. But the operator, they have to balance the reliability that is 100% uptime for the facility, affordability, total cost of operation, low cost of power and then sustainability. A lot of times, still more educational phase where investors will have to learn to ask the right questions. It doesn't mean that the answer is not available. But if they're not asked, sometimes the information is not transparent.

Okay. That -- those are very valuable insights here. So I'm going to go to a couple of audience questions right now. And certainly, the audience keep them coming in here. We've got some good ones. One is actually -- it's on that very point, A, you talked about data centers needing to run 24/7. And I assume they're running 24/7, so we can figure out how this AI can be used to make climate risks more apparent to people like us. But maybe that's the question I have for the group here. With the advent of AI and the proliferation of that, do you at all find that there are solutions to the climate conundrum, whether that's physical risks or transition risks or opportunities that are coming to the front that were absent or are there ways to kind of arbitrage some of these risks that weren't apparent a couple of years ago?

Maybe I will chime in from the data center demand standpoint. We have seen the demand for data center booming for a while, but more recently triggered by the strong AI-related demand. We're seeing -- I visit many data centers in my career, and it's -- the density has become stronger and more power is needed to support the data center. So on the one hand, is the U.S. wants the dominance in AI and therefore, the dominance in energy has to support that. And some of it has benefited our everyday life. But at the same time, we also look at utility providers, how the increasing energy power demand is going to affect the energy cost across the board, not only to the data center operators, but also to the consumers.

Yes. I will say to your point about the utilities, we've actually had a lot of good engagement with utilities in the last probably year or two, where they've talked about AI as being very helpful, more on the physical risk side than on the transition risk side in terms of kind of diagnosing where they see risks cropping up. Wildfires is a good example of that. Storm readiness is a good example of that. And certainly, there's no shortage of innovative solutions with AI here. It's not just college seniors trying to write their paper more quickly. I think that there are practical applications that we're starting to see more and more of. So that's -- there are, I think, real solutions to the climate conundrum here that will be driven by AI. But a kind of similar technology-related question that's also come in is around the IRA. So of course, there's the bill going through Congress right now, and we don't know what the end result of that is, but it does seem likely that at least certain provisions of the IRA vis-a-vis energy will be strict in from that. We will not be part of it going forward. The question we had on this was whether we still believe that there's going to be an adequate pipeline of renewables, next-generation technologies, carbon capture, hydrogen and so forth going forward, specifically in the private markets. Michael, Tom, what do you think about that?

Yes, I'll take it. I think the demand for the energy needs, we're all agreed is will continue to increase. And I think we also all agree that the solution to meet that energy demand is going to be a combination of solutions, be it the traditional oil and gas to some of these renewables. And I think partly the AI question before, we're going to continue. I think this is going to be an evolution of finding solutions for that energy need. And so I think it's going to be increasing. I think you brought up the idea of advanced nuclear. I think that's an exciting development. And there'll be others that we probably may not even be thinking about today that 3, 4 years down the road will provide us with some solutions to more efficiently solve the energy issues. But getting back to the legislation, there's some question, sure. I think people may be switching bets as a result of that and trying to find more efficient ways to deploy the capital with less uncertainty. But I think we're going to continue to see investment. But it is -- this is one of these hiccups that I said before. We're in the middle of that. And I think people are waiting to see where the chips fall so they can deploy their capital intelligently in a longer duration.

Yes. there's going to be headwinds. There are going to be some projects that are just not as economical as they were, not as attractive. But you are seeing areas that are now more attractive. You're seeing a lot of discussion around critical minerals, areas for battery development. You're looking at how can we remove the red tape in order to harden the grid and fortify the grid, so we can electrify as quickly as we will need to, to meet, for example, just these growing electric demands for AI. So there are some areas that maybe surprisingly to some are actually now more attractive where some of the other areas might have, I would say, less incentive, built-in incentive as they would have depending on where the IRA goes. Those can be a little bit more of a challenge now that some of those incentives may go away.

And you touched on an important point around the critical minerals, and that's certainly something that while it's obviously been part of the policy dialogue, it's also come up with regards to sustainable debt financing of late. In the last year or so, there's been the green enabling technologies guidance that's been issued by ICMA. And I think in general, the public sustainable debt markets have been very good at innovating. 10 years ago, we were looking at green bonds, now it's green and social and transition and sustainability linked and green enabling, and I can go on and on. For those of you who are involved in the private markets, though, do you see kind of in parallel, similar innovations in financing structures. We've talked a bit about the technology. Are you also seeing innovative new structures to help satisfy investor and potentially issuer demand for products like this?

I think one of the most fascinating areas is what people would not think of the private markets, people tend to think about the private markets as the riskier sector of the market. But in truth, publics can be both safe and risky and privates can be both safe and risky. I don't think of that myself. Our CEO says that, Marc Rowan says that often. And so what does that mean? We're seeing investment-grade companies decide for various reasons to not go away from the public markets, but to diversify from going solely to the public markets to adding private markets as another financing tool for themselves. And sometimes that could be a pure credit deal that could be hybrid. And we saw that with Intel at Apollo on financing a chip fabrication facility in Ireland. And in our view, one of the most energy-efficient, water-efficient facilities that we could find in chip fabrication. You saw that with Vonovia with real estate. We saw that with Air France, as I noted before, with sustainable aviation fuel. And so what we're seeing is investment-grade corporates decide in some -- for some cases, the public markets is not the place to issue a certain type of transaction. And in that area, those entities tend to be more sophisticated. They have developed sustainability teams. And I see that -- polices that as an area of a lot of innovation, where it's not going to be simply Intel. It's not going to be simply the company issuing. It may be an SPV. It may be some type of hybrid vehicle. It may be sometimes maybe a term that we're used to a project finance style deal that may not be something we see in the public markets every day.

Yes, I can add to that and build on what you're saying, Michael. And by the way, I like the thinking there are good -- are risky and less risky investments in both the public and private. But where I think to answer the question, Mike, around where in the public -- of the private markets play a role is, look, private is private. So therefore, what I've seen is the private investors saying, I can be more flexible. I can be more creative. I can create structures that are customized to that business plan, and they don't have to have a cookie-cutter approach. So as a result, and this is not true for every deal, but as a result, I'm seeing increasing number of private credit groups who really work if they like the deal, how can they structure it to meet their needs and the needs of the sponsor or the operator. And I think that's the big differentiator versus the public markets. The second thing maybe in terms of differentiator is the speed is that the private markets can move at times, not always, but at times more quickly than a public financing solution.

Adding to that, the assets in public market, private market, they can be similar, the assets in ABS, project finance, corporate finance, they can be similar, really is the financing mechanism that's driving how we look at the credit and look at the risk exposure. But in the -- on the public side, you tend to see a bit more standardization, right? What the other panelists mentioned is in the private transaction, sometimes there are more hybrid solutions between the securitization technology combined with corporate guarantee, some insurance exposure and the different components that can make it a bit more challenging for credit analysts on the rating agency to assess trying to follow certain set of criteria. But I also want to caution that there's not only the risky public and private assets, risky or conservative assets that there's also more sophisticated and less sophisticated private investors. And in the latter case, sometimes in I would caution that in the private deals, investors will have to pay attention to some of the terms may be more prevalent on the public side for a good reason. Sometimes those term provisions are not present, potentially can make the deals more risky.

Okay. That's interesting. And maybe just to underscore the difference between public and private markets here. I know we've got it some risk -- you could be risky or not risky in both. But maybe another question I would have is, for instance, in terms of structures, we've seen sustainability linked in public markets among bonds, all that go away in the U.S. and Canada over the last year or two years. Do you think that there's some persistence of SLLs in private markets in part because of the ability to make these a little bit more customized and tailored to the creditors?

So if we maybe move from environmental, we've seen waning demand on the sponsor side or borrower side to even implement these provisions. I would say less from a benefit or a penalty on a ratchet or redemption rate maybe at the maturity of the loan or bonds. But more so, is this an issue that the company tracks today that we believe is material. Mike, there was one area issuance in Europe where we looked at turnover on the base of employment turnover and the tracking of product, which is their way that they make their money and its return usage. And from us, a very significant social issue, the product quality, how are they able to engage their employees. So I'd say, Mike, where we've actually seen them sometimes in a little bit more success in the private markets, has been the social side. So really, how do you keep your employee base engaged? How do you reduce turnover? How do you think about your product quality and how you reduce the risk that your product just doesn't meet the standards of the market, let alone with the regulations. And so we've been successful in a couple of cases of implementing that less about the ratchet benefit, more about now that we have a material disclosure we didn't have before. It's written into the bond document, so it's required. And now we can use that in our annual or at least annual engagement, Mike, with that issue where they have to provide that. And now we have an engagement point at least annually on their success. So whether it's an environmental data -- material environmental data point or social, I do think what you've seen is maybe a realization that I just can't throw the cookie-cutter data points that just look good on paper and are not material, that's probably fallen flat. What you might see more is a company wanting to prove itself because it's emerging. And so in that case, it's going to make some pledges or promises from a data disclosure standpoint that can be helpful.

Okay. Very interesting. Tom or Jie, do you have anything to add to that?

Jie, I don't have much to add. I think Michael nailed it.

Okay. Interesting insight there. And now we'll pivot to one of the questions we got here, and Jie, I think this one is probably for you. And it's a provocative one. I apologize in advance. The question is, can data centers really be sustainable with high water use, most data center PUEs are around the same range. What's the real kind of differentiator between a sustainable data center and one that isn't quite as much?

Well, this is a very loaded question. So I would say that at this stage of the game, 100% renewable power probably is not practical from the operation standpoint. Solar and wind, we mentioned before, can only provide intermittent power subject to duration constraint, and we need some major breakthrough in the long duration battery storage solution in order to keep the data center coming 100% of the time, right? We cannot afford our kids watching streaming in cartoon to be offline when school is over every day. So at this stage, there are definite sustainable metrics and measures that operators can add, for example, using our closed-loop water solution in cooling instead of evaporative water cooling system to drastically reduce the water usage. And I think someone mentioned that is the PUE more or less the same across all the data centers? No, that's not the case. I think it's largely sitting on the design because of the technology development like in the past, the legacy data centers were seeing 2-plus PUEs for colocation and operation. Now the wholesale hyperscale center is 1.3, which is a significant improvement from the past. And there's still room for improvement. We have seen hyperscale in certain locations, the most efficient ones running at 1.1, right? Maybe there's a limit, is the bottom, you can't really get better than that, but the improvement from 2 to 1 will reduce the energy waste on other components beyond just what's being supporting the AI calculation, for example.

I'll say, Jie brings up a good point. It's really a fundamental question of what do you view as sustainable? Is it only a certain type of technology, renewable energy, only that can be because it's not debate alone. And by the way, I'm sure someone can debate that as well. Or are you looking at activity and saying, is this activity, this infrastructure, J was mentioning pushing the limits on PUE, water usage, recycling heat and energy. What's the best that this industry can do? And is this in the top decile quartile of the peer set. And so we're touching back, Mike, on what we discussed earlier that the transition is broad. And if we have a very limited view of sustainability can only be this one small area, we're going to miss a very attractive opportunity to help capitalize companies that for various reasons, are trying to decarbonize or trying to become more efficient. Almost every reason they're doing that is to be more profitable, be more sustainable, resilient and grow. And so from a data center standpoint, fuel, energy, real estate, there's always arguments of saying, can this industry ever be sustainable? I think what we've seen is a broad agreement that if you can compare yourself to that industry subset and say, here are my credentials and I'm reporting that with clarity that the broader market has agreed that, that can be sustainable.

Okay. So interesting kind of comparative analysis. Tom, do you have something to add?

Well, I think Jie and Michael made some really good points. I'm not a technical expert. What I can say is I think what we need is, and hopefully, we'll see from all different corners of both the investor and the sponsor is more transparency on what that end product looks like and so we can compare and contrast. And I think that if we can, if you will, democratize the transparency of how these different operations, we're still early innings. So you can't start pointing fingers at everybody for making a mistake. I think people are trying to do the best they can. But I do think if we can find a way to have that transparency around these different operations will help all the industry improve itself.

Yes. And, Michael, I think you raised a really good point here. You did earlier around the idea that you need to understand the transition story. I think a lot of stakeholders, ourselves included, have been struggling to figure out when it is we're going to have transition principles, transition bond principles or loan principles. But realistically, transition only makes sense in the appropriate context. And I think to the extent you can do comparative analysis and understand best practices, that does tell you a story. Sometimes it would be nice to have a checkbox exercise. But realistically, it's a bit more complicated than that. And that's why it's good to have people who are focused on that topic to hone in on that and drive it forward. And another question we got here was around the kind of leader -- the global leadership in sustainability. And of course, EU, U.K., Canada are all looking like leaders. I think it's fair to say that the U.S. is not necessarily at the moment. That being said, I think what it comes to here is that a lot of local context is important, too. I think that we'll start seeing in the absence of federal regulation, probably a bit more state-level regulation and ambition in places like California and New York and elsewhere. And so I think that, that's something to keep an eye on about the kind of changes to the grid and other sectors as we go forward. So with that, I don't think we have any other questions lined up. One of the things I did want to ask that the audience -- I'm sorry, the panelists here, though, is we talked a lot about things that have happened so far. My question, I guess, for all of you would be, if we're having this discussion, let's say, a year from now, what's the one big change that you'd like to see to kind of improve the level of the quality and persistence of sustainable finance in private markets? Any thoughts on that?

Well, I'll go back to my prior comment about having a transparency and some more consistency on how we measure ourselves. And I think that's -- it's a little bit of an evolution. But I think a year from now, I'd love to think that we're going to be a little bit further ahead. The other thing I'll mention, and this is maybe not a 1-year, but maybe a 5-year, is there's a tremendous amount of innovation going around renewables, and we're seeing some move ahead, some more slowly, more -- some less so, advanced nuclear, green hydrogen, long-duration energy storage. We're seeing some activity around enhanced geothermal. I'd like to think that we'll see a couple of winners there that will -- may overtake some of the big guys. I don't think so, but at least add to the mix.

Okay. So maybe see some insurgence there, few companies on the rise. Okay. Jie, Michael, what do you think?

I'll just say one thing, and it's tied to the IDP. I think any asset owner, LP wants their sustainability team to focus on sustainability diligence, finding good deals. doing all the eight different types of reporting regimes and spending all of our time on different reporting is to the benefit of no one. And I think the greater we can see different jurisdictions harmonize on reporting and regulations, the more sustainability people, again, always partnering with the investment team, key issue. You never have the sustainability people off to the side. So always appreciate about S&P and some of our peers is those teams are fully integrated. Having those sustainability teams focus on what matters rather than trying to fill 10 different questionnaires out, I think we'll be better off in the market.

Okay. I think that all makes sense. Jie, what do you think?

I think if we have more concern on the regulator side, the direction that we're going and the policy that would allow the more innovative carbon-free power solution to be put in place that would probably make the data center development and other digital infrastructure expansion a bit easier.

Okay. Very good. Thank you all for your comments, and thank you for your thoughts. Yes, I don't see any other questions out there right now. So with that, I suppose we'll wrap this up, but not before, just saying a big thank you to all of our panelists. This was a rich discussion, very interesting and certainly very topical, like I said at the beginning, with all of this kind of capital making an exodus into the private space, it's something that we need to understand better and something that I think no serious market participant can avoid going forward. And there are nuances, and I appreciate you all bringing those to light today. And I hope we will do this in another year, and then we'll have some good feedback between now and then that will give us something to talk about. But until then, thank you all for your time, and we'll chat soon. Take care.

Thank you.

Thank you.