S&P Global Inc. (SPGI) Earnings Call Transcript & Summary

Hello, and thank you for joining today's webinar, where we're going to take a look at the impacts of the European Union's Sustainable Finance Disclosure Regulation, or SFDR, and how S&P Global can help with SFDR implementation. My name is Steven Bullock, Global Head of ESG Product Innovation and Analytics here at S&P Global, and I will be your moderator for today's discussion. So I'm very pleased to say that we've got an incredible lineup of speakers from S&P Global on this webinar, each bringing a significant amount of expertise on SFDR and its implementation. We are joined by David Henry Doyle, who is the Head of Government Affairs and Public Policy in EMEA; we have John Diebold, a senior analyst in ESG Product Management and Development; and finally, Elise Depetiteville, a Client Development Associate. I'm going to pass over to our speakers in just a moment so that they can talk you through the material. But before I do, I just wanted to cover a few housekeeping points. So firstly, for those of you who are new to these sessions, this webinar is designed to be interactive. The console you are looking at can be completely customized. You can resize or move any of the windows that you have open. And at the bottom of the page, there are a number of widgets that you can access. If you have any questions during the webinar, you can use the Q&A widget to the left of the screen, and we will do our best to answer it. Or if it's relevant to the wider group, hold it to the end for the Q&A session, which will take place for the last 10 to 15 minutes or so at the end of our discussion. Also, we do capture all questions. So if you'd like to drop us a note, a question or a follow-up, please do so using the same widget. Secondly, just a quick note that this webinar is being recorded, and an on-demand version will be sent to you by the end of the week. If you experience any technical difficulties, please visit our webinar help guide. This is the widget with a question mark on it, and it covers common technical issues, or you can use the Q&A to speak with us as well. Finally, at the end of the webinar, you will be lead to an evaluation form. We're always keen to hear feedback, so please do take a moment to complete this when it comes up at the end. This is the same format you'll notice as open in the widget to the left of your screen. Before we get started, I'm very happy to announce our new appreciation program. For every participant that attends an S&P Global Market Intelligence ESG-related event from February through April and complete the event survey at the end of the webinar, we will plant a tree through the EcoMatcher, a third-party vendor. Shortly after completing your survey, you'll receive an e-mail about the tree donation, and you can even track the growth of that tree over time. So please do take a moment to complete the survey. As I mentioned before, we always appreciate the feedback. It's really helpful for us as we organize these webinars in the future. And we obviously hope that you enjoy this special gift. So let's turn our attention to the agenda for today. So firstly, we are really excited to have this opportunity today to discuss the implications of SFDR on the eve of it taking effect. So as you may know, the main goal of SFDR is to increase transparency on sustainability issues across capital markets. And it sets our disclosure obligations for financial market participants, or FMPs, on a broad range of sustainability issues. This will be the start of a disclosure journey for many organizations who will need to make sense of the requirements and the associated time lines. With this in mind, David will start by providing some insights on the evolution and the history of the regulations. He would also describe what it actually means for financial market participants themselves. Then John will provide an overview of S&P Global's SFDR data and how it enables financial market participants to start the process of disclosure at the entity level and eventually at the product level across a broad range of mandatory and opt-in principal adverse impact indicators outlined by the SFDR. And then finally, Elise will provide a practical example of how SFDR disclosures will work in practice by talking us through a real-world company example. So with that, I will now pass over to David.

Thanks very much, Steve. So in the next few slides, I'm going to try to take us through the SFDR at a high level. Now to understand the SFDR, we need to understand the policy momentum behind the regulation. SFDR is just one component of the EU's sustainable finance agenda. This agenda has evolved over the last 4 years to meet certain policy goals, and it will continue to evolve. The final SFDR requirements, some of which have yet to be decided, are still subject to the pressures of the political agenda, so it's really important to explain what those forces are. Let's start with the genesis of SFDR. Where did the regulation come from? The origins of SFDR lie in the work of the EU's high-level expert group on sustainable finance for the HLEG. The HLEG worked from 2016 to 2018 to produce a road map for the EU to achieve 2 goals: firstly, to integrate sustainability consideration into the financial system; and secondly, to steer the flow of capital towards sustainable investments. Now to deliver the HLEG road map, the European Commission launched an action plan in March 2018. This action plan had 3 main legislative proposals. First, the EU taxonomy, which defines what a sustainable economic activity is, very groundbreaking piece of legislation. Second, amendments to the EU benchmark regulation to introduce ESG disclosure requirements for benchmark administrators. And thirdly, the SFDR. These are the 3 main pillars of the first action plan. So what were the main objectives for SFDR? It is a complex regulation, we'll come on to that. But despite its complexity, the SFDR has a simple objective: to avoid green washing of financial products and financial advice in the European Union. At its core, the SFDR aims to ensure that investors have the disclosure they need to make investment choices in line with their sustainability goals. And I think one really important point here is that while the SFDR appears to be about transparency and disclosure, the regulation actually has quite far-reaching normative effects on behavior. Now what do I mean by that? Well, when you work through the SFDR's disclosure requirements, which we will come on to in a moment, the regulation effectively requires firms to make strategic decisions about their approach to sustainability and then to communicate those decisions externally. So let's move on to what's actually in the regulation. What are the main requirements under SFDR? The SFDR is complex, like I said. However, to simplify, it essentially lays down a common set of rules for 2 questions. First, how to provide transparency on the integration of sustainability risk at the entity level. And second, how to provide sustainability-related information on financial products. The easiest way to understand the regulation and indeed to read the regulation is to divide the provisions into 2 levels: entity level and product level. It is slightly more complicated than this, but we're trying to keep things simple on this webinar. So let's take the entity level first, which is the top half of the screen. At the entity level, the SFDR requires firms to undertake a series of disclosures. So moving from left to right, the main headlines are, under Article 3, information on how an entity integrates sustainability risks in their investment decision process or their financial advice; under Article 4, there's a requirement for firms to provide a statement on entity level policies about how they consider what's called principal adverse impact of investment decisions on sustainability factors. Now for small firms under 500 employees, this can be done on a comply or explain basis. That, for larger firms, actually expires in June, and we'll come on to that in the time line. But let's spend a minute here on Article 4. These principal adverse impacts, or PAIs, are really essential to understand. They are described in the SFDR as impact of investment decisions and advice that result in negative effects on sustainability factors. What are sustainability factors? The SFDR describes them as environmental, social, employee matters, as well as matters related to human rights, anticorruption and antibribery. So why is Article 4 and the concept of PAIs important? Because PAIs are the basic unit for many of the detailed SFDR disclosures. They are, in respect, the currency of how you disclose things in SFDR. So coming back to the entity level disclosures to finish out. Under Article 5, firms have to provide information on how their remuneration policies are consistent with their integration of sustainability risks. And finally, under Article 6, firms have to provide precontractual disclosure on sustainability risk integration, including assessments of how the performance of financial products may be affected by those risks. So that's the entity level. Let's move on to the product level. Depending on the objectives of a product, the SFDR requires different amounts of disclosure. Again, moving from left to right. For firms considering these PAIs, the principal adverse impact, Article 7 requires that they provide an explanation on how the financial products consider those impacts. For Article 8 products, which promote E or S characteristics, firms have to provide additional information on how these characteristics are met. Article 8 products have been described as sort of light green products. Part of the disclosure is whether they use an index. And if they do, how the index helps meet those product characteristics as well as disclosure if the product falls within the taxonomy regulation. Article 9 products, sometimes described as dark green products, those are products that have a sustainable investment as an objective. The firm has to provide an explanation about how that objective is achieved. And again, this includes how any index is used in the product, how that index is aligned with the objective as well as additional disclosures under the taxonomy regulation. And finally, for both Article 8 and 9 products, there are additional disclosures under Articles 10 and 11. And these really relate to detailed disclosures on the characteristics or the sustainability objectives of those products. But it includes their methodologies, data sources, screening criteria and quite a lot of other detailed information. So moving to the next slide. Let's look very quickly about what the path forward looks like. What are the main implementation milestones going forward? The SFDR takes a phased approach to implementation. And this adds to the complexity of the regulation. The time line can be very confusing. In the top half of this slide, we have key dates in the SFDR level 1 legislation. In the bottom half, we have the expected level 2 dates. Now something that's critical to understand is that the final details of SFDR are also a moving target. And this is because the key level 2 measures, which are called regulatory technical standards, have not actually been finalized yet. This level 2 will provide really important details on the content and the presentation of disclosure, and they will also specify detailed indicators for principal adverse impacts and key elements of the indicator methodologies that firms will have to use. So what are these key dates? Really importantly, the SFDR will apply from 10th of March 2021, which is tomorrow. Most of the level 1 provisions will apply from this date. Now despite the delays in adopting the level 2, the European Commission has made clear in a letter last October, that's been sent to the European supervisory authorities, that it expect firms to comply with the high-level and principal-based requirements of the level 1 text from 10th of March. So there is a compliance deadline coming up very shortly. The next milestone really is the 30th of June 2021. Large firms with over 500 employees will be required to disclose their due diligence policies on the principal adverse impact on sustainability factors under Article 4. And something really important here is that, moving kind of towards the end of this year, the Commission has stated that the level 2 will become applicable at a later stage. There's some uncertainty as to what that later stage is, but this is expected to be probably from the 1st of January 2022. That is something that the European supervisory authorities have collectively asked for. But in January 2022, for Article 8 and 9 products, the light green and dark green, we will have the start of periodic reporting on the E and S characteristics and the sustainable objectives as well as any relevant taxonomy-related alignment disclosures on the 2 climate objectives, which are under the taxonomy. Moving later into the year, for firms which consider principal adverse impact by 30th of December 2022, impacts will have to also be disclosed at the product level when firms consider these impacts. Now in 2023, in January, Article 8 and 9 products will have to start periodic reporting and taxonomy alignment disclosure on the 4 other taxonomy objectives, which are currently outstanding in terms of the details that are required. And finally, and this is very important, by 30th of June 2023, firms have to disclose the detailed indicators or principal adverse impacts on the period from January 2022 to December 2022. That's the first recording period on an annual basis. Now to sum up, SFDR is a very complex regulation. It has a simple objective, but it's got a very complex process behind it. The time line for implementation is challenging, and that reflects the political forces at play and a very ambitious desire to see capital flow towards sustainable investments in terms of the political objectives that the EU is pursuing. And finally, the key level 2 measures remain a work in progress. So with that, let me stop for now, and I'll hand back to Steve.

Thank you, David. And yes, I'm sure we'll have a few questions on this later on. So we're just going to take a brief pause here, and this is a question for our audience. And we'd like to know what is the main challenge that you see in terms of implementing SFDR? And there are 4 options here. Your individual responses will not be shared, but we will aggregate this across the audience in a moment. So the 4 options are: firstly, lack of clarity on the specific requirements and time lines; data availability; data quality; and then internal resources. So if each of you could take a moment to vote, we'll see the results in a second. [Voting]

Okay. So let's now have a look at what the results say. Okay, so I think leading is the lack of clarity on specific requirements and time lines. I think almost 60% of you identified that as one of the main challenges. The data availability, data quality and internal resources also featuring quite high. So David, maybe just an initial reaction on that. So any comments you'd like to make?

Yes. Thanks, Steve. It's actually very fascinating to see the lack of clarity and specific requirements on this. As I said, the SFDR is very complex to read and to understand. It was negotiated under extreme time pressure to get it out in the last year of the European parliament and Commission's mandate. So it's not very clear what exactly you're supposed to be doing and what the time lines for that are. What we hear most in Brussels, where I am, is questions about the data availability in terms of how you comply. But it's fascinating to see that actually, people are still struggling with what the requirements themselves are and by when they actually have to meet them.

Yes, absolutely. Thank you, Dave. And I think it's really interesting as well as the data availability and data quality challenges as well, I guess, as they relate to the things like the principal adverse impact indicators. So I guess now an opportunity to move on to the next part of our presentation today. And I'm going to hand over to John, and John is going to talk through the S&P Global SFDR data and how we've been approaching some of the data challenges. So John, over to you.

Great. Thanks, Steve. So as David just described, the SFDR reporting requirements focus on the principal adverse impact indicators, which financial market participants will be required to report on at an entity and product level. So the framework consists of 18 mandatory indicators and 46 opt-in indicators that can be used. So the goal of S&P Global's SFDR data is to facilitate reporting on these indicators at a portfolio level by providing the underlying constituent level data that currently exists in the S&P Global data sources. We currently cover 13 of the 18 proposed mandatory and 19 of the 46 opt-in. And this is a phase 1 data set, and we'll be rolling out a phase 2 to address coverage gaps, et cetera. So the main data sources are the Trucost core environmental data, Trucost sovereign carbon exposure, the physical risks for those that are geographic and asset-based indicators, S&P Global ESG Scores and data and the S&P Global Marketing Intelligence. So Trucost data covers 15,000 public companies, which was recently expanded with 5,000 private companies. And the environmental data includes the basic carbon emissions, waste, water, et cetera, as well as sector revenue, which we're getting to in the research process, that essentially allows you to flag all types of business activities from a set of 464 different business activities. Also included is the sovereign carbon exposure, which covers 170 countries. And the physical risk data, which currently covers 15,000 companies, with about 0.5 million assets mapped to it. And we'll be expanding soon to 110,000 companies with 2.7 million physical assets mapped. So the research process for Trucost data is essentially companies are researched, data collected and business activities are identified and mapped to revenue. So all revenue from any business activities is then mapped to the company. There's modeling -- data modeling, data aggregation and the -- and companies are engaged to verify or correct any data that's been collected on them. And then that goes into the Trucost data. And then S&P Global ESG Scores are based on the CSA, the Corporate Stability Assessment, and covers about 11,000 companies, 1,400 of which are self-reporting directly to S&P via questionnaires. And these are comprehensive and industry-specific questionnaires, which average about 1,000 data points per company across about 100 questions. And next, we'll get into the type of data from each of these sources we'll be providing to cover the indicators, which essentially falls into 3 categories. So we have, firstly, direct data, which will be coming from the Trucost data sources, Market Intelligence and some of the ESG score underlying data. So an example of this would be the indicator #5, the mandatory, environmental, the nonrenewable energy consumption and production, broken out into percentages from renewable and nonrenewable sources. So for this indicator and some indicators, we will be providing the gigawatt hour data and clients will be able to use this to create the percentages and report that at a portfolio level. And similarly, for a social indicator such as #13, the ratio of female from male Board members. The data source for that is the CSA, the ESG scores. And we will have -- you'll provide the number of female directors, number of male directors. And that can be used to report on the ratio that SFDR requires. Another type of indicator is business activities and assets. So in this case, SFDR requires the share of investments in companies active in fossil fuel sectors for #4 for this one. So in this case, because Trucost is able to map all of a company's specific business activities, any activities or revenue from the specifically defined fossil fuel activities in SFDR, there will be a flag, yes, no, involvement for that company. And then can be used to calculate the share of investing companies involved in fossil fuels. And a similar data point are some of these geographically based indicators. So for example, they're in indicator #5, which is sites located in areas of high water stress without water management policy. So Trucost's physical risk data actually is based on these definitions of the World Resource Institute's Aqueduct data set to identify water stress areas. And then those with high or very high water stress scores will be identified at a company level. So the indicator of yes or no identifies if the company has assets in these areas. And that can be used as a resource to do further research on which companies do not have water management policies. And then lastly, the ESG scores, we use in different ways. One is on a risk level and one is on an indicator level of sort of a yes, no for policies. So we're looking at the rate of accidents in investee companies. That is an indicator where if you receive a very low score, I think threshold is below 50, there is some risk of there being high rates of accidents in that company, which would require some further research into the company itself. And additionally, there's -- we have the share of investments without policies for supplier code of conduct. Some of these, where the question is asking about a policy, the ESG scores lead to provide a -- will provide a yes, no or a score of 0 to 100. And for instances where there's a score of 0, that indicates that there's no policy. And then for some of these cases, there's actual a yes or no based on the research actually checking for, for example, human rights policies. And with that, I'll turn it back to Steve, and we'll take some questions later on the indicators and how we are addressing them.

Great. Thank you. Thank you, John. A good overview there of some of the data sets that are available to support these disclosure requirements. So a question here for the audience again. So would you like to be contacted to learn more about SFDR reporting? And there's some options here specific to those, but that's all under this reporting requirement. So again, I'll just pause for a moment and let you vote and then we'll move on to the last section of the presentation. [Voting]

Okay. Well, we've heard a little bit about the evolution and the history behind the regulations. We've heard about the time line, some of the specific requirements. And we've also learned a little bit about some of the data sets that S&P Global has available to help financial market participants start this process of disclosure. Now I'm going to hand over to Elise. And Elise is going to sort of bring this to life for us really by talking through a specific company example and looking at each of the indicators that John has just described and some of the data that we have available for those indicators. So Elise, over to you.

Thank you, Steve. Hi, everybody. Yes, in this last section of the webinar, we're looking to the data through a specific common example. We'll be using Total, the oil and gas integrated company, to highlight the data points that can be used at company level. So we'll start with mandatory indicators. And the first one is GHG emissions. So we collect and estimate GHG emissions for scope 1, 2, 3 upstream and downstream as far as Trucost data, and we calculate intensity. So we retrieve the data from any publicly available source, whether it's annual reports, CSR reports from the CDP, and we systematically estimate when no disclosed data is available, allowing us to cover a large universe. So I've provided you here with the metrics for GHG emissions and intensity for Total, along with those sources on the right for each data point, so we can see really where the variety of sources used here. Then carbon footprint and GHG intensity are calculated metrics at portfolio level using GHG emissions here, but also revenue and EV and market cap. Now if we move into the next one, so the fossil fuel indicator and the exposure of companies to fossil fuel. For this indicator, we use -- we will identify it with a yes or no indicator of this involvement based on Trucost sector revenue breakdown, as shown below the indicator. And for Total, we have identified the company as having 100% revenue exposure to a fossil fuel. So we would answer yes. And for all companies in our universe, basically we'd breakdown company revenue per business sector and a portion revenue to each of them, allowing us to provide this exposure to fossil fuel across our full universe. Now if we move on to other indicators and energy consumption. For these 2 indicators here, we are using energy consumption data breakdown provided by the S&P Global ESG Scores. And here in particular, using that breakdown, we have calculated that 99% of the energy consumed and produced by the company derives from nonrenewable sources. Similarly, we use that data to calculate energy intensity for the company. And regarding this high impact on climate sector, we have identified Total's business activities as all being high impact. So for this one, we would consider that indicator and calculate intensity. Now if we look at water and waste, we would also collect and estimate water and waste indicators. So for water, for instance, we collect emissions to water and estimate based on the 3 categories you see for Total in the screen and then consolidate to have total emissions to water. And for Total in particular, it's 579 tonnes for 2019. Regarding waste, we would collect and estimate waste data per type of disposal and then further breaking down between hazardous and nonhazardous. And by consolidating that hazardous waste data across all disposal methods for Total, we reached 288,000 tonnes of other waste output for 2019. I have also provided here the sources for that data point. And you can see that all the different disposal method waste have been derived from annual report data. And for nuclear, in particular, this has been estimated but not applicable for the company. Now moving over to the social and employee indicators. We would rely here on the S&P Global ESG Score, as it provides very granular information on environmental, social and governance matter and down to an equal remuneration score. This will be looking at the gender pay gap. Total scoring 0, we can assume that the company has a very high risk of above-average gender pay gap. As per gender -- Board gender diversity, we would still look at S&P ESG scores because the data -- underlying data of those scores provide us with the number of female Board members. And based on the questionnaire filled in by Total, their corporate sustainability assessment, Total counts 4 female Board members, bringing the ratio of female to male directors to 33%. Now if we look into controversial weapons exposure. For this one, so we would consider anti-personnel mines, cluster munitions, chemical weapons and biological weapons. So for this metric, we have it -- we will have it available through S&P Global ethical stream flags that will flag this involvement in various products and services. And so Total has not been identified as a company involved in those sectors, but data of a full universe will be available as of May 2021. I will now move to voluntary indicators or opt-in indicators and see what is the data that we provide on those indicators. So for emissions, we look at in the opt-in indicators of other emissions than greenhouse gases. And we would collect and estimate, still a part of the Trucost data, this information on inorganic pollutants and air pollutants, the latter including the category for ozone depletion substance. And we have provided the breakdown for Total for each of the 3 indicators here in this slide. And the opt-in indicator also has some energy consumption indicator. And for this one, the indicator is having a breakdown of energy consumption by type of nonrenewable sources of energy. So this would be collected as well, and we would provide a very granular breakdown of this energy consumption scores. And for Total, in particular, we can see that Total is consuming energy generated mostly from natural gas, 90%, but also from coal and fuel oil, as shown on the screen here. Now for water, we would cover 2 indicators, so the water usage and recycling, and this exposure to areas of high water stress. So for the first one, we would provide you with this breakdown for water in terms of direct and purchase water in cubic meters. And we are able to calculate intensity dividing by revenue in particular. And for the exposure to water stress would provide a binary yes/no indicator for a company with assets in high water stress areas, which can be used to identify those without water management policies. We would use for this our physical risk data set to look at each asset map to the company individually. And although the overall water stress score for the company is 47 out of 100, 100 being the riskiest, Total -- our company here, Total, does have assets in high water stress area, and for some of their assets are scoring 100 in water stress for a high scenario. Now if we're looking at other opt-in environmental indicator. So investments in companies producing chemicals. For this, we would also provide a yes or no indicator based on the revenue -- on the sector breakdown of revenue generated by the company and whether we have revenue generated from the manufacturer of pesticides and other agrochemical products. So based on the revenue breakdown of Total's business activities that we're looking into for the mandatory indicator, Total has no involvement in chemicals production. So for these indicators, Total would have a no. Now the second indicator on this slide is the investments in companies without sustainable land or agriculture practice. So for this one, we would look into S&P Global ESG Score and the particular criteria called sustainable agriculture commitment score. But since the corporate sustainability assessment that is the space for our ESG scores is industry-specific, this particular criteria only applies to companies in the following industry. So we have beverages, food and staples, retailing, food products and tobacco, which is not the case for Total. So for Total, the score would be not applicable. And then for this nonrecycled waste ratio, so similarly to our mandatory indicator on waste, we would collect and estimate data on waste by type of disposal method. And this is how we can see that Total has waste -- nonrecycled waste output of 230,000 plus tonnes for 2019. Now let's finish up with the social opt-in indicators. So for those indicators, the following voluntary indicators, for social and employee matters use the S&P ESG scores, for which the lower the score, the higher the risk of accident incidents, or score below 50 indicate partial mechanism in place in terms of governance. I won't get into too much detail for each of them, but you can see how we match each indicator. And for instance, for the rate of incidents, we would have a different score for employee and contractors. And since Total is scoring 100 on both indicator, it indicates a low risk of workplace accidents. Now following indicator for social and employee matter is a lack of grievance/complaints handling mechanism related to employee matter. For this one, and this one you see on the screen, we provide a score that is systems and procedure of the code of conduct. And it looks at what mechanism are in place to ensure effective implementation of company's code of conduct. A score of 0 here would be considered equivalent to lack of mechanism for grievance and complaints. Total scoring 100 indicates that the company has those mechanisms in place, and we're confident that those mechanisms are in place. Similarly for insufficient whistleblower protection, we would use code, a score, but provide a yes/no indicator. So this would rely on this code of conduct score, where Total scores 100, showing they have their Code of Conduct includes whistle blowing and whistleblower protection. Now for CEO pay ratio, excessive CEO pay ratio, for this one, we provide a ratio of CEO annual compensation to median employee compensation. And so this information has not been disclosed by Total itself. If we look into human rights, now for this one, so we have 2 indicators. We have, first, the lack of human rights policy and then lack of due diligence. For the policy indicator, we would look at the human rights commitment score and provide a yes/no indicator, if company has publicly available human rights commitment consistent with UN guiding principles on business and human rights. Our company here has a score of 100, proving that it has a human rights commitment, consistent with these UN guiding principles. If we're looking into the due diligence now, we would take the score into account. And here, for this due diligence, a score of 0 would indicate lack of sufficient policies to assess human right impacts. But a score of 58 here indicates that policies to assess human rights are in place and partially satisfactory. Our last one here -- or last indicator would be on corruption and bribery and lack of anticorruption and antibribery policy. For this one, we would provide as well a yes or no indicator. If -- depending on -- if the company has a publicly available corruption and bribery policy. So here we have a no for Total. It does not lack anticorruption or bribery policies because the score is 100, indicating transparency in showing their policy on that matter. Thank you, everybody, for your attention. And I hope this example has highlighted you on the type of data we use for each indicator. And I will now hand it back to you, Steven.

Thank you, Elise, that was great. And it really sort of brought back to life. So thank you for going through each of those examples. So yes. So we've just got one final poll question here. And the question, it's time for voting, is would you like to be contacted to learn more about responding to SFDR? And I'll just give you a few seconds to respond for that. And then we will open up to Q&A. And just while that's happening, I can see that there's been a lot of questions coming in, which is fantastic on each part of the presentation. So I will be bringing our panelists back in a moment to pick up some of those questions. [Voting]

Okay. So I guess, firstly, thank you to all of our panelists so far. It's been a really interesting discussion. And yes. As I said, let's open up now for Q&A. Just a reminder to those listening, that you can use the Q&A widget on the console to submit your questions. We're ready to go through all of the questions live today, but we'll go through the most common and frequently asked ones. And if we don't get to your question, of course, we will follow up with you directly within the next 24 hours.

So I might just start with a couple of questions that have come in. And David, the first one's for you, actually. Just going back to your overview of, I guess, the requirements. Just a clarification question from our audience here. So when you describe entity, are you only referring to financial entities? Or does that also include or apply to listed companies? If you won't mind just picking on that one first, David.

Sure. Thanks for the question, it's a good one. SFDR only applies to financial market participants and financial advisers. So it does not apply to corporates, for example. What are financial market participants? What are financial advisers? They are things like insurance intermediaries, insurance undertakings, banks that provide investment advice, investment firms that provide investment advice. They are also those entities that are providing products, insurance products, fund products, that kind of thing. So SFDR does not apply to corporates, but it has a knock-on effect in that the financial advisers and the financial participants will be seeking disclosure from corporates. And one really interesting thing that we might come on to later is the EU, as I mentioned, is still pursuing a sustainable finance agenda. The big milestone in 2021 will be the publication of the Non-Financial Reporting Directive review. And that will have requirements for corporates, for financial institutions as well, for any companies operating in the EU that are scoped into NFRD. And we are eagerly expecting a very detailed level of requirements for disclosure on ESG matters there. So more to come on that, but certainly, SFDR only applies to financial market participants and financial advisers.

Excellent. Thank you, David, for clarifying that. Elise, I thought I might ask this question to you, actually. There's been a question come in around scope 3 emissions, and in particular how we look at and consider downstream emissions. Obviously, that's quite a -- quite a complex area, a challenging indicator. And so I thought you just -- you might be able to offer a few insights on how we look at scope 3 downstream. Perhaps you could just describe what that means, first of all, and then how we consider it.

Yes. Thank you, Steve. Yes, for scope 3 downstream emissions, to ensure quality, we actually combine a top-down and bottom-up approach. So for our top-down approach, we would first collect data from the CDP. And to fill in the gaps, we would use best fit sector intensity model for each of the 7 downstream activities based on those CDP information. And this would be for most sector. And then we would use bottom-up approach. So for oil and gas and coal extraction, we would use production data to estimate scope 3 downstream. And then for the automotive sector, we would use the average fleet emission per region for each auto manufacturer using the sort of the company and regulatory reporting. I hope that clarifies.

Yes, very helpful. Thank you, Elise. So a question here potentially influenced by the recent Brexit conclusion. But David, one for you, perhaps. So does SFDR apply to the U.K. and cover U.K. managers?

That's a great question. Again, the SFDR comes into effect on 10th of March after the U.K. has left the European Union. So the decision was made, we understand, in London, not to onshore the SFDR in its current form. So that means that U.K. firms don't need to comply with the SFDR. However, they will be likely indirectly impacted if either they have affiliates or clients that are in scope of the SFDR. So if you're marketing products in the European Union from London, certainly, the SFDR will apply to you. If you are providing financial advice from London into the EU, it will also apply to you. The other question is, what will happen in the U.K. next? It's possible that a streamlined version of the SFDR could be something that the U.K. looks to introduce. It's also possible that they will take a wait-and-see approach to how the SFDR implementation goes this year. But certainly, for anyone providing products or financial back into the European Union, SFDR remains relevant and the compliance obligations will be relevant, too.

Thanks, David, for clarifying that. So there's a question here about the data itself and whether the S&P Global SFDR data will include constituent level information or company level information or will it cover only investment portfolio. So I thought, Elise, I'm going to come back to you for that one, actually.

Sorry, can you repeat the question? I'm not sure I understood it.

Yes. No, of course. It's just whether the SFDR data, the S&P Global SFDR data will include company level information or just portfolio level. So maybe you could just clarify that.

Yes, absolutely. So our product would be -- so a data package that would have information at company level. And then so my presentation focused on the data available at the company level, but this can be aggregated into portfolio level calculation. But what we provide will be the company level information that you can then aggregate.

Thank you very much. And then maybe just to add to that, so yes, as Elise explains, it will be company level, constituent level data. And there will be some supporting documentation that will explain how those metrics can then be applied to a portfolio. So that will obviously help enable disclosure. So John, a question for you, and this is on the S&P Global ESG Score data, one of the sort of, I guess, some of the building blocks of this data package. Does that data cover all industries? Or does it cover any specific industries?

Sure. So for most of the core environmental and social indicators, such as energy consumption, the Board diversity, et cetera, those are across all industries. However, for certain sort of sector, industry-specific type questions, such as sustainable land and agriculture practices or employee accidents that apply more to more technical industries, those are only going to be available for the indicators that are material in that sector. And there'll be underlying methodologies available so that all those material considerations are covered.

Fantastic. Thank you. And then just a follow-up question. And this is, I think, more relating to the environmental data that we've seen today. Is disclosure on an absolute basis or a relative basis? So does it mean that, for example, total SFDR disclosure -- and unfortunately, that question just disappeared from my screen. But I think that was just getting at essentially sort of whether it's looking at absolute or intensity level information, John. So maybe you can just offer a few comments on that because I know it does vary depending on the indicator.

Sure. Yes. And this is a consideration that we took in building the data set. And we believe that it's best served our clients to provide raw data. So that intensities center can be then calculated based on SFDR's own formulas. And then investors can use the financials that they're using to model other data and report on their investments to create the intensities and other and also wait according to their portfolio.

Great. Thank you. Thank you. So David, perhaps just another one for you here as well. So in your sort of opinion, what are the next steps on the EU sustainable finance agenda, if we're just looking forward a little bit?

Sure. So I think one thing to bear in mind here is that according to new commissioner for financial services, there's no silver bullet for what they want to achieve. So they're looking for comprehensive solutions, and they're looking really at addressing all different sorts of sustainability issues in lots of different places. The main milestone this year, as I mentioned, will be the Non-Financial Reporting Directive review. We're expecting that in April, alongside some of the SFDR regulatory technical standards as well as some of the regulatory technical standards under the taxonomy, which will help define the first 2 climate objectives that taxonomy is looking to address. That will be a huge milestone because the NFRD review is looking to try and solve some of these disclosure gaps and disclosure holes. You can't report information that isn't disclosed by companies. And this is what the NFRD is going to try and address. There will also be a renewed sustainable finance strategy published by the European Commission in June. We don't know exactly what will be in that, but one really important aspect of that will be an EU green bond standard that will be proposed alongside that action plan in June. We expect, as we got in 2018, a list of actions that will take the European Union into the next couple of years and probably align some of the existing pieces of legislation and frameworks like SFDR with things like NFRD and other things. There is also a host of reviews in terms of how the current legislation is working. So in part, it will be moving forward. And in part, it will be reflecting and trying to improve on some of the problems that have emerged in the implementation of what already exists in legislation today.

Thanks, David. Thank you for providing your insights on that. And then we just got time for a couple more questions. There have been a couple coming in just about, I guess, how we ensure that the data that's being provided by companies in the disclosure is robust and sufficient quality. And John, I thought maybe you just might offer a couple of insights on our kind of verification process. I know you covered it in the slides, but perhaps just a recap on how we how we sort of engage and verify data with companies. Perhaps you could just offer a few more insights on that very quickly.

Sure. Yes. So for one side, from the ESG score side, as I mentioned, there are about 1,400 companies that are reporting directly to S&P Global. And for those companies, there's a very robust process, with not only just verification, but engaging with the companies, and there's a conversation back and forth. And then for the companies that are researched, we provide the companies opportunity to respond to all of the data that we have collected from them and to correct where anything is wrong. And then from that, also, we have some modeling and QC behind the scenes to ensure that it seems like it's in line with what should be expected from a company of its size, geography, et cetera. So hopefully, that addresses it.

Thanks, John, yes, very much. I guess just to reiterate that, that sort of engagement process with companies is an excellent way of ensuring that we get that quality data that we need for increased transparency. So just in the last minute or so, perhaps I'll just wrap up here. So first of all, I want to say thank you to the audience. I mean I think I've been on a number of these webinars recently, and these are the most questions we've received and they're keeping coming in. So thank you for being so engaged. It's obviously a really interesting topic. Being at the eve of implementation, I think it's great that we've had the opportunity to discuss some of the challenges and perhaps some of the opportunities around data and the availability of data to address some of those reporting requirements. Obviously, we did cover a lot. So if you do have any follow-up questions, then please use the contact us widget and we'd be very, very happy to assist. Maybe just a few concluding remarks from me. I think firstly, we've seen that SFDR, it's about increasing transparency on sustainability risks. And there are, as we have seen, very important disclosure requirements for market participants at the entity level, but also at the product level. And David did a fantastic job just talking through, the somewhat complex time line, but obviously, outlining what those requirements are. We've seen from your feedback that there are barriers, lack of clarity being one of them. Hopefully, some of that may have been alleviated today, but also data availability and quality. And it was great to hear from David and -- sorry, from John and Elise on some of the data that is available and how we can start supporting disclosure on these. And just to say, obviously, that the S&P Global SFDR data can start helping that sort of -- that disclosure journey, supporting financial market participants in that process of disclosing and providing that constituent level information aligned with various mandatory and opt-in and voluntary indicators. So for those of you who want to review anything we've been through today, this session has been recorded. You will also receive a copy by the end of the week so that you can access it on demand at your convenience. Also when we close out this webinar, you will be routed to our evaluation form. We'd love to hear your feedback. So please do take a few moments to fill this in. And so I guess all that's left to say really is a big thank you to David, to John and Elise for presenting. And thank you to all of you for taking the time to attend this session today. And we really look forward to you joining us all again. So thank you very much.