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

Good afternoon, everyone. Thanks, and welcome to today's Government Affairs and Public Sector webinar. My name is Kellin Clark. I'm the Director of Government Affairs for S&P Global. I'm stepping in today for Courtney Geduldig, who's our Chief Public and Government Affairs Officer. She's unfortunately able to join us today, but it's my pleasure to moderate this morning -- or this afternoon's webinar, Politics & Policy: Pathways to a Sustainable Recovery. I recognize that for those of you on the call, this topic is of great interest and, as such, we want this to be an interactive session. So please feel free to submit questions throughout the presentation or during the Q&A session towards the end of our broadcast here today. Also check out the helpful widgets to the right of your screen. The Resources widget is filled with valuable content and thought leadership. And there's a Survey widget, so please take time to fill out our short survey. We really value all of your insight, and we take it to heart. I would like to introduce my cross-divisional colleagues, Paul Gruenwald, who is the Global Chief Economist at S&P Global Ratings. Paul leads the economic research agenda for us and serves as the primary spokesman on macroeconomic matters globally. Previously, Paul spent several years at the Australia and New Zealand Banking Group as the Asia Pacific Chief Economist, responsible for helping set and direct ANZ's Asian and global economic research agenda as well as building the bank's economic research efforts and profile in the region. Paul also worked at the IMF for almost 2 decades. I'd also like to introduce Mona Naqvi, the Head of ESG Indices at North America at S&P Dow Jones Indices. Mona leads the strategy for developing ESG indices for the North America market, from best-in-class approaches like the world-renowned Dow Jones Sustainability Index, to broad market ESG alternatives and core solutions like the S&P 500 ESG Index. Mona also served as an advisor to the Obama administration on climate and energy policy, and she worked for several years as an economist at the U.K.'s Bank of England. Finally, our guest speaker, Sanjay Patnaik, is the Director of the Center on Regulation and Markets, the Bernard L. Schwartz Chair in Economic Policy Development and a Fellow in Economic Studies at the Brookings Institution. He's also a Fellow for the Initiative for Sustainable Energy Policy at Johns Hopkins University. His research focuses on climate policies, specifically carbon pricing, business and government relations, corporate political strategy, globalization and international business. So thanks to Paul, Mona and Sanjay for joining us this afternoon. And before I begin, please note that the activities of S&P Global Market Intelligence are independent and separate from S&P Global Ratings. So with that, I'm going to get started, kind of give a high-level overview of where we're at, and then I'll turn it over to our speakers. But in the next 45 minutes, we're going to discuss the unprecedented U.S. transition power that took place when President Biden took the oath of office on January 20. How will the Biden administration establish a strategic agenda as the country looks to recover from an economic downturn, with a rising tide of COVID and vaccine rollout? The Biden administration's first 100 days in office, which are coming up soon, were crucial to set the tone for the economy with implications for a global recovery. Our panelists are all going to address the effect of critical policy shifts on the economy, regulation and ESG today. So we're really excited for that. One other thing that I want to mention is the political environment. In recent months, the progressive push for increased levels of government spending on COVID and the President's $2 trillion infrastructure proposals have been pitched against a rapidly recovering economy and fears of economic overheating from the other side of the aisle. Given the disparate feelings towards the policy responses to COVID among all sorts of policymakers, let's dive into our first polling question to gauge our audience sentiment on the economic recovery and potential near-term policy actions. So we've got our first polling question up: which statement most closely captures your current macro view? The American Rescue Plan creates meaningful inflation risk; resolving COVID-generated sectoral and labor market dislocation is the top policy challenge; we need to get expiring debt under control quickly; or last, supply chains for critical technology and help supply needed to be brought back to the U.S.? We all know these things are questions that policymakers are dealing with right now, and they're all questions that both Republicans and Democrats are looking at. [Voting]

So let's go ahead and take a look at our results really quickly here. Interesting. It looks like the majority of you think resolving COVID generation -- or generated sectoral and labor market dislocation is the top priority. All right. Interesting. Well, with that, I'm excited to turn it over to Paul Gruenwald, our Chief Global Economist. So Paul, I'll hand it over to you for your presentation.

Yes. Thanks, Kellin, and good afternoon from New York, everyone. Just looking at those poll results very quickly. I would note that at least in the economics profession, we've recently begun to talk about inflation risks in ways that we haven't for a long time, but it came in last in the poll. So maybe we're pretty relaxed about that. So I'm going to take you through the high-level global and U.S. macro view in about 10 minutes. So here are the main macro themes. Every quarter in Ratings, we get together with our credit research team, and we come up with a fresh global forecast and a fresh global narrative. So this is pretty hot off the press. It's our credit conditions outlook that we released about 2 weeks ago. So just the highlights here. The global macro outlook has really improved noticeably, and the big driver of that view is actually the U.S. So we raised U.S. growth forecast this year to 6.5%, and this will be the highest growth since 1984 in the U.S. And the U.S. will be driving most of the global recovery after China. This is pulling up global growth by 50 basis points this year, so we're at 5.5%. The theme around the recovery for us is whether it will be positive for credit and positive for macro. So in order for that to happen, we need an orderly reflation. So if yields are rising on the back of stronger growth and stronger earnings, that's a good thing. If yields are rising just because of inflation fears, that's not such a good thing. So I'll talk a little bit about that. And then I'll talk a bit about the unevenness of the recovery, and I think that's going to get worse before it gets better. So let's go to the next slide, please, and this will bring you up to date on our global growth forecast. So you can see the major countries and regions there on the left. You can see the U.S. at 6.5%, followed by Europe at around 4% and down the line to 5.5% this year. The heat map on the right will show you who the big movers are. So the U.S. was a big increase in the latest forecast round, but also we increased China and India and we lowered the U.K. and Eurozone. The recovery there has been set back because of struggling vaccination rates. We're calling this the race between the virus and the vaccines, and at least in the short term, the virus seems to be winning that race. But all economies are now clearly in the recovery phase from COVID. It's just a question of speed and distribution. And as I said, there's a lot of sectoral variation. There's a lot of growth variation. There's a lot of fiscal policy variation. So that's going to drive a very interesting outlook for the next year or so. Let's go to the next slide, please. I can show you a whole bunch of charts on the uneven recovery, but I think this one probably suffices. These are PMIs. These are purchasing manager indices. It's a widely used market indicator to forecast short-term moves in activity. On the left, you can see manufacturing, and on the right is nonmanufacturing, which captures a lot of the service economy. And then we've just got the big 3 here: the U.S., Eurozone and China. And you can see on both charts that China dropped first because the virus started there, as we know. And then the pandemic spread to Europe and the U.S. So we see China getting here first and then bouncing back. On the right, you can see that the nonmanufacturing or services took a bigger hit than manufacturing, which is very atypical. And then coming out of this, we were originally telling a story where China was the manufacturing-heavy recovery, and the U.S. was nonmanufacturing. Now Europe is really picking up on the manufacturing side. So the narrative right now is that China has a manufacturing and export that rebound. The U.S. has a household- and consumer-led rebound and Europe, so it's a little bit of the 2. We'll talk about the ramifications of that in a minute, but let's go to the next slide. In the introduction, Kellin mentioned the Biden administration and the America Rescue Plan. The mantra of the new administration is to go big. This shows a chart from our U.S. team led by my colleague, Beth Ann Bovino. If you focus on the dash lines, those are the pre-COVID path, the blue dash, and the gray dash is potential GDP. And now we've got the red American Rescue Plan forecast going above both of those. So what we're going to see for sure in the next couple of quarters in the U.S. is a big pickup in growth, a pickup in inflation pressures. And the question is, is that overshoot going to be temporary? And are we just going to glide back to a sustainable path? Or will the Fed have to take action earlier by raising rates sooner than people thought, which could lead to a turbulent period? So I think, as I said earlier, all the eyes of the economists are going to be on the inflation forecast as the recovery gains speed over the next couple of quarters. Next slide, please. This is just kind of a flavor of what we're going to see in the infrastructure plan that's working its way through Congress. Again, this is from our U.S. team. I'd like to make the distinction between the American Rescue Plan, which is really a transfer to household to spend, and the infrastructure plan is really an investment. So we would classify an infrastructure boost as a spending that raises the potential growth of the economy and should have a much more lasting impact. The American Rescue Plans are shot in the arm, and this is kind of a medium-term plan to build out infrastructure, to repair roads and bridges, new bridges, electrical grids, bigger employments, raising long-term potential growth. So there's a lot of stuff going on in the infrastructure plan. We know about the definition of infrastructure that's winding its way through the press. This one's a bit broader than the traditional one. But our view is that the infrastructure bill is going to be a sound investment to facilitate the carbon transition of the U.S. economy and also to raise outcome, to raise potential growth and raise jobs. So let's see what version goes through the Congress. But not just here in the U.S., the Europeans have a version as well, and China has been doing green infrastructures for a while. So it's part of a global trend, but we see this as broadly positive on balance. Next slide, please. Okay. And I'd mentioned this orderly reflation before, so let's go back to this. On the left-hand side, you can see the benchmark 10-year government bond yields, a big pickup in the U.S. over the last couple of quarters. But this chart kind of nicely puts it in perspective. The U.S. 10-year yield has risen from about 80 basis points at its trough late last year to about 1.7%. We are still well below where we should be. If we believe the Fed's so-called dot plots and the longer-term forecast for the Fed funds rate, if that's 2.5%, that implies that the 10-year U.S. Treasury yield should be in the low- to mid-3s once we get through all of this stuff. So again, we would expect bond yields to rise as the economy recovers. They probably got another 150 basis points or so to go. The question is, does that get from A to B in a smooth and orderly way? Or is it going to be a bumpy wave? Our view is the more smooth and the more orderly the transition, the better that is for macro outcomes, including employment and also better for credit. You can see inflation there on the right-hand side. I think we've forgotten very quickly that central banks have been trying to generate inflation since the global financial crisis, mainly missing their targets on the low side, even though the pedal is totally to the metal with policy rates at zero and quantitative easing on top of that. So if we get this orderly reflation and we come out of COVID and we get the U.S. economy back on a good path and we get the Fed back to normal rates, lifting off of zero and creating some 2-way inflation risks, that's a good outcome. We should not be afraid of a period of fast growth that lifts inflation a bit, lifts wages a bit, lifts growth and starts getting us back to normal. So there is a little bit of hysteria in some parts of the market, but let's keep our eyes on the prize here, which is a global orderly reflation. Let's go to the next slide, please. Well, I do work for a rating agency. And this slide, I borrowed from my research colleagues on the credit research side. First of all, it shows on the right some of the changes to the sectors. That might be a little bit hard to read, but the sectoral impact of COVID has been extremely uneven. We know that the virus doesn't discriminate at the medical level. But certainly in the economic sphere with leisure, hospitality, food and beverage, some of these sectors have been hit extremely hard. Other sectors in the economy have actually done reasonably well, parts of financial services, tech, health services, things like that. So there's a huge amount of variation that needs to be unwound. And on the left there, we're really looking at earnings in addition to growth. So let's think of the company that's coming out of COVID. We know that there's going to be some reflation. We know that interest rates are going to be rising. We know that interest bills are going to be rising. But again, if that's on the back of a robust recovery with healthier growth and healthier earnings, we think that's a broadly good story from a credit angle. So again, we're talking about the macro and credit together. And the story of that orderly reflation with growth and earnings rising together, along with some of these nominal variables like interest rates and inflation, that is -- that's what we're describing as a healthy outcome. Let's go to the next slide, please. Yes. Maybe to wrap it up for me. We've got some old friends here that are coming back into play. So we haven't talked about current account and balances for a while, and we haven't talked about credit-to-GDP gaps in a while. On the current account, those of you who have been around for a while know that this was a big issue, particularly before the global financial crisis. And the story there was the U.S. was very strong. It was sucking in lots of imports. The trade deficit was growing. The current account deficit was growing. And we had this global divergence in current account balances, which we're starting to see again. You can notice that very clearly in the last few quarters in the chart on the right. That's basically a sign of two things: one, the U.S. economy is picking up; and two, as I mentioned earlier, the U.S. has a consumer-led recovery and the rest of the world, partly Europe, but certainly in Asia, they have a manufacturing-led recovery. So this is Asia and Europe piggybacking on the U.S. demand a little bit. But the way that's going to play out in the current account is the current account balances are going to worsen before I get -- before they get better. I wouldn't necessarily start stressing about this. Again, if there's a healthy reflation, I wouldn't worry too much about this. But it is something that's going to start making the headlines over the next couple of quarters. And then on the right, we have a well-known measure of credit imbalances by the Bank of International Settlements. They have this famous -- or well known, at least for economists, credit-to-GDP gaps. We were all worried about China for a while, but theirs has come down quite substantially. But we can see over the last couple of quarters in response to the COVID crisis, debt levels have really risen. Just to get on the record here, we think the initial response to COVID going big on fiscal to protect the most vulnerable and to support demand that, that was the right thing to do. But as we come out of COVID and as the economy recovers and as we get on to a more normal path, some of these debt levels in the corporate, government sector, financial sector are all going to have to be addressed. And again, that's part of this narrative for an orderly recovery. So that's a quick highlight of the issues for me. And Kellin, I'll turn it back over to you.

Well, thanks for that, Paul. That was a great overview of the sort of macroeconomic situation. And before I hand it over to our next presenter, I do want to ask you, because I think this is a question a lot of folks on Capitol Hill are asking, it's the question the Biden administration is asking themselves. But the President's proposed $1.9 trillion stimulus package. At the time, it was estimated to bring the U.S. GDP back to precrisis levels by the second quarter of this year, which would be about 1 quarter sooner than our $1 trillion base case. As you look at things, do you think we're back to precrisis levels at this point?

Right. That's our estimate. Our estimate is now that the U.S. will get back to pre-COVID GDP levels this quarter, the second quarter of 2021. Let's remember that we're basically back to the end of 2019, and the economy was on a 2% growth path then. So we've lost 1.5 years, so that gives us a hole of about 3%, if you think of the U.S. as a 2% growth story. And we'd lose 1.5 years, we're down about 3%. The question is whether the American Rescue Plan is appropriately calibrated because it's something like 9% of GDP. So what we're really watching is to see how quickly that gets transmitted to the economy. We're probably going to go above our pre-COVID path, the dash lines I showed you guys a couple of slides ago. And again, we'll be watching to see whether inflation is well behaved, whether wages are well behaved, whether the markets think the Fed is credible and whether we get this orderly reflation. I think as the vaccinations continue to roll out and as the GDP news gets better and the labor market starts to get a bit more healthy, focus might turn a bit more than in the past to this inflation story. But that's going to -- that will be a good -- if we stop focusing on the damage from COVID and we exit and we start focusing on inflation, I guess, that's a good narrative to have.

All right. Well, thanks, Paul. Before we head over to our second presenter, I just want to -- I think you probably have had the second polling question up for a second. But our second polling question is, which policy approach do you think the U.S. will prioritize to address climate change? A carbon pricing scheme? Example, carbon tax, cap-and-trade program; the Green New Deal; financial market regulations to mitigate risks? Examples through the SEC and others; or d, agency regulations mainly through the EPA? These are all questions certainly policymakers are asking themselves. Certainly, a number of questions are arising as part of this infrastructure deal and how much and how far can they go on that. So we're going to learn a lot here in a second. [Voting]

But here is our answer: it looks like the majority of you think a carbon pricing scheme is the policy approach that the U.S. will prioritize. Interesting. Well, with that, I'm going to hand it over to Sanjay to share his thoughts.

Thank you very much, Kellin. And this is really interesting poll result. I think it's actually in line with what economists advocate for, which is to have a carbon price. And I'm going to get to it a little bit at the end of my presentation. So I'm the Director of the Center on Regulation and Markets at Brookings. Next slide, please. So what we do is we really try to analyze a lot of important policy issues at the intersections of markets and regulations. To give you an overview, these are some of the areas that we work in, financial market regulation, a very important aspect. We also look at the regulatory process. We have what is called a Deregulatory Tracker, where we look at major regulatory actions over the past couple of years and how they have shifted. Next slide, please. And we also have embarked on studying a few new focal areas. Artificial intelligence is one of them; the second, climate change, which I will talk about today mostly; and the third, consumer protection. And so why do regulations actually matter for the economy? That is a really critical question. Next slide, please. And so regulations provide a critical framework for markets to function. They correct them, they prevent market failures, and they [ send ] a rule-based system for market participants. And so it's very important for regulators to strike a balance between correcting the market failures or failing to correct them and stifling innovation. And that is sometimes very difficult for regulators to find that balance. And so for businesses and investors, it is essential in the U.S. to have a predictable regulatory system. That has been found over and over again when you look at polls, especially for foreign companies that want to invest in the United States. And what we have seen in the last couple of years is that we have seen wide pendulum swings in regulatory approaches between Democratic and Republican administrations, going from one extreme end to the other extreme end if we look at climate policy, for instance. And so most of these actions in the past were down through executive orders. And so if we look at what Biden has done so far in the first couple of weeks, most actions that he has taken also through executive orders because that is usually much easier and quicker to implement. Next slide, please. And so what are some of the actions he has taken? So one is he issued a very important regulatory freeze memo, and that regulatory freeze memo basically proposes that agency should refrain from proposing or finalizing any rules until a new agency had its influence. It also directs the agencies to withdraw any rules that haven't been published in the federal registry before Biden was elected and took over and to postpone and review any rules that have been published but were not yet effective. And so that is obviously -- that basically means that all rules that the Trump administration have tried to put in place in the end are basically all eyes pending a review by the Biden administration. Biden also delayed and issued a notice to withdraw the Trump rule of classifying workers with independent contractors, which is a very important rule for the gig economy, as you've been seeing it play out across the country. And he also issued key executive orders on the agency rulemaking process itself. For instance, he issued a memo on modernizing the regulatory review. That means he is trying to change the review process for new rules. And he revoked several executive orders by Trump on the regulatory process, including Executive Order 13771, which is often known as the 2-for-1 rule. Next slide, please. And so I want to talk to you about the climate today, right? Because when we talk about a sustainable recovery, and it can go in 2 ways, and also looking at the recent infrastructure bill, climate is really a key part of the investment strategy that the Biden administration is pursuing. And so he has issued a couple of executive orders on climate over the last couple of weeks. One, a pretty high profile one. He rejoined the Paris Climate Agreement. And I think as part of that commitment, he also is hosting a global summit with 40 world leaders next week. He revoked the Keystone XL pipeline permit, kind of like sending the signal that pipeline permits will be more difficult to obtain in the future. He also directed the agents to review and potentially reverse all rulemaking actions taken by the Trump administration and especially on the environment. So this is a big review of a lot of the regulatory actions and goes a little bit to the pendulum swing that I had mentioned earlier. And he also issued a very wide-reaching and comprehensive executive order that he called Tackling the Climate Crisis. And I'm going to talk a little bit about what the components of this executive order are. Next slide, please. So the Tackling the Climate Crisis executive order is quite remarkable because it really pursues a whole-of-government approach, trying to direct the entire federal government towards climate change and towards mitigating some of the climate risks that we are facing. They include smaller-scale actions like having a leaders climate summit, designating a Special Presidential Envoy for Climate, developing a climate finance plan and establishing a White House Office of Domestic Climate Policy. It also sets a goal to reserve 30% of federal land and water for conservation purposes by 2030 and the development plan to replace about 600,000 vehicles owned or leased by the federal government with zero-emissions cars. And also quite importantly, especially for the oil and gas industry, it pauses any new oil and natural gas leases on public lands or in offshore waters. Next slide, please. It also sets the goal of achieving a carbon pollution-free electricity sector by 2035, so that's quite ambitious, and directs the Interior Department to review the permitting process in order to double offshore wind energy production by 2030, at least the permitting process on the federal side. And Biden has especially advanced the plan to build more offshore plants on the East Coast. We will see how in practice that will pan out. He also directs the OMB to identify opportunities to spur clean energy innovation and deployment, and that is quite significant to remove fossil fuel subsidies from the budget. So this is kind of like really a direct intervention to remove financial support from the government for fossil fuel exploration and production. He also directs the agencies to develop international climate finance plans to assist developing countries in reducing emissions. And that are obviously was a very big part of the Paris Climate Agreement in order to help developing countries reduce their emissions and mitigate their exposure to climate risk. Next slide, please. What other actions has he taken? So these were some of the executive orders. He also issued a memo restoring the evidence-based policymaking, which is quite important because it really puts the science and the scientists at the center of the decision-making again in order to take the political and politicized aspects out of it. And he also reestablished the President's Council of Advisors on Science and Technology, which was in line with a previous memo. And then interestingly, especially for a lot of investors, the SEC also just issued a request for public comment on the potential change to disclosure requirements related to climate change. And so the request came out very recently and touches on disclosure content, on best practices for the development of standards and best practices for organization and enforcement. And obviously, this is only for publicly listed companies, but I think it's a quite important step that puts the U.S. more in line with other countries and blocks, like the EU have been doing in terms of moving publicly listed companies more towards the disclosure of climate-related risks. Next slide, please. And so just the last point I would like to make is, what does it take that the U.S. can actually become climate-resilient and not face a lot of risk due to climate change or at least prepared for those risks? And that actually, a lot of you answered already in the poll question. What is really needed is a federal cargo pricing scheme. This is what all economists predict will actually move a lot of the investments towards low-carbon technologies because it would make a more carbon-intensive technologies and production methods more expensive. As we have seen over the last couple of years, I think this is rather unlikely in the current political climate. And we will probably see more actions through the -- on the state level, like in California, or through the regulatory agencies. What is as quite important that the U.S. has to do, and I think Biden is taking the first steps in that direction is adaptation. Oftentimes, adaptation to climate change is neglected because a lot of policymakers focus on mitigation. But we have to see the rising cost of climate disasters. We have to start planning for that. And that will really involve a lot of different levels of government, local state and federal, looking at a lot of issues such as flood maps, zoning map and things like that, that can really comprehensively look at climate risk exposure in the United States. I think what we see already and what is quite interesting is that we see there are some market trends that are pushing towards decarbonization, like banks pulling back from funding coal-fired power plants and fossil fuel companies. And I think what regulators can do is to really reinforce those trends and kind of like make them irreversible in some degree. And so I think this is where regulation can have a quite significant impact. And I think if we just look globally a little bit, we see that worldwide carbon pricing schemes are being implemented at a rapid pace, and multinational firms are preparing for that. There are about more than 400 large companies were not yet already have an internal carbon price, and 900 major companies that are planning one. And so I think the writing is on the wall. And the private sector is already taking some steps that, I think, well-thought-out regulation can support quite significantly. Thank you very much, and I hand it back over to Kellin.

Well, thanks, Sanjay. I do want to ask a real quick question. Recently, many of us have probably seen that the Treasury Secretary, Janet Yellen, she urged an adoption of a minimum global corporate income tax. It was said that, that was done in an effort really to offset any disadvantages that might arise from the President's proposed increase in the U.S. corporate tax rate. So I'm really just sort of curious about how you think tax competition and corporate tax base erosion fare in the G20 Summit this fall and if it'll impact the overall economic recovery.

I think that's a great question. Thank you. I mean I do think it is a very bold proposal. And I think if successfully implemented, it could really kind of like stop that race to the bottom among tax jurisdictions that we have seen. I think there is quite a lot of appetite for this, especially among some of the U.S. global partners with Europe, for instance, that have been clamoring for this, especially the tech sector for quite some time. So I think in terms of political constellation, this is quite a good time that probably would lead to higher rates of success if it's implemented successfully. I also think that it might actually tie in well with some of the other developments on the front of carbon tax border adjustments that the Europeans are especially talking about. And so I think we will also see movement in that front. And I think maybe because of the COVID crisis and what we have seen economically the last year, there seems to be appetite among policymakers for both of those measures, at least on the other side of the Atlantic.

All right. Well, thanks, Sanjay. I want to move on to our next polling question: which of these policies do you think the Biden administration will prioritize? Mandatory sustainability reporting through enhanced SEC disclosure labels and certification of sustainable investment products or carbon tax emissions trading scheme? [Voting]

In the meantime, we're starting to get our first questions in our Q&A function. [Operator Instructions] And we'll get to them here after our third presenter. But before we give it over to Mona, I just want to check out our results here. And it looks like more than half of you think mandatory sustainability reporting will be part of the FCC's future agenda here. So with that, I will turn it over to Mona.

Thanks, Kellin. It's very interesting to see that the audience, when framed in this way, sees carbon pricing as less likely but prior thought it was more likely. And I think it just goes to show that all these are different, it is so interconnected, and it's very hard to know what the right priority should be. But we're going to talk much more about that now. So I'm going to talk to you guys about the evolving sort of regulatory landscape for the finance sector and the role that it is trying to play in financing the transition to a sustainable economy. So on the next slide, please. I thought I would start just by framing the problem, like what are the 2 biggest issues that regulators in the sustainable finance ecosystem are currently trying to solve? The first is that there is generally very poor visibility into the sustainability practices of companies. And this is, as we've covered a little bit already, due to either limited or, in some cases, completely nonexistent disclosure requirements around sustainability topics. And this is creating a real lack of transparency in the market when it comes to investors understanding the sustainability risks and opportunities in that portfolio. The second impact due to this lack of transparency is really the threat of greenwashing. So that is when sustainable investment products are sort of overstating the sustainability merits or impact either intentionally or unintentionally through misleading marketing and misinformation. And together, these 2 problems are contributing to a systemic mispricing of assets that underweight, undervalues or perhaps even completely ignores externalities, such as climate change, that are potentially standing in the way of securing a sustainable allocation of capital for the long term. And this is, in fact, the real problem that policymakers must address in order to achieve a sustainable recovery, right? The transparency in the greenwashing issues are only problematic insofar as they contribute to the systemic misallocation. And so to the extent that this systemic risk pricing of assets is potentially causing asset bubbles to fall, like the carbon asset bubble that may eventually burst, this is, in fact, posing a systemic risk to the stability of the financial system. That doesn't just equate to an ethical conundrum for the sort of socially conscious policymaker, but actually becomes a supervisory one, too, right? And misinformation and the threat of greenwashing could also be considered very problematic from a consumer protection standpoint. So on both accounts, I think policymakers have a decisive mandate to address these issues that transcends simply an ethical basis for doing so although that may, of course, play a role. So on the next slide, please. Just like to kind of address now that we know the problem, what are the very types of policies and remedies that might be needed to achieve a sustainable recovery as a single feature? And of course, I would say that achieving a sustainable allocation of capital for the long term, which, remember, I think, is the real problem we're trying to solve here, requires much more than just transparency and the absence of greenwashing. In my view, I think it really has to start first with setting the right public policies that represent our collective societal preferences and that creates a system of incentives to successfully sort of reorient capital flows towards financing sustainable solutions of the future. So only then do I think we really have the proper context for setting financial system regulations in place that sort of actually work. But assuming we have the correct societal policies in place, there are a number of financial regulatory initiatives that can help address this transparency and greenwashing issue, some of which we've touched upon already in Sanjay's presentation. But for example, we've got product-naming rules. This would be not calling a fund fossil fuel-free and if it actually is fossil feel-free, which believe it or not, is much harder to define than you might think. Things like Googles and certification, so not describing a product that's sustainable unless it adheres to very strict definitions and characteristics. So these 2 -- these first ones really will help limit the threat of greenwashing. But before we can even get to that, we really need much more data to be able to inform those labels and those investment products. And that's where disclosure is such an important piece. So terminology and classification. We have the EU sustainable taxonomy, which is really helping to define what a sustainable business activity is, transparency and standards. So databases, questionnaires, regulatory disclosure, all of this is essentially trying to solve the problem with low transparency into what sustainability risks and opportunities companies are currently exposed to. So on the next slide, I think we've covered already sort of what the problems are, what remedies are needed, but we must also ask ourselves where should policymakers be implementing these new rules in the most efficient way possible. And if we look at the entire investment value chain, I think it's clear that there are many different touch points where policymakers could apply these measures. But as I said, it seems to be the case that the starting point is really that real-world public policy commitment. So things that frame the overall goals and set the context like the UN Paris Agreement, UN Sustainable Development Goals, the various different Biden policies for climate justice. These are the types of things that set the context for what a sustainable allocation of capital even looks like before we can begin to start tweaking financial regulations here and there that increase transparency and reduce greenwashing. So then I think after we've set those public policies on the corporations, I think the most important next link in the chain, so to speak, is what comes next, which is the sustainability reporting framework. So as I often like to say when talking about sustainable investment products, garbage in, garbage out, right? Meaning that they can only be as good as the quality of the data that's going into that. Where does that data come from? Of course, it has to come from the companies directly. And at the moment, there are few mandatory reporting frameworks on sustainability issues. There are some voluntary ones that many companies are choosing to adhere to those. So things like SASB, Sustainability Accounting Standards Board, that is defining material sustainability risks for different industries. We've got the Carbon Disclosure Project, CDP, that has been trying to solicit more climate data from companies for many years. The TCFD, of course, the G20s, FSB-convened Task Force on Climate-Related Financial Disclosures that the U.K. is actually implementing into law within the next 1 to 2 years. And then, of course, we've got, among others, the EUs nonfinancial reporting directive. That is perhaps one of the most widespread efforts to really enhance transparency within the sustainable finance ecosystem today. So Sanjay talked about this already. I think the question on everybody's lips is what is the SEC going to do in this space, right? We've seen a lot of back and forth, as Sanjay mentioned, that pendulum shift depending on the administration. We've had the prior administration suggest that there was no need to update reporting requirements for sustainability risks. We also saw the Department of Labor ruling that made it harder to access ESG investment options in ERISA plans. And that came with a lot of commentary from the SEC at the time to say that what they described as nonpecuniary factors having sort of no place in financial reporting frameworks, although this is something that the Biden administration has announced that it is going to reverse. Now of course, as mentioned already, we've got the SEC calling for input on climate-related disclosures and whether they should adapt their reporting requirements. So we'll have to watch closely and see what happens there. But of course, I would just say that even climate isn't everything. There's a lot more sustainability gaps in terms of data that continue to remain. Conversely, just to kind of contextualize the role that the Biden administration is playing in all of this, I would say the EU has certainly done the majority of the legwork in setting the standards and the frameworks for the sustainable finance ecosystem to date. They're really driving most of the studies we see, whether it's the EU taxonomy, defining sustainable business activities, the Sustainable Finance Disclosure Regulation, Green Bond standards that they're going to propose, and even put disclosure requirements on benchmark providers like ourselves and provided benchmark labels to prevent climate index greenwashing. And in addition to this map, which already has more things than I can present in the time we have, there are somewhere between 120 to 150 additional ESG SRIs, sustainability regulations, principal standards guide, the whole thing. The real problem, however, is that, first of all, these -- there are just so many different competing frameworks and definitions that it might, in some cases, be contributing to more confusion in the marketplace. And in many instances, the root problem here has yet to be fully addressed. So on the next slide, please, just talk a little bit about what I see as some of the potential challenges we have. So as I mentioned already, competing definitions. This is a very big problem for the investor and the corporations who are trying to align their sustainability disclosures here. And I would say that given the prevalence of all these various different frameworks and initiatives, I think alignment probably is too far of a pipe dream at this point. Rather, the better question to ask is, are these various different regulations compatible, right? But I think one of the challenges we have in achieving something that is compatible is that we lack multilateral coordination. I think what we've seen to date is, at least the early indication of the Biden administration is that we might leave this to the market to determine because, of course, the EU has already driven much of the market standards. It remains to be seen whether or not the Biden administration will swoop in and introduce their entirely new set of standards. I think a bigger risk to the financial markets and to the sustainable finance ecosystem would be having an entirely different set of standards that competes with that of the EU, simply adding to the confusion, right? So that alignment is really key. I would also just say that these types of regulations are inherently just really complex and very challenging to get right. Because if you think about a corporation that is domiciled in country A that has business activities in country B with supply chain impacts in country C, D and E, which of these various jurisdictions should that company adhere to in terms of the sustainable finance policies, right? It becomes incredibly complex so that alignment and coordination is really key. We've also seen, unfortunately, certainly unintentionally, the misdirected or kind of misuse of some of these sustainable finance policies that have come out over the last several years. I think a really good example of this is the UN Sustainable Development Goals, which, of course, were devised for governments to try to achieve this national -- international set of global goals. However, the investor community has looked to this framework for defining the correct KPIs and metrics to achieve a sustainable level of impact in the impact investing portfolios. The challenge is that it's been very difficult to reverse engineer the appropriate country- and industry-specific budgets with each of these different UN Sustainable Development Goals and to then define the correct KPIs, metrics and standards with which to apply them in a portfolio construction context. So the misuse of some of the existing policies is also contributing to some of the problems there. I think it's interesting that the audience earlier mentioned that carbon pricing is perhaps the best or one of the most important things that we should have next to help address this problem. I would also agree with that. Just as an economist would say, corrective pricing is probably our best chance of addressing these externalities. And I think when we look at the current framework and global picture for sustainable finance regulation at the moment, one of the challenges we find is that these don't necessarily go hand in hand, right? We've got a lot of emphasis on transparency and on greenwashing, but these are no substitutes, in my view, for corrective pricing. So they really need to go hand in hand, which so far, we've yet to see. So really hope that, that is the direction that we'll be going in the future. Another potential kind of question for the U.S. to consider, is the EU dominance of problem for much of the sustainable finance regulation. I think from our perspective as an index provider and for many of our clients at the end investors, I think they would just rather as much coordination as possible, irrespective of where these policies are coming from. On the right-hand side here, I just kind of wanted to juxtapose all of this because I know this conversation is a little bit technical on the regulation side. But what does this mean in real life, which is a rather startling graphic? This is the current emission gaps we have based on our current trajectory versus our commitments and pledges relative to the goals of the Paris Agreement. And as you can see, we are way overshooting even with the current commitments and policy. So it's all very well and good to talk about the nuances of regulations and the different tweaks that might be beneficial. But actually, we're still just completely way off the mark in terms of achieving a net-zero economy. So there's a lot more work that needs to be done. And on the last slide, I'm just kind of quickly -- I realized I'm just short of time. But given my role as an index provider, I just wanted to quickly highlight what I think truly represents a fundamental paradigm shift in the way we allocate capital. And that is really what's required in order to achieve our pathway to a sustainable economy. If we think of climate change as a good example, we look at climate investment strategies. In the past, these have been very relative. So this is about relative carbon production relative to the benchmark, relative degrees of impact, again, relative to the benchmark. But the overall framework for financial decision-making tends to be linked to the benchmark, the policy benchmark or the market at large. And so this is what I like to call the tyranny of tracking error, right? It's this constraint that we impose upon ourselves to stay as close to the policy benchmark as possible. But in order to achieve the goals of the Paris Agreement and to achieve the sustainable recovery, we actually need to be able to go past this relative concept and start to integrate absolute commitment. So I won't go into the details of what this last chart recommend -- describes. It's a little bit too complex to cover in the time we have. But we do have a paper core transitioning to a 1.5-degree well that explains what this is. But essentially, in a nutshell, if the economy is carbonizing, then a Paris-aligned index or a climate portfolio needs not just decarbonize relative to the benchmark but needs to actually start to take a much higher, potentially exponential levels of active share. In other words, we need to dispel our reliance on very low levels of tracking error if we are to achieve the goals of the Paris Agreement and actually reshape the status quo for investment decision-making. So I think there's a huge challenge ahead of us, not just in terms of the policy, not just in terms of the nuances of all these regulation, but actually in terms of our culture and our mindset when it comes to how we choose to invest our capital. So I'll stop there. I realize I've gone a little bit over time and hand it back over to you, Kellin.

Thanks, Mona. I do want to quickly ask you, the President has set a goal of making the U.S. carbon-neutral by 2050, which, no question, sort of would require steeper emissions cuts than the U.S. has ever achieved in the past. He's also emphasized investing in communities that are hardest hit, both communities of color and those that bear the highest pollution burden and those that depend on disappearing fossil fuels. So I guess my question is sort of to you is, as governments and investors are increasingly making climate transition a priority, talk to us a little bit about sort of how the S&P Paris-Aligned & Climate Transition Indices helps pave the pathways to sustainability.

You raised some really good points, Kellin, because actually, our transition to a low-carbon economy must not come at the expense of social and economic benefits to especially minority communities. So environmental justice is a really big concern. So I just want to say also, in addition to that, I think it's important that we adhere to what the EU is calling a principle of do no significant harm. So in any portfolio index construction methodology, we have to make sure that we're constraining this decarbonization relative to maintaining some levels of kind of social and economic status. But in terms of the Paris-aligned index series that we have, there's more than 8 different climate objectives that are addressed in the methodologies through an optimization that essentially allows the index to align with a trajectory that is consistent with achieving net-zero emissions by 2030. It also reduces the fossil fuel reserve exposure, maintains or improves the green to brown revenue share, is aligned with Science Based Targets initiative requirement, addresses not just the transition but also the physical climate risks stemming from climate change. So there's a whole number of different objectives that are addressed through this optimization while minimizing the underlying active share to the benchmark. So as you can see in this chart and as I just described, if you don't do that, you could end up with exponential amounts of active share, which from an investor standpoint could be considered quite risky. But then again, that's just the level of risk that I think is required in order to really make this change. We have more information available on the S&P Paris-Aligned & Climate Transition Indices on our website and also lots of papers and resources for folks to learn more about that there.

Thanks, Mona. That's fantastic. And I also want to thank Paul and Sanjay for an exceptional and dynamic sort of deep dive into the challenges and opportunities for the U.S. sort of against this new backdrop of Biden administration and the agenda taking shape within these first 100 days and with their key takeaways for their long-term implications. So I want to move on to our Q&A section with a few questions from our audience members. [Operator Instructions] We can't guarantee we're going to get to all the questions live today. So if we don't get to your question today, we'll definitely follow up on the Q&A resource document that we'll distribute on the on-demand replay by early next week.

So with that, I'm going to move on to a few questions. Paul, I want to come back to you and sort of ask a question sort of about the COVID response. Obviously, vaccinations are accelerating, businesses are reopening and the growth forecast at 6.5% this year. Are we out of the woods? Are we close? Are we -- where are we?

Right. We're not out of the woods. What we've been telling our clients, stakeholders, anyone who will listen to us, is that we need to pay less attention these days to the growth rate and pay more attention to just the level. So we talked a little bit earlier about the U.S. getting back to its level of pre-COVID GDP. Europe is not there yet. So many emerging markets are not there yet. China reached it earlier. But as we come out of this, we need to again get back on something close to the old growth path, but that's going to take probably another year or so in the U.S. And then we have these sectors as well. I mentioned a couple of sectors that have been hit extremely hard, the ones that have been most impacted by social distancing, whether that's food and beverage or entertainment or anything that requires person-to-person. Travel is another one. So we're not out of the woods yet, but I think we can see the end of the tunnel. So that's a good thing. And maybe just something very quickly, Kellin, I want to stress, the vaccine narrative has changed globally dramatically in the last 2 months. Early on, we were talking about Asia's success in containing the crisis and how the West and the U.S. were lagging. But over the last couple of months, we really see the U.S. and the U.K. as well pick up on the vaccination. So again, that's another dimension to this unevenness. But we should look at the U.S. and also the U.K. outperforming for the next couple of quarters because the vaccination rollout has been much more successful than the rest of the world. And now we're talking about maybe the Chinese coming out of this a bit slower than we thought because they're rolling out the vaccine more slowly and household spending is sluggish. So we've really had a pivot over the last couple of months toward a better story for the U.S. But again, to answer your question in the short version, we're not out of the woods yet. We've got a couple of more quarters to get back to a healthy economy.

All right. I'm going to -- I've got a question for both Sanjay and Mona. Sort of what lessons can we learn from the COVID crisis, particularly as it relates to addressing climate change?

So I think one thing that the carbon crisis really has shown us is the importance of risk and risk management. I think when we look at climate, oftentimes, the debate is very ideological. But if we think about it, climate essentially is a fundamental economic threat and a problem of risk management. And the risks we have seen with COVID will be actually relatively small compared to the risk that climate has in store for us in the next coming decades if we don't prepare for them. And I think it really shows how important it is at all levels of government and the private sector to prepare for these kind of risks and put mechanisms in place that can cope with risks like that. Now Mona, maybe you have some more thoughts on that?

Yes. I mean I completely agree. I think that the pandemic was sort of a litmus test for the materiality of ESG issues in general. Because public health and safety, supply chain risk management, all the things that Sanjay talked about, these are very much captured by the ESG investment framework and is not always readily available in traditional financial reporting. So having access to that type of information, being able to identify the types of resilient businesses to withstand the economic shock of a global pandemic and a zero-revenue environment throughout lockdown period is actually what ESG precisely tries to capture. So I think ESG not only passed the test, but it did so with flying colors, and I think it really helped us cement what was already a trend towards much more momentum in sustainable investing. And of course, a huge subcategory of that is climate.

Well, thanks. And our next question -- I guess, I should say, questions are for Paul. Unsurprisingly, Paul, we've got a number of questions here about China. And so I'm going to lump 2 of them together and, hopefully, we can get you to answer both of them. But sort of where do you see U.S.-China economic relations going? And do you think it's on a good path? And then sort of at the same time, too, given the forecast for mid- to long-term growth, where do you see -- do you see investors investing in China or the U.S.? And why?

Okay. And there's a bunch there. Let me try to unpack that. First, yes, the U.S.-China relationship, which I think most people would agree nowadays, is the most important bilateral relationship in the world is not in the best place. I think the good scenario there is the U.S. and China are going to agree to disagree on certain fundamental economic issues. I'll leave the policy issues to decide. But if we're talking about technological security or sensitive areas to invest or intellectual property or probably more recently, health security, data is another one. We're probably going to have some duplication, and each country is going to have their own system. But in the good scenario, we compete with China on the rest of that stuff, right? And you mentioned one thing that Chinese are really opening up their financial services sector. There was a very intentional strategy to open up the trade sector first and the financial sector second. But S&P Global is in China with a local rating agency, and the authorities are trying very hard to build out the sophistication of the financial sector. So I think that's really a growth potential, not just for U.S. companies but Western companies in the coming decade and more as China continues to rotate toward a more consumer-driven economy. But the political stuff needs to be managed. And then just very quickly to wrap it up, China is going to be slowing, right? The fast era of Chinese growth is over. It's going to be more technological change rather than piling on capital investment. And we think China is going to be slowing, probably into the low- to mid-single digits by the end of this decade rather than the kind of 7, 8-ish where they are right now. So it's still on a good path. It's a complicated relationship, but there's still lots of opportunity there.

Thanks, Paul. Mona, I want to go back to you. You mentioned greenwashing a little bit in your presentation, and we've got a question here, sort of which sectors are you seeing the greatest amount of greenwashing occurring in?

I don't know if the question is which type of sectors in terms of industries but what types of investment products. Because I think across all sectors, all types of businesses run the risk of greenwashing. Greenwashing is kind of a relative concept. It's not to say that some are more green than others. It's more about are any misrepresenting or perhaps through a lack of information, not necessarily disclosing the full extent of the various different sustainability risks that they face. All types of businesses in all sectors and industries face different types of sustainability risk. There is almost no industry that is exempt from a sustainability concern altogether. So then when investors take this information that comes from companies or doesn't come from companies and then create -- when financial service providers rather create investable products based on these, that lack of disclosure from companies across the board is sort of flowing through into those investment products that are then equally not super transparent. Is there a specific sector or industry that's at risk of the most greenwashing? I'm not sure. But certainly, we do find more disclosure on certain types of issues in some industries more so than others. Actually, believe it or not, it might sound surprising. Energy does -- energy companies do tend to disclose quite a lot because it's been proven for a very long time that these issues are material and in the investor interest. Some other industries, for example, media, not particularly carbon-intensive, might perhaps disclose less. Which one has the bigger impact? Certainly, energy would from a climate standpoint. But which is potentially more at risk of greenwashing? Probably the media just because there's less information available on that type of industry.

Thanks, Mona. And I think we have probably time for about one more question here. And so our last question is for Sanjay. Sanjay, how can the private and public sector work together to mitigate climate risk exposure on not only companies but governments and citizens?

Thank you. Very good question. I think one thing that is important to keep in mind is that we need both the public and the private sector to address the climate crisis. And that is often neglected and we cannot do without either one of those. And so I think some of the trends that we have seen are already going in the right direction, for instance, on financial market disclosure, where we see trends that are already happening in the market. For instance, with BlackRock's announcement that they're scrutinizing all of their investments based on climate risk are complemented by these financial market regulators that are trying to nudge the market along. Similarly, we see, for instance, that a lot of market forces are already moving away from coal because coal is costly in the U.S., more expensive than natural gas. And we can support some of those trends with regulatory action. But I do think where the public can really play a role in outside the U.S. that has been recognized quite significantly is again the role of the carbon price because the carbon price provides certainty for companies, a long-term certainty. They have a price signal. They know what they can plan for when they plan new investment projects. And that can really help kind of like develop that climate assessment, climate risk strategies going forward. And we do see that a lot of companies are already planning for that, and they actually want certainty. They want to know what the carbon pricing scheme looks like and how long it will be in place so that they can plan accordingly.

Well, thanks, Sanjay. And again, thanks to Mona and Paul for joining us today. We've covered a broad range of topics with fantastic insights for organizations, academics and consumers alike. [Operator Instructions] And we'll be happy to connect you with folks to answer some of your questions. To our audience members who would like to review anything that we've discussed today, this virtual session has been recorded, and you can expect to receive a link in the coming days to access the replay and view at your leisure. Also when we close out this webinar, you're going to be routed to an evaluation form. We'd love to hear your feedback, so please take a few minutes to fill this out if you have a second. So with that, a final thank you to Paul, Mona and Sanjay for expertise and analysis today. And to our audience, thanks again for taking time out of your days to attend our webinar. We look forward to you joining us again in the future.