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

Hello, everyone. Welcome to today's webinar. My name is Lawrence Choy, and I'm a Director for the Corporate Segment at S&P Global Market Intelligence. It is my pleasure to moderate today's live webcast on the intersection between ESG factors and M&A investment/analysis. For those who have joined us before, welcome back. For those participating for the first time, we host webinars to address the challenges identified by our clients or to present thought leadership on a relevant timely topic. At the end of our webinar, please fill out the short survey as it will provide feedback on other topics of interest, which we will consider for future webinars. Please note that the activities of S&P Global Market Intelligence and S&P Dow Jones Indices are independent and separate from Standard & Poor's Rating Services. [Operator Instructions] Some of you have already submitted questions upon signing up for the webinar, so we will cover several of them during the discussion today. In addition, if you are interested in any of the S&P Global Market Intelligence suite of products, you can simply confirm your interest when the pop-up appears on your screen. For today's panel, we're happy to have joining us Evan Greenfield, COO, ESG at S&P Global; Sonia Kim, Head of ESG Product and Development, S&P Global; Neema Vaheb, Director, Capital Markets and Accounting Advisory Services, ESG at PwC; and Amy Liane West, Managing Director, Global Head of Sustainable Finance and Corporate Transitions, TD Securities. As COO of ESG, Evan Greenfield oversees ESG research, operations, technology and strategy across the firm. Having previously led ESG investments and acquisitions at S&P Global, which culminated in the acquisition of SAM. Evan has 2 decades of experience working in the financial services vertical, with significant time focused on ESG investing in the alternative markets. Prior to joining S&P Global, Evan helped build and oversee the ESG and Impact Investment platform for Deutsche Bank's asset and wealth management vertical. Previously, he spent over a decade as a private equity investor in the States, Europe and Asia. Evan has an MBA from the Harvard Business School and a BA in Economics from Duke University, where he graduated Summa Cum Laude. Sonia Kim is the head of ESG Product and Development for S&P Global and is responsible for the company's enterprise-wide ESG product strategy and development. Prior to her current role, she served as the Head of Credit Solution's RatingsDirect business, the flagship commercial platform delivering S&P Global Ratings' intellectual property. She joined the company in 2009. Prior to joining S&P Global, Sonia led product development and commercial management of the desktop platform at Fitch Solutions. Sonia also served a number of roles at Moody's within product strategy and international finance and strategy functions. She began her career as a financial analyst at a health care solutions firm. Sonia graduated from Barnard College with a degree in economics and received her MBA from NYU Stern School of Business in international finance and organizational management. Neema Vaheb is a Director at PwC Deals Practice with over 13 years of experience providing accounting and financial reporting, environmental, social, governance and sustainability advice. Neema leads the PwC ESG and Deals team that supports clients that are pursuing capital markets transactions in acquisitions, divestitures and IPO readiness. He has advised numerous Fortune 500 companies and supports clients globally across many industry sectors by reviewing processes, systems, controls, potential risks and exposures. He also advises management's key assumptions in clients and potential targets accounting for asset retirement, environmental obligations and broader ESG risks. Neema is a certified public accountant in New York. He graduated with honors from the University of Connecticut, with a Master of Science in Accounting and a Bachelor of Science in Business. Last but not least is Amy West, who is a Managing Director and Global Head of TD Securities Sustainable Finance and Corporate Transitions team. In her role, Amy works with corporate and institutional clients across global banking and markets to provide environmental, social, governance, advisory services and solutions. Amy has led TD's sustainable finance efforts since 2015 and co-chairs TD's Sustainable Finance Hub within the ESG center of expertise. Amy currently holds a seat on the ICMA Climate Transition Finance and Sustainability-linked Bonds working groups as well as the Canadian Standards Association Transition Finance Technical Committee. Prior to joining TD in 2013, Amy worked at HSBC and RBS in investment banking and debt capital markets. As you can simply tell from their bios, we have an extremely accomplished panel today, so we're all in for a treat. For today's webinar, our speakers will touch upon multiple aspects of the ESG world and its growing impact on the M&A and investment landscape. The increase in importance and scrutiny of ESG within the past decade and especially in recent years, is undeniable. Companies are looking to understand the factors as closely as possible and incorporate them into operations, strategy, processes and everywhere in between. However, the challenge with ESG, due to its relative infancy of importance, is not only limited to the question of how to incorporate the factors or where to start. During the session, you'll hear from our experts who will share their thoughts on the growth of ESG, how ESG risk factors into M&A analysis and the impact ESG policies have on both M&A and corporate strategy. And of course, with this being an ESG-focused topic, we have a Plant the Tree event where you can contribute by simply completing the See What Matters quiz after the webinar. With that being said, I'll now hand it off to Evan.

Thanks so much, Lawrence. And what an enticement to complete the See What Matters quiz to get some trees planted. I'll say a brief opening caveat, I've silenced my phones and other things at the direction of the team, but I've negotiated with my 2-year-old and 6-year-old who are in the apartment to go outside and they haven't done that yet, so Peppa Pig in the background at some point in this dialogue. But this is -- if we go to the next slide, this is really a once-in-generation shift that we're seeing as it pertains to the capital markets. So maybe once in multiple generations as it pertains to the integration of the ESG factors, really, throughout the capital markets, and the speed by which it's happening is really stunning. I've had the fortune of being involved with the ESG movement for the better part of a decade. And every year, we see this exponential increase in demand for ESG solutions across the board, and there would be a lot of conversations, but the conversations wouldn't always coincide with investment in ESG integration and the investment process. We're really seeing that turn on its head, especially in the last year. In many respects, the pandemic has been a watershed moment for the ESG movement in the respects that we're seeing a significant amount of exposure and interest in ESG throughout the capital markets. And a case in point on that is that Q1 of last year, when the challenges of the pandemic had become fairly obvious and the global health and economic and social implications of that, we saw about $50 billion of inflowing into sustainability-related strategies on the back of $400 billion in Q1, emanating or detracting away from traditional strategies. And it was a unique moment in time because this was really since the first moment in the modern age of ESG investing, which to me is post the financial crisis of 2008, where we saw economic stress and contraction in share prices and significant volatility, ESG hadn't been tested in that manner for many, many years. And we saw that ESG not only withhold that test, but it, in many respects, thrived and was a place of allocation for the volatility of the market, allocating to better managers. And we've seen that continue, albeit with the economic recovery at least in share prices, we've seen that the allocation to ESG strategies has increased tremendously. Where we are today, broadly speaking, is about $1.7 trillion are allocated to global sustainable funds. Now that's primarily looking at this from a public market standpoint, And what we can ascertain though, is that if we think that, broadly speaking, there's about $100 trillion of global assets, we're still at less than 2% of capital allocated to ESG strategies. So while the growth is significant, the aspect that we're seeing is that we're still in the earlier stages of this evolution. So it's particularly exciting. And what we see on this right chart here is signatories to the United Nations Principles for Responsible Investment. These are 6 main principles that govern integration of ESG into an investment diligence process, to an investment process overall, to the monitoring, et cetera. And we see, again, this meteoric growth in terms of number of signatories from the asset owner, the investment management community and the $100-plus trillion of assets that have signed up to the United Nations Principles for Responsible Investing. I'm particularly in a really enviable organization at S&P Global in the respects that we have this 360 degree view of the financial services ecosystem through the underlying businesses and divisions that are housed within S&P Global. Obviously, we have a large credit ratings firm, Platts, which covers energy and commodities, analytics, pricing, market intelligence, which helps deliver essential data and intelligence. And what we're seeing at this ecosystem level, which allows us to have an understanding of whether it's the active market, the passive market, fixed income, equities, commodities, real assets, infrastructure, real estate, et cetera, is that ESG is in part and parcel every one of our conversations with our clients, which is very telling as this movement is progressing forward. And there's a variety of levers that are progressing this movement. We have the pressure that's coming from the asset donor community and posing that upon the investment managers to ensure that they're integrating ESG up and down the asset classes, public markets, private markets, et cetera. We're also seeing the lever of the regulatory landscape. There's certainly a lot of activity that's happening in the European construct with SFDR and other type of regulations that are emerging, and we anticipate that will be the case emanating from the Biden administration as well. We're also seeing levers from customers in the respects that they're looking to interact more with firms where sustainability is the inner core of their strategy. And then we're also seeing a lot of lever and pressure coming from employees. The next generation of talent is making sure that they're aligned and that they're taking positions with firms where sustainability is at the core of their strategy. So we see these levers that are all coming together and having deep impact on the capital markets and as well on the corporate structure across the equation. And so if we look towards the next slide, we see that -- maybe one additional slide. I may have mis-ordered my slides, apologies. If we go 2 slides out, but I'll speak to it while we're trying to get there. We see that up and down the asset classes that we're seeing this tremendous integration of ESG. And we're also understanding that emanating from this transition to a low-carbon economy to net zero that we see commitments that are being made by sovereigns, by corporates, by investment managers, almost on a daily basis of late, as it pertains to what they're going to accomplish in net zero in 2050, which is further embedding sustainability and ESG within corporate practices. Now as it pertains to the private markets and as it pertains to the title of today's discussion, M&A, we're seeing a great deal of activity. If we take the private markets for a minute or 2, we -- what's frankly interesting is that the preponderance of ESG, generally speaking, has primarily been focused on the public markets. But what we're seeing of late is that from a private market standpoint, general partners are getting further up to speed as it pertains to ESG into their portfolio as they're doing diligent and really looking at the growth in the public markets and ascertaining that what we've seen in the public markets, both from academic literature and more importantly, in practitioner results is that there is the ability to achieve risk reduction, return enhancement as a result of integrating what we classify as these material ESG factors into an investment process. There are some great work from a professor at the Harvard Business School by the name of George Serafeim who produced a report called the First Evidence on Materiality that talks about integrating in material ESG factors actually has the ability to yield outperformance relative to not. And we look at materiality from a sector industry-specific focal point. But we're seeing that the private markets are starting to emanate that activity into having greater attention to these ESG factors as a part of diligence and certainly, as a part of portfolio monitoring. As we know in the private markets, you're, generally speaking, a significant minority or majority investor from a shareholder standpoint. You generally have opportunities to be on the Board and you have the ability to effectuate change a bit more easily than a public markets investor that may have a very small amount of shareholdings, given the defuse of shareholdings on the public market side. So from a portfolio monitoring standpoint, there's tremendous opportunities to leverage these material ESG factors into portfolio monitoring and operations and really to achieve multiple expansion at exit. We also recognize that you don't necessarily need to invest in the best-in-class underlying investments or companies at the onset. You need to ascertain where their sustainability characteristics are, understand how they can be approved on during the monitoring process. But if we look at a strategy of best-in-class, that's looking at investing in those companies that have already figured it out in some respect. But if you look at an ESG momentum play, which is fairly interesting, that's actually saying we're going to take this company, help evolve and enhance its sustainability characteristics and hopefully have the opportunity to achieve multiple expansion emanating from exiting that investment with a sounder more established sustainability profile at exit, relative to -- at its purchase. But this slide, the last one of my segment, just entails the amount of focus in the alternative asset class arena as it pertains to ESG integration. And that really has implications on the M&A landscape that we will ensure that as we're looking for opportunities that this ESG profile will be done in a quite an extensive manner. We have a variety of solutions here at S&P Global, emanating from our Sustainable1 division, which focuses on ESG that my dear friend and colleague, Sonia Kim, will discuss in a minute just detailing some of these solutions that we can assist our clients, whether they be in the capital markets arena or in the corporate sector in their ESG evolution. So thank you again to Lawrence and team for putting this together. And at this time, I'll hand it back to Lawrence to engage with Sonia.

Thank you, Evan. Before we move on to Sonia and our first polling question, I just wanted to comment, I thought the charts which you showed, the increasing ESG investment, and I believe the adoption of UN Principles for Responsible Investment were incredibly illuminating. And it really highlights how much focus there is recently on ESG these days. So again, before we move on to Sonia, I want to put up our first polling question for the audience. The question is what dimension of ESG do you think is the most pertinent to M&A and shareholder activism? You have 3 choices: a, environmental; b, social; and c, governance, and we'll give the audience about 10 seconds to answer before we see the results. [Voting]

All right. Let's see what the audience's thoughts are. So it looks like by over 50%, the audience thinks the environmental is the largest dimension right now that's most pertinent to M&A. And then following that up with governance and lastly, social. That's really interesting. Okay. And then we have a second polling question, which I'd like to also bring up now. And the question is, what do you think will drive ESG integration into M&A analysis? We have four choices here: a, voluntary initiatives; b, regulation; c markets; and d, other specific M&A. Again, we'll give the audience the same amount of time, and then we'll take a look at the answers before I hand it off to Sonia. [Voting]

All right. I see a good amount of responses right now. So let's take a look and see what the audience thinks. This one is a little bit more evenly split. So a little bit more than 50% markets, with regulation coming up at 41.1%. And it looks like our audience is a little bit less, or let's just say, more pessimistic on voluntary initiatives being the cause. So more so -- M&A and ESG integration is driven more so by market. You could consider it competitors or peers or regulation from governments and the less so on our own individual -- our, meaning, companies, our own individual thoughts. Very interesting. All right. So thank you to the audience for your thoughts on the 2 questions. And so now, Sonia, I'll hand it off to you.

Thanks, Lawrence. And thank you, Evan, for teeing that up and Lawrence for those great poll questions because that actually sets me up really well. I was going to talk about how we are actually helping our clients today with the decision-making process, particularly with a focus on M&A for this session. But again, going back to some of the market trends that Evan cited, I think really the key drivers of this focus on ESG factors and integrating that into our decision-making, in our due diligence process, it really comes from the fact that $1 out of every $3 or $4 now represents assets that are being invested toward ESG goals or strategies. And we also know that in order to achieve our Paris Agreement goals, it's going to call for something like $1.5 trillion in incremental spend annually between now and 2050. And so this has broad and wide implications for companies that have to make capital allocation decisions going forward. And so while -- as the poll results say, I wanted to focus deeply on the climate-related risks and opportunities that we're looking at as part of our investment decision-making process today. And although we're seeing a lot of momentum gaining in this front vis-a-vis TCFD reporting, this is still voluntary and there's limited disclosures that really help us fine-tune our ability to measure, monitor and quantify what climate risks and opportunities can present in the way we look at companies and their attractiveness. So if you think about all the pain points that companies have to address today, I mean this is a growing number, and these are very much same -- the same factors that we now have to look at and analyze when we think about targets in our merger and acquisition workflow. I mean these are the same set of factors that we have to integrate into the way we measure risk. And so thinking about that as a combined organization, post-integration, I mean these are all very important facets of the M&A due diligence process. And so if you -- I'm just going to skip a slide here -- just painting a really broad brush around the typical M&A process and the workflow, the way that we've been helping our clients in the recent past is around really the valuation and the due diligence process. And so now when you're thinking about the financial performance of a target, these ESG performance factors are becoming more and more critical. And what I wanted to focus on specifically were some of the data sets that we're using to help our clients with that valuation and risk assessment process. In fact, I'm referencing a piece that we published last year squarely focused on how to integrate climate analytics into the due diligence process. And I wanted to share with you the fact that we have a number of valuation -- we have a variety of different metrics that we can offer to help in that valuation process. But really, I think the starting point is understanding the target company's current performance in terms of their carbon intensity, in terms of their energy mix, in terms of how exposed and prepared they are to the future costs and opportunities related to physical risk and energy transition. And so when you are evaluating a target, one of the things that is critical to this assessment is understanding the baseline. So how is this company's current carbon intensities, its current environmental impact going to translate into future costs or opportunities. Perhaps you're a company that is looking to buy a company that is actually a leader in sustainability and is going to help you as a combined organization accelerate your plans to achieve less than 2-degree alignment, where it's going to help you be better aligned in terms of the products and services and how they impact society. And so doing that analysis, benchmarking against peers and industries, that is really the first step in understanding how forward-looking scenarios can look and how to integrate that into your valuation process. So the 3 data sets that make up our climate analytics suite are things that we've been talking to our clients about. The one -- physical risk, past alignment and carbon earnings at risk, are data sets that we make available. Our clients have been very keen in learning how to integrate this into their due diligence process. So first, I'd like to talk about physical risk. This is an analytics that allows you to understand where the largest risks fly in a company based on where the assets are located. We actually will provide a risk assessment based on where -- which assets are located and how prone they are to any one of the climate-related hazards that are associated with things like wildfire, hurricanes, heat waves, cold waves, motor stress, these are all things that will impact the value of your assets. And if these are identified at the asset level, it's very difficult to be -- you can get very blindsided only looking at the enterprise level. And so doing this at that asset level is really critical. In terms of energy transition, we also have a data set that tracks how companies are currently aligned to Paris alignment targets of the below 2-degree warming scenarios. And the way we do that is that we look at a company's current carbon emissions and intensity. We look at where that company needs to be in order to be 2-degree aligned. And by measuring the difference, we're able to quantify the amount of current emissions that need to be -- that are either over or under budget. So now if you're looking at a company whose target -- if you're looking -- excuse me, if you are looking at our target and their alignment is way above the budget, I mean that's a real cost that you're going to have to consider. And the reason that consideration is going to also be important is because that has cost implications. And that is in concert with our carbon earnings at risk analysis, which takes into account company's current carbon emissions, and we are able to then assess, using different pricing scenarios, what the future cost of that carbon will be to a company's financial performance. And so by quantifying that carbon pricing across low, medium and high scenarios, we're able to quantify what does this company need to spend in order to reduce its emissions. And that will inform the reduction in financial earnings that this company faces potentially. And these are all metrics that should be integrated into the cash flow modeling process and therefore, valuation process. And then last but not least, even post-integration, it will be critical for the combined organization to continue measuring how they are aligning to the 2-degree targets, how their products and services are aligning to other goals, such as the SDGs, and having the proper governance in place to ensure that certain provisions or warranties have been made prior to the integration that were meant to address some of these environmental or climate-related projects are actually being implemented successfully. And so if you think about all of those steps in that -- in the due diligence process and then even post-acquisition, it's -- I think this highlights the importance of looking at ESG factors and making that part and parcel of the M&A transaction workflow. And with that, that concludes my section. If you would like to learn any more about our products and services, please feel free to reach out to us. I think I'm going to pass it to Lawrence now.

Correct. Thank you, Sonia. That was also really great. I think you went through so many different scenario analyses and different ways of quantifying ESG data. I think that was also very illuminating for our audience. So thank you for that. Next, we have our third polling question. So you see it in front of you now. The question is, let's see, which of the following are priority areas for ESG integration in your organizations? You have four options: a, M&A process, including due diligence for acquisitions or existing investments/portfolio; b, ESG strategy and integration, i.e., policies, framework, adoption, climate risk, net zero or other targets; c, ESG reporting, i.e., systems, controls technology; or d, all of the above. So again, we'll wait about 10 seconds for the audience to provide their answers, and then we'll comment on it before I pass it off to Neema. [Voting]

Really curious what the audience's thoughts are on these after the first 2 polling questions. So let's see. It's great. Again, overwhelming majority, over 50%, say, all of the above. So it looks like we can't just bucket any of these areas as the main priority, companies, clients, whatever your function is within your corporation, you're looking at all of these as almost must-haves for integration. So again, really illuminating. I think that segues very nicely to our next speaker, Neema. I'll pass it off to you.

Thank you, Lawrence. Appreciate you transitioning that here. Thank you to S&P Global for hosting this event, and honored and pleasure to be here with this talented panelist group. I wanted to spend a few minutes here part of this session to discuss M&A and how ESG is ramping up as part of the entire deal life cycle and some of the market trends that we're facing. And so if we transition to the next slide here, in absence of a formal regulatory requirement and pressures that are gaining traction, what we're seeing is that ESG is being driven by investors, key stakeholders and societal expectations, right? In other words, externalities that you may or may not have control over. And so as you think about the deal continuum, how are we factoring in risk assessment and due diligence phase as a primary focus area through post-close strategy integration, into monitoring and reporting, ultimately to your exit. At the end of the day, the goal here is to mitigate risk and maximize value upon exit. The question really is around how does one do this and manage these ESG risks and opportunities as part of the deal life cycle? Well it can be a daunting task because ESG can be a bit of a land mine out there in that there are so many topics, and it may mean different things to different people and different companies. For example, Sonia and Evan did a really nice job talking about climate risk and carbon pricing and how that's gaining traction in assessments of a potential asset-level integration and acquisition as well as the corporate enterprise value. Now that is one aspect of the E of ESG. So when you think about environmental, there are other areas as well that potentially could be considered. Things like water use and stress, biodiversity and land usage, toxic emissions, environmental liabilities, or about packaging and materials, all the way to opportunities in clean tech and renewables. And then you transition to social, and there are -- those are further bucketed down into human capital risk, right? Things like your workforce, diversity, equity and inclusion, human rights. And then you transition to the marketplace within social. And that's things like product safety, customer satisfaction, responsible sourcing, of course, data privacy, which is very -- very, very prevalent and an area of focus these days. And then, of course, community and social areas to what extent is the target or the company focusing on local economic development, volunteering and giving back, access to health care and finance and community engagement. This is all then dovetails into the overall governance structure, which is who's managing this systemic risk here, who is the Board oversight, who has the policies and procedures in place, the business ethics of the organization and as well as managing anticorruption. So when you think about all these areas, the question is to what extent do you factor these in, in your due diligence period? Typically, what we're seeing is focusing on what is the most material issues to your company, and that's driven by the sector that you're operating. So company in oil and gas sector versus a technology or a financial services are going to have different material issues. So one is scoping around identifying those to really focus it on one of the key risk areas in the transaction itself. And then more broadly, once you kind of identified that current state assessment of risk, then you transition into value creation. The risk piece is to prevent value erosion. But at the end of the day, the impact piece is really what drives potential growth in enterprise valuation impacts. So how do you define the positive externalities of the potential target that you're looking at and the ESG impact opportunities throughout the value chain. This really begins on how you're going to transition your journey into value chain transformation and ultimately, factoring in the pressures that are coming from your external stakeholders and how do you integrate that and take advantage of it. Lastly, the final transition is really upon exit in driving value. So in order to do that, you have to be able to define metrics and start to measure those areas. So whatever your ESG journey may be to your organization or what you're looking at in your targets to grow, you need to be able to measure. And I think Sonia brought up some good points around baselining and starting to actually put pen to paper on the different key metrics out there in order to show and demonstrate positive impacts, both from a corporate standpoint, internally, but also externally, impact on society. As you see here on this chart, we provided some statistics here from some of the surveys that we've done. You can just see that there's a growing trend that many respondents are taking into consideration the positive impacts. So we started from table stakes being risk and liability and that's what you want to prevent upfront. But more and more, we're seeing the growth into wanting to capture value creation opportunities and how do you identify potential value in a transaction before others have caught up, because that could drive potential impacts later on. And of course, PE firms are placing greater emphasis on all areas of ESG. So this isn't just climate taking front and center, but it's across a whole host of issues, whether it be engaging with investors, whether it be governance and resourcing, investment decisions and pricing, all the way to policy tools, monitoring and reporting. We are seeing that as a growing trend. So the question is really, what type of dedicated resources do you have and what does it mean to your organization? Some folks provide more emphasis upfront in the due diligence period. Others may go lighter and then focus more on the integration side. It's really customized to your company in terms of priorities and how does it fit in. But the companies that do create external benefits to society tend to be rewarded with increased revenues over time. Maybe we can transition to the next slide. Based on our 24th Annual Global CEO Survey that was recently released as well as our Global Private Equity Responsible Investment Survey and Corporate Director Survey, we're seeing a big uptick trend in what's on the minds of CEOs and large private equity institutions. Over half of our CEOs that were surveyed are increasing the rate of digital investments, specifically in sustainability and ESG initiatives. That is really focusing in on data gathering, controls, processes and ultimately reporting in order to measure and capture value. ESG is not only focused on a valuation perspective, but also having a growing influence on your business strategy and ultimately, the entire transaction life cycle. So if you think about looking at investment thesis, it's no longer table stakes to just have maybe a light checklist, right, or check the box exercise. Companies are going above and beyond that through due diligence, through post-close, including it as part of the 100-day plan, including it as part of an integration strategy point, ultimately having Board responsibility and executive oversight. We saw that 43% of CEOs are choosing environmental impact as an area they should be doing more reporting on. And that's been driven by investors. The commitments that we're seeing, some of the panels discussed those, things like net zero, circular economy, of course, inclusive recruitment, some of the societal impacts that are out there. Companies are more and more growing with coming out with public commitments, and what that ultimately drives is being able to measure and report on those commitments and being held to those commitments. And what we're also seeing is that from a regulatory perspective, the regulators are starting to latch on to these commitments and making sure that if investors are relying on that information, companies are held accountable in order to maintain transparency and trust in the capital markets. And we're seeing a growing trend from private equity firms that's saying they're -- a majority of them are screening all their targets. They're including it very early in the pre-acquisition stage. Most of them have responsible investing or some form of an ESG policy or strategy and including tools to implement those. Ultimately, what this all leads to is managing and mitigating risks and creating value. Value creation is really 1 of the top 3 drivers of responsible investing that we're seeing right now in the capital markets. And what this is, is an opportunity to have proactive mitigation. Businesses that are able to quickly shift to lower negative and higher positive societal impacts are more likely to outperform as sustainable transition adversely affects their slow-moving peers. You have also targeted disruption here. And so new information on societal costs and drivers of internalization in different industries or parts of the value chain can be used to identify and target new market opportunities using existing capabilities. This then leads to linking value capture, right, where certain businesses have opportunities to convert uncompensated societal benefit streams into revenue streams. So we started from risk mitigation into revenue generation. And then ultimately, thinking about your strategic M&A, that new societal impact information can impact or likely create emerging winners with solutions that focus on societal challenges and really identifying those before they become visible to others in the wider market. And ultimately, this leads us to the key takeaway around preventing value erosion. So ESG is an opportunity to identify key risks. And the last thing you want to do in an M&A or a transaction is to overpay for something and take on headline risk. And then ultimately, we want to transition to identifying potential impact and value creation opportunities throughout the investment life cycle in order to drive future enterprise value long term upon exit. So with that, I appreciate the time here, and I wanted to transition to our next speaker.

Thank you, Neema. I'm a person who loves surveys. So I thought the survey information you had with the CEOs and private equity was really great. As we've been getting a lot of questions from the audience about workflows and data. So I want to remind the audience, if you're interested in any of the ESG data analytics that we've talked about, please fill up the survey that you see in front of you, and we're happy to contact you with any way we can help you guys out. [Operator Instructions] So with that being said, I will now transition it to Amy West, who'll talk about her piece.

Sure. Thank you, Lawrence, and thank you for inviting us to be a part of the presentation today. From my seat at a bank, I think a little bit of a unique perspective on the M&A angle as we try to integrate ESG factors into a holistic cycle. So we'll go through a few high-level conversations today, but I think it will really build on what my peers have presented. So maybe we can go to the first slide. I love what was said to start off this presentation by Evan, which is that we are seeing a once-in-a-generation shift and the speed of this shift has taken a lot of the market by surprise. Even 3 years ago, we were not talking about ESG as a material financial risk. We were talking about ESG as corporate citizenship initiatives. Really, the closest thing we had to proper ESG was the concept of socially responsible investing, where it was very common to sacrifice returns to really get impact and do the things that you thought were right. The focus on this has evolved massively. Obviously, the Paris Agreement was a watershed turning point where we saw policy really galvanize the public markets. And we saw growth of the public markets with ICMA putting in place the green, social and sustainable bond principles that really put in force market best practices. And on the back of that, we've seen a precipitous rise in both data and analytics. So now here we are. We're coming through this cycle, and we suddenly hit what one could call the ultimate stress test. We had a pandemic in the last year. If there was ever going to be a market event that really threw ESG for a loop, an area of the market that's evolving, it has never really been stress tested like this before, it was the last 12 months. But instead of seeing ESG whither into the background given the current dynamics, we've seen quite the opposite. We've seen the political environment, focusing on recovering not just quicker but better, and we've also seen increasing regulatory backdrops. We've seen in Europe and in North America, in Canada, in Asia a number of focuses on how we can implement ESG factors in a thoughtful way on the governance side to address what we now perceive environmental and social risk to be, which are material. If you look at how companies are now responding, this is going to change everything. This is no longer off the side of the desk. This has been incorporated at the Board level, and it's really been ingrained into how corporates are approaching their overall strategy. We're seeing returns openly talked about as being linked to our ESG governance factors. And there's no doubt now that ESG is really impacting company valuations. We've also seen a big evolution on the fiduciary duty file. If you know that it positively impacts valuations, we're seeing outsized focus and demand for ESG factors. It's hard to not consider this part of fiduciary duty. We don't think that this momentum is going to let up. So maybe I could ask Lawrence, if we could go to our first panel question, which I think is a quick one for the audience, although I think this audience may be more informed than most. How many countries globally have now made net zero commitments? I'll give a few seconds for the answer. And then we can share the results. [Voting]

Perfect. So interesting results here, a pretty split audience, with over almost, let's call it, 38%, saying 0 to 30; 51 to 100, got 28% of the vote; and over 100 got 16-roughly-percent of the vote. So if you go to the next slide, the answer in terms of who's made net zero commitments is now, over 130 countries have made net zero commitments to their emissions targets. So this is now something that is not just a nice to have. It's not affecting part of the global economy. It's really becoming a force across the global economy. So what form does this take? It takes the idea here that what gets measured gets managed. And so we are now seeing all of our major regulations and institutions implementing policy to try to address these material financial risks. We're seeing mandatory ESG reporting and disclosures in a number of jurisdictions. We're seeing legislated greenhouse gas emissions, and we're seeing increasingly reduction targets. And these targets aren't static. They're going to be increased and they're going to be reviewed every 5 years as countries go ahead and actually increase their naturally-defined contributions. Interestingly, we've even seen some countries, the U.K. being the first in 2019, to legislate the push towards net zero. So it's not just a policy commitment, but it's really been enshrined in legislation. So now we're facing a world where over 70% of the global economy is being covered by net zero pledges. So the question becomes, how do we actually see the markets then take what we know on the legislation file and actually try to engage, try to engage with companies through shareholder action. And I've said it a lot, but I'll say it again to this group. I do think really that proxy becomes policy. If you look back 5 years at shareholder votes that were being held, a lot of what we were asking for 5 years ago is now actually policy. In the 2021 proxy season, which we're in the middle of right now, has really been no different. We saw over 126 climate-focused shareholder actions. Over 1/4 of these were focused on GHG reduction targets and strategy, and 11% actually called for Board oversight. So again, if you're at a company and you're looking at this holistically, this is now something that is unavoidable when you look at corporate strategy. We're also seeing significantly more support from the public markets in terms of these resolutions. Just last week, ConocoPhillips actually had a pretty interesting outcome. There was a proxy that was put forward for their -- for Conoco to disclose Scope 3 emissions and on the back of that for them to also come up with a plan for Scope 3. Both Conoco and others have asked the SEC saying, "We can't necessarily control Scope 3, should this be something that's not on the ballot?" The SEC actually voted in favor of allowing it to stay on the ballot. And as you can see here from the slide, Conoco actually had 68 -- sorry, 58% of its shareholders approve for them to start disclosing their Scope 3 emissions. Again, what gets measured gets managed. And this is all becoming part of how our Board of Directors and our C-suite executives look at the viability of companies. So if we take this concept and we now talk about how ESG really relates to the M&A considerations of companies, we go to the next slide. As we see ESG as a consistent material financial risk, it's going to impact every area that a company looks at. And that includes M&A. That includes how we look at how we're going to grow our businesses. If you look at a recent PwC survey, they actually found that over 80% of companies surveyed had reduced valuations or been less willing to deal with the target based on poor performance against ESG factors. This is a trend that I think will likely continue. If we look at the utility space as a proxy, renewable energy M&A as a part of the overall utilities M&A landscape has increased over -- has more than doubled in the past 5 years. It's increased at a pace that we haven't seen in any other sector. And we're seeing more focus on what are factors that you would say are material. It's not just environmental. We actually see an increase of focus on both governance and social as well. If you go to the next slide, so how do we think about ESG as it integrates into M&A? Well, first off, and I know we've actually covered this in 3 presentations, and I love seeing the difference in approaches between the presentations. The way we look at it is first and foremost, the selection of M&A target. If you know a company has a publicly-stated ESG goal, has a net zero commitment and is factoring in these considerations, you also have to be looking at ES&G factors when you're proposing target companies. If an entity is misaligned on an ESG factor front, that can obviously post integration challenges. A great example recently of the opposite, where you actually saw huge benefits, knock-on benefits, was the Fiat Chrysler merger with Peugeot. There actually was the potential to help them avoid significant challenges on the carbon file. And to give a little more detail there, there was a lot of value creation. Fiat was not going to meet its emissions targets. And so it actually had a deal with Tesla to buy some of their renewable energy credits to avoid EU fines. After the merger, we actually saw the combined company is in the clear. They don't even need to buy credits because Peugeot's electric vehicle fleet actually brought the emissions down in a material way that was measurable, saving the company billions of dollars that they would potentially would have had to use via offsets. We also see, if you look at integrating ESG, a focus on reporting and disclosure. We see more companies, both public and private, looking at materiality assessments and stakeholder engagements. We're talking more and more, and I love some of the tools that Sonia shared, about ESG financial risk modeling, both transition risk and physical risk. And we're assessing how targets are compliant in integrating these risk models into their analysis. On the financing side, much is made of sustainable capital markets, and I think they are another great tool to focus on and highlight what companies are doing, and they can be a way to finance a lot of the integration we're doing on the M&A side and to address further and highlight a lot of these initiatives. And finally, just to talk a little bit about governance, and I think it really comes out in integration for M&A. But we're talking about how we address ESG risks and the opportunity areas that are identified during due diligence and the post-acquisition work plan. I think that the key here is really going to be progress updates, how we develop an internal ESG strategy and policies for the pro forma company and then also, how do we monitor and respond to evolving views of the market. And I think I loved earlier that there was the question around market and regulation and what's really driving M&A activity. And almost 90% of you said it's either the markets or regulation. And I think that's very true. In fact, I think it's both self-informing each other. So if we can flip to the next slide, I think a big question we get a lot is why is there so much focus on carbon? And I will say, I think that one of the focuses around carbon as it relates to M&A is because emissions is one of the very first things that's been legislated. It's also one of the things that we have the best ability as a market to quantify. And so what we're seeing is that increasingly, there's a monetary value assigned to carbon dioxide, the CO2. And while there's no global standard, there are a number of approaches that companies can do to actually implement what it would cost. Now bear in mind, companies really have 2 paths to achieving net zero. The first one is that they can actually have operational improvements in their company; second one is that they can go to the market and buy carbon offsets, the removal or avoidance credits. But most companies, before they even go down that path, have actually started to internally reflect the shadow price. In fact, over 50% of companies, per a recent CDP report, are factoring in the cost of carbon into their investment decision-making processes. And if you look over 80% in overall companies are using an internal carbon -- there's been 80% increase in companies using internal carbon price in the last 5 years. So as this evolves, we're seeing nearly half of the world's largest companies by market cap now looking at using an internal carbon price or planning to use an internal carbon price in the next 2 years. That's more than doubled than the last report from CDP on the topic. So if we look now, we have a majority of respondents in the CDP survey flagging that driving low carbon investments is going to be key for implementing how they look at M&A activity. Now we also need to factor in that this will also change how we do M&A. If the median price for carbon in the U.S. is $25, that may vary from market to market. Europe is higher than the U.S. Latin America is lower. In Asia, it may be a different price altogether. So now you can actually see differentiation between markets, differentiation between companies' location and the overall expectations on companies and the profitability and returns based on certain M&A activities. So I think that brings us to our second polling question, which is, does your firm incorporate carbon pricing into its investment decision-making process? [Voting]

And once we have the results, if you could share them with the group. So we had over 50% of those on the line say, no, you currently do not have your firm incorporating carbon pricing into your decision-making process. But I'm actually impressed that we have almost an equal amount, just under 50%, saying, either yes, you are incorporating it or you're working to incorporate it, which I think is in line very much right now with the conversations we're seeing. So if we look at carbon, and we realize it's going to be a vital tool for how we evaluate assessments, how do we put this into practice? I think that's going to be the challenge moving forward. Can you just go to the next slide. So how does this really work? And we call it on my team, really, you need to evolve or you can pay. There is an option for companies that you can say, "We're going to keep doing business as usual, and we will pay to offset our emissions." And that's a viable option if some want to do it, but I do think that we need to highlight that it doesn't come without a cost. As an example on the right, you can see a company with 10 million tons annually of carbon emissions. In 2016, the cost of offsetting that may have only been EUR 60 million. But in 2021, as the price of carbon skyrockets, the cost to offset that becomes very meaningful and material. You're also seeing demand outpace supply in terms of the EU carbon price. And this is something that we likely will see across jurisdictions. So we're going to see it becoming more and more expensive for companies to solely achieve emissions reduction targets, their carbon offsets, which highlights once again how M&A is going to be an incredibly effective tool to help companies accelerate their operational transition to a more -- to a reduced emissions or a lower emissions world. So if we look next at valuations, I think we should just highlight really 2 parts. One is that ESG started off -- if you go to the next slide, ESG actually started off in the public markets and was very much a focus. If you go back to ESG impact on valuations. Thank you. We wanted to share a recent example from the public markets, and we're also happy to share an example from the private markets. But in the public markets, NextEra has proven to be one of the most interesting examples of a multiyear shift that they've had underway from really a traditional utility to a renewable energy company. At this point, I think it's fair to say NextEra is one of the largest renewable energy companies in the U.S. Most recently, they were even in the market acquiring a number of wind farms from Brookfield Renewable that happened in April, was all publicly available. And if you look at the response from investors, investors are very clearly rewarding NextEra. They have both an elevated share price and a multiple that is far higher than peers in the utility space. In fact, in 2020, you may have seen headlines because NextEra actually surpassed both ExxonMobil and Chevron in market cap for a period of time. So what do we see as the difference here? Well, peer private -- peer PE ratios tend to be in the high teens, NextEra tends to be in the high 20s. The share price now, while still largely trading in line with the overall peer set, tends to consistently be elevated as we're seeing a focus on this. So if we look at this and we say, okay, we do see an opportunity for outsized valuations. One of the areas where we're seeing increased growth, probably a headline every other day, is the private markets. And I think there's a lot we can learn in the private markets from what we're seeing happen in the public markets as it relates to equity valuations. If you can just go to the next slide. And this is really our last slide, and I'm happy to open it up for Q&A. But I do think that ESG and private equity and for all private markets participants is going to become an increasing focus. It's appearing more frequently on Board agendas. And I think that when you talk to private equity firms, and I was very glad PwC did a survey here, but if you look at really where ESG ranks for our private equity clients, it's a top 3 initiative for over 2/3 of our clients at the Board level. We're also seeing an increasing amount of ESG screens applied to our private equity portfolios. And what I find even more interesting is that we saw almost 60% of these same private equity firms are now actually starting to refuse to go into agreements or they'll turn down investments on ESG grounds, which I think is materially different than how the market was a few years ago. How we now look at this and how we move forward is obviously evolving rapidly. But even in the last 2 years, we're seeing a consistent shift to factor this in. How do we think about if there's an acquisition that we're looking to model out? And we have a residual value associated with the asset at the end of a long-term project. Well, what if that asset is a fossil fuel-based asset? Does that change the residual value at the end of the long-term contract? If that asset is no longer worth something, but actually worth 0, does that change the return on the model? And I think the answer to all these things is yes. And so really, the question here is how do we take what we know, implement it thoroughly into our processes. And for some of our, I'll call it, first movers and our progressive companies, I do think there's intrinsic value to be had here and an opportunity for outsized returns, valuations and frankly, an opportunity for ESG to do M&A in a more forward-looking but also profitable way for a lot of our clients in both the public and private markets. So maybe I will leave it there and turn it back over to Lawrence and hopefully, we can open it up for the question and answer session.

Thank you, Amy. We are actually up at the end of the hour. So I don't think, due to time constraints, we'll have any time to tackle any questions. As I said earlier to the audience, we have a really fantastic group today with lots of information and lots of analysis and thoughts to share. However, we will try to follow up with anyone who asked questions post webinar. I do want to thank everyone for your questions and submissions and our presenters for their thoughts. At this time, I'd like to take the opportunity to ask our audience to answer our short questionnaire at the end of this webinar. Let us know if you're interested in learning more about our products, if you like a free demo, how you like today's webinar and what other topics you would like us to cover in the future. Also check out the Resources icon for additional collateral, including slides, survey data and reports relevant for today's webinar. To Sonia, Evan, Amy and Neema, again, I'd like to give thanks from myself and on behalf of the audience, for your insights. For our attendees, the presentation and replay will be available in a follow-up e-mail in the next few days. Again, we'll try to tackle any questions that were asked following this webinar directly to you. On behalf of our S&P Global Market Intelligence Group, along with our presenters, thank you for your interest and valuable time as we greatly appreciate it. Take care.