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

Thank you for joining us for this 30-minute session with S&P Global at the GS Carbonomics Conference. I'm George Tong, and I cover business and information services at Goldman Sachs. I'm really pleased to be joined by Doug Peterson, President and CEO of S&P. Doug, thank you for spending time with us.

Great. George, thanks for having me here today. It's going to be fantastic to have this dialogue.

I agree. So Doug, S&P as an organization is committed to ESG and climate. Can you talk about your overall approach and philosophy to ESG?

Well, first of all, again, thank you for having us here today. And ESG is not new for us. We started many years ago. As you know, we started in 1999 with the S&P Dow Jones Sustainability Index. And I became very interested in the topic personally when I was at a conference in Copenhagen 8 years ago and realized that all of the people around me were talking about ESG and environment and climate change. And we weren't really engaged in that in the U.S. yet. And so after that, we decided to have a 3-pronged approach. One is that we're engaged in how we can have the best approach to sustainability for our own company. The second is product and services and how we're going to provide data and analytics and research to the markets. And then the third is we're very engaged in policy topics. We are parts of different organizations on G7. We've been engaged with the TCFD, helping them understand what would be the best approach to disclosure. And internally in the company back to the second wing, I took on an approach for many years that we'd let 1,000 flowers bloom, that we would have different parts of the company coming up with new ESG products and services. But then 2 years ago, we decided to bring them all together to have an approach where we could have a single data set, a single data source and start coordinating all of our ESG initiatives across the company.

That's great. Now earlier this year, S&P announced the launch of its new ESG and sustainability organization, S&P Global Sustainable1. Can you describe this organization and the role that it's playing in key ESG and climate areas?

Yes. So that as I mentioned, this 1,000 flowers bloom, we had done an acquisition of Trucost. We've done an acquisition of the RobecoSAM CSA, Corporate Sustainability Assessment business. We had other scoring and ratings and initiatives across the company. And when we first brought together all the data and the background research, then it got to the point where we said, "You know what, we should build this as a horizontal organization across S&P Global, so we can have a single sustainability ESG approach." When we looked at it, it's absolutely incredible. We have research on over 15,000 companies, including our climate research. We have 700 billion different points of data. And we also have 400 people working on it full time, and we're adding to that group. And this gives us an ability to look at organizations and help them link their data, help them bring solutions that they need to make better decisions. And I'm very pleased with what we've been able to do so far with Sustainable1. It's the early days, and we're really excited about the growth we're seeing already.

That's great. Now research that's been put out by S&P Global Sustainable1 has looked into the path to achieving net zero emissions by 2050. What are the key opportunities as well as potential pitfalls of this objective?

Well, one of the pitfalls, start with that, is that there's still no real standards around the kind of reporting that companies are required to do or even what they like to do. The market doesn't -- hasn't really agreed on yet what is a standard and how do you define getting to net zero. There's organizations like Science Based Targets that's doing metrics and measurements on that. But there's many companies and organizations that are starting to talk about their net zero commitments, but there's not a way to measure it. Everybody has been involved in the Glasgow COP26 initiatives, and there's also a group called the Glasgow Financial Alliance for Net Zero, GFANZ. And there's over 300 organizations that are part of that, including us. And that group is responsible for assets of over $90 trillion. So one of the ambitions is to start getting all of those 300 financial institutions together to start converging on similar standards because there's a demand and a need for comparable, consistent scenarios; comparable, consistent data. And I do think that with the Paris Accord and now with the work coming out of Glasgow that there will be some approach that's going to bring more convergence, more comparability, which will allow us, to the root of your question, to start being able to assess, well, what will it take to actually meet all these commitments.

Right. Let's dive a little bit into ESG and sustainability offerings across S&P's core divisions. Within the Indices business, S&P offers over 150 ESG and sustainability-focused indices, such as the S&P 500 ESG Index and the Dow Jones Sustainability Index. What are examples of ESG indices that you've launched recently that are focused on a sustainable, low-carbon future?

Yes. This has been a really fantastic area for us, and we're pleased that there's been so much uptake so quickly. And there's also a lot of interest in indices because people see that as a metric to track progress, but also they see it as a way to invest with different types of investment objectives. So a couple of these. Let me start with one that's called the Net Zero 2050 Paris Aligned and Climate Transition Indices. It's PACT, P-A-C-T. These indices were developed to meet client -- climate and sustainability goals. But what's important is that they're specifically aligned around the Paris Agreement. Another example, the government of Germany selected our Index business to create customized EU climate transition indices for them that they're going to use to benchmark the performance of their government of pension funds. And the third, I'll give you an example on another country, Korea. In Korea, the Korean exchange, they're launching a new index. It's a carbon efficient index, and it's also based off of all of the information from S&P Global. So it's going to be branded S&P/KRX Carbon Efficient Capped Index. And so we're seeing a huge uptake in demand for using our data and our analytics to build these type of index products.

Right. Demand for sustainability investing has been on the rise. How much AUM is currently indexed to your ESG ETFs? And how rapidly is that growing?

Well, at the end of the third quarter, we had $26.5 billion in AUM that were linked to our ESG indices, and that was in ETFs. Compared to a year ago, it was up 178%. And so we see a lot of interest, as I mentioned before, in the net zero indices, climate indices, especially in Europe. We've also seen examples of where our -- just our data itself is being used. But when it comes to that AUM, we're seeing great partnership and a lot of uptake from asset managers, from governments, from pension funds, from endowments, et cetera. So we're really pleased with the growth, and 178% growth over a year is not something to sneeze at.

No, that's fantastic. In your Market Intelligence business, S&P Global Marketplace and Xpressfeed offer access to environmental and climate analytics in addition to ESG scores and governance data. Can you talk a little bit about recent innovations that you've made in climate credit analytics and Trucost carbon and environmental data in that part of the business?

Yes. So this is another area that we're seeing a lot of uptake. And you mentioned the different data sources that come into this. But one of the first ones is what I'd call the ESG portfolio analytics. And this is where asset managers, financial institutions, banks, they want to look and see what is the, for instance, carbon attribution or the ESG portfolio weightings that they've got. And what would be the way that either, a, put together a portfolio that would meet their ESG guidelines or the other is to say, "Well, I don't have guidelines. I want to know what does my portfolio look like?" So this ESG portfolio analytics tool is one that we've launched, and it's doing really well. There's another one, which I mentioned for our Index business, we've got the S&P PACT or the climate-oriented net zero. But we also have the ability to now measure performance against that portfolio, so that you can look and see a selected portfolio of stocks and see how are they going to perform against the 1.5-degree climate warming scenario. Another example would be -- you know the SDG, the Sustainability Development Goals of the United Nations. We have also a tool that allows you to look in a quantitative manner to see how an investor's portfolio or how portfolios can benchmark against each other to see how they're doing in terms of the Sustainability Development Goals. So we're finding different angles on this using our data. But it all starts with having very, very robust data sets so we can meet the needs of these different use cases and bring them to the market to help them make better decisions and manage and track portfolios.

Right. Now along those lines, how do you think S&P's products in Market Intelligence can help reduce the world's carbon footprint?

Well, it's -- one of the things we always say, if you don't measure it, you're not going to do anything about it. And so measuring this and getting the data available is critical. We're helping businesses and financial institutions make these decisions and understand where they are because of this sector-specific data. It's data that goes to the asset level, the company level. We've got information that we call it, it's the physical risk that allows you to understand what was the physical risk of fire or floods in an organization. We've got information about what we call preparedness, which would be solutions around energy, power plants, utilities, pipelines in the metals and mining industry. In the real estate industry, we have green property certifications. We're looking at -- in the technology industry, data center energy usage, et cetera. But when you take the information that we've got from Trucost, and Trucost has this environmental data, the analytics. And we put it together with the other tools for Market Intelligence, we can get that company level environmental data, build it into portfolio metrics. And we can then look at that across 15,000 companies and have a really good profile of their energy, their greenhouse gas emissions, their water and bring all that together for people that can understand the carbon footprint, the waste footprint, the water footprint, et cetera, at all different levels.

Right. No, it makes a lot of sense. In your Platts business, you provide pricing, news and analysis on energy and commodity prices. What role is Platts playing in the energy transition movement?

Well, a lot of times, people don't realize how important Platts is as part of our overall ESG footprint. And Platts, as you know, is a commodity analytics research pricing business. But if you think about it, I mentioned commodities, well, the #1 commodity has been energy, energy sources for so long. And that's really been the root of our business. So our customers, both on the side of those customers that are in the energy industry, whether you're in the energy-producing or the energy-using industry, they're all keenly aware and keenly focused on energy transition. And so how do the commodity markets get impacted by that? What we've been doing, increasing our services of data, of research. We've been looking at medium- to long-term views in our research to understand what was climate change and what do energy transition look like. We've also been developing very specific price points for things like clean oil or battery metals, which are going to be used inside of the electric vehicles, which are going to be changing the dynamics of the transportation sector. We have benchmarks for wind, for solar. We've got a hydrogen benchmark now that we have out there. And then we also have some analytical tools of something called, as an example, the atlas of energy transition, which is something that is on our website. And it's a way that you can map sustainable commodity markets to the future. And it gives you all of the picture. This map gives you a picture of all the different energy transitions that are taking place across the markets.

Right. Now sticking with Platts. Platts actually launched the world's first carbon daily or carbon-neutral liquefied natural gas price assessment tool and also started publishing 2 new daily voluntary carbon market credit price assessments. How far has the energy industry come in embracing sustainability as seen through the lens of Platts?

Well, when we look at this, there is real interest from both the industry itself as well as the users as well as policymakers to understand what is the footprint of the energy challenge that's out there to have this transition. So we're seeing incredible interest. As you mentioned, we started launching new products, new services, research as well as benchmarks. As an example, we started with this low-carbon approach with the blue hydrogen analytics and hydrogen analytics. We've seen a huge uptake for that very immediately. But this really creates some challenges. And we're trying to help those companies that need that data and that analytics to fill their challenges, to find ways to help service them and bring the solutions that they need. So we're along with our clients. We're along with the markets. We're also involved with regulators to help define what will be the needs the market has and how we can fill those.

Yes. No, makes a lot of sense. S&P's Ratings business has reflected ESG factors in its credit ratings for some time. Can you provide some statistics on the number of ESG Evaluations you're doing in the Ratings business and areas where you expect to innovate here?

Well, as you referred to it, a rating -- a credit rating and an ESG Evaluation are actually 2 different concepts. We've been including ESG factors in ratings for a long time. And recently, we've come up with some -- much more standardized approach to how we incorporate into a rating, what are the key factors that could impact a rating as well as having some specific language in a report, a specific paragraph about the rating and how the ESG impacts that. But today, when you talk about the ESG Evaluations, we've completed -- through the first 3 quarters of this year, we've completed the same number that we did in all of last year. Similarly, we also have what we call Green Evaluations. We've done 40 ESG Evaluations, new one completed so far this year and 24 Green Evaluations. And then we've also done -- we performed 40 ESG Evaluations through the year this year. So we're already at the same level of where we were last year. We surpassed it just in 3 quarters. And so we've also introduced something else that's related to that. It's called second-party opinions for sustainability-linked financing. It's when an organization wants to issue a loan or a bond, and they want to have a framework where somebody can provide an opinion about the sustainability aspects of that. And that's a new business that we've just started, and we're just working on that as well. And so we're interested and surprised and actually pleased that there's probably going to be another opportunity we can start pursuing.

That's great. In 2020, S&P acquired the ESG ratings business from RobecoSAM. What was the strategic motivation for that transaction?

Well, first of all, we had a relationship with RobecoSAM that went back over 20 years. They were the data source for the S&P -- or sorry, the Dow Jones Sustainability Index. They were the data provider that we used to determine what would be the components of those sustainability indices. So we knew them really well, and we had a great relationship with them. We also realized that since data is the core of what we do, and I keep talking about it over and over how important data is, we realize that having this kind of data that went back over 20 years consistent across many different sectors, different countries and basically covering the same type of large-cap organizations that are -- we work with very closely, that it would bring us this rich data that would allow us to supplement all of the ESG work we were already doing. We can link it up with the data that we have in Trucost. And that what we've seen is since we now have started working with them and brought it into the group, we've been able to increase the number of companies by almost 600 just this year alone. We're up to 1,800 companies now that are filling out the forms and involved in the CSA. The companies today represent over 45% of the global market capitalization, and it's growing quickly. So we felt that this was a way for us to bring a source of data that went back over 20 years. It's transparent. It's got a consistent methodology. It's a very robust source of data, and that's exactly the kind of thing we wanted to have in our company.

Yes. No, that makes sense. We're at the very beginning, arguably, of a long journey of enhanced disclosures of carbon intensity and Paris alignment metrics across investor portfolios, across consumer goods, services. And this likely will require a pretty extraordinary effort across asset owners and consumer-facing companies and collecting and elaborating and disclosing this data in a relatively reliable and auditable and digestible way. Given all that, where can S&P Global make a differentiated contribution to this important journey towards reliable and informative carbon labeling?

Yes. Well, we believe, first of all, we can be involved in helping the markets with our research, our standards, our data and helping ensure that we can provide the market with information they can use to make decisions, that there's ways we can help standardize it. And that's in a sense when I talked about upfront, one of our work streams, which is our products and our services. But we also think it's important that we're at the table with the different organizations that are setting the standards. As an example, there's a lot of public-private partnerships. There's the work at the GFANZ. I'm leading a task force with the G7 on Impact Taskforce. There's a working group that I'm leading that's looking at harmonization, integrity, transparency of sustainability reporting and providing the feedback and recommendations to the G7 governments on how they should look at their securities regulators to have greater harmonization. We've seen a threefold increase in the number of companies that have started working on TCFD. So remember, the Task Force for Climate-related Financial Disclosure came out, I guess, 4 or 5 years ago when they first had the work, and then it started when the companies started reporting. Now, it's gone up 3x that. And we've also been working with companies to provide them with the data that they need for that. But connecting asset owners, asset managers, financial institutions, organizations -- like government organizations, regulators, this is something that we feel like we're already in a unique position because we do this through our Ratings business, our Index business, Market Intelligence, Platts, anyway. And we think this new world of sustainability is one where we can play a critical role.

That's great. ESG represents a very topical and fast-growing area for many of S&P's customers. Approximately how much in revenue do you generate from ESG-related products a year? And how quickly is this revenue base growing?

Well, last year, we delivered $65 million of revenue across our portfolio. This year, we're on track for approximately $100 million, so a 40% growth rate. And looking at the portfolio, the investments we're making, what we see projecting our earnings, we think that by the -- 2025, this could be a $375 million, $380 million business.

Got it, which is incredible. S&P has significant insights into environmental and sustainability topics and research. How are you leveraging your unique insights to run a more sustainable operation at the corporate level?

Well, this is something that -- first of all, we have a commitment to this. We felt that if we want to be a credible supplier and partner for sustainability data and analytics that we also had to look at our own home or if you want to say, eat our own cooking. So we started this program many years ago to look at our governance standards and our Board of Directors, our risk management standards, how we run the company, how we disclose ourselves. And then we looked across ES&G factors. We also looked at environmental factors. We've announced this year our own road map towards net zero. And we've done a detailed analysis on Scope 1 and Scope 2 emissions. We've also provided a way to look at Scope 3 emissions and how we can have our procurement team looking at corporate spending around sustainability so we can calculate our emissions. We also -- through our own analytics, we provide the market with a carbon-adjusted EPS score. When it comes to the social side, we've looked carefully at our own DEI analytics and our own position on diversity and equity and inclusion. And beyond that, we're also looking at our suppliers, the organizations that we work with to supply us with our information, whether it's our real estate, our advertising agencies, et cetera. Who are we working with? And who are the suppliers to us? And are we also promoting the DEI in our supply chain? We're also looking at our communities and how we're supporting those around us. So we've taken a comprehensive view, if you want to call it, of the S of the ESG in our company as well. And then clearly, because we have these great partners and great companies inside of somebody like Trucost has been helpful feeding our own TCFD report. So we've done our own reporting on Scope 1, Scope 2, TCFD. We're involved with how we think about DEI factors, how that's used. And it's also included in our own benchmarks. So we have a scorecard that we use as a company for managing our performance, including how that is included in our calculation of our compensation levels. And we've included a sustainability metric in that as well as in our people metrics, we're including more about DEI. So this is something that's the way we live. We think it's important for us, and we really appreciate that this is something that makes us stronger as a partner, a trusted partner to also help other companies have the data and analytics and solutions so they can make the best decisions about their own sustainability.

Right. Now wrapping things up, Doug, what would you say is your outlook for ESG longer term and S&P's overall role in ESG and climate?

Well, first of all, this is -- I probably said this before. You've heard me say this before. I think we're only in the second inning of a 9-inning baseball game. This is something that's really just getting started. And the way that the analytics and the data and the research from sustainability products and ESG, it's going to start snowballing. It's going to get bigger. It's going to move faster. But the reason I say it's the second inning is that we've just started understanding the use cases, what are the data sources, what are going to be the use cases by governments, by corporates, by financial institutions. And a lot of this is being driven by the demand from asset owners, from people that are our employees. They're students on campuses. They're people that are beneficiaries of pension funds, of endowments. And so these are people that are starting to demand more and more information. And the more information they see, the more that they can understand what the impact is of what they're investing in, the more information they're going to want. And the more there's going to be need for ratings, for scores, for data, for analytics, for research. We see this in the second inning. We see the game moving faster, moving into later innings. And it's our goal and our commitment to help build the market, build it in a responsible way and help participate to ensure that this is a central topic that we're one of the key players at the table.

That's wonderful. Well, Doug, it was a pleasure having you. Thank you for joining us, and thank you for the incredible insights and color.

Great. Thank you so much, and congratulations on having this conference.

Thank you.