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

Hello, everybody. Thank you very much for joining us for today's webinar. My name is Lauren Smart, I'm the Chief Commercial Officer at S&P Global Sustainable1, and it is my great pleasure to be moderating today's webinar, The future of ESG Scores. Before we get going just a little bit of housekeeping, so we want this to be an interactive session and encourage you to submit questions for discussion. At the bottom of your screen, you'll see there's a row of widget icons, and these icons will allow you to interact with us throughout the session. I'd like to point out the Q&A widget, which can be used to submit questions to the panelists as well as a survey widget. And please take a moment to fill out the short survey after the webinar because we really do value your insight. Additionally, you can find any of the reports discussed today in the resource widget. The webinar is being recorded and an on-demand version will be made available shortly after we conclude. And if you encounter any technical issues during the program, please try refreshing your browser. And if the issue persists, please use the Q&A widget to contact us, and a member of our technical team will assist you. So that's it with the housekeeping, and let me now kick off by introducing today's panel. So we have Jaspreet Duhra, who is the Managing Director and Global Head of ESG for S&P Dow Jones Indices. We have Manjit Jus, who is the Managing Director and Global Head of ESG Research and Data for S&P Global; and we have James McMahon, who is the Chief Executive Officer and Co-Founder of The Climate Service, which is now an S&P Global company. So let me kick off by presenting to you a little bit of the flavor of the webinar we're going to be speaking to today. So we have seen, obviously, in the market, the explosion of interest in ESG data and scores recently. And we've also seen an evolving use case and evolving needs from different market participants for ESG data and scores. And let's talk about ESG data and scores in the broadest possible sense. So ESG as well as climate data because we're beginning to see that both have got quite specific use cases in need in all different segments of the market. So if we think, for example, about some segments of the market are aiming to have a very clear and precise impact outcome, how can I make the biggest impacts in the world with my investment or with my project? We've also got use cases which are much more specific on risks. So how do I make sure that I derisk my portfolio or although I've got a due diligence process that takes into account ESG risk. We've also got other use cases. So is my portfolio or are my investments Paris-aligned? Will they meet Net Zero targets? And all of these different types of questions have got very different sets of information and data that feeds into them. And so what we really want to unpack today is what is the evolving role of ESG scores and climate data in the market? And how can we make sure that we meet the needs of the different market participants and their use cases. I'm going to kick off today with great pleasure, though, in introducing The Climate Service and James, the co-founder. We announced the acquisition of TCS on the 4th of January. And one of the key reasons why TCS was such an interesting proposition and we're so pleased to have them in the S&P family is because they are meeting in a unique way, one of the key evolving needs for climate data, which is in terms of physical risk. So without further ado, I'm going to pass over to James to introduce himself and TCS.

Wonderful. Thank you so much, Lauren, for such a kind introduction and also for the warm welcome to a sustainable one. We're just extremely excited about our joint vision for the future of ESG scores and particularly climate risk for us and how we intend together to enable embedding climate-related financial risk into every economic decision. So today, I'd like to share with us all where we're seeing the needs in this space and how we're approaching creating an ever more transparent decision useful and scientifically and financially robust set of models. So next slide, please. And I'll just say that the climate service is a risk analytics platform that enables you to measure and manage your financial risks due to climate change. So as we're all aware, the demand for decision-useful data on climate risk has increased really dramatically over the past few years. I mean, I think that's why we're all here today. We're hearing that our clients are under extraordinary pressure these days from both regulators and investors to answer basically a simple question that provides -- that actually proves quite difficult to answer. And that question is, what's your climate risk? Well, it sounds simple, but getting there is quite a long while. Next slide, please. And to top it all off, there, all of our clients are increasingly being asked to disclose their climate risk in a quantitative way. So I've heard it said that disclosure is moving from a literature paper to a math paper. And the challenge then is to start with all the best data in all the gray boxes on this picture from the task force and climate-related financial disclosures. Start with this -- the best data possible and then model climate risk in the most robust and defensible way using transparent, basically, physics and economics, and then get it all the way down this chart to the financial impact box, that light blue box so that you can then begin understanding, okay, how does this really impact income statement, cash flow, balance sheet? And that's the way that it can be actually useful to make financial decisions. So next slide, please. And that's, of course, what I'd like to tell you about today, and this is a screenshot from the Climanomics risk analytics platform. Climanomics is what we call this platform the marriage of climate economics. And so over the past 5 years, we've tap some of the world's experts frankly, to build an analytics platform that models the financial impacts of climate change aligned with the TCFD that I just showed you on the last slide. And we need to be able to do this for any asset, anywhere in the world, anytime between now and the end of the century. And we need to do -- be able to do it and the platform does do it from the rooftop level all the way to the company level and even the portfolio level and across multiple mission scenarios. That's what it takes to be decision relevant at this point. So if you go to the next slide, I'll ask, how are clients using this data right now. And there are 4 main ways that they're using it. The first is strategy. So executive managers are using this data to support medium- and long-term strategy building in nearly every business function from product to procurement to HR even. And then there's risk management and resilience. So Chief Risk Officers and their teams are able to quickly understand the risks in their whole portfolio so that they can then prioritize their risk mitigation efforts. There's responsible and sustainable investing. So portfolio managers are using this data to understand the risks in sectors and companies and even individual real asset investments, shopping malls, et cetera. So that they can improve their long-term risk-adjusted returns, maybe even find some alpha. And then finally, compliance and reporting. So CFOs, chief sustainability officers, et cetera, are using this data to underpin their reporting with the best available science and data so that they can justify their financial and nonfinancial reports. So holy cow, that's a lot of use cases, which makes sense, I guess, since all business functions operate in the context of the weather and how it changes that is to say, the change in climate. So what kind of coverage is needed to inform these decisions, all of these use cases and these decisions. And if we go to the next slide, please, we've heard loud and clear that, first and foremost, clients are asking to quantify the impact, financial terms. It's no longer as useful to just simply say, hotter, drier weather, cooler, those kinds of metrics are not as useful when you're actually talking about investing dollars. Investing this much amount of money, I need to understand what the return would be. It's important that the coverage is global and our coverage is global. It's important that it's start at the asset level and build up. In the past, we've seen approaches to understanding climate risk start at the top -- sort of a top-down approach, which is, of course, very useful a macroeconomic view down through countries and sectors. That's, of course, very useful. And yet when I'm dealing with a clear asset or set of assets, we really do need to understand how close to the coast are they and those types of things. And I'm going to get to that a bit more in the next slide. We need to be able to evaluate multiple scenarios and look at this across time periods as well. So how do we do this? That's what this slide talks about. We use a hazard vulnerability risk framework that -- similar to those that are used by catastrophe risk models in the insurance industry. So starting with the hazards, of course, at every point on earth or every asset that you have, we look at the -- what the climate data and all of the climate models, frankly, say about what could happen to the physical climate under various different scenarios at that point. And that's the very first step is understanding how the hazards themselves will change. Then very critically, we need to understand how the change in the hazards or perils would impact that particular asset. So let me give you an example. Imagine a region-wide drought that the climate models say will be worsening or improving in a particular place. You've got a field of grapes. That drought will impact the field of grapes very differently than it would impact an office building sitting in that very same location. So you can see that it would decimate the economic productivity of the field of grapes, do almost nothing to the office building. That's why the vulnerability is so important in getting us to that final step of financial impact. So going to the next slide, please. Circling back to that simple question, what's my climate risk? You can see that there's a huge amount of complexity under the covers to get there, petabytes of data that are crunched through multiple econometric models, hundreds of -- thousands of impact functions across hundreds of different asset types. But we need to boil it down to something that's simple to use and you don't need a PhD in Climate Science, leave that to our team. But let me just give you an example of how some clients use this kind of data and how simple it can be. Imagine that you have a portfolio of real assets. The first step is just to say what they are and where they are, of course, and how they produce financial impact for you. So for example, the insured value might be a measure of that. You upload that into the platform. The platform crunches away, does its thing and then you can actually use the interface on the platform to analyze the results. And there's some nice maps and graphs, as you can see. And then on top of that, though, you can download the data so that you can import it into your own decision-making tools and of course, some -- get some reports on what the top lines are. So if you go to the next slide and in conclusion. We're super excited about the opportunities to leverage the strength of -- many strengths of S&P Global to combine them with this industry-leading capability we've developed over the past 5 years to take this capability to the next level and this whole field, frankly, is evolving very, very rapidly. We're guided as always, by what's most important and useful to our clients. So we love to have the back-and-forth discussions. And that allows us to further our mission of embedding climate into every financial decision on earth. So thank you very much for your time. Very happy to answer questions in the next segment. Over to you, Lauren.

Thanks, James. We are super excited to have TCS in the S&P Global family. And I think as James described, the needs and the use cases for climate -- specifically climate data is really taken off. There are so many critical use cases. And it would be interesting now if we just pivot to Manjit, on the ESG data side, obviously, we've been running the corporate sustainability assessment for many years, and we asked more questions each year, and so our data set evolves and growth. Can you talk a little bit about that and the kind of expanding ESG questions and use cases that we have for ESG scores?

Yes, absolutely, Lauren. I mean very much, as James pointed out, this is a lot of data that goes into what is known as an ESG score or an ESG rating or ranking however you want to call it. And as ESG has evolved, and as topics have evolved, as the world around us has changed, these metrics have had to kind of move with that. And what we are seeing now is also a shift kind of in perception of how an ESG score potentially could be used. There is a headline score that contains a lot of different information. Some of that information may be relevant to some clients. Other pieces may be relevant for other people. And so I think what we're seeing is that ESG scores are no longer kind of this stand-alone, one-size-fit-all concept, but rather they are increasingly being used either alongside other data sets. So like climate data sets with exclusionary screens that you might want to run on a company or an industry with impact metrics being overlaid on top of that to kind of meet these new use cases, whether that's avoiding risks related to ESG, whether that's focusing on impact. You may have thematic needs. You may want to zoom into a topic like diversity to create a specific index. And so we see that the concept of an ESG score is also changing because increasingly, I think it's being seen as the sum of many different parts that are relevant and kind of usable in their own right. So I think that is really interesting to see, and I think that comes with more knowledge about ESG generally as ESG kind of enters the mainstream financial markets and the deeper understanding. So back to James' point of view, you don't have to be an ESG specialist to grasp some of these concepts because they're very kind of close to your daily work, even if you are just a normal financial analyst and not an ESG specialist. And I think that opens up entirely new realms of opportunities for using ESG scores and the underlying data.

Thanks, Manjit. And we've seen an increasing number of companies participating in the survey and also releasing their data and being transparent. Can you give a couple of examples of ways in which our kind of engaged approach with companies helps to kind of expand the -- well, really sort of lift the market for everybody in terms of the ESG availability, take data availability?

Yes, absolutely. So I mean when we started collecting ESG information over 2 decades ago, the only way to get that information was to pick up the phone and call a company or to send them a questionnaire in the mail on paper and hope that they would respond because at the time we were asking questions about water consumption and energy consumption that kind of baffled them and then confuse them as to why this would really be relevant for anyone outside of people within their company. Obviously, we've come a very long way since then, and there is much more information that's disclosed. The quality of information is significantly better than it was. So we're on that path, but there are still many areas of the world where ESG disclosure is not very prevalent. There are obviously a lot of ESG topics that are -- it's a conversation. It's changing every day. You can't really keep up with all the metrics and then kind of predict what exactly will be needed in the coming years. So there is always going to be kind of a gap between what's disclosed and what -- because of the new hot ESG topics are, that people are discussing, and for which investors will want answers and will want data in the future. So what we found is that an engaged approach -- approaching research by involving the companies who are actually researching helps not only us understand their business models better and understand them as companies better and the challenges that they face being at the ESG challenges but also the challenges in collecting data, sourcing data, bringing hundreds of people together within these very large organizations to have a conversation around ESG. So that helps us become better, I think, in terms of asking the right questions. But at the same time, we've also found there is a very educational element to this. And by asking questions and involving companies and challenging them on new upcoming ESG topics, we help them think about things that they may have thought about but haven't maybe had the internal buy-in to really discuss more formally. And putting these metrics into a score certainly is kind of a driver and incentive to actually formalize those discussions and start looking at these things. And what we found is that -- it is -- there are so many actors in the space that are driving transparency. We are one player in that space. But by challenging companies, by involving them, by getting them to think ahead and not just look backwards at what their water consumption was last year, but to James' point, what are the risks that are coming in the future? We have seen that they are more comfortable than disclosing that information, not only to us but also to the broader community of stakeholders. And I think that is quite a powerful component of our research model.

Fantastic. Thanks, Manjit. Turning to Jas. So the index world is obviously consumer of ESG and climate data. And what have you seen in terms of changing or evolving needs from within your client base for ESG and climate-related data sets and indices?

Yes, sure. Thank you, Lauren. So we've been creating ESG indices for over 2 decades now. We launched the first-ever global sustainability benchmark back in 1999. The Dow Jones Sustainability Index, that benchmark is still going strong and in fact uses the scores as Manjit just described, the CSA process for the last 2 decades. And what we've seen in the course of those 2 decades, of course, that interesting ESG investing has grown significantly. And with that has come maturity, there's come a variety in demand and interest from investors as to what they're expecting from an ESG index and our offering has evolved to anticipate what the modern market is moving, but also to reflect investor interest as well. Now the pace of interest in ESG indexing has really increased over the last few years. If I can give you one stat to support that. In 2020, we saw that was $170 billion in ESG ETFs in U.S. dollars. When we look at the data coming up to the end of 2021, there's been a 2.5-fold increase in the space of 1 year. We're now getting USD 430 billion in ESG ETF. So a really strong committed interest and increasing interest in ESG indices. Now we've heard a little bit about alternative data sets outside of ESG scores. What we're seeing is that demand for ESG indices that are using ESG scores at their heart or selection, which really still remains very strong. So we launched new ESG index series a couple of years ago in 2019. This is one of our flagships. It's where it's from strength to strength. And what we're also seeing is that there's a very strong demand where we have a flagship benchmark strategy or an ESG equivalent using ESG scores. So we have flagship equal it -- we have flagship dividend our scrap indices. And we're now launching ESG equivalents based on the demand we've seen from the market. and ESG scoring is, of course, one approach. The other approach where we see a lot of demand. There'll be no surprise here is around climate indices. And here, we're using alternative data sets looking outside of ESG scores. Again, there is no one-size-fits-all when it comes to climate. We're launching different indices to speak to different investor use cases. So we have some investors who've chosen a path of divestment. For those investors, we have possibly free indices where we're reducing exposure to any companies that have access or to have books -- possibly revenues on their books. For those investors who chose not to go down the divestment route, and there are many investors who are not able to do that because they're universal owners because they choose an engagement path. We have carbon indices that allow the carbon footprint relative to the parent index but still remain invested across the industry. The way we do that is we shift the weight towards companies who are less carbon-intensive within carbon -- within their industries. And also really interesting is we build in an engagement tool as well. So we'll shift the weight more towards companies who are disclosing the greenhouse gas emissions. So a nice way to engage with companies to try and increase their weight in those particular indices. And of course, there's a huge amount of interest in Paris-Aligned & Climate Transition indices at the moment in indices as well. The other areas where we've seen changing appetites over recent years is, of course, not just in equity indices. So we offer indices focused on other asset classes. So increasingly, we're seeing demand for fixed income, ESG indices. We have a great bond index, for instance, that gives exposure to that particular market segment. We have real estate indices where we're using data from [indiscernible]. We recently launched and infrastructure index, which focuses on that Paris-Aligned & Climate Transition benchmark that we mentioned earlier. And what we're also seeing is demand for regional exposure, so not just exposure on the North American market, the European exposures, emerging market exposures, country-specific exposures when it comes to ESG. And that's we're moving into more of these smaller regions, as we move more into emerging markets we're finding that one of the challenges is around the data coverage and the ESG data that's available there. And so of course, we're concerned about what companies are disclosing. We're also concerned about the quality of that disclosure. And this is really where we're leaning on our research providers and partners within the sustainable 1 unit to help validate that data to give us assurance about the quality of that disclosure and potentially to fill those gaps where the disclosure is not quite there.

Fantastic. Thanks, Jas. And that really underlines the whole range of different use cases that they are even within climate, the data sets that you would need to create a fossil fuel-free index would be different to the data sets that you would need in order to create a Paris-aligned index. So -- and I think it would be good to pick up on the point that you raised around the index in different asset classes because I think that this -- the ESG world really originated within the listed equity space. As Manjit mentioned before, the primary way of accessing data was from disclosure from companies. But as we've moved out of the listed equity space as the -- as ESG needs to be embedded and integrated into a whole range of different types of asset class. It presents some unique challenges in terms of data availability. Obviously, the private companies tend to disclose a lot less, if at all, smaller companies often have disclosure challenges. So it would be great, Manjit, maybe you could talk to us a little bit more about how we solve for some of these kind of disclosure challenges?

Yes, absolutely. And you're absolutely right. Certainly, ESG has been primarily focused on the listed equity market space for much of the time that it's been around. We do see that it's shifting though. I think there is increasing interest from, for example, privately held companies to better understand what disclosure requirements are for ESG, I think there's increasing pressure. We're seeing also from private equity investors that want more transparency on the holdings that they have. So we see that there is a shift, but we also know it will take time for us to get there. And so in the absence of information, I think what many of us in the industry turn to is finding a way to kind of estimate what data would be, what a score would be to try to bridge some of the gaps. And that's something we've been doing at S&P for a very long time. On the climate front, Trucost has been doing it, also for a very long time before there was broad climate disclosure around there. And I also think that increasingly, we're seeing company-reported data to my earlier point, is being supported by more kind of an outside in view of a company. So alternative data sets. And there are so many data sets that exists today. There is -- if you're looking at climate, there is satellite imagery, there's asset-level data. There's all kinds of data sets that you can use to actually inform what a score would be or actually should be even in the absence of a company reporting that information itself. So for us, this is kind of cutting-edge, looking at what data can you use? How can you combine this data to make an informed decision or to have an opinion about a company's exposure to ESG risks? And I think that just using external data will gain a lot of traction in broader ESG scores in the coming years. I'm quite certain of that because I think there's also a lot of questions around, well, should we just be relying on what a company is saying? If you're, for example, measuring impacts towards SDGs? Or should there really be kind of a second opinion on whether, when a company is reporting in terms of having a positive or a negative impact is actually valid. So we use imputation in a number of different areas already. We are looking at how we can apply this also for ESG scores, especially as we enter the SME space, looking at more private market companies but always combining that with engagement as much as possible to even be able to give companies kind of a starting point by saying, hey, we've estimated something on you. Can you please review this and tell us if this is accurate? And we're already having those conversations today. We do it with our environmental data. And that, again, going back to my point earlier about education and engagement that is a very important step because often these companies are completely unaware of how these scores are being constructed. They are being assessed. There is opinions on them, but they're not really involved in the process. And I think that is something that is really important. And combined with that, I think the most important thing is transparency. So to be very transparent about how you're doing this, why you're doing this, be transparent about the assumptions that you're using. And again, you can spell it out in very complicated technical documentation that only PhDs can understand. So we also need to be able to boil down that really technical work into something an explanation that is very simple and easy to understand for our clients, and that is something that we continue to work on and improve on every year because not having that transparency, I think, is something that, again, I think won't hold up in the coming years as more and more people use ESG data.

Thanks, Manjit. And pivoting now to James. So obviously, TCS has got a really interesting approach in terms of not having to rely on company disclosures. That's increasingly relevant when particularly with real assets, and you've got a client base that includes some real asset investors too. Can you just expand a little bit on the bottom-up approach that you guys have?

Sure. One of the things -- you remember me going through the hazard vulnerability risk framework. Well, the input to this framework is the assets and their data and starting from the rooftop level. So that has been a challenge for this entire industry for years and years and years, and like many long white papers have been written about the need for better asset-level data to inform this climate-related analysis. This is actually one of the things that we find incredibly exciting that our joining forces with S&P is that S&P has phenomenal asset data. But when we're working directly with the company, the company can give us that asset data. So we work directly with companies and we also work with the financial institutions. If the companies give us the data, of course, in a very obviously confidential way, we would then we can analyze that data directly can. If we don't know the data or if the company has not given us the data, those are the kinds -- that's when we can use the -- what is known about that asset label data already that a company has through other disclosures that they've made or other publicly-available sources. I will also say that some of the questions that are beginning to come in are asking about what happens with a privately-owned company, if it's not publicly-listed? Well, it's just basically the same answer. If it's easy to understand or if it's possible to understand or model, where those assets are, what they are and how they contribute to financial impact, then it's possible to put them into the system and generate some models for how climate would impact them. So we don't have any magic wands as much as I wish we did, and we can't know things that -- about where assets are in privately-traded companies or nonpublic companies. But we can to the extent that asset-data level is understood, we can model the impact. Does that help, Lauren?

That is perfect. And I think that we've got lots of interest in this particular area as well from the questions that are coming in, which is -- just a reminder for the audience, if you've got questions, please put them into the Q&A. We'll start weaving some of those questions into the -- into my questions now. Jas, there's a question here about the challenges of integrating ESG and climate into different index objectives. And as the demand for ESG and climate-related investment strategies grows and expands and the use cases evolve, so too do some of the sort of risk volatility, other investment needs and the ability to integrate ESG & Climate into a range of different strategies. Can you talk to us a little bit about that?

Yes, absolutely, and that's a terrific question. So our approach is to offer choice to the market. So we understand that investors have different investment objectives. They're trying to achieve different ESG objectives when they're looking at index use cases. Our objective is to recognize that some investors are looking at core ESG benchmark. They want ESG or climate overlay to that benchmark, but they have an eye to the parent index. Risk return profile, we have an eye to tracking error. We will take a different approach to constructing indices to speak to that audience relative to someone who's looking at an ESG index, and they're very much focused on the climate or ESG improvement and they're less concerned about that tracking error objective or the profile of the parent benchmark. So it's our objective to get those to the market. You heard me talk earlier about the different ways that we are able to do that with climate indices, tackling different plan objectives. Let me also give you an example of how we do it on the ESG scoring side as well. So we have clients who will come across and say, okay, we want to invest in the S&P 500 but we want the ESG version. We don't want to deviate too much in terms of risk return. It's for that audience, we cater that flagship ESG index series back in 2019 and the way we were able to achieve objective is that we do apply core business activity exclusions. We do apply core ESG scoring exclusions. It's very important that we are removing companies that are problematic from an ESG perspective. We're then taking that remaining pool of companies that are eligible from the parent benchmark. We're ordering them by their ESG score within their industry groups. And then we're selecting the top rank companies targeting 75% of the market cap in the parent index industry group. And what we're left with, if we stick with the example of the S&P 500, about 300 constituents, you get about a 1% tracking error and about a 10% uplift in aggregate ESG score. Now that's perfect for some investors to get the low tracking area, get the ESG score improvement. There are other investors who say, look, we want to go more right conviction. So we also have an elite version of that index. So that's where we're applying a much longer list of ESG exclusions. And we're targeting only the top 25% of companies within sector. So again, on the S&P 500, what you're left with there is about 100 constituents, about an over 2% tracking error, but you're getting an uplift of about 25% when it comes to ESG score. So you -- as the user of the index, you have the choice as to how high conviction you want to go, extend the climate indices, you have the choice as to whether you want to go divestment, as to whether you want to go Net Zero aligned as well. And there's not just one approach to creating levels of conviction. So again, on the ESG scoring side, we can tell based on ESG scores. So we don't have to make any exclusions that's particularly relevant, as I have mentioned earlier, as we're moving into smaller regions where perhaps you don't want to apply a lot of ESG exclusions. Again, you have the option as the investors how heavy you want that ESG to be dependent on how much tracking error you can stomach and our high conviction you want to go there. It's our job to make sure that we're clear as to the methodologies that we're applying, all our methodologies are on the website that we're clear about the underlying ESG data that we're using in our indices -- and really, as I said, it's kind of down to the investors to make the choice as to which ESG index best suits their needs.

Fantastic. Thanks, Jas. We've got a great question here, Manjit, which I'm going to pose to you, which I think is particularly pertinent as -- with the expansion of ESG use cases is, what -- on what basis is it decided what is ESG, one, what is not ESG? Like how do you do that when you're doing the survey process? How do you determine whether something should be within the survey or outside the survey? And how have you seen that evolve?

That is a really good question. I think the first question is, it something that you can measure? And I think we've also had experiences in the past where we've tried to quantify something that possibly isn't measurable. So if you're looking at sustainability within the company, a lot of it has to do with culture, with things that are really kind of difficult to measure in the number, and we try to keep our assessment as objective as possible by really using numbers wherever we can get it -- we can get them. So we try to avoid long, open-ended answers, big kind of call it of pieces of tech that are open to a lot of subjectivity. So that kind of already is -- kind of a filter in terms of what we ask. I mean, we certainly look at best practices out there, right? So if we're looking at human rights, we're absolutely going to be looking at standards that they have put out, the U.N. guiding principles on business and human rights. If we're looking at corporate governance, we're going to look at different corporate governance standards, across the globe and kind of determine what is best practice there? What does academic research say? Is that best practice when it comes to things like board independence? So we try always to start with what's already out there and also what are other standards that currently exists because what we're not trying to do is unnecessarily reinvent the wheel. If there is a metric that we really need to ask and want to ask because we think there is investor demand for it, it's something that no companies have asked us to possibly think about, then we may come up with something very new. And otherwise, we try to work with our partners, whether it's the CDP, whether it's GRI, to try to borrow metrics that already exists that companies are using to report today and introduce those. And obviously, the menu is very long. And so what we need to decide is what are the relevant factors for each industry that are material in nature, either because they're going to have -- they're having a business impact on the company today or they are going to impact the business in one way or other in the future. And often, what we find is something may have a high stakeholder impact today, so it's absolutely relevant, and you may not be able to quantify its impact financially yet on the company. But we do know that over time, as the links between kind of the business value drivers of the company impacts on the natural environmental society become a bit more defined that these issues likely will become financially relevant as well for the company itself.

Fantastic. Thanks, Manjit. Such a simple question and then actually there's so much more to it. We have got a lot of questions coming in for you, James. I think one of the key areas that people are really interested in is like the financial materiality, how you put to build a -- Manjit touch on, but how do take it to the next level and put a dollar value on the risk. Can you expand a little bit for the audience on that?

Yes, sure. The crux of it is the vulnerability of each asset to the changing climate hazards. So this is all scenario analysis. I just want to make sure everybody remembers that nobody knows how the future will unfold, and that's why there are multiple scenarios. For example, the IPCC, the climate change body has designated 4 key scenarios that they call representative concentration pathways for how the emissions could evolve into the future. So -- and depending on which one of those we follow, the next certainly 50 years could look extremely different. So all of this is a scenario analysis, but how do we get to the financial materiality is to take those different scenarios and the outputs from what they say could happen to the climate under the different scenarios. And then connect that with these econometric functions that we've been developing over the past few years. Those are derived from the literature. And the reason that I love this approach is because, a, it's transparent. We can tell you how we're doing it. We're not using AI because our clients have asked us not to. They've said, please tell us what data you're using? What are you doing to it? And then how do we interpret what comes out the other end. So that's what we're doing. And we derived these from historical understanding of how climate actually has affected in that example I gave, a field of grapes versus an office building. So how has it affected those asset types in the past with varying different degrees of hazard, let's say, the drought I was suggesting. There's a little drought maybe it doesn't affect it very much. If there's a lot of drought it affects it a lot more, and we quantify those relationships based on what's happened in the past. And then we can drive those econometric functions basically with what the climate models project will happen in the future. And in that way, get the best possible estimate or model of what could potentially happen in the future. I hope that makes sense, Lauren.

That's fantastic. And there's another question here, James, I'll ask you to expand on it as well, which is about how transition risk is looked at? Is that integrated here?

Yes. It's a beautiful question. And this is why when that TCF -- remember the TCFD diagram that I showed. That showed how physical risk and transition risk both filter into financial impact. When I first saw that diagram, I was tempted to get it tattooed on my left shoulder or something because it's -- that's what marries the -- how the company is impacted by climate with how the company impacts the climate. So one is physical risk and the other is transition risk effectively. So the more, let's say, emissions there are, the more transition risk they would be. It's a fairly simple item there. So from the beginning, we've always modeled both physical and transition risks so that we could produce that holistic, how does the climate impact me, answer. So we do model all of those now. All of the models are improving as we go. So it's critical to consider both physical risk and transition risk. One or the other just is missing part of the picture.

That's brilliant. Thank you. And one other question for you, James, because I've just seen that one pop in as well is about the applicability of the TCS approach to nonlisted assets. I think you touched on that, but you want to just confirm the breadth of assets that can be analyzed.

Yes. We work directly with many small companies, in fact, with some communities in some cases that don't have publicly listed -- that aren't publicly-listed companies at all. So we absolutely can work directly with smaller companies, and it doesn't require that they'd be listed. Now that said, we don't have yet a product that, for example, presents every company on earth listed or not to investors and says what the climate risk is. And the key there is the lack of an asset level -- a database of the assets that they own. So to the extent that we know what that company owns, and what it does and where those assets are, we can run an analysis, but we don't have, for example, a PE, all the private companies in the world database at the time. We'll get there, but it could take us a little bit of doing.

Fantastic. Thank you. Manjit, we've got a question here. So that is a question and a statement, I guess, is ESG scoring some rating systems need to inform industry and investors alike? And companies need to know exactly how schools are calculated and the sort of the information, otherwise ESG gets a bad rate. I think this is a particularly personal one, given the engaged approach that we have, which is. And so I was thinking, Manjit, maybe you could explain a little bit more about how we have that transparency for companies as well. So companies are able to understand exactly how they're being evaluated. And that transparency is very, very clear.

Yes, absolutely. And then that's kind of the cornerstone of this all because if we can't explain to companies why we're asking a question and why we need the data or want the data and how the data is being used then we obviously can never get that buy-in. So for us, it's very important that to companies we always present a why. Like why are we asking you this question, what's the rationale for asking these metrics? What is the kind of the business value in terms of collecting this data from kind of an investor's point of view? Like how does this link to kind of your business value drivers? Because that's the conversation you need to have with the company. You still need to convince the sustainability manager to engage with us, you need to convince the executive management to allocate that time and those resources, and they need to understand it in terms of what's the value for us. We have -- we do a lot. We do webcasts with companies each year. Those are all publicly available for anyone. They are more focused to companies that deep dives into any new methodology changes that we are introducing. We consult with companies on methodology changes that we plan on making, so that they also are involved in that process. There is buy-in. There is a lot of documentation. We have a document called the CSA Companion. I think the last time I checked, it was roughly 300 pages long. That's available on our website. For anyone to go and read it, a list -- a majority of the questions that we ask in our methodology, the rationale, as I just described. We also explain the scoring techniques that we're using. So are we assessing you based on the public availability of information? Are we assessing some kind of a trend based on your historical quantitative information that you've provided? And I think that -- those are just some examples of transparency of document and materials that we have. But also we have a dedicated help line for companies. So the process of communication with companies isn't just once a year. Here's our data request, fill it in and come back to us, but there is a constant dialogue with companies we get, I don't know, tens of thousands of e-mails every year saying, well, when you say this, what do you actually mean? And then we may realize, well, we need to refine or improve our definition. So it's kind of a continuous cycle of improvement. But we also give them access to us, anytime they need it to make them feel comfortable about our research process. And I think that is really important.

That's a really, really important point, Manjit. That transparency is absolutely key. And I should mention because that the companies themselves in the rate-rate survey have consistently praised the approach. Jas, a question for you. Have we seen -- are you seeing kind of evolving needs from investors? Are they asking you for specific types of indices going forward? Are there regional differences in that? Can you talk a little bit more about what you see -- what you're hearing about the sort of future needs at all?

Yes. Sure. Thanks, Lauren. So I'd say the biggest trend we're seeing at the moment is the interest we see in Net Zero indices. So I mentioned earlier, we've got a solution, which is called at PACT, Paris-Aligned & Climate Transition indices. Of course, anyone who is looking at the area of Net Zero indices will be familiar with the EU low-carbon benchmark regulation, which has really set a standard for what a low carbon benchmark should look like. That's aiming for Net Zero. Our indices too, of course like with the benchmark, we meet the all-important requirement for that annual rate of decarbonization of 7% year-on-year. It's interesting you ask about regional trends. So even if we're talking about somebody in Asia or Australia or the U.S., often they're referring back to this EU low-carbon benchmark regulation so it is becoming an international standard when it comes to Net Zero indices. And it was great to hear James earlier outlined the importance of the TCFD framework. So in the design of our indices, we've gone beyond just those minimum EU requirements. We've also aligned with the TCFD because we recognize the importance of that framework opportunities of transition our physical risk. And what we're finding is really resonating with investors. It's not just the fact it's a Net Zero index. It's the way that we've used data sets to create that Net Zero index. So the fact that we're using script-free data on the outset. So the fact that we're looking at the full footprint of a company's impact and risk is really important in resonating with investors. We've also incorporated forward-looking data sets -- and again, this is really resonating with the industry at the moment. So we're not just looking at carbon footprints as of today. And going backwards, we're also using transition pathway data sets to understand where companies might be heading in the future in terms of their 1.5 realignment. And also, we heard the importance of physical risk data. We're also using this in our indices. As we heard earlier, we don't know what the stars going to be going forward. We want to make sure that if you're utilizing our interest, our index as much as we can, we're protecting our interest in different scenarios. Also a really interesting trend we're seeing is that the interest from investors, it's not just in a Net Zero index job done, is that they do want to come corporate other ESG data sets. So the business activity screens need to be in there. And also the ESG scores that we've been discussing also need to be in the index to provide the holistic view of companies. Investors aren't interested in just looking at companies in isolation. They want to understand them from different lenses. The other big trend we're seeing is interest in companies that may benefit from the move to a more sustainable society and an economy. So for instance, we have a number of thematic indices like our clean energy index, which provides exposure to companies who are producing clean energy or providing the technology to support clean energy. These indices are doing very well and getting a lot of traction and what we would expect to see more of in the future and what we're hoping to create going into 2022 is indices using data around the EU taxonomy to get exposure to those companies that are providing solutions and also potentially aligning with companies providing tools and products that are aligned with the sustainable climate goals as well. So that positive impact lens I think, is going to become increasingly important.

That's fantastic. Thanks, Jas. We've got some questions here asking about the documents that Manjit referred to. We will make sure that those are put into the resource center for you. So -- and we can directly to all of those places that Manjit mentioned in terms of transparency. We don't have much time left, but there is a question here, which I think a big picture question, which I'm going to turn it to James and probably a good one for us to round out this session on. But how much variability is there in the scenarios? Do you think they will change dramatically in the future with changing climate patterns? How much -- this is a very big question. It's a real test so to answer in 3 minutes, but just going to throw that question over to you, James.

What a great question. And my background is as a scientist. So I've always found it a lot easier to model what the physical world is going to do than what human beings are going to do. So there's -- I would say the source of most of the uncertainty over the next several decades is what human beings decide to do in the next decade. And that is a tremendous source of variability in the potential outcomes over the course of the next few decades. Now we also know that we are all -- this entire field is trying to figure out how do we reduce this problem into a set of agreed upon standard ways of looking at this. So even just when we say scenarios, I have a feeling we're talking about different things. There are emission scenarios that, for example, the IPCC uses to drive the climate models. There are pathways to achieving those, which is related not only to those scenarios, but also the Net Zero pathways. There are many ways to get to this goal and they all have different outcomes and impacts in terms of the climate. I absolutely believe that we will see a coalescence around a set of agreed upon scenarios and pathways so that we can talk apples-to-apples when we start trying to figure out this company versus that company or how am I doing versus my competition. You can't do that if you have different scenarios -- if you're modeling different scenarios. So I absolutely believe we will see a settling in, in the next few years into a set of scenarios that we all agree or cover the range of possible pathways. Does that make sense, Lauren?

That does. And I think you did a tremendous job of explaining the variability -- a lot of the variability is coming from humans. So thank you, James. We have had tons and tons and tons of questions, and we are going to -- not going to be able to answer all of them right now, but we will try and come back to you offline. We just want to thank you all for your participation. I'd like to thank the speakers. This webinar will be made available on demand. It's been recorded. So if you've signed up, you should get that availability. When I wrap up in just a moment, you'll be directed to a survey, please do fill out the survey because we really do value your feedback. But with that, I'm just going to say thank you very much to the panelist. Thank you, audience, and have a good rest of day.