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

Hello, ladies and gentlemen. Thank you for joining S&P Global Ratings Live Webinar and Q&A today discussing our ESG evaluation on Itaú Corpbanca. My name is Michael Ferguson, and I lead the Sustainable Finance team in the Americas for S&P Global Ratings, and I'll be your moderator for this webinar today. Before we begin, Allow me to take you through a quick overview of the web console on your screen. This webinar comes with audio and accompanying presentation slides. You can submit questions at any time during the webinar via the Q&A box located on the left-hand side of your screen. You do not have to wait until the end of the speaker's remarks to submit a question. Also on the left, there's a resource bar where you can download a copy of the presentation slides along with related research and insights from us. Finally, we invite you to complete a short survey at the end of the webinar. We would love to hear your feedback to continue shaping relevant content for you. Additionally, some of our speakers are participating in this webinar remotely as many of you probably are, too. Please excuse any unforeseen technical disruptions during this live session. If you face technical issues, please let us know via the Q&A box. Now joining me today in this web are Rafael Janequine, Associate Director of the Sustainable Finance team in LatAm; Annia Mayerstein, a Research Assistant in the sustainable finance team in LatAm; and Ivana Recalde, a Director of the Financial Institutions Group within S&P Global Ratings. This group is going to discuss our ESG evaluation on Itaú Corpbanca. This was actually our 50th evaluation that was made public recently, and it was the second one that was published in Latin America. So before we get too much into the specifics of this exact evaluation, I'd like to go over a few things about S&P Global Ratings and what we do with regards to Sustainable Finance. We are from -- our team here, the people that are on the call today, are firm S&P Global Ratings. And therefore, we can only talk about the analysis that's done by the Sustainable Finance team. And we're not allowed to discuss the other products from other divisions at S&P Global. At S&P Global, our enterprise does a lot on ESG in general, but our team is focused on the specific products that we're going to be talking about here today. And we'll get into it from there. So first, let's get a little bit of context here. Rafa, can you please go through S&P's footprint and ESG evaluations globally and on a regional basis? You could show us how the final score of Itaú Corpbanca compares with, let's say, other financial institutions, other LatAm peers, perhaps. I think that would be highly useful for the group here.

Thank you very much, Mike, and thank you all for joining this webinar today. Moving to the first slide, just to give you a little bit of the background that we have here. We released this product back in 2019. We have currently about 130 ESG valuations globally, of which, 52 are currently public. Although the number of public evaluations is gradually increasing, we do publish monthly newsletters showing insights to the market from the results of our analysis. We -- of course, we don't disclose the names, but we disclose by sector and region, like the chart that you are seeing right now. And in this specific chart, you can see that each circle is a company and the scores range for 1 to 100. And then you can see the distribution by sector and also by region, depending on the color. Throughout the presentation, you're going to see a lot of peer comparison chart with the finance scores of the company, but I highly encourage all of you to take a look on the report at some point as well because the reports are really good to have insights about the company's exposures, their practice and also of course our opinion on how this compares with the sector's best practice, in which they operate. Well, now going to a deeper look on the peers in LatAm first. We currently have 14 evaluations here, 2 of them are public. So Ecopetrol in Colombia made public about 2 months ago, and now we also have Itaú Corpbanca. It is good to see different factors making the evaluations public, which speaks to the improving ESG transparency in the region, not only disclosing our view about the company's good practice, but also showing up the factors that still need to improve or even the most controversial ones, right? You can see the upper right in the slide that the average for LatAm is currently quite low at 51. However, I would point out that the sample is still relative [Audio Gap]

I think we might have lost Rafa over there, but we can carry on while he logs back in. When we were talking about Itaú, Latin American sample is still relatively small. So if you see, most of the sectors that we have analyzed so far are extractive sectors, and they have a higher intrinsic exposure to environmental and social issues, for example. Now that -- not that we would expect LatAm to be leading the regional ranking on ESG best practices, but indeed, it is still not yet comparable with the sample that we have for other regions. The good news is that we have a lot of upcoming evaluations to be written in the next 2 months or so, and you'll probably see a larger sample to compare with. Now if we can go to the next slide. This is taking a closer look at the financial institution peer comparison. We currently have around 25 rated entities, 9 companies which have made their evaluation public. The names are on the public ones and the sector and region on the confidential one. As you can see in the chart, Itaú Corpbanca, it did quite well, being above the average of 66 for this sample. And you can see most of the entities are a bank, but we do have 5 insurance companies and 6 nonbank financial institutions also on this set.

Thanks, Annia. I'm back. Sorry about that.

Sure.

So finally, looking only at the banks, peer comparison. We have 13 evaluated so far, 7 of them are public. The average higher compared to the 51. So we have 72 in a global basis here. But you can see that the high end of the scores is driven by European players. So we see, mostly in the Europe, they are more advanced in incorporating sustainability in their long-term strategy, but also sometimes, they are subject to more advanced regulations. Also, they have access to more sophisticated data and tools to integrate ESG. However, it's important to highlight here that Itaú Corpbanca was our highest score so far when we look at non-European bank. So everything on the left was from Europe, and on the right is actually from other regions as well. Back to you, Mike.

Okay. Thank you. So Rafa, maybe before going to the specific analysis of Itaú Corpbanca, could you possibly go through our methodology to understand how it is we end up with stores that range from 1 to 100?

Sure. So here in business line, you can see on the left, first our ESG profile. So here is where we focus on the short-term and medium-term ESG risks that a company is exposed. And we're going to analyze their practices in order to mitigate and to handle those exposures that they have. Of course, when talking about ESG, it's not about -- all about risks, it's also opportunities. So we're also going to have a deep look on that. And of course at the end, we're going to see quantitative metrics, but also the qualitative part and to see how effective are the practice and how this compares with the sector in which the company operates. And then we have an adjustment that we call preparedness. This is a more longer-term view that we have. We try to assess here the capacity of the company to anticipate and adapt their business to disruption, not only ESG-driven, but any kind of disruption. So it could be a technological disruption, could be regulatory or any type. We're going to discuss that, and we actually even get a meeting with someone from the Board of Directors of the company to have this long strategic [ perspective. ] [Audio Gap]

Okay. I think we are having the issues again. But as you can see here, is the building blocks, our ESG evaluation. Here, we can see the sub factors that we assess. And that go from lagging, a strong or a weak score. And we here see that we have the evaluations, the waste, water and land use and other additional factors that we might consider, depending on the specific company. We also see here that there is a specific section for the sector and region. And Rafa, I see you back here, do you want to jump in?

Sorry about that again. Somehow I'm getting disconnected very often. Can you hear me?

Yes.

Okay. Great. So I was telling you the starting point. And we have a risk atlas that is our macro view about the differentiation about the sector. So we have different scores for the sectors. We have also paragraph talking about the risk involved intrinsically in each of the sectors. And we also have an adjustment by country. So we have kind of a heat map that you also can see there, our view regarding the environmental, social and governance piece. And after this starting point, we go through the specifics of each company, and we have subsectors on each of the profiles. We're going to score them as leading, strong, good, lagging or weak. So for a good, for instance, we would expect this company to be performing and having practice in line with the industry. And you're going to see that for each sector, we have different ways of which sub-factors are more or less important when analyzing that. All these specific analysis is important for you to know that it's within the sector. So in the starting point, we discussed the cross-sector differences. But now here, we are focusing on the best practice in the sector that we are analyzing. E-Profile has 30% of weight on the final score; then S-Profile, another 30%; and G-Profile, 40%. And we end up with an ESG profile of 100. And lastly, I told you about the preparedness would be a neutral adjustment, a negative one or a positive. And in this one, we will try to assess the different capabilities that a company and the Board of Directors have in order to be -- to have awareness about the disruptions that could come to a sector, how they assess how the disruption could impact their business? What are the action plans that they are building in order to face them? And then how they embedded that the company with the culture and decision-making in the top-down management analysis. And with these different opinions, we arrive to those adjustments. Finally, just maybe I have a couple of slides yet, Mike. But in terms of the analysis, it's important for you to know that ESG analysis for us is looking at the whole value chain. And here, it's really important because, especially for financial institutions, the downstream plays an important role here, especially for environmental. So in the environmental exposure, the corporate and upstream impact of those business is not relevant. So you're going to see in our report that we don't talk much about that. However, in the downstream, in the credit side of the lending portfolio, in the investment portfolio of the bank; or even financial institutions that are asset managers, we're going to look at the third-party management of those investments, it's mainly on the downstream analysis. Of course, social and governance, they are also linked with the corporate and upstream and -- but still, we're also going to look at the downstream as well. And just to finalize, this downstream analysis is based on 4 pillars. So we check how the companies are incorporating those factors into the credit decisions, for instance, what policies they have in place, what team they have in place in order to have the sufficient expertise to deal with those risks. We check for the exclusion policies of the bank and the restriction policies. However, we also know that banks commonly finance the real economy. And therefore, it's not all about exclusion, so engagement with clients in order to transition their business is also important. And taking a little bit aside the risks, also the opportunities in the ESG products and services. Back to you, Mike.

Thank you. That's a helpful explanation. And now that we've set the stage, what about going into the environmental analysis of Itaú Corpbanca? I see that we have laid good scores for all the sub-factors and actually added a plus 3 general adjustment. Can you maybe explain to the audience what all this means?

Sure. Thanks for that. I put this slide just for you to have a recap of how we added and got the 70. And a little bit of the context of Itaú Corpbanca. They're based in Chile, but they have operations in Colombia, which represent roughly about 20% of their assets. It's owned by a Brazilian bank, as you all are very aware about. But I just put this slide to encourage you to go to the report because there, you're going to have all the mechanical part of the analysis and also all the insights related and the rationale behind those mechanicals of the 70. But going to the scoring part, just a disclaimer. As I said before, the good would be in line with the industry standards. We would apply lagging scores for weaker than those industry standards. A strong for stronger. And leading and weak for -- more for outliers. So where we do see them as having lagging procedure, but also even worse performance compared with lagging peers? And going to the question of my -- specifically here. First, in terms of exposure, here, the company has this exposure mainly in the credit portfolio. The asset management business is relatively small. Their own investment portfolio is very much focused on liquidity management and therefore mostly exposed to government bonds. However, in the lending side is where the company has exposure. It does not have as much exposure for oil and gas and mining sectors, for instance, like other global banks have. This is pretty much in line with the domestic financial system in Chile and Colombia. However, it's important to say that the company has a broad exposure to the economy in Chile, including other sectors that are indeed exposed to environmental issues as well. So the exposure is not large enough that we would flag that as a short-term concern that we have, but of course we disclosed this exposure in the report as well. And going to the ESG integration and remember the pillars that I just presented to you. In the ESG incorporation factor is really the strength where we see Itaú Corpbanca really well positioned there. They have a dedicated environment and social risk management policy. They do also have internal manuals to handle this risk management policies [ that risks for E and S ]. They have that since 2016, actually. They do have also an exclusion criteria within those policies. They make these exclusion criteria also available publicly, so you can check that. The policies are based on some recognized international standards on measuring ESG performance, which is good in our view. They have a specific risk management team in Chile that is dedicated only for the E and S risk analysis, but they also have support from a larger specialized group that is based in Brazil. They do apply some questionnaires, due diligence and individual assessment for the clients with our more highly exposed to environmental risks. And they also engage with them to build action plans and to hire consultants to mitigate those risks, which we generally view as a very good practice. Just for you to have a sense on what we look when we analyze all those things. We went through all the process that they manage. And we found a lot of evidence where they were quite robust compared to others that we've seen across the industry globally. So they are indeed tackling all the force and factors that we look. So GGE, waste, water and biodiversity in the assessment and questionnaires. The client coverage of those assessments are quite large compared with global peers, and they have a good track record of monitoring and frequently doing reviews of those clients. We were kind of impressed with the data source that they have. We know that in LatAm, that's a big limitation. But they did have some data sources to have those informations. And that's the rationale behind the plus 3, basically linked with those ESG factors incorporation. But the question is, why not stronger -- strong then, right? And the limitations that we see here is more on the ESG engagement piece. So Itaú Corpbanca does not have commitments or targets to reduce carbon intensity in its finance portfolio yet, which is quite common on more -- this is quite common for more advanced players in banks. Although they have labels, which loans are addressing the UN Sustainable Development Goals, it's still not an outcome from an ESG engagement strategy. So for instance, we see more strong players that have developed a policy on how to engage with clients to help them on energy transition, for instance. Usually as a result of those policies, we see banks developing commitments on landing certain volumes to certain categories of wind projects with targets, impact metrics and so on. But we still don't see those features in Itaú Corpbanca. Given their size and the role in the Chilean and Colombian financial system, they are quite well structured to keep progressing on this strategy, in the ESG integration strategy. Thanks, Mike.

Thank you. So now let's move on to some of the social aspects. Annia, I see that we've placed strong scores for customer engagement and workforce diversity. Can you walk us through the rationale behind this, and what this 3-point adjustment in the general adjustment is all about?

Thanks, Mike. No problem. Indeed, in safety management and communities, we did not identify many considerations that will differentiate Itaú Corpbanca from the average industry practices. In that methodology, we already recognize that safety management and communities are less relevant factors for banks. This compares to, for example, customer engagement and workforce. And as you can see, only 50% of the analysis came -- come from our safety assessment and 20% comes from our communities assessment. However, customer engagement and workforce and diversity are the most important drivers. And it is also why Itaú Corpbanca has some good strength that we highlighted in our reports. First, in the workforce and diversity piece, we saw that Itaú Corpbanca has a very strong selling management system in place with sound benefits for employers, high internal promotion rates and trainings available to support the development of subskills, leadership skills and risk management awareness in the organization. Apart from what is formalized in policies and procedures, we can see that the bank has been able to retain its talent successfully with very low turnover rates which were at least 3% against 7% from the industry globally. And high satisfaction rate on its employee surveys, which were at 84%. On the other hand, our diversity [ NMC ] was focused on gender. And our opinion is that they are in line with the industry average. The metrics show that female representation in the workforce is about 62%, and management position is close to 30%, which are fairly in line with the banks' average. There is a diversity policy in place, which we see as a positive indication that the company consider that on its work environment and strategic decisions. However, the bank has not established targets to address the gap, which would be a standard feature in the diversity piece of [ BNLs ]. Now going to customer engagement. There are a couple of elements that support the strong score in these 2 factors. However, it is important to state that the track record is not that long, and we do consider some forward-looking risk of these factors. First, we believe the strategy around its digital offering and customer experience is well structured. We have clear action plans in place to improve data analytics and track user experience closely. Itaú Corpbanca has targets for customer satisfaction that they have been able to achieve. They used to be at the low ranking at the national customer satisfaction survey, [ its survey says ]. And last year, they have been able to be on the top 2 NPS of the local financial system in Chile. So despite the fact that the track record is short, we expect that the bank will be able to keep up with the increasing trend in their market share in the retail business, and also in the satisfaction and the [ attrition ] rate of its clients and digital platforms. Moreover, the bank has been able to avoid many of the large high-profile controversies involving in data and cyber breaches in the region in the past 5 years, which is a key risk for all sectors, but especially for financial institutions. And lastly, the plus 3 adjustment is related with the -- again, with the ESG integration into the entire value chain, not only on its direct exposures. The company assesses 100% of its suppliers and requires to comply with a number of social factors, such as human rights, health and safety, indigenous communities and anti-money laundering, which is in line with the best practices of the industry. Moreover, we identified some evidence that the bank is incorporating social factors in the credit decision process, with real business cases shown to us in which the disbursement was denied when there wasn't an effective action plan to mitigate the risks involved. Thank you, Mike.

Yes. Thank you, Annia. Finally, Rafa, can you finalize the ESG profile for us and let us know what the strengths and weaknesses are when it comes to governance? It would also be good for you to maybe just talk through the long-term strategy of Itaú Corpbanca and explain how it is that this results in an adequate preparedness.

Sure, Mike. Thanks. And Annia, feel free to jump in, in case I get disconnected, please. So in the governance profile, we found here a lot of positive attributes at the Board. Itaú Corpbanca has a highly experienced Board of Directors with different set of expertise for different financial products, which is a good fit for purpose given that the bank is gradually strengthening its business footprint since the merger. There is a separation between the CEO and Chairman position, which is a good feature and not always common in the region. The level of independents is close to 30%, which is low compared to global standards, but still in line with our local and regional standards. Itaú Unibanco, the controller, appoints 8 out of 11 members of the Board, which is in line with their economic interest in the company. And they certainly have an important influence over the governance practices that are generally very good at the bank in Chile. One limitation that we do see is that the Board lacks much diversification in terms of gender and also related with sustainability expertise. Nevertheless, the bank has recently appointed its first female Board member, which is also part actually of the sustainability department at the parent operations. So they are tackling these, showed efficiencies there with this position. And we're going to see how this evolves in the next few years. And finally, we also have here, just to conclude first the governance profile, just to highlight the transparency and reporting piece. Let's move back 1 slide. They are pretty much in line with global practices. They integrate their annual report. They are GRI compliant. Audited both of the reports. We found the ESG disclosure quite sound. They include gender pay gap, which is a good feature because we don't have that much disclosure in a global basis. Still things to improve. They still don't -- they are not reporting their relevant Scope 3 emissions. And here, we are talking about the Category 15, where we talk about the finance operations, right? So indeed, they don't have also the decarbonization pathways. And they are still starting with the TCFD recommendations. But to conclude our analysis is the preparedness piece. And finally, here, we are reflecting some of the constraints related with the short record of the execution of this bank. So the long-term strategy is still recent and it's still playing a role here. As you all know, this bank has faced a lot of profitability hurdles since the merger, some linked with the consolidation of the 2 former banks. Also, they adjusted new entity's risk appetite; adjusted provisions; did some impairment; and of course, most recently, also handling with the social unrest in Chile and also with COVID-19. However, we expect the bank to be able to move forward with this long-term strategic vision. And with more track record, we're going to have a better view on how they will reincorporate sustainability under the strategy, especially on the climate change piece, which is still nascent in the company. But definitely something that we have a view on, is that there is a lot of parent support and influence on the culture of this bank. And especially regarding disruptions of the banking system. Let's say for instance the digital transformation or innovation in products, there's a lot of influence and good expertise that Itaú has across the regions with the other operations that they have. So we expect the Chilean operation to be able to leverage on this experience and also bring those other products that they are disrupting other markets in the region.

Thank you, Rafa. This is all very helpful. And that brings us to the end of the prepared slides. So certainly, we'd be happy to see any questions that people have. And yes, again, maybe while waiting for questions to come in. Ivana or Rafa, do you maybe want to talk about the difference between this ESG evaluation we've done on Itaú Corpbanca? And maybe any kind of ESG-related credit work that we've done on the same company?

Sure. Ivana, you want to start or should I?

No. One comment related to the credit quality of the bank is that, recently, there was an upgrade of the bank because of -- hello? Hello?

We can hear you.

You can hear me. There was an upgrade related, both to the result of the capital injection than -- into this quarter, together with the consolidation in results and in dividend -- in moderate dividend distribution. And this was reflected in the rating, still as many other entities in the industry in Chile, the outlook is negative related to the banking industry.

And that's really important for all of you to know. The ESG evaluation is entirely focus totally on the ESG factors. So there is no correlation with the credit analysis. Of course, when Ivana is analyzing the credit side, there are ESG aspects that could impact, at the end of the day, the ratings. And they do have a lot of publications that talk about that. They have the ESG credit indicators to show transparency to the market how this is embedded and how this is affecting ratings. However, when we are talking here about the ESG evaluation purely, we are focusing on the ESG matters. And the stakeholders that we are looking are much broader compared to the debt holder, for instance, that credit ratings are looking. Here, we are talking about regulators, we are talking about suppliers, employees and all kinds of stakeholders involved in the operations of this business.

Thank you. Thank you, Rafa. That's helpful. Okay, well maybe just kind of a follow-up question for me here. Rafa, I don't think you mentioned this yet, but this is a product, the ESG evaluation, that is a monitored one. It's one that, as like our -- as with our credit ratings, we're going to continue to look at year-over-year. So what -- if we're going to go through this and talk to this company year-over-year and update this, what do you expect to see from an energy transition perspective from a bank? Perhaps a bank in LatAm, what are some sort of like leading practices that you might keep an eye out for in the future?

Yes, sure. This is going to be very interesting because I think banks in general are catching up with a lot of the measurement regarding their carbon footprint at the end of the day on the downstream. But this is really evolving. We have some LatAm players that already were able to measure that, and there are global players leading that as well. And here in the case of Itaú Corpbanca, this is the next steps they're going to have. So build the climate change strategy. Understand, given the market share that Itaú Corpbanca has, the type of portfolio that they have in Chile, what's the role of this bank in climate transition? So therefore, we will understand better, with this strategy, what kind of commitments. This is not like a large bank or a global large bank that already have many commitments in place for 2050. They are taking it step by step. And also because they don't have that much exposure, but it will be very interesting to know how the bar is going to increase over time for the industry and also for different banks with different type of exposures.

Thank you, Rafa. We've now had another question come in. How much is past history, recent history is considered when we are addressing the governance score?

Thank you very much for the question. No, this is a good one. Of course, we take a look on historical figures. So we do look at how the company is progressing on the different matters, especially on the governance side. However, we also take into consideration that this is a forward-looking opinion. So therefore, we try to also incorporate those in our conclusions and considerations. And so it's a combination, I would say. We look at the past, but also consider the current figures and then moving. And in the past, of course, some things we always take into account and be very careful is looking at controversies around the different topics. And of course, we have also to know how to separate which ones are really relevant, which ones has an impact in terms of reputation or financially, and what is material or not to impact any of our scores.

Thank you, Rafa. Well, I don't see any other questions coming in. So if there's nothing else, we certainly appreciate everyone's time. And I want to say a big thank you to all of the participants here, both the ones who were speaking and the ones who were listening and providing questions as well. As a reminder, this webinar will be recorded. And we're also doing another version of this webinar in both Spanish and in Portuguese, actually, in the next couple of days here. And you can check out all of our content on our website, all of these -- the commentaries we've worked on recently as well as our recent ESG evaluations, as you see here, would be on S&P Global's website. And as we continue to publish more ESG evaluations and more second-party opinions on companies that we analyze, they will be available here as well. And this will not be the last webinar we have. Certainly, we look forward to having you all on future webinars discussing new evaluations and new research that we put out into the market. So thank you. And until next time, we appreciate you listening. Take care.